Demystifying Service Tax A vast majority of automobile dealers have been finding it difficult to come to terms with the complexities of service tax. As already announced, FADA has appointed Mr Ashok Batra, FCA as Service Tax Consultant to clarify the legal position and practices with regard to various provisions of Service Tax, as applicable to automobile dealers in response to the queries received from them. Reproduced hereinbelow are the clarifications on a few service tax related queries raised by a dealer based in Kolkata. Query # 1: Works Contract Tax & Service Tax – In West Bengal VAT Act, there is a levy on Works Contracts Tax (WCT). As per our understanding, this is payable on items like painting, polishing, etc., where the material and labour are indistinguishable. From 2007 onwards we had been paying the same @ 70% of full VAT rate (13.5%) i.e. 9.45%. Also, we had been paying service tax on the same item at full rate of 10.3%. Hence, the total tax levy on items like painting is almost 20%. Thereafter, we have received an opinion, wherein it has been suggested that we can pay service tax at one-third the rate only i.e. 3.33% on the items where we are paying WCT. We implemented the same 3 months ago. Recently, the Service Tax Department investigated our operations and have pointed out that this is not as per ST law and is demanding that we charge service tax at the full rate to our customers even where we are charging WCT. Please note that we follow the normal practice in the industry, wherein a Job Card/Repair Order is opened and finally an invoice is generated, which has both the parts as well as labour on the same invoice (though shown separately), with separate tax amounts. The Service Tax department's contention is that nowhere on the reverse of the Repair Order there is an explicit condition that this contract includes labour and material, and hence this is not a works contract, which would otherwise have the benefit of a concessional service tax rate. On the other hand, the West Bengal Sales Tax department contends that even beyond the WCT, which we pay on polishing and painting, we should also pay WCT @13.5% on the parts which are shown in the invoice, claiming the entire contract as a works contract. We are currently charging VAT on parts @ 4% which is the rate of VAT for parts sold within the state. As understood by us, we are showing the value of spare parts sold and labour charges separately in the invoices. The cost of paints and polish purchased are included in the labour charges and the spare parts sold are shown separately in the invoice. Can we obtain a concessional rate of service tax on the items where labour and material consumed, like painting of vehicle, during service/repair are inseparable and we are paying WCT? Should we be charging our customers WCT@ 13.5% on the parts sold during service/repair, shown separately as sale in the invoice or can we continue paying only the VAT on parts which is 4%? Reply Service tax The current situation does not fall within the purview of taxable clause of Works Contract Services provided in Section 65(105)(zzzza) since prima facie, all the essential prerequisites of such services are not satisfied. Thus, the services provided by the querist are not covered under the Works Contract Service. Prima facie, the repair services of vehicles provided by the querist falls under the Authorised Service Station Services. The paints and polish purchased are used as consumable while providing the authorised service station services and it is being assumed that the cost of such polish or paints are included in the labour charges in the invoices and are not separately identifiable. But the value of labour charges and spare parts are separately identifiable. As per larger bench decision in M/s Aggarwal Colour Advance Photo System Vs Commissioner of Central Excise, Bhopal [2011-TIOL-1208-CESTAT-DEL-LB], the value of consumables like paint and polish are included in the value of taxable services. However, in the case of Commissioner Vs Shilpa Colour Lab - 2009 (14) S.T.R. J163 (S.C.), the apex court has decided that the value of consumables are not to be included in the value of taxable services subject to Notification No. 12/2003-ST. Thus, the benefit of Notification No. 12/2003-ST can be availed and the cost of consumables like paint and polish can be excluded from the value of taxable services. Such exclusion of value of consumables from the value of taxable services is subject to litigation since the department will refer to the larger bench decision of Hon'ble Tribunal. The concessional rate of service tax in the instant case is not available and the service tax is payable on the full rate on the value of labour charges excluding the cost of consumable like paint and polish as per the apex court decision and Notification No. 12/2003-ST. However, if the value of consumables is excluded, the same shall be subject to litigation. VAT The transaction is covered under the WCT when the value charged involves both labour and material sold. However, the spare parts sold does not involve labour and hence, they are subject to VAT. Thus, the querist can continue to charge VAT on the sale of spare parts provided the same are shown separately in the invoice. Query # 2: Handling Charges on Registration We charge 'Registration, Road Tax and Miscellaneous Charges' to our customers under the invoice of a separate company - Topsel Services Pvt Ltd. This is to avoid the imposition of VAT on the amount charged as 'Registration & Road Tax'. If it were charged and invoiced by the dealership that is selling the vehicle, the WB Sales tax department contend and consider it to be a part of the pre-sales expenses and demand VAT on the total bill. In such a case are we exempted from paying Service Tax on the amount retained by us, as it is a pre-sale expense? Or, since we charge the same under a separate company, it is no longer a pre-sale expense and we would need to pay service tax on the amount retained by us? Is the contention of the Sales tax department correct that we need to pay sales tax on the full amount of 'Registration, Road Tax & Misc charges' charged by us as it is a pre-sale expense? Reply VAT 'Registration, Road Tax & Misc charges' are pre-sale expenses and are subject to VAT. Hence, VAT is payable on the same. As per Section 2(zd) of DVAT Act, 2004, sale price includes "any sum charged for anything done by the dealer in respect of goods at the time of, or before, the delivery thereof". The Registration, Road Tax & Misc charges are charged before the delivery of vehicles; hence, the same are included in the value of sales and shall be subject to VAT. Similarly, the definition of sale price would have been provided in West Bengal VAT Act also. Service tax As discussed above, 'Registration, Road Tax & Misc charges' are subject to VAT since the same are pre-sale expenses. These expenses are not subject to service tax. 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. Query # 3: Centralised Service Tax Registration Our company Topsel Pvt Ltd is into various activities like -auto spare parts distribution business, franchisee of Titan watches and Tanishq jewellery and dealers for Toyota vehicles, spread over many states in East India with an additional branch office in Delhi. Till 2007, we had a separate Service Tax registration for each branch. In 2008, during a Service Tax audit, it was suggested that we obtain a centralised registration for Service Tax for our company and we obtained the same. Since then, all branches send the computation of input and output service tax to the Head Office from where it is collated and deposited under the various heads, Business Auxiliary, etc. However, there is no distinction made in the input credits of various divisions like auto spare parts distribution, Titan & Tanishq, or Toyota business, as we thought this was a benefit of centralised registration. During the Service Tax investigation, the authorities have objected to the same. Can we contend that the above centralised registration was granted by the Department itself and, hence, we have been collating our credits? Or do we need to go back to separate Service Tax registration for each unit/branch/division? Reply As per the facts of the case, the Cenvat credit once availed properly can be utilised against the same output services or other output service provided. The one to one co-relation of CENVAT credit and output service provided is not required. Query # 4: Finance Commission We sometimes buildin the finance commission receivable as a discount into the finance scheme so that the EMI to the customer is reduced. For example, if we are to receive 2% finance commission and the EMI would have been, say, Rs. 15,000 payable by the customer to the bank, we request the bank to plough back 1% of our commission so that the EMI is reduced, say Rs.14,800. Hence, when at the month end the finance company sends us a statement of finance commission payable, it shows that our gross commission was, say Rs. 10,000 @ 2% and the net commission paid to us is Rs. 5,000 @ 1 %. Hence, the amount of cheque that we receive from the finance company as commission is Rs. 5,000/- only and even the TDS is deducted by the bank on the same amount. In the above cases, we are paying service tax only on the net amount received, i.e. Rs.5,000. However, in some cases, we receive a commission of Rs. 10,000 from the bank, but give an upfront discount of, say, Rs. 5,000 to the customer, which is built into the value of the vehicle sold, i.e. we give a discount of Rs.5,000 on the ex-showroom price of the vehicle. In such a case, we receive Rs. 10,000 as finance commission from the bank and TDS is also deducted on Rs.10,000. In such cases, we pay service tax on the gross amount of Rs.10,000. We would like to know if the above practice is correct? Though the nomenclature used on the statement is "gross commission", we actually receive by cheque the net commission, and, hence, we pay service tax on the amount actually received from the bank. Reply The relevant portion of Circular no. 87/5/2006-ST, dated 06-11-2006 is reproduced 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 is passed on to the customer." Hence, as per the circular, the service tax is payable on the gross amount earned by the Automobile dealer. The part of commission shared by the Automobile Dealer with the customers either directly or indirectly is a separate transaction. The earned commission in both the cases is gross commission, which is subject to service tax irrespective of the amount received by the querist. Thus, the querist is liable to pay service tax on the gross amount receivable as finance incentive from the Banks, Financial Institutions, etc.