CESTAT Chennai allows appeal on service tax demands for incentives, forfeited advances, and CENVAT credit reversal

CESTAT Chennai ruled in favor of appellant regarding service tax demands on multiple issues. The tribunal held that incentives received from Volkswagen and Castrol were not consideration for business auxiliary services but were based on sales targets for appellant's own profit, not service promotion. Service tax demand on forfeited advance amounts from cancelled car bookings was unsustainable, following precedents that such forfeitures don't constitute taxable services. The tribunal rejected department's claim requiring 5-7% payment on exempted services value when appellant had already reversed proportionate CENVAT credit under Rule 6(3A)(ii). Regarding pre-2015 liability, since appellant company existed only from 2015, no service tax liability could arise for prior periods. The impugned order was set aside and appeal allowed.

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Issues Involved:
1. Liability for service tax prior to December 2015.
2. Service tax on incentives received from Volkswagen and Castrol.
3. Service tax on car advance forfeiture from customers.
4. Reversal of CENVAT credit under Rule 6(3)(i) of the CENVAT Credit Rules.

Summary:

Issue 1: Liability for service tax prior to December 2015
The appellant argued that the liability to pay service tax as per Section 68 is on the person who has rendered the services. Since the appellant company was incorporated only in December 2015, it cannot be held liable for service tax prior to this period. The court found that further discussion on this issue was unnecessary as the demands for the period prior to 2015 and after 2015 were found to be unsustainable on merits.

Issue 2: Service tax on incentives received from Volkswagen and Castrol
The department alleged that the incentives received from Volkswagen and Castrol were for providing services of sales promotion and marketing, falling under Business Auxiliary Services (BAS). The appellant countered that these were target incentives related to the sale of cars and Castrol oil. The court noted that the Show Cause Notice did not specify the sub-clause of Section 65(19) under which the alleged service would fall. The agreements indicated a principal-to-principal relationship, not a client-service provider relationship. The court concluded that the incentives were not consideration for promoting the sales of Volkswagen or Castrol but were related to sales transactions. Hence, the demand for service tax on these incentives was set aside.

Issue 3: Service tax on car advance forfeiture from customers
The department claimed that the amount forfeited on cancellation of car bookings was liable to service tax. The court referred to the case of Lemon Tree Hotel and Bharat Heavy Electricals Ltd., which held that such amounts are not liable for service tax as they are not consideration for any service but are in the nature of liquidated damages. The court concluded that the demand for service tax on the forfeited advance amount could not be sustained and was set aside.

Issue 4: Reversal of CENVAT credit under Rule 6(3)(i) of the CENVAT Credit Rules
The appellant reversed proportionate credit attributable to trading but did not give prior intimation to the department as required under Rule 6(3A)(ii). The court held that the requirement for prior intimation is procedural and cannot deny the appellant the option available under Rule 6(3)(ii). The court referred to several decisions, including Mercedes Benz India Pvt. Ltd. and Cranes and Structural Engineers, which supported this view. The demand for 5%/6%/7% of the value of exempted services was found unsustainable and was set aside.

Conclusion:
The court set aside the confirmation of demand for service tax, interest, and penalties, allowing the appeal with consequential reliefs.

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