Relief to Honda Cars India: CESTAT quashes Service Tax demand on transaction concerning Termination Agreement [Read Order]

Relief to Honda Cars India: CESTAT quashes Service Tax demand on transaction concerning Termination Agreement [Read Order]

CESTAT Delhi - CESTAT - Honda Cars - Service Tax - Termination Agreement - Taxscan

The Customs, Excise, Service Taxes Appellate Tribunal (CESTAT), New Delhi Bench while granting the relief to Honda Cars India quashed the Service Tax demand on transaction concerning Termination Agreement.

The appellant, M/s Honda Cars India Ltd. a manufacturer of motor vehicles in India, entered into a “Technical Collaboration Agreement‟ dated April 1, 2010 with Honda Motor Co. Limited Japan for receiving technical and proprietary information for manufacturing new models of cars.

Subsequently, the parties entered into a “Model Agreement‟ for the launch of a new model of “Honda Civic‟ in India. This Model Agreement provided that the model fee and royalty fee would be determined as per the Technical Agreement.

The appellant claims that on account of unviability of high-end petrol cars due to increase in diesel cars, it decided not to launch the new model of Honda Civic car in India. For this reason, the Model Agreement was terminated on March 30, 2012 by a “Model Termination Agreement”. In terms of clause 3 of this Termination Agreement, the appellant paid an amount of Japanese Yen 130,000,000/- to Honda Japan to compensate all costs, expenses and non-cancellable commitments incurred by Honda Japan till then.

The issue raised was whether the amount paid by the appellant to Honda Japan can be subjected to service tax.

The department contended that in terms of Article 4.1 of the Technical Agreement, Honda Japan was required to furnish technical information to the appellant on a continuous basis or that the amount was paid for the commencement of the production.

On the other hand the appellant urged that the amount paid by the appellant to Honda Japan is actually in the nature of a cancellation fee and, therefore, neither any service was rendered by Honda Japan to the appellant nor any amount was paid for any service.

The Assessee’s contention is that the amount was paid by the appellant only to restitute Honda Japan for the cost incurred, once the Model Agreement to provide the service was terminated.

The CESTAT, in view of the specific provisions of the Termination Agreement, observed that no service, much less “consulting engineer‟ service, was provided to the appellant. The appellant, therefore, could not have been subjected to service tax on a reverse charge basis.

The Coram headed by the President, Justice Dilip Gupta held that the amount paid by the appellant to Honda Japan was not towards any consideration for a taxable service. It is, therefore, not possible to sustain the demand confirmed by the Commissioner (Appeals).

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