Reimbursements from Manufacturers for Warranty Services not Taxable before May 2008 Definition Change: CESTAT [Read Order]

The Bangalore Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that warranty reimbursements received from vehicle manufacturers for free services rendered to car owners were not taxable under service tax provisions before the definition amendment in May 2008.

The appellant Marikar (Motors) Ltd., a service provider engaged in "Authorized Service Station Services," "Maintenance or Repair Services," and "Business Auxiliary Services," challenged a service tax demand of Rs. 46,52,790 imposed by the Commissioner of Central Excise, Customs, and Service Tax, Thiruvananthapuram.

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During an investigation, the revenue authorities found that the appellant paid service tax on "Authorized Service Station Services," certain reimbursements were not included in the declared taxable value. The appellant had received Rs. 1,63,82,965 as warranty reimbursements from vehicle manufacturers for free services provided to vehicle owners between 01.10.2003 and 31.03.2008. The department stated that these reimbursements were taxable under "Authorized Service Station Services."

On appeal, the appellant’s counsel submitted that service tax applied only to services provided to "customers," as defined in Section 65(105)(zo) of the Finance Act, 1994. The reimbursements were received from manufacturers and not from vehicle owners (the "customers"). So, the appellant argued that the liability did not arise.

The appellant’s counsel relied on the Supreme Court’s decision in Union of India v. Intercontinental Consultants & Technocrats Pvt. Ltd. and other precedents, which held that reimbursements cannot form part of taxable value.

The department’s counsel countered that the reimbursements were integral to the services provided and should be taxed.

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The two-member bench comprising D.M. Misra ( Judicial Member ) and R. Bhagya Devi ( Technical Member ) observed that the legal definition of taxable service before 16.05.2008 excluded such transactions. The tribunal also observed that the term "customer" in the definition was replaced with "any person" only after the amendment on 16.05.2008, and the taxability of warranty reimbursements could not be applied retrospectively.

Referencing the Supreme Court's ruling in Union of India v. Intercontinental Consultants & Technocrats Pvt. Ltd, the tribunal ruled that the service tax demand on warranty reimbursements was unsustainable for the period before the 2008 amendment and directed to drop the demand. The appeal was allowed.

To Read the full text of the Order CLICK HERE

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