2007 (11) TMI 73 - AT - Service Tax

Service Tax Cannot Be Levied on Dealers' Margin for Free After-Sales Service

The Tribunal held that service tax cannot be levied on the dealers' margin representing expenses for free after sales service provided by authorized ... Mutual exclusivity of fiscal entries - taxability of services incidental to sale of goods - service tax on reimbursement for free servicing - sales tax as covering the value of goods including dealers' marginTaxability of services incidental to sale of goods - sales tax as covering the value of goods including dealers' margin - mutual exclusivity of fiscal entries - Whether service tax is leviable on free after-sales servicing provided by dealers where the dealers' margin is included in the sale price of the cars and the entire sale price has been subjected to sales tax - HELD THAT: - The Tribunal noted the distinction between reimbursements by manufacturers (which the Ministry clarified are subject to service tax) and the dominant commercial practice where dealers meet free servicing costs from their dealers' margin without any reimbursement. Applying the constitutional principle of mutual exclusivity between State-imposed sales tax on sale of goods and Central levies, the Tribunal observed that the dealers recovered the full sale price from customers, including the dealers' margin, and that amount was subjected to sales tax. The dominant intent of the transaction was sale of the cars, with free servicing being merely incidental to promote the sale. Given that the amount representing the dealers' margin formed part of the taxable sale consideration already charged to sales tax, levying service tax on that same amount would improperly intrude into the field of sales taxation. The Tribunal therefore held that no service tax could be levied on the dealers' margin or any part of it which has already been subjected to sales tax. [Paras 4, 5]The impugned demand for service tax on free after-sales servicing (to the extent it seeks tax on the dealers' margin included in the sale price and already subjected to sales tax) is set aside and the appeal is allowed.Final Conclusion: The appeal succeeds: service tax cannot be levied on that portion of the dealers' margin recovered as part of the sale price of cars and already subjected to sales tax, since free servicing in this case was incidental to the sale and there was no reimbursement by the manufacturer. Issues:Whether service tax can be levied on the amount representing dealers' margin for free after sales service provided by authorized dealers of Tata Motors.Analysis:The appellants, authorized dealers of Tata Motors, sell cars at full price to customers, pay sales tax on the price, and provide free after sales service charging only material cost. The Ministry's Circular clarified that if the value of service provided free of charges is zero, tax will also be zero. Another Circular stated that reimbursements for free servicing are subject to service tax, but the appellants did not receive any reimbursement. The dealers' margin covers expenses for free servicing, and since the full price is recovered from customers, no service tax can be charged on the dealers' margin.The consultant highlighted that other auto dealers follow the same sales pattern with free servicing, but only the appellants faced service tax demands. Referring to a Tribunal decision, it was argued that service tax is not leviable when sales tax has been paid. The Tribunal noted the exclusivity between sales tax, excise duty, and service tax. The dealers' margin recovered from customers was for selling cars, not providing free service. Thus, the entire amount, including the dealers' margin, already taxed under sales tax, should not be subjected to service tax. Consequently, the Tribunal set aside the impugned order and allowed the appeal.