The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that discounts and incentives related to the sale of goods cannot be subjected to service tax under the Finance Act, 1994.
Capital Cars Pvt. Ltd., the appellant is an authorized dealer of Honda Cars India Ltd. (HCIL), and its General Manager (Accounts), Vipin J. Kapoor filed appeals against the imposition of service tax of Rs. 51,05,981 along with interest and penalties under Sections 77, 78, and 78A of the Finance Act, 1994.
The case arose from credit notes received by the appellant for participating in mandatory consumer-specific schemes introduced by HCIL during the period from October 2012 to June 2017. These credit notes reflecting discounts or incentives were accounted for under “other income” in the appellant’s financial statements.
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The department issued two show-cause notices. The first notice proposed recovery of service tax on incentives received. This was dropped after adjudication. The second notice sought service tax on reimbursements for discounts passed on to customers under HCIL schemes.
The appellant’s counsel before the CESTAT, argued that the reimbursements were tied to the sale of goods and did not qualify as taxable services. The appellant’s counsel explained that these activities related to trade and were excluded from service tax liability as per established precedents.
The department’s counsel argued that the discounts and incentives were related to promotional activities and fell within the scope of taxable services under the Finance Act, 1994. The department’s counsel further argued that no specific exemption applied to these transactions.
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The two-member bench comprising Binu Tamta (Judicial Member) and Rajeev Tandon (Technical Member) reviewed records and prior judgments including decisions where similar reimbursements and discounts were deemed outside the scope of service tax.
The tribunal observed that the amounts reimbursed were directly related to the sale and purchase of goods and were not linked to the provision of any service. The tribunal ruled that the reimbursements for discounts and incentives were part of trading activity and could not be classified as taxable services. The tribunal set aside the impugned order and allowed the appellant’s appeal.
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