Meetings at Mumbai

FADA Academy Training Programme, Manpower Availability, Manufacturer-Dealer Relations and Service Tax issues vie for attention

FADA organised its 232nd Council Meeting, an Interactive Session on Service Tax, and an Open House Session on 2nd December 2006 at Mayfair Rooms, Mumbai.

232nd Council Meeting

The day started with a Council Meeting in the morning. Among various matters discussed, Council gave its go-ahead to the launch of 4-month training courses to cater to the manpower requirements of automobile dealerships, at Mumbai, Kolhapur and Kolkata from January 2007. FADA is already running the training courses in association with Ind Search and Kamal Ratan Automotive Institute, at Pune and Jaipur, respectively.

Interactive Session with Ms Puloma Dalal, Tax Consultant

An Interactive Session in the afternoon with Ms Puloma Dalal, Tax Consultant witnessed a lively discussion. The interaction not only helped in clearing the mist on some of the major issues related to service tax of concern to automobile dealers, but also provided a direction in which FADA should proceed to address the issues that fall in the grey area and continue to dog the dealer fraternity. The issues taken up and outcome of the discussion are summarised below:

A.	Business Auxiliary Service
(i)	Service Tax on Incentive/Commission received for arranging vehicle finance for customers FADA would hold discussion with banks engaged in vehicle finance to sort out the issue.
(ii)	Date of Applicability of Service Tax on Amount Received by Automobile Dealers for Arranging Vehicle Finance for their Customers At best, the automobile dealers are providing service on behalf of the banks/NBFCs. Accordingly, the service tax, if at all leviable, should be applicable w.e.f. 10th September 2004, when the definition of "Business Auxiliary Service" was amended/expanded to include "Provision of service on behalf of the client" in clause (vi) of section 65(19) of the Finance Act, 1994, notwithstanding the circular No. 87/2006 - ST dated November 6, 2006. Automobile dealers can contest the demand made for the period 1st Jul'03 to 9th Sep'04. They have a strong case, but should be prepared to fight it out.
B.	Autorised Service Stations
1.	Margins on Sale of Spare Parts sold during service/repair Some of the Commissionerates have issued notices demanding service tax on margins of dealers on sale of spare parts sold during the course of service/repair of vehicles prior to the period 1st July 2003. Notification No. 12/2003-Service Tax dated 20th June 2003, Explanation to Section 67 of the Finance Act, 1994 and the circular No. 699/15/2003 dated 5th March 2003 issued in this regard reinforce each other and interpreting them differently goes against the principle of harmonious construction of law. The intention of law is quite clear, i.e. to levy service tax on service and repair bill. Replacement of parts is essentially a sale of goods. The sales tax is paid on the value of sale as reflected in the invoice, including mark-up. The term ‘cost’ appearing in Explanation to section 67 means the value as shown in the invoice to the customer. Hence, demanding service tax on the sales margin earned by automobile dealers prior to 1st July 2003 before the issue of Notification No. 12/2003 is not valid. Recent Circular No. 87/06/2006-ST dated 6th Nov'06 also clarifies amply that mark-up on parts sold during service/repair is not chargeable to service tax.
2.	Repair & Service of Commercial Vehicles Notices have been issued in some cases, demanding service tax on repair/service of commercial vehicles that are specifically excluded from the purview of definition of authorized service station, by invoking the provisions of Business Auxiliary Service, i.e. providing service on behalf of client. Circular No. B3/7/2003-TRU dated 24-6-2003 clarifies that service tax is not leviable on service or repair of buses or trucks. Recent Circular No. 87/06/2006-ST dated November 6, 2006 settles the issue and, accordingly, no service tax is leviable on repair or service of buses and trucks or, for that matter, other vehicles not specifically covered in the definition of authorized service station.
C.	Service Tax on Free Services provided during Warranty There are two types of arrangement between manufacturers and automobile dealers for provision of free services during warranty period, namely:
	(i)	Manufacturer reimburses some amount on production of free service coupons by the dealer. In such a case, dealer charges and deposits the service tax collected.
	(ii)	Provision of free services is built in the dealer margin. In other words, there is no reimbursement from manufacturers for the free services provided.
	However, some of the Commissionerates are taking notional value of the free services and demanding service tax on the notional value, where free services are built into the margin. For the period prior to 19-4-2006, there is no question of payment of service tax based on notional value of free services rendered by the automobile dealers if there is no reimbursement by the manufacturer, particularly when VAT Is paid on the entire sale margin. For the period from 19th April 2006 onwards, the issue needs to be studied in the light of new rules for valuation of service effective from 19-04-2006 and circular No. 87/06/2006-ST dated November 6, 2006.
D.	Service Tax on Incentives The issue needs to be discussed with manufacturers & experts.
E.	Service Tax on Comprehensive Maintenance Contract, Including Spare Parts, for Vehicles For the convenience of customers, some of the automobile dealers are offering Comprehensive Maintenance Contract, including replacement of worn-out or defective parts. Service tax is charged on the gross amount of such indivisible contracts. Under the CENVAT Credit Rules 2004, it should be possible to claim Input credit for the excise duty paid on the materials/parts/consumables used during service/repair, provided automobile dealers receive excisable invoices from suppliers. Similarly, it should also be possible to claim input credit for the excise duty paid on paint used for painting the body. The value of paint, otherwise, cannot be excluded for the taxable value as per circular No. 699/15/2003 dated 5-3-2003.

 
A small team of FADA members is being constituted for discussion with tax experts, banks and, if necessary, with manufacturers.

Open House Session

The Interactive Session on Service Tax was followed by an Open House Session. Guests at the Open House Session included: Sachin Khandelwal, Head, Credit Cards, ICICI Bank; Shyam Mani, President, Sales & Marketing, Tata Motors; and Rajesh Jejurikar, MD, Mahindra Renault.

Sachin Khandelwal took the opportunity to launch Purchase Card for FADA members. The purchase card comes with the following benefits for FADA members:

▪	Up to 50 days free credit
▪	Convenience of payments - just swipe the card
▪	Single cheque for multiple invoices
▪	Ease of account reconciliation
▪	Access to wider network of suppliers
▪	Greater negotiating power with vendors as payments are immediate.

 
Shyam Mani, in his presentation, touched on Manufacturer-Dealer Relations encompassing the issues of outlook, expansion of dealership network, margins & retention, dealer stocks, and manpower & their compensation including incentives and disincentives. He observed that the current attrition level in the industry and trade is about 25%. However, it has to prepare itself to accept attrition rate of 40%. The solution lies in greater emphasis on training and retraining. Even if the auto retail trade is able to retain 20% of the trained manpower, the training cost is recovered.

Rajesh Jejurikar, in his presentation, emphasised on creating talent pool. Giving an example of the cat family, he said that the automotive business does not need sissy cats or pussy cats but ‘TIGERs’, which, he explained, stood for five qualities, namely, Tough, Ingenious, Go-getter, Enterprising and Resourceful.