CESTAT quashes Service Tax Demand Order on Book Entries [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Chennai Bench quashed the order demanding the service tax along with interest and imposed penalties under ‘Maintenance and Repair Services’. As the service tax cannot be imposed upon mere assumption and consideration of figures.

The Appellant, M/s.Heidelberg India Private Limited is a wholly owned subsidiary of Heidelberg International, Germany/ Denmark and are providing the services of procuring orders, for supply of printing machinery in India to Heidelberg, Germany.  The appellant gives a quotation / proforma invoice based on which customer opens a Letter of Credit in Heidelberg, Germany.

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After the sale is effected, the machineries received are cleared at the port and the installation is done by the appellant. The appellant provides warranty services for 12 months. M/s.Heidelberg Germany pays commission to the appellant for all these services provided in India. The appellant installs the machines supplied by the Germany company and are providing maintenance and services during the warranty period. For this purpose, a warranty provision is made in the books of account of the appellant as “warranty income” from the commission received by them from M/s.Heidelberg Germany.

According to department, the ‘warranty income’ for which provision is made in their books of account is a consideration for providing maintenance and repair services as defined under Section 65 (64) of the Finance Act, 1994 as introduced w.e.f. 1.7.2003, amended w.e.f. 16.6.2005 and later amended on 1.5.2006.

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A Combined reading of Section 65 of Finance Act, 1994 and the Boards Circular No.59/8/2003 dated 20.06.2003 reveals that the service provided by the appellant falls under the category of “Maintenance and Repair Services” and the appellant ought to have paid service tax on the warranty income for which provision is made in their books of account. The appellant did not discharge service tax on this income.

After due process of law, the original authority vide order dt. 25.6.2008 confirmed the demand of service tax in the SCN along with interest and imposed penalties. 

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Against such orders, the appellant preferred an appeal before the Commissioner (Appeals) who via order-in-Appeal No.160/2009 dt 15.12.2009 remanded the matter to the adjudicating authority with a direction to verify whether the appellant has received consideration apart from the commission income.

In de novo adjudication, the original authority as per OIO held that the appellant has paid service tax on the commission income received and that the commission is received for providing maintenance of machinery during the warranty period also. The demand, interest and penalties were confirmed.

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Against such order, the appellant preferred appeal before the Commissioner (Appeals) who vide impugned order upheld the same.

The Counsel Ms. Shrayashree appeared and argued for the appellant, submitted that the parent company viz. M/s.Heidelberg Germany is in the business of manufacturing printing machinery.

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During the relevant period, the appellant was the exclusive distributor of the said machinery in India. The distribution was done in two manners. Firstly, the appellant purchased the machinery and sold it to customers in India. Secondly, the appellant supported the sale, installation and after-sale service, for a commission paid by HIL Germany, where the sale was done directly by HIL Germany to the customers in India.

The Counsel submitted that appellant received commission when the sale was done directly by HIL Germany which was for all the services provided by the appellant towards the sale including installation and after-sales service.

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In terms of the agreement with the parent company, specifically clause 9 & 12 of the agreement, the appellant provided warranty services to the customers who purchased the printing machinery. 

However, as per the agreement, the appellant was not entitled to any separate consideration for providing such warranty services. The appellant has not received any separate income over and above the commission.

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In fact, clause 9.1 of the agreement clearly provides that the appellant has to bear the expenses for the warranty services. In order to fulfill the obligation of providing warranty services on the machineries sold by the Germany company in India, the appellant created a provision in their books of account in anticipation of the expenses which the appellant may have to incur for providing warranty services. The said provision was created as per Accounting Standards (AS) 29. This provision was made by appropriating some amount from the commission received by the appellant from their parent company.

The said ‘warranty income’ has been debited to Profit & Loss Account as provisional expenses under items of expenditure and also disclosed as liability in Balance Sheet. The provisions are utilized and reversed as and when the actual warranty expenses are incurred by the appellant.

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The Department has merely referred to the provision of this anticipated expense maintained in their books of accounts in accordance with AS-29 and alleged that the same is consideration received by the appellant from HIL Germany for providing maintenance and repair services during warranty period.

The Counsel argued that the allegation raised in the SCN is completely baseless and not in accordance with the agreement entered by the appellant and the parent company.

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In the earlier round, the matter was remanded by the Commissioner (Appeals), with a specific direction to verify whether the appellant has received income over and above the commission income. The adjudicating authority in de novo proceedings has not made any finding that the appellant has received income over and above the commission income. It is merely noted by the adjudicating authority that the appellant is providing warranty services from the provision made in the commission income. Merely because the appellant is obliged to provide warranty services, it has been assumed by the department that the provision made in their books of accounts for incurring the expenses for such warranty service is a consideration received from foreign company for providing maintenance and repair services.

The Counsel referred to an Interim order and asked for the stay filed by the appellant. It was noted in their interim order, that the warranty charges are already included in the commission amount received from the parent company and the entire amount of commission has suffered service tax also. It was noted that there is prima facie case made out by the appellant and stay was granted without pre deposit.

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However, in the impugned order the commissioner (Appeals) has upheld the order passed by the adjudicating authority holding that the appellant is liable to pay service tax on the provision of warranty income alleging that it is consideration received for providing repair and maintenance during the warranty period.

The Counsel for the Appellant, Ms. T. Shrayashree, Advocate submitted that the service tax cannot be levied merely based on entries in the books. The appellant has not received any separate consideration for providing repair and maintenance services during the warranty period. Appellant has discharged service tax on commission received. The Department has not been able to show that the appellant has received any separate consideration.

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The counsel relied upon the decision of the case Hewlett Packard India Sales Private Limited Vs CCE & ST (LTU) Bangalore - 2024 (1) TMI 679 – CESTAT BANGALORE to argue that the Tribunal in the said case observed that in the absence of consideration for providing any service, the demand of service tax cannot sustain.

Shri M. Ambe, Authorized Representative for the Respondent argued for the Department, the appellant has not shown the income received by them for maintenance and repair services in the returns filed before the Department.

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They are liable to pay service tax on the income received for maintenance and repair services. It is admitted by the appellant that they have to provide repair and maintenance service during the warranty period. For providing such services, the appellant has made a provision in their accounts to incur the expenses. This indicates that the consideration for providing warranty services. The appellant is therefore liable to pay service tax as demanded. It is prayed that the appeal may be dismissed.

The CESTAT Bench composed of Vasa Seshagiri Rao, Member ( Technical ) and Sulekha Beevi.C.S, Member ( Judicial ) observed that Demand of service tax cannot be raised on mere book entries assuming such figures as consideration. Upon the facts, the court is convinced that the appellant has not received any separate consideration for providing maintenance and repair services during the warranty period.

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So the demand cannot be sustained and requires to be set aside, the tribunal noted.

In result the impugned order was set aside and the appeal was allowed with consequential reliefs.

To Read the full text of the Order CLICK HERE

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