Incentive & Discounts on target-based milestones from manufacturers not a consideration for services under BAS

The CESTAT, New Delhi in the case of M/s. Vipul Motors Private Limited and Suresh Kumar Jain Versus Principal Commissioner of CGST & Central Excise, Jaipur - I  - 2025 (7) TMI 215 - CESTAT NEW DELHI held that incentives/ discounts received by car dealers from manufacturers are not taxable under Business Auxiliary Service, being transactions on a principal-to-principal basis.

Facts:

M/s Vipul Motors Pvt. Ltd. (“the Appellant”), an authorised dealer of Maruti Suzuki India Ltd. (“MSIL”), received various target-based incentives, reimbursements, and trade discounts from MSIL for the period from October 2013 to June 2017. The Department treated these receipts, amounting to ₹22.05 crores, as consideration for sales promotion services taxable under the category of “Business Auxiliary Service” under Section 65(19) of the Finance Act, 1994.

A show cause notice was issued invoking the extended period of limitation, which culminated in an Order-in-Original confirming service tax demand of ₹3,00,54,304 along with interest and penalty.

The Appellant contended that no service was rendered to MSIL, and the relationship was on a principal-to-principal basis. Being aggrieved, the Appellant preferred an appeal before the CESTAT.

Issue:

Whether the target-based incentives, discounts, and reimbursements received from MSIL by the Appellant were consideration for a taxable service under 'Business Auxiliary Service'?

Held:

The CESTAT, New Delhi in M/s. Vipul Motors Private Limited and Suresh Kumar Jain Versus Principal Commissioner of CGST & Central Excise, Jaipur - I  - 2025 (7) TMI 215 - CESTAT NEW DELHIheld as under:

• Observed that the issue of levy of service tax on dealer incentives is no longer res integra and stands settled in Rohan Motors Ltd. Versus C.C.E., Meerut-I - 2018 (7) TMI 29 - CESTAT NEW DELHI, where it was held that such dealer incentives are not consideration for service but form part of business transactions on a principal-to-principal basis.
• Held that the incentives received by the Appellant were wrongly classified as consideration for Business Auxiliary Service, as no service was rendered to MSIL, and the transaction was clearly one of sale.
• Further relied on PRATIBHA PROCESSORS Versus UNION OF INDIA - 1996 (10) TMI 88 - Supreme Court wherein the Hon’ble Supreme Court held that tax is the amount payable as a result of the charging provision and Interest is compensatory in character. If there is no short or non-payment of tax, interest cannot be levied, and held that once no service tax is payable, interest under Section 75 and penalties under Sections 76 or 77 or 78 of the Finance Act, 1994 are also not sustainable.
• Held that Order-in-Original be set aside and allowed the appeal.

Our Comments:

This view relied on Commissioner of Service Tax, Mumbai Versus M/s. Jaybharat Automobiles Ltd. and vice-versa - 2015 (8) TMI 503 - CESTAT MUMBAI, wherein the Tribunal held that only because some incentives/ discounts are received by the appellant under various schemes of the manufacturer cannot lead to the conclusion that the incentive is received for promotion and marketing goods. It is not material under what head the incentives are shown in the ledgers, what is relevant is the nature of the transaction, which is of sale.

Further, in CCE, Kanpur Versus M/s Cross Road Auto Pvt. Ltd. - 2015 (8) TMI 1247 - CESTAT ALLAHABAD, the Tribunal dismissed Revenue’s appeal and rejected the argument that incentives or reimbursements attract service tax. Also, as observed that Maruti Udyog Ltd. have categorically stated that they do not reimburse any amount towards such free services to the dealers.. Also the free services are rendered to the car buyers and not to M/s MUL... Thus the respondents have not provided the services of authorized service stations to them Accordingly, this amount cannot be made liable to service tax under the category of authorized service station service.

However, under the GST regime, CBIC Circular No. 105/24/2019-GST dated June 28, 2019, states that post-sale discounts or incentives may be taxable as a separate supply of service, if the dealer is required to undertake any activity like brand promotion or marketing. The key distinction here lies in whether the manufacturer is a service recipient — if not, taxability does not arise even under the GST Law.

Given the settled position under service tax and the evolving jurisprudence under GST, it is crucial that each incentive scheme be examined based on contractual terms and factual substance, rather than on labels or accounting treatment.

 (Author can be reached at [email protected])