Manufacturer Reimbursements for Parts used in Warranty Services Exempted from Service Tax: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), New Delhi has ruled that reimbursements received by an automobile dealer from manufacturers for parts used in warranty services are not subject to service tax.

This decision came in the case of M/s Divine Autotech Private Limited, which contested the demand for service tax on various heads, including warranty claims.

The appellant, M/s Divine Autotech Private Limited, a dealer of Renault cars, had its accounts examined for the period from April 2011 to March 2015. The Central Tax authorities scrutinised the company’s Balance Sheets, Profit and Loss accounts and ST-3 returns, leading to a demand for differential service tax amounting to Rs. 43,78,435. One of the critical contentions was regarding the reimbursements received for parts used in servicing cars during the warranty period.

The appellant represented by Atul Gupta and Anmol Gupta argued that these reimbursements were simply the recovery of costs incurred by the dealer for fulfilling warranty obligations. These amounts should not be treated as payments for taxable services but as cost reimbursements from the manufacturer.

The respondent revenue, Commissioner of Central Tax, represented by Shri Anand Narayan contended that the reimbursement received by M/s Divine Autotech Private Limited from the manufacturer for parts used in warranty services should be considered as payment for a taxable service. They argued that these reimbursements constitute additional revenue for the appellant, thus falling within the purview of service tax liability.

The CESTAT held that the cost of parts used during warranty services and reimbursed by the manufacturer did not constitute taxable services. The bench noted that these reimbursements were a part of the operational costs and not payments for any service provided to the manufacturer.

The tribunal emphasised that service tax should not be levied on reimbursements for parts used during warranty services, as they do not fall under the ambit of taxable services.

In result, the two-member bench of the CESTAT comprising Ms. Binu Tamta ( Judicial Member ) and Mr. P. V. Subba Rao ( Technical Member ) categorically quashed the service tax demand on reimbursements for warranty parts, providing substantial relief to M/s Divine Autotech Private Limited.

The decision stressed the importance of distinguishing between taxable services and mere cost reimbursements in service tax matters.

To Read the full text of the Order CLICK HERE

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