Service tax cannot be levied on warranty provisions made in books under Accounting Standards AS 29

The CESTAT Chennai held that service tax cannot be levied on warranty provisions made in books of accounts under Accounting Standards (AS) 29. The appellant provided warranty services to customers who purchased machines from HIL Germany, receiving commission which was already subject to service tax. The department incorrectly treated accounting provisions for future warranty expenses as separate consideration for maintenance and repair services. Since no specific consideration was received beyond the already-taxed commission, and the provisions were merely book entries following accounting standards to meet future warranty obligations, the service tax demand was unsustainable. The appeal was allowed and the impugned order set aside.

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Issues Involved:

1. Classification of "warranty income" as consideration for maintenance and repair services.
2. Liability to pay service tax on the warranty income.
3. Validity of invoking the extended period for service tax demand.
4. Assessment of whether the appellant received income over and above the commission.
5. Compliance with Accounting Standards (AS) 29 in making provisions for warranty services.

Issue-wise Detailed Analysis:

1. Classification of "warranty income" as consideration for maintenance and repair services:

The department argued that the "warranty income" provision in the appellant's books of account is a consideration for providing maintenance and repair services as defined under Section 65 (64) of the Finance Act, 1994. The appellant contended that the warranty services were part of the commission received from M/s. Heidelberg Germany and no separate consideration was received for these services. The provision was made in accordance with AS-29 to anticipate expenses for warranty services.

2. Liability to pay service tax on the warranty income:

The department issued a show cause notice demanding service tax on the "warranty income" for the period 1.7.2003 to 31.12.2006, invoking the extended period. The original authority confirmed the demand along with interest and penalties. The appellant argued that service tax was already paid on the commission received and no separate income was received for warranty services. The tribunal noted that the department failed to establish that the appellant received any specific or separate consideration for providing repair and maintenance during the warranty period.

3. Validity of invoking the extended period for service tax demand:

The appellant argued that there was no suppression of facts with intent to evade payment of service tax. The provision for warranty services was made in compliance with AS-29 and disclosed in the financial statements. The tribunal found that the appellant had no intention to suppress any information and that the extended period could not be invoked. The tribunal relied on decisions in Kalya Constructions Private Limited Vs CCE Udaipur and Raghuvar (India) Ltd. Vs CCE Jaipur to support this view.

4. Assessment of whether the appellant received income over and above the commission:

The Commissioner (Appeals) had previously remanded the matter to verify if the appellant received any income over and above the commission. The adjudicating authority in de novo proceedings did not find any separate income received by the appellant. The tribunal noted that the demand was based on entries in the books of account and not on actual separate consideration received.

5. Compliance with Accounting Standards (AS) 29 in making provisions for warranty services:

The tribunal examined AS-29, which allows for making provisions for future expenses. The provision for warranty services was made from the commission received and was a liability measured by estimation. The tribunal concluded that the provision in the balance sheet was to meet future expenses and not a separate consideration for services. Therefore, the demand of service tax based on these book entries was not sustainable.

Conclusion:

The tribunal set aside the impugned order, concluding that the appellant did not receive any separate consideration for providing maintenance and repair services during the warranty period. The demand for service tax was based on mere book entries and not on actual income received. The appeal was allowed with consequential relief.

(Order pronounced in the open court on 27.08.2024)

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