2025 (11) TMI 1341 - AT - Service Tax

Sales incentives treated as trade discounts, no service tax on vehicle trading under section 66D(e) Finance Act

M/s. Audi Motors Pvt. Ltd., Shri Sawai Singh Purohit, Accountant & Authorised Signatory, M/s. Audit Motors Pvt. Ltd Versus Commissioner of CGST and Central Excise Commissionerate, Jodhpur

CESTAT held that incentives and discounts received by the appellant from the manufacturer for achieving sales targets are in the nature of trade discounts ... Levy of service tax - incentives/discount, reimbursement extended by MSIL to the appellant - HELD THAT:- The Larger Bench of this Tribunal in the case of Kafila Hospitality and Travels Pvt. Ltd. [2021 (3) TMI 773 - CESTAT NEW DELHI (LB)] dealt with the issue whether service tax can be levied under the category of “Business Auxiliary Service” on target based incentives paid to the travel agents by the Airlines as they were promoting and marketing the business of the Airlines. The Tribunal took the view that it is not a case where the air travel agent is promoting the service of the Airlines rather by sale of airlines ticket he was ensuring the promotion of its own business even though this may lead to incidental promotion of the business of the Airlines. On the issue, whether “incentive” paid for achieving target are taxable, the Tribunal analysed the scope of the term “incentives” that they are generally given to encourage performance of the party. It is found that the activity undertaken by the appellant is for the sale and purchase of the vehicle and the incentives are in the nature of trade discounts. The incentives, therefore form part of the sale price of the vehicles and have no correlation with the services to be rendered by the appellant. That in terms of the dealership agreement, the appellant purchases the vehicles from MSIL and sells the same to its end customers. The activity of promoting the sale is with respect to the vehicles owned by the appellant which incidentally is in interest of both the parties. Reliance is placed in the case of Kafila Hospitality and Travels Pvt. Ltd. - it is also found that the appellant is engaged in the onward sale of vehicles which involves merely transfer of property in goods which is excluded from the definition of “service”. Section 66D of the Finance Act, 1994 contains the negative list of services under various clauses and clause (e) provides for “trading of goods”. On this ground also it is found that incentives which are part of sale activity are not exigible to service tax. The amount of incentives and discounts cannot be treated as consideration for any service and therefore no Service Tax is leviable thereon. Having decided the issue on merits in favour of the assessee, it is no longer required to go into the question of limitation raised by the appellant. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether incentives, discounts and reimbursements received by an authorised motor-vehicle dealer from the manufacturer (under a principal-to-principal dealership agreement) constitute 'service' and are liable to service tax under the Finance Act, 1994. 2. Whether target-based incentives paid by a manufacturer to its dealer amount to consideration for Business Auxiliary Service or any other taxable service under the negative/positive scheme of the Act. 3. Whether the transfer of vehicles by a dealer to end customers and the related incentives fall within the exclusion from 'service' for transfer of property in goods or 'trading of goods' under the negative list (Section 66D). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of levying service tax on incentives/discounts given to an authorised dealer Legal framework: The definition of 'service' under Section 65B(44) of the Finance Act, 1994 and the negative list under Section 66D read with the scheme of the Act govern whether consideration constitutes taxable service. Section 73(1), Section 75 and Section 78 provide for demand, recovery and penalty but are consequential to taxability. Precedent treatment: The Court followed binding Tribunal precedents which held that incentives/discounts paid by manufacturers to dealers under principal-to-principal dealership agreements are not consideration for a service and are therefore not exigible to service tax. Key authorities analysed the nature of dealer-manufacturer relationship and treated incentives as trade discounts or part of sale consideration. Interpretation and reasoning: The Tribunal examined the dealership agreement and found the relationship to be buyer-seller on a principal-to-principal basis, not agency. The incentives were contractual trade discounts linked to sales targets and formed part of the sale price of vehicles. The activities performed by the dealer (sale and onward transfer of vehicles) concern promotion of the dealer's own business and the sale of dealer-owned goods; any incidental promotion of the manufacturer's business is not tantamount to rendering a service to the manufacturer. Consequently, incentives lack the requisite nexus to a 'service' rendered to attract service tax. Ratio vs. Obiter: Ratio - incentives/discounts under a principal-to-principal dealership agreement, when constituting trade discounts forming part of the sale price, are not consideration for a service and thus not taxable. Observations about the incidental benefit to the manufacturer are obiter insofar as they explain commercial context but do not alter the core ratio. Conclusion: Service tax is not leviable on incentives/discounts/reimbursements received by an authorised dealer from the manufacturer where the arrangement is on principal-to-principal terms and the incentives form part of sale consideration. Issue 2 - Whether target-based incentives amount to Business Auxiliary Service or another taxable category Legal framework: The taxable categories include Business Auxiliary Services where one party promotes or markets the business of another for a consideration. The scope of 'incentives' must be examined to see whether they are consideration for promotion/marketing services. Precedent treatment: A Larger Bench authority considered target-based incentives paid to agents and held that selling tickets/promoting sales primarily promotes the agent's own business and only incidentally promotes the principal's business; such incentives were not taxable as Business Auxiliary Services. The Tribunal applied that principle to dealer-manufacturer relationships in subsequent decisions, treating those authorities as binding. Interpretation and reasoning: The Tribunal differentiated between an arrangement where an agent actively promotes the principal's service and situations where the dealer sells goods owned by it and thereby furthers its own commercial interests. The contractual designates sales promotion activities as mutual commercial benefits but do not convert dealer activities into services rendered to the manufacturer. Target-based incentives were characterized as encouragements for dealer performance and trade discounts, not payments for marketing services to the manufacturer. Ratio vs. Obiter: Ratio - target-based incentives that reward dealer performance in selling dealer-owned goods are not taxable as Business Auxiliary Service when the dealer acts on a principal-to-principal basis. Ancillary discussion distinguishing agent-type arrangements is explanatory (obiter) unless the factual matrix establishes agency. Conclusion: Target-based incentives paid to an authorised dealer do not qualify as Business Auxiliary Service consideration where the dealer sells on principal-to-principal terms; accordingly, such incentives are not exigible to service tax under that category. Issue 3 - Applicability of the negative list exclusion for transfer of property in goods/trading of goods Legal framework: Section 66D contains a negative list including 'trading of goods' which excludes certain transactions from the definition of taxable 'service.' The nature of the dealer's activity - transfer of property in goods - is pivotal. Precedent treatment: Prior Tribunal decisions treat onward sale of goods by dealers as transfer of property in goods and therefore excluded from service tax where the activity is essentially trading rather than provision of a service. Interpretation and reasoning: The Tribunal found that the dealer's core activity is purchase from the manufacturer and resale to end customers, involving transfer of property in goods. Incentives that effectively reduce sale price or are connected to sale performance were held to be integrally linked to trading activity. Therefore, such amounts fall within the negative list exclusion for trading of goods and are not consideration for a taxable service. Ratio vs. Obiter: Ratio - incentives and discounts that are part of sale transactions and arise from trading activity are excluded from service tax under the negative list provision for trading of goods. Remarks on borderline cases where additional services may be performed are obiter and fact-sensitive. Conclusion: Incentives and discounts that form part of trading transactions and relate to transfer of property in goods are excluded from service tax under the negative list; thus no service tax is leviable on those amounts in the factual matrix before the Tribunal. Cross-reference and overall disposition The Court applied the above legal principles and binding precedents to the contractual terms and commercial reality presented, concluding that incentives/discounts/reimbursements were trade discounts part of sale consideration and not taxable services. On that basis, the demand, interest and penalties for service tax were set aside. Because the matter was decided on merit, the Tribunal did not decide limitation issues. The holdings are confined to facts where the dealer operates on principal-to-principal terms and do not address arrangements reflecting agency or distinct service provision to the manufacturer.