Demystifying Service Tax

Demystifying Service Tax

To help its members come to grips with complexities of service tax, FADA has appointed Mr Ashok Batra, FCA as a Service Tax Consultant for clarifying and giving legal opinion on various issues concerning Service Tax. Reproduced hereinbelow are the clarifications/legal opinion given by Mr Batra on queries raised by some of the FADA members.

Handling Charges

This represents the amount we collect from the customers along with the registration charges towards petrol, driver's wages, brokerage, expenses at RTO. After all these expenses, there will be a small amount left with the dealership.

The amount we collect from the customers are shown as income and the expenses we incur are shown under Selling Expenses.

Whether the handling charges we collect is subject to Service Tax? If so, can we adjust the expenses mentioned above from the handling charges and pay service tax on the balance amount?

As per Circular No. 699/15/2003-CX, "any activity of sales dealer at the pre-sale stage or at the time of sale will not come under the purview of service tax". Hence, handling charges collected before or at the time of sale in respect of a particular sale are not subject to service tax. The circular is reproduced herein.

Insurance Charges

We collect the insurance premium from the customers based on "On Road Price" as per Price List. But, subsequently the premium is paid based on the discounted on road price - i.e., "On Road Price -Discounts offered" to the customers. As a result, a small portion of the amount will be left with us.

Whether the difference amount is subject to Service Tax?

As per Circular No. 699/15/2003-CX (supra), "any activity of sales dealer at the pre-sale stage or at the time of sale will not come under the purview of service tax". Hence, insurance charges collected before or at the time of sale in respect of a particular sale are not subject to service tax.

Insurance Incentive

We have tie-up with few Insurance companies, and the insurance business in the case of vehicles we sell are referred to them. For these references, we get incentive/ commission from the insurance companies.

Whether the incentive/commission is subject to Service Tax?

In case the dealer only refers the insurance companies to its customers and the insurance is done by the insurance companies, then the dealer is promoting the business of the insurance companies and such services are taxable under the category of "Business Auxiliary Services".

Finance Incentive

We have tie-up with few finance companies and the business for the vehicles we sell are referred to them for finance. For these references, we get incentive/ commission from the finance companies.

Whether the incentive/commission is subject to Service Tax?

Similar to insurance incentive, in such case also, the dealer is promoting the business of the banking/ finance companies.

This has also been clarified by the department vide Circular No. 87/05/2006- ST dated 06-11-2006, which is as follows:

"4. In some cases, the automobile dealers help the buyers of the vehicles for arranging the finances. For this, they have a tie-up with banks/Non-banking finance companies. The customers are advised by the dealers to approach such financial companies for taking loans. The automobile dealers get commission from such financial companies for directing the customers to the latter. By this activity, the automobile dealers 'promote or market the services provided by their customer (i.e., the financial institution), and are therefore covered under taxable service', namely, the "Business Auxiliary service". The tax is payable on the gross commission received by the automobile dealer. In some cases, the dealers share part of their commission with their customers to attract them. However, this is an independent transaction between the automobile dealer and the purchaser of the vehicle, and does not involve the service rendered by the automobile dealer to the finance company. Therefore, the tax payable by the dealer would be on the gross amount received from the financial company and not on the balance amount, i.e., after excluding the amount that he passes on to the customer."

Thus, the referring finance incentive is subject to service tax under the taxable category of "Business Auxiliary Services".

Incentive, Stock Compensation from Principals

We get incentives from principals on achieving our targets fixed by them for both purchase of vehicles and sale of vehicles to the customers.

Whether such incentives attract Service Tax?

The querist is working on principal-to-principal basis and, therefore, not providing any service to the seller (client) from whom the vehicles are purchased. Hence, such incentive is not subject to service tax.

Our principals make downward revision in prices based on the market scenario and the downward revision are being offered as discounts to the customers by us. The discounts, which we offer to the customers are being reimbursed to us by our principals by way of “Stock Compensation”.

Likewise, we offer discounts to the employees of certain corporates who are listed with our principals on production of certain documents and the discounts, in turn, are being reimbursed by our principals.

Whether reimbursement of discounts by principal attracts Service Tax?

The discounts that are being offered do not fall within the purview of any of the taxable service categories and hence, the same is not subject to service tax.

Circular No. 699/15/2003-CX., dated 5-3-2003
F. No. 248/1/2002-CX.4

Government of India Ministry of Finance (Department of Revenue), Central Board of Excise & Customs, New Delhi

Subject: Clarification regarding service tax on authorised service station.

I am directed to say that some doubts have been raised as to -


(i)	Whether the service provided by an Authorised Service Station related to the motor vehicles other than those for which they do possess authorisation from the manufacturer, are liable to service tax or not.

(ii)	Whether the cost of lubricants/paints provided during the course of providing any taxable service by an Authorised Service Station would form part of value of taxable service for the purpose of levy of service tax.

(iii)	Whether any services provided to customer at the time of purchase of new vehicle is liable to service tax.

(iv)	It is clarified that per Section 65(8) of Finance Act, 1994, "Authorised Service Station" means any service station, or centre, authorised by any motor vehicle manufacturer, to carry out any service or repair of any motor car or two wheeled motor vehicle manufactured by such manufacturer. As per section 65(90) (zo), the taxable service is any service provided to a customer, by an authorised service station, in relation to any service or repair or motor cars or two wheeled motor vehicles, in any manner. Therefore, service tax is leviable only on such services which are provided in relation to motor cars or two wheeled motor vehicles for which the service station is authorised. The intention was also to cover only the authorised service and repair of motor car and two wheeled motor vehicles.

2.	During the course of providing service, an authorised service station also replaces engine oil, gear oil and coolants, etc., as per the request of the customer. The price charged by authorised service station for engine oil, gear oil and coolants is towards sale of these consumables to the customer. Therefore, the sale of consumable during course of providing service is akin to sale of parts and accessories and therefore value of such consumables is not includible in the value of taxable services provided value of such consumables is shown separately. However, there are certain items such as paints used for painting body, etc., during the course of providing service, and form intrinsic part and parcel of service in so much as that these are not distinctly and separately identifiable from the services rendered. Therefore, value of such items, which form intrinsic part of service, is includible in the value of taxable service.

3.	The activity of providing Teflon Coating at the time of sale cannot be construed as a service or repair provided by an authorised service station even though the same dealer may also be authorised to carry out after sale services. The authorised sales dealer and authorised service station are appointed to perform two distinct functions for the car manufacturer and therefore the activity performed at the time of sales of vehicle by the dealer is distinct from the service provided by the authorised service station. Normally, authorised service station comes into picture only after vehicle comes on road. Therefore, it is envisaged appears that any activity of sales dealer at the pre-sale stage or at the time of sale will not come under the purview of service tax.

Free Services during Warranty Period,

Principals offer free services for a specified period for the new vehicles purchased and they compensate us for the services to be done to the customers during the above period in advance by making suitable adjustments in our margin (i.e., Dealers' margin) on sale of vehicles.

Whether such free services are subject to Service Tax?

As per Master Circular No. 96/7/2007 dated 23.08.2007, the department has clarified as follows:

"036.07/23.08.2007

Authorised dealers of motor vehicles provide to customers free servicing of motor vehicles without charging any amount as service charge from the customers. The vehicle manufacturer promises such a facility to attract customers and reimburses the service charges to the authorised dealers, who provide to customers free servicing of motor vehicles. However, as per agreement, consideration for the service provider is not directly paid by the customer but by the vehicle manufacturer.

Whether such 'free services' given to the customer free of cost by the authorised dealers (for which they are reimbursed by the vehicle manufacturers) are liable to service tax under authorised service station service [section 65(105) (zo)]?

In this case, service is provided by an authorised service station to a customer and the service provider receives the consideration for the services provided from the manufacturer.

Service tax is liable on the amount received from the vehicle manufacturer for the purpose of servicing."

With respect to the query in relation to free services provided by the authorised service station to customer, where there is no reimbursement from the manufacturer and component of free services is built into the dealer's margin, and taking into account all the facts of the present case, the service tax is not leveiable on such free services since at the time of sale, the dominant intention of the seller is to sell goods. This is further clarified by the fact that VAT is being paid on the full sale price including dealer's margin.

We conduct promotional activities on getting prior approval from our principals and the portion of the amount spent on such promotional activities are being reimbursed to us by our principals on submission of certain documents.

The querist is working on principal-to-principal basis. By doing promotional activities, they are increasing the sale of their own goods purchased from the principal. The querist is not providing any service to its principal. Rather, the querist is providing service to promote its own business. As per CBEC Circular No. 332/35/2006- TRU dated 01.08.2006, if there is no service provider and service recipient relationship, question of providing taxable service to any person by any other person does not arise. The views are expressed by the department in case of construction services, but as per our point of view, the same would apply to all taxable services.

Renting of Immovable Property, and Storage & Warehousing Services

We have four warehouses, which are being used by our group companies for storage, servicing and repairs of 3-wheelers (one warehouse), 2-wheelers (one warehouse) and Cars (2 warehouses).

The user companies are paying a warehousing charge to my personal company who owns the four warehouses that have been leased to it by Kolkata Port Trust.

The storage and warehousing charges would amount to approximately Rs. 2.5 lacs per month. My company raises a bill/ invoice on the user companies each month for the storage and warehousing charges.

Should it charge a service tax on this?

The services are either covered in (a) Renting of Immovable Property Services; or (b) Storage and Warehousing Services.

The category of service provided can be ascertained as per the terms and conditions of the agreement for providing such services. In any case, the service tax is chargeable on the service.

My company that owns the warehouses is not registered under the Service Tax. Should it get registered and, if so, under what category of services and what will be the formalities for registration?

Since the service provided is a taxable service, the company has to get itself registered under either of the above two categories of service, based on the terms and conditions/as per the agreement with the parties. The company has to file form ST-1 with the Service Tax Department for registration.

In case the service tax is to be charged, whether we will have to deposit the amount with the Government every quarter or every month?

In case of a company, the tax is to be paid on a monthly basis.

Can the user companies claim as an input the service tax that they have paid while calculating their service tax liability?

The user companies can take the input service credit of those services, which are being used by them for providing output taxable services. So far as the input service is being used to provide output taxable service, they can take credit of input service.

Advertising Agency Services

We are generating revenue as "Finance Commission" in respect of business given to banks and finance companies. The above has been treated as "Income under Business Auxiliary Services".

We are also releasing advertisements, advertising finance schemes in the newspapers. In respect of these advertisements, we are paying service tax under the heading "Advertising Agency Services". This has been taken as an input credit by us and adjusted against Service Tax payable in respect of finance commission received.

Service Tax department has rejected this claim for input credit, telling that the advertisement is in relation to sale of vehicle and is not directly related to the finance commission earned by us, notwithstanding the fact that all the advertisements carry a finance scheme.

Please let us know if any other similar case and judgment is there in our favour or otherwise.

As per the brief stated to us, in our opinion, the service tax paid under the heading "Advertising Agency Services" used for providing "Business Auxiliary Services" to banks can be taken as input service credit on proportionate basis. The definition of input service is given in 3 parts - means, inclusive as well as exclusive clause. As per the relevant extract of definition of input service under Rule 2(l) of CENVAT Credit Rules, 2004, input service:

Means:

(i) "used by a provider of taxable service for providing an output service"; or

Includes:

"and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation up to the place of removal".

The services of advertising agency are covered under Section 65(105)(e). As per Section 65(105)(e), taxable service means any service provided or to be provided to any person, by an advertising agency in relation to advertisement, in any manner.

The advertisement services received are covered under the inclusion clause of definition of input credit services. Input service includes services used in relation to advertisement or sales promotion.

Opinion

Since the advertisement services received are covered under the definition of input credit services, thus the input service credit in relation to such services can be taken and utilised.

It is to be clarified that the advertising agency services are being used for both i.e. selling of automobiles and earning finance commission. The whole service of advertising agency is not being used for earning finance commission. Hence, proportionate amount of input service credit shall be reversed accordingly, which does not pertain to finance commission income.