The Allahabad bench of the Customs, Excise & Service Tax Appellate Tribunal(CESTAT) has held that booking cancellation charges are compensation, and no service tax demandable on the same.
M/s Nimbus Motors Pvt. Ltd.,the Appellant was registered with Service Tax Department vide registration No. AAACN3829ST001 for providing “Business Auxiliary Services”, Repair/Reconditioning, Restoration or Decoration or any other similar Services of Motor Vehicles. The Appellant was appointed as an authorized dealer of M/s Hyundai Motors India Ltd .
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Based on an intelligence that the Appellant was not paying Service Tax on incentives/discounts received from HMI, cancellation charges of booking made by customers for purchase of motor vehicles and commission received from banking and other financial institution for processing of loan etc., the Officers of DGGI, Meerut Zonal Unit, initiated an enquiry against the Appellant in regard to the above matters.
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At the end of investigation, it was found that the Appellant had not paid Service Tax during the period from October, 2013 to June, 2017 on the amount of incentives/discounts received from HMI and cancellation charges collected from customers subsequent to booking of motor vehicle and commission collected from banks etc for facilitating loans. The investigation culminated into issuance of Show Cause Notice dated 16.04.2019 for demand of Service Tax of Rs.1,34,60,732/- along with interest and penalty under Section 76, 77 & 78 of the Finance Act, 1994.
The SCN was adjudicated by the Joint Commissioner, CGST, Meerut and the demand was confirmed vide Order-in-Original No.43/JC/ST/Noida/2020-21 dated 27.01.2020 along with interest and imposition of equal penalty. Being aggrieved with the said Order, an appeal was filed before the Commissioner (Appeals), CGST, Noida. The Commissioner (Appeals) modified the order by dropping the demand on incentive/discount. The demand of Service Tax on cancellation charges was confirmed treating the said amount as cum-tax value and Service Tax on commission was confirmed as demanded in the SCN. In this way demand of Rs.12,67,805/- was confirmed along with interest and penalty.
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The Appellant contended that Service Tax confirmed on cancellation charges in respect of cancelled booking could not be treated as consideration since it was a compensation received by the Appellant from customers who cancelled their booking for purchase of vehicles. The Appellant refunded booking amount after deducting cancellation charges. He further contended that the nature of the contract with customers was for sale of goods and cancellation charges were collected as per the terms of the contract. He emphasises that this action does not constitute a service.
It was submitted that Service Tax, if any, paid on the commission or cancellation charges, the same was available as Cenvat Credit as the above services were input services of the Appellant which were used in sale of motor vehicles. Shri Kalra submitted that it was a case of revenue neutrality.
A two member bench of P.K. Choudhary, Member (Judicial) and P. Anjani Kumar, Member (Technical) observed that, based on booking of cars, the Appellant placed orders with HMI to manufacture/supply the cars, but on account of cancellation, there was some kind of loss to the dealer and to compensate the same, cancellation charges were collected. There is no service element in such a transaction. The amount collected towards cancellation charges does not represent “consideration” received on account of provision of any service. The Appellant entered into a contract with its customers where customers pledged to buy car.
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The non-defaulting party in such a case is entitled to damages from the defaulting party. The damages could be in the form of liquidated damages in which case the amount to be paid as compensation is decided before hand and indicated in the contract itself. Liquidated damages are not a consideration for contract of service but a compensation for breaking the contract. Where a customer books a car, he enters into a contract agreeing to buy it. If he re-negates on the contract, an amount is recovered as damages which in this case is called as “booking cancellation charges”.
It needs to be noted that a consideration is the purpose of the contract, the damages are penalty for breaking it. Therefore, booking cancellation charges being in the nature of damages are not a consideration for the contract. The CBIC vide Circular No.178/10/2022-GST dated August 03, 2022 confirmed this legal position. Therefore, the demand of service on the amounts received on this account needs to be set aside.
In the case of Comet Car Sales & Service Pvt. Ltd., it has been held that booking cancellation charges received by the Appellant is in the nature of compensation and not consideration for service. Hence, no Service Tax is chargeable thereon.
It has been contended by the Appellant that Service Tax chargeable on „commission‟ received by the Appellant was available to the Appellant as Cenvat Credit as the above service was input service. Thus, there was no loss of Revenue to the Government Exchequer. It is a case of revenue neutrality. We find that the issue of the applicability of revenue neutrality has been settled in catena of judgments.
The Tribunal held that as the assessee could have availed CENVAT credit of the service tax paid on reverse charge mechanism, hence, a revenue neutral situation arises wherein appellant pays the tax and takes the credit and accordingly set aside the tax demand, interest thereon and penalties. As regards interest and penalty we find that the issue is no more res integra. Once demand is not sustainable, interest would not survive and penalty under Section 78 of the Finance Act, 1994 would not be imposable.
In the case of CCL Products (India) Ltd, the Tribunal held that in the case of revenue neutrality, no penalty is imposable under Section 78 of the Finance Act, 1994. While allowing the appeal , the tribunal set aside the impugned order.
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