Ford India not liable to pay Service Tax on Amount received under Value Participation Agreement with RICO: CESTAT [Read Order]

The Chennai bench of the CESTAT recently held in favour of Ford India by observing that it is not liable to pay service tax on the amount received under Value Participation Agreement with RICO.

The appellant, Ford India, entered into a Value Participation Agreement with RICO, India along with Ford USA wherein specific role has been assigned to each parties with reference to promotion and sales of auto components manufactured by RICO India. As per the agreement, the auto components of RICO India are sold to Ford, USA, its affiliates and to non-ford companies like Volvo, Land Rover etc. The agreement states that there will be an Annual Incremental Purchase Payment in US dollars terms which will be fully remitted to the appellant as a percentage of incremental sale of auto components of RICO, India. The appellant did not buy any components from RICO. The components are sold to Ford, USA and affiliates and also non-Ford companies. The full consideration at the rate of 5% of incremental sale value is paid to appellant in India.

The issue was that the department took a stand that the above said income is subject to service tax in the hands of the assessee under the head Business Auxiliary Service.

Advocate Raghavan Ramabhadran, the counsel for the appellant vehemently argued before the Tribunal that the appellant along with Ford, USA and affiliates were party to the agreement. However, for the goods sold by RICO and Ford, USA and affiliates, there can be no question of any promotion of business of the client. He said that the taxation of consideration received for terminating the arrangement with RICO. The value participation agreement dated 1.4.2003 was terminated on 6.5.2005. After terminating, the appellant received certain termination payment.  There is no service attributable to such payment. This is more like a compensation for lost business opportunity. Such payments are never considered as services at least till 2012.

Accepting the above arguments, the division bench held that the whole of the consideration received cannot be subject to tax under the heading Business Auxiliary Service. “This is for the simple reason that the appellant is part of a party to the agreement. They received full consideration as assigned by Ford, USA who have purchased to components made and sold by RICO. The amount attributable to such purchase cannot be considered as promotion of RICO product to third party. Here, Ford is the single party of agreement consisting of appellant as well as Ford, USA. Apparently, the service of business promotion could have been attributed to both appellant as well as Ford, USA and affiliates. Only because the full amount is assigned to the appellant, tax liability on all the activities cannot be fastened on the appellant.”