In the recent case, the Chennai bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) ruled that a service tax demand cannot be justified solely based on accounting entries presumed as consideration. The Tribunal set aside the demand, finding that service tax was wrongly imposed on a provision for warranty expenses already covered by taxed commission.
Heidelberg India Private Limited, the appellant-assessee, was a wholly owned subsidiary of M/s. Heidelberg International, Germany/Denmark. It procured orders and handled the supply of printing machinery in India for M/s. Heidelberg Germany. The appellant provided quotations or proforma invoices, facilitating Letter of Credit openings with Heidelberg Germany.
Ready to Grow? Choose a Course That Fits Your Goals!
After sales, it cleared the machineries at the port, installed them, and provided 12-month warranty services. The appellant received commission from Heidelberg Germany for these services, which was recorded as “warranty income” in its accounts.
The department contended that ‘warranty income’ is consideration for maintenance and repair services under Section 65(64) of the Finance Act, 1994, as amended.
The appellant’s warranty income was classified as “Maintenance and Repair Services” under Section 65 of the Finance Act, 1994. Failing to pay the required service tax, a show cause notice (SCN) was issued on 12.6.2007 for the period 1.7.2003 to 31.12.2006. The original authority confirmed the demand, including interest and penalties, in an order dated 25.6.2008.
Ready to Grow? Choose a Course That Fits Your Goals!
The case was remanded by the Commissioner (Appeals) to check for any additional consideration. On re-adjudication, the original authority confirmed the service tax demand on commission income, including interest and penalties. The Commissioner (Appeals) upheld this decision, prompting an appeal to the tribunal.
The counsel of the appellant argued that M/s. Heidelberg Germany manufactured printing machinery, while the appellant, as the exclusive distributor in India, handled distribution in two ways: purchasing and selling machinery directly or supporting sales made directly by Heidelberg Germany for a commission.
Warranty services were provided without separate payment. Instead, a provision for warranty expenses was created from the commission, following Accounting Standards (AS) 29, and recorded as provisional expenses and liabilities.
Ready to Grow? Choose a Course That Fits Your Goals!
The Department referenced an anticipated expense recorded as per AS-29 and alleged it was consideration received from HIL Germany for maintenance and repair services during the warranty period. The counsel argued that this allegation was baseless and inconsistent with the agreement between the appellant and the parent company.
The tribunal noted that the appellant received a commission for warranty services on machines from HIL Germany, and service tax was paid on this commission. The appellant created a provision from this commission for warranty expenses. The SCN incorrectly treated this provision as separate consideration.
Ready to Grow? Choose a Course That Fits Your Goals!
The bench found that the department failed to prove additional income beyond the commission, and the demand was based solely on accounting entries. AS-29 allows for provisions based on estimation, so no extra consideration was established.
A coram of Sulekha Beevi C.S (Judicial Member) and Vasa Seshagiri Rao (Technical Member)set aside the demand, contending that the service tax was incorrectly levied on a provision for warranty expenses already covered by taxed commission. The appellant had not received separate consideration for maintenance and repair services.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
