2025 (4) TMI 1331 - AT - Service Tax

Taxability - reimbursement received by the appellants from the automobile manufacturer towards the cost of spare parts used in free services - sale of goods or service - HELD THAT - It is an admitted fact on record that on the value of the parts used for replacement by the authorized service station VAT was paid by the appellants considering the same as sale of goods and the liability for service tax on the labor component was also discharged by the appellants treating the same as service. Since the spare parts used for replacement in the authorized service station was considered as a sale transaction and appropriate VAT amount was paid by the appellants the said transaction cannot be considered as provision of taxable service for the purpose of levy of service tax thereon. The appellants in the present case had availed cenvat credit of service tax paid on the Mandap Keeper service which were utilized by them for making of temporary shed for providing uninterrupted servicing of vehicles during the rainy season. Since the said disputed service was used for provision of the output service it cannot be said that such service is not confirming to the definition of input service for the purpose of taking of cenvat credit thereon. In an identical situation the Tribunal in the case Endurance Technologies Pvt. Ltd. V/s. Commr. of C.Ex. Aurangabad 2013 (8) TMI 601 - CESTAT MUMBAI has allowed the cenvat credit taken on the Mandap Keeper service. Conclusion - i) The appellants are not liable to pay service tax on the reimbursement received for spare parts from the manufacturer. ii) The appellants are entitled to cenvat credit on the Mandap Keeper service utilized for their output service. There are no merits in the impugned order insofar as it has upheld confirmation of the adjudged demands on the appellants - appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this matter are:

(a) Whether the reimbursement received by the appellants from the automobile manufacturer towards the cost of spare parts used in 'free services' constitutes a taxable service under the Finance Act, 1994, or if it should be treated as a sale of goods subject to VAT, thereby excluding it from the service tax net.

(b) Whether the appellants were liable to pay service tax on the full amount reimbursed (including both parts and labor components) as per Section 67 of the Finance Act, 1994 read with Rule 6(vi) of Service Tax (Determination of Value) Rules, 2006.

(c) Whether the appellants were entitled to avail cenvat credit on service tax paid on input services such as the 'Mandap Keeper' service, which was utilized for creating temporary sheds to facilitate uninterrupted vehicle servicing during adverse weather conditions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Taxability of Reimbursement for Spare Parts and Labor Charges

Relevant legal framework and precedents: The primary statutory provisions considered include Section 67 of the Finance Act, 1994, which governs the determination of value for service tax purposes, and Rule 6(vi) of the Service Tax (Determination of Value) Rules, 2006, which clarifies the valuation methodology when reimbursement is received. The Tribunal relied heavily on the precedent set in the case of Star Motors v. Commissioner of Central Excise, Nagpur (2017), wherein it was held that the cost of spare parts supplied and invoiced separately, on which VAT was paid, cannot be treated as part of the taxable service.

Court's interpretation and reasoning: The Tribunal observed that the appellants had distinctly accounted for the reimbursement received from the manufacturer for spare parts and labor components separately. VAT was duly paid on the spare parts, which were treated as sale of goods, while service tax was discharged only on labor charges. The Tribunal noted that the spare parts transaction was a sale transaction and not a service, and hence, the value of spare parts should not be included in the taxable value for service tax purposes.

Key evidence and findings: The appellants' books of accounts and invoices clearly demarcated the cost of parts and labor separately. The spare parts were invoiced as goods sold, with VAT compliance, establishing the nature of the transaction as a sale. The department's contention that service tax should be levied on the full reimbursement amount was therefore found to be inconsistent with the documentary evidence.

Application of law to facts: Applying the legal principle from the Star Motors case, the Tribunal concluded that the reimbursement for spare parts, being a sale of goods on which VAT was paid, was not liable to service tax. The labor component alone constituted the taxable service. The Tribunal further noted that even if the parts were considered part of the overall service, the exemption Notification No. 12/2003-S.T. would apply, exempting the value of parts from service tax.

Treatment of competing arguments: The department argued that Section 67 and Rule 6(vi) required service tax on the entire reimbursement. However, the Tribunal found this interpretation untenable in light of the separate invoicing and VAT compliance, as well as the binding precedent. The Tribunal rejected the department's contention, emphasizing the distinction between sale of goods and provision of service.

Conclusions: The Tribunal held that the appellants were not liable to pay service tax on the cost of spare parts reimbursed by the manufacturer, and service tax was payable only on the labor component. The impugned order confirming service tax on the entire reimbursement was set aside on this ground.

Issue (c): Entitlement to Cenvat Credit on Mandap Keeper Service

Relevant legal framework and precedents: The issue pertains to the admissibility of cenvat credit on input services used in providing output taxable services. The Tribunal referred to the decision in Endurance Technologies Pvt. Ltd. v. Commissioner of Central Excise, Aurangabad (2013), where cenvat credit on Mandap Keeper services was allowed when such services were used for business operations.

Court's interpretation and reasoning: The Tribunal observed that the Mandap Keeper service was utilized by the appellants to erect temporary sheds, enabling uninterrupted vehicle servicing during the rainy season. This utilization directly related to the provision of the output service (authorized service station service). Therefore, the Mandap Keeper service fell within the definition of input service eligible for cenvat credit.

Key evidence and findings: The appellants demonstrated that the Mandap Keeper service was availed specifically to facilitate the smooth operation of their authorized service station activities. There was no evidence to suggest that the service was unrelated or not used for provision of taxable output service.

Application of law to facts: Applying the principles from the Endurance Technologies case, the Tribunal concluded that the Mandap Keeper service qualified as an input service and the cenvat credit availed was legitimate.

Treatment of competing arguments: The department contended that the Mandap Keeper service was not used for providing output service and thus credit should be denied. The Tribunal rejected this argument, finding that the service was integrally connected to the output service provision.

Conclusions: The Tribunal allowed the appellants' claim for cenvat credit on the Mandap Keeper service, setting aside the denial by the lower authorities.

3. SIGNIFICANT HOLDINGS

"We find that the said transaction cannot be considered as provision of taxable service, for the purpose of levy of service tax thereon... service tax on the value of parts used for repair and maintenance of vehicle is clearly not sustainable."

"Since, the said disputed service was used for provision of the output service, it cannot be said that such service is not confirming to the definition of input service, for the purpose of taking of cenvat credit thereon."

The Tribunal established the core principle that reimbursement for spare parts, separately invoiced and subject to VAT, does not attract service tax as it constitutes a sale of goods, not a service. Further, input services like Mandap Keeper service, when used for facilitating the output service, qualify for cenvat credit.

Final determinations:

(i) The appellants are not liable to pay service tax on the reimbursement received for spare parts from the manufacturer.

(ii) Service tax is payable only on the labor component of the 'free service' provided by the authorized service station.

(iii) The appellants are entitled to cenvat credit on the Mandap Keeper service utilized for their output service.

Accordingly, the impugned order confirming service tax demands on the full reimbursement amount and denying cenvat credit was set aside, and the appeals were allowed in favor of the appellants.

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