OIO NO. 64/STC-AHD/ADC (MKR)/2011-12 Page 1 of 44
BRIEF FACTS OF THE CASE:-
M/s IFB Industries Limited, Upper Level, Akik Complex, Pakwan Dining Hall Lane, S.G. Highway, Bodakdev, Ahmedabad ( hereinafter referred to as “IFBL” for the sack of brevity ) are providing taxable service under the category of ‘Management, Maintenance & Repair’ as defined under Sub Clause (105) (zzg) of Section 65 of the Finance Act, 1994, holding Service Tax Registration No.AAACI6561RST002. Basically, M/s IFB Industries Limited is a manufacturer of Washing Machines and Microwave Ovens. For marketing its products in the territory of Gujarat state M/s IFB have established an office in Ahmedabad in the name and style of M/s IFB Industries Limited, Ahmedabad. M/s IFB Ltd., are independently registered with Service Tax Commissionerate, Ahmedabad for rendering post sale repair and warranty period repair service to their clients in the state of Gujarat. The Service Tax registration so taken is limited to their repair activities carried out in the state of Gujarat only. In other words, M/s IFBL, Ahmedabad are an independent entity as far as Service Tax provisions are concerned.
1.2 Whereas, during the course of audit, it was observed that M/s IFBL were providing service after sale of product under warranty period. During warranty period, M/s IFBL were not charging any charges on parts used for the service provided to the clients of M/s IFB Industries Limited. However, it is seen that M/s IFBL were getting warranty income for the services rendered from its head office on which service tax was not being paid. As per circular No. 59/8/2003 dtd. 20.06.2003, it has been prescribed “in case where during the guarantee period, the services are provided to the buyer of the goods while payment for the same are received from the supplier of the goods. In this regards it is clarified that irrespective of the facts that the receiver of the service is different from the person making payment for such services, the service tax is leviable on the services provided towards maintenance & Repair. Therefore, for the services provided during the warranty period by the dealer or any other authorized persons, service tax would also be leviable on any amount received by such dealer or such other authorized person from manufacturer of such goods”. In the instant case, M/s IFBL were getting warranty period repair/maintenance charges from their manufacture unit M/s IFB Industries Ltd, Goa and were also getting reimbursement of cost of parts used towards service in the warranty period. M/s IFBL were also availing CENVAT credit of input used during service under warranty service. Further, the assessee had their office in Ahmedabad and under which some franchises elsewhere in Gujarat state were also rendering repair/warranty period service on behalf of M/s IFBL. Those franchises were raising bills on M/s IFBL, Ahmedabad towards service rendered to the clients of M/s IFB Industries, Ahmedabad. M/s IFBL were availing benefit of CENVAT credit on the bills raised by those franchises, who provided service on behalf of IFBL. M/s IFBL during audit discussion had contested that, whatever they were obtaining from their manufacturing unit, were expenses of their main branch. Further, M/s IFB Industries Limited was not centrally registered with service tax department. As per service tax law, M/s IFBL, Ahmedabad were separately registered with service tax department and they were a separate entity as far as Service Tax is concerned. Therefore, the consideration received by them from M/s IFB Industries, Goa ( Factory ), which were reflected in their books of account were liable to service tax as M/s IFBL, Ahmedabad, were an independent entity as per Service Tax law. The detailed of warranty income received financial year were as under:-
Table-1
Year / Warranty income received by IFB, Ahmedabad from their head office Rs. / ST payableRs.
2005-06 / 10,30,750/- / 1,05,136/-
2006-07 / 15,96,500/- / 1,95,411/-
2007-08 / 23,56,760/- / 2,91,296/-
2008-09 / 24,35,190/- / 3,00,989/-
2009-10 / 30,66,895/- / 3,15,890/-
Total / 1,04,86,095/- / 12,08,722/-
1.3 Further, it was seen that in the instant case, M/s IFBL, Ahmedabad had obtained Service Tax registration under the provisions of Section 69 (1) read with Rule 4(1) of Service Tax Rules and therefore it was the liability of M/s IFBL to discharge service tax liability on the income they had received from M/s IFB Industries, Goa towards the repair and warranty period repair and maintenance. Also, the periodical returns (ST-3) under the provisions Section 70 of Finance Act read with Rule 7(1) and 7 (2) had been filed by them with the department and in doing so, M/s IFB Industries Limited, Goa does not figure for the obvious reason that M/s IFBL were an independent entity as far as service tax provisions are concerned. The provisions of Section 68 of Finance Act reads as under:-
“(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.
(2009) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.”
1.4 If the above provisions are applied to in the present case, M/s IFBL were service provider and it was their responsibility to discharge the Service Tax liability on the income they had received from M/s IFBL Industries Limited, Goa. Therefore, it appeared that M/s IFBL failed to discharge tax liability on the income of Rs.1,04,86,095/- which comes to Rs.12,08,722/- as shown in the above table.
1.5 It also appeared that M/s IFBL were availing benefit of CENVAT credit under CENVAT credit Rules. During the course of audit, it was observed that M/s IFBL were providing service under warranty period after the sale of products manufactured by M/s IFB Industries Limited, Goa. During the period, the assessee were not charging any charge to the clients on the service provided and parts used during warranty period. Further, the value of parts, which were replaced during the course of warranty period service were reimbursed/credited by M/s IFB Industries Ltd, Goa to the account of M/s IFBL as shown in their balance sheet (Schedule-9). As the value of the parts were reimbursed/ re-credited by M/s IFB Industries, Goa, the CENVAT credit, which were already availed by M/s IFBL became inadmissible and the same were required to be reversed with interest. If an assessee used the parts in any service and availed the CENVAT credit on such parts, than the same were required to be included in the taxable value. However, in the present case M/s IFBL were not billing the client and they were getting the warranty charges from M/s IFB Industries, Goa as discussed in previous para and were also getting the credit / reimbursement of the value of parts utilized in warranty period, in addition to warranty income referred to in above para. In such an eventuality, M/s IFBL were required to discharge the Service Tax liability on the quantum of value of the parts utilized in warranty period service or reverse the CENVAT credit already availed. As no tax liability was discharged on the value of parts reimbursed. Apparently, no CENVAT credit had been reversed by M/s IFBL on such parts received free of cost by them by virtue of free replacement system followed by M/s IFB Ltd, Goa. However, the value of free of cost parts so used in the repair/warranty repair service by M/s IFBL would necessarily form part of taxable value of the service rendered by M/s IFBL, which had not been done and clearly the value of free parts received by M/s IFBL escaped levy of Service Tax. The details of value of parts received free and CENVAT availed thereon were as under:
Table-2 -
Year / Reimbursement of parts received by IFB, Ahmedabad on use of parts during warranty period. Rs. / Cenvat Credit availed on inputs used during warranty period.Rs.
2005-06 / 6,17,056/- / 1,10,574/-
2006-07 / 8,67,902/- / 1,19,174/-
2007-08 / 9,72,556/- / 1,01,793/-
2008-09 / 9,39,825/- / 1,34,827/-
2009-10 / 11,35,574/- / 1,62,955/-
TOTAL / 45,32,913/- / 6,29,323/-
1.6 M/s IFBL were having sales and service activity at Ahmedabad. The Balance-Sheet for the both those activities were prepared separately. The CENVAT credit availed on the various expenditures incurred on their sales activities namely advertisement, telephone bills, mobile phones, bank charges; insurance etc., were transferred to their service unit for taking CENVAT credit. The sale activities were having no relevance with the output service they were rendering. In this way, inadmissible CENVAT credit of sales activity were availed and utilized for payment of service tax. The details of CENVAT credit so availed were as below:-
Table-3
Year / Amount of credit taken / Education Cess / Higher Edu. Cess / Total2005-06 / 1,10,961/- / 171/- / 0 / 1,11,132/-
2006-07 / 76,503/- / 1,541/- / 0 / 78,044/-
2007-08 / 83,293/- / 1,670/- / 776/- / 85,739/-
2008-09 / 1,13,136/- / 2,265/- / 1,131/- / 1,16,532/-
2009-10 / 14,285/- / 277/- / 143/- / 14,716/-
Total / 3,98,178/- / 5924/- / 2050/- / 4,06,163/-
1.7 As per Rule 3 (1) of the CENVAT Credit Rules, 2004, a manufacturer of final products or a provider of taxable service shall be allowed to take CENVAT credit of the duty of excise specified in first schedule of Excise Tariff Act, leviable under the Excise Act and the Service Tax leviable under Section 66 of the Finance Act. However, it appeared that the trading or the sale activities under taken by M/s IFBL were not related to the service being rendered by them, and thus the CENVAT availed on the sale activities has no nexus with their taxable output service and hence, the CENVAT so availed was irregular and deserves to be reversed/recovered with interest thereon under the provisions of Section 73 and 75 of the Finance Act. Rule 14 of CENVAT credit Rules, 2004 reads as ‘where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same alongwith interest shall be recovered from the manufacturer or the provider of output service’.
1.8 Therefore, in the present situation, it appeared that the CENVAT credit had been taken by M/s IFBL on their sales activities and credit so taken were utilized on payment of Service Tax on the taxable service being rendered by them. Two activities of ‘Sale’ and ‘Service’ were having no nexus and thus the credit so taken and utilized needs to be recovered from them with interest thereon as discussed in this para.
1.9 A statement of Shri Ramdev Agarwal, residing at Block A, Akik Complex, Pakwan Dining Hall Lane, Bodakdev, Ahmedabad- 380015, Branch Manager of IFB Industries Ltd. Ahmedabad was recorded on 20.10.2010 under section 14 of the Central Excise Act, 1944 made applicable to service tax vide section 83 of Finance Act,1994. On being asked about non payment of service tax on warranty income received from their Goa Factory for the period 2005-06 to 2009-10, he submitted the figures of 2009-10 of warranty income from Goa Factory of Rs.30,66,895/-. On being further asked about the non payment of service tax on such warranty income, he stated that this income are nothing but a financial support provided by Goa factory to the branch & the entire transaction are internal & when the profit & loss a/c of the company as a whole is prepared, such income gets knocked off & no where it is reflected as income of IFB. Since it is an internal financial arrangement between the factory & the branch both belong to the company (IFB) & the service provided by the branch to its Goa factory is nothing but a self service. When service is provided to own self, no service tax is payable. Thus they had not paid any service tax on such income of the branch.
1.10 On being further asked about the wrong availment of Cenvat Credit on sharing of expenses, he stated that since the expenses incurred by the branch are in relation to the business activity of the branch, these are input services within the meaning as defined under rule 2 (l) of the Cenvat Credit Rules, 2004. Thus, they have rightly availed the Cenvat Credit on such input service.
1.11 On being further asked about non payment of service tax on reimbursement of cost of spares used on sale of machines to the dealers, he stated that they had already paid an amount of Rs.94,756/- on 16.09.2010 relating to the period 2005-06 to 2008-09 along with Interest amounting to Rs.32,488/- as applicable upto the date of payment & duly intimated such payment to the Superintendent of Audit, Service Tax, Ahmedabad on 28.09.2010. He further stated that they have duly reversed the entire Cenvat Credit in respect of reimbursement of cost of spares used on sale of machines to the dealers during the year 2009-10.
1.12 On being further asked about non reversal of Cenvat Credit on sale of parts, he stated that they had already paid an amount of Rs.88,440/-on 16.09.2010 relating to the period 2005-06 to 2008-09 along with Interest amounting to Rs.57,487/- as applicable upto the date of payment & duly intimated such payment to the Superintendent of Audit, Service Tax, Ahmedabad on 28.09.2010. He further stated that they had duly reversed the Cenvat Credit in respect of Sale of Parts during the year 2009-10.