No service taxes on free services

However, the issue of whether such costs can be charged to service tax is a live one. It is interesting to analyse this issue, as some key indirect tax principles are involved.

After sale services provided by dealers were covered under service tax, as authorized service station's services', from 16/6/2005. The definition envisages that if a service station or centre authorized by a motor vehicle manufacturer carries out, inter alia, servicing of any motor vehicle manufactured by such manufacturer, the tax would apply.

 

As can be seen, the definition is limited to the automotive sector but the situation could relate to other industries as well, as similar other definitions in service tax law are in force.

It is important to note that service taxes are payable on the consideration charged by the service provider from the service recipient. Further, the service tax rules specifically provide that the tax is only to be paid upon receipt of consideration by the service provider, unlike any other indirect tax.

Consequently, should no consideration be received by the service provider or should the service be provided free of cost, no service tax is leviable unless where consideration is determined to have been paid in the specific situations envisaged by the Valuation Rules.

In the context of authorized service station's services, the Department has clarified that the tax is applicable where free services are provided to customers but consideration is received from the manufacturers. This is the correct position since the fact that the person paying for the services, i.e. the manufacturer, is different from the receiver of the services i.e. the customer, is not material, as long as consideration has been paid to the service provider i.e. the dealer, for rendering the services.

The issue is with regard to those cases where no consideration has been paid at all to the service provider by either the customer or the manufacturer.

This issue was addressed by the Tribunal in a recent judgement in ASL Motors Pvt. Ltd. Vs. Commissioner of Central Excise (2008 TIOL 114). In this case, the assessee was an authorized dealer of a motor vehicle manufacturer and provided after sale services to its customers. The dealer charged only the material costs relating to these services to the customers and did not charge any labour or service costs to the customers. Further, the motor vehicle manufacturer also did not reimburse these expenses to the dealer.

Nevertheless, the authorities sought to recover service tax on the ground that a part of the dealer's margin, recovered by the dealer from the customer as part of the price of the motor vehicle, was to be attributed towards the provision of the above services. In other words, the charge was that since the price of the product was inclusive of the dealer's margin or mark up, a part thereof was to be necessarily construed as relating to the labour element of the after sales service and hence charged to tax.

The Tribunal held that in case of after sales services, service tax is leviable provided the manufacturer had reimbursed/paid for the expenses incurred for rendering such services. In the absence of such reimbursement/payment, no service tax could be levied on services rendered free of cost to customers. The recovery of the materials cost was not relevant for this purpose.

It further held that there was mutual exclusivity between the taxability of the sale of goods, which was charged to the State sales tax, and the excise duty on the manufacture of goods and the tax on services, which were both levied by the Centre. It noted that the dealer's margin had been recovered by the dealer from the customer as part of the sale price of the vehicle, and this is an important point, and that the entire amount had hence been subjected to sales tax/VAT.

Further, when the dealer sold the vehicle to the customer and recovered the price, including his margin, the intent was to sell goods and not provide any services.

The dominant nature of the transaction between the dealer and the customer was that of sale of goods and not the provision of service and the relevant tax leviable on the transaction should hence be the sales tax. The Tribunal thus held that the dealer's margin was charged as part of the consideration for sale of the vehicle alone and that no part of such consideration was recovered by the dealer from the customer on account of services. Thus, no service tax would apply in such a situation.

The case is important as it affirms several important and basic principles of indirect taxation including that of mutual exclusivity of goods and services taxation as also the related and salutary one of impermissibility of double taxation of a single transaction to both the goods tax and the service tax, as upheld by the Supreme Court in the BSNL case.

The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers

                                                                           pwctls.nd@in.pwc.com