OIO No. 53/TSC-AHD/ADC(AS)/2012-13 Page 1 of 26
Brief facts of the case:-
The present show cause notice is issued in terms of Section 73(1A) of the Finance Act, 1994 as amended, for recovery of Service Tax not levied/not paid or short paid or erroneously refunded. The said section reads as under.
Section 73(1A): Notwithstanding anything contained in sub-section (1), the Central Excise Officer may serve, subsequent to any notice or notices served under that subsection, a statement, containing the details of service tax not levied or paid or short levied or short paid or erroneously refunded for the subsequent period, on the person chargeable to service tax, then, service of such statement shall be deemed to be service of notice on such person, subject to the condition that the grounds relied upon for the subsequent period are same as are mentioned in the earlier notices.";
1.2 M/s. IFB Industries Limited, Upper Level, Akik Complex, Pakwan Dining Hall Lane, S. G. High Way, Bodakdev, Ahmedabad (hereinafter referred to as “the said service provider”) had been issued the following Show Cause Notices for non payment of Service Tax and wrong availment of Cenvat Credit:
Table - 1
Sr. No. / Show Cause Notice File No. / Date / Issued by / Period / Amount of Service Tax not paid (Rs.) / Wrongly availed Cenvat Credit (Rs.)1 / STC-37/O&A/SCN/ IFB/ADC/10-11 / 22.10.2010 / Addl. Commr. of Service Tax, Ahmedabad / 2005-06 to 2009-10 / 18,35,045/- / 4,06,163/-
2 / STC-527/Demand/ IFB/D-III/11-12 / 21.10.2011 / Asstt. Commr. of Service Tax, D-III Ahmedabad / 2010-11 / 4,27,094/- / 14,558/-
1.3From the details submitted by the said service provider vide letter dt. 21.07.2012, it was observed that they have continued to follow the same practice of not paying the Service Tax and wrongly availing the Cenvat credit on the strength of cenvatable invoices of the spare parts used for maintenance during warranty period during the period 2011-12 as detailed below:
Table - 2
Period(F. Year) / Income received being warranty income (Rs.) / Rate of Service Tax (inclusive of Edu. Cess and S. & H. Edu. Cess) / Service Tax Payable (Rs.) / Service Tax Paid (Rs.) / Service Tax Payable/ not paid (Rs.) / Wrongly availed Cenvat Credit (Rs.)
2011-12 / 64,05,534/- / 10.30% / 6,59,770/- / 00 / 6,59,770/- / 1,91,172/-
1.4It appeared that the facts, circumstances and contraventions of the provisions of the Finance Act, 1994 and the grounds relied upon in the present notice are similar to those discussed in the earlier Show Cause Notice mentioned at Sr. No. 2 of Table-1 above and therefore, this notice is being issued in terms of Section 73(1A) of the Finance Act, 1994 which has been introduced in the Finance Act, 2012.
1.5 Therefore, M/s IFB Industries Limited was issued a show cause notice asking them as to why:
(i) the services rendered by them during the F.Y. 2011-12 should not be considered as taxable service under the category of “Management, Maintenance and Repairs” services as defined under Section 65 (105) (zzg) of the Finance Act, 1994;
(ii) the amount of Rs. 64,05,534/- received being warranty income from M/s IFB Industries, Goa should not be considered as taxable value under the category of Management, Maintenance and Repairs services;
(iii) the service tax amounting to Rs.6,59,770/- (Rupees Six lakh fifty nine thousand seven hundred seventy only) on the above mentioned warranty income of Rs. 64,05,534/- should not be demanded and recovered from them under Section 73 of the Finance Act, 1994;
(iv) Interest at the prescribed rate should not be charged in terms of the provisions of Sec 75 of the Finance Act, 1994 as amended from time to time;
(v) Penalty under Section 76 of the Finance Act, 1994 should not be imposed upon them in as much as they failed to pay service Tax within the stipulated time frame;
(vi) Penalty under Section 77(2) of the Finance Act, 1994 as amended should not be imposed upon them as they failed to self-assess the correct taxable value of the services rendered by them and report the same in the statutory ST-3 returns;
(vii) CENVAT credit amounting to Rs.1,91,172/- (Rupees One lakh ninety one thousand one hundred seventy two only) wrongly availed by them should not be demanded and recovered alongwith interest from them under the provisions of Rule 14 of the Cenvat Credit Rules, 2004 read with Section 73 of the Finance Act,1994 ; and
(viii) penalty should not be imposed upon them under Rule 15(1) of Cenvat Credit Rules, 2004 in as much as they have contravened the provisions of Rule 3 of the Cenvat Credit Rules, 2004(as amended);
2.Defence Reply :-
2.1The said service provider had submitted their defence reply on 23.11.2012 vide their letter dated 21.11.2012 wherein they, inter-alia, submitted that M/s
1.1 IFB Industries Ltd. is a company registered under the Companies Act, 1956 having its Registered Office in Kolkata, West Bengal (hereinafter referred to as ‘The Company’). The operations of the company involve manufacturing and trading in Home Appliance products, like washing machine, dryer, dishwasher, micro wave oven, etc. The company is having its manufacturing unit in Goa where it produces washing machine, dryer, etc. Dishwashers and micro wave ovens are being imported. The entire range of products is being sold through the network of branches of the company located across the country. After sale servicing of such appliances is also being handled by the said branches. One such branch is the Ahmedabad Branch (hereinafter referred to as ‘the Noticee’) located at Upper Level, Akik Complex, S.G.Highway, Bodakdev, Ahmedabad.
2.2They further submitted that ‘The Noticee’ sells the home appliance products as aforesaid; the manufactured products sold are being dispatched by the Goa factory through stock transfer. The Noticee handles the after sale service of the products for and on behalf of ‘the company’. The after sale service provided by the Ahmedabad branch was in the nature of “Maintenance or Repair Services” which had come into the service tax net w.e.f. 01.07.2003 vide Notification No. 7/2003 – ST dated 20.06.2003. On being registered under the Service Tax law ‘the Noticee’ has been regular in depositing the service tax and filing the half yearly returns.
2.3They further submitted that as per the corporate policy, the manufacturing unit in Goa and all the branches of IFB Industries Ltd. including the Noticee branch are considered as separate and independent profit centers for the purpose of evaluating their performance. For the purpose of evaluating the performance of the branches as individual profit centers, in terms of the said corporate policy, a sum of Rs. 220/- per machine sold is being paid by the Goa unit to all the branches of the IFB Industries Ltd. as financial support towards the cost of provision of services during the warranty period. Such financial support is being disbursed to the Service Division through Marketing Division of the concerned Branch.
2.4They further submitted that during the financial year 2011-12 it received a sum of Rs. 64,05,534/- from its Goa unit through Marketing Division as financial assistance for providing after sale service during warranty period in respect of the machines sold during the material period in accordance with the corporate policy as aforesaid. The Noticee therefore, iterate that money so received from the Goa unit was not in the nature of warranty income.
2.5They further submitted that during the warranty period, the Noticee did not charged any amount from its customers for providing maintenance and repair services and accordingly, the Noticee does not pay any service tax thereon. Beyond the warranty period and at the request of the customers, the Noticee enters into annual maintenance contracts with them for a consideration and accordingly charges and in turn pays service tax on the consideration so received. In addition, the Noticee also provided ‘Repair and Maintenance Services’ to the consumers of the company not covered by the annual maintenance contracts. Thus it is clear that for providing the ‘maintenance and repair services’ whether under annual maintenance contract or not, spares as and when necessary were used by the Noticee. While providing ‘maintenance and repair services’, the Noticee used duty paid inputs and service tax paid input services and takes credit thereon and utilizes such credit for payment of service tax on output services.
2.6They further submitted that the Noticee did not maintain separate accounts for inputs and input services used for providing taxable services on which service tax had been paid and for inputs and input services used for providing taxable services on which service tax had not been paid as the noticee entertains a bona fide belief based on legal interpretation that, it was not required to maintain such separate accounts under the law; that the Noticee takes entire credit on inputs used in provision of output services but appropriately reveres the Cenvat credit of service tax paid on common input services attributable to the trading activity carried out through the Service Division as the Trading had been treated as ‘exempted service’ w.e.f. 01.04.2011 within the meaning of Rule 2(e) of the Cenvat Credit Rules, 2004.
2.7They further submitted that the Noticee vide letter, bearing Ref No. F. No. ST/04-24/RG-14/2009-10/2066 issued by the Superintendent, Service Tax, Range-XIV, Division-III, Ahmedabad, was asked to provide the detail of the following from April-2011 to March 2012
- Warranty Income received month wise.
- Cenvat Credit on Warranty Spares.
- Cenvat Credit on sharing of expenses.
- Cost of Spares used on sale of machines to dealers.
The Noticee vide its letter dated 21.07.2012 provided the details as required by the abovementioned letter.
2.8They further submitted that after the aforementioned letter was received by the Department, by the impugned Show Cause Notice the Noticee was asked to show cause as to why –
(i) the services rendered by them during F.Y. 2011-12 should not be considered as taxable service under the category of “Management, Maintenance and Repairs” services as defined under section 65(105)(zzg) of the Finance Act, 1994.
(ii) the amount of Rs. 64,05,534/- received being warranty income from M/s IFB Industries, Goa should not be considered as taxable value under the category of “Management, Maintenance and Repairs services” ;
(iii) the service tax amounting to Rs. 6,59,770/- on the abovementioned warranty income of Rs.64,05,534/- should not be demanded and recovered from them under section 73 of the Finance Act,1994;
(iv) interest at the prescribed rate should not be charged in terms of provisions under section 75 of the Finance Act, 1994; as amended from time to time;
(v) penalty under section 76 of the Finance Act, 1994 should not be imposed upon them in as much as they have failed to pay the service tax within the stipulated time frame;
(vi) penalty under section 77(2) of the Finance Act, 1994 as amended, penalty should not be imposed upon the Noticee as they failed to self assess the correct taxable value of the services rendered by them and report the same in the statutory ST-3 returns;
(vii) cenvat credit amounting to Rs. 1,91,172/-wrongly availed by the Noticee should not be demanded and recovered alongwith interest from them under the provisions of Rule 14 of the CENVAT credit Rules,2004 read with section 73 of the Finance Act,1994; and
(viii) penalty should not be imposed upon the Noticee under Rule 15(1) of the CENVAT credit Rules, 2004 in as much as they have contravened the provisions of Rule 3 of the CENVAT Credit Rules, 2004(as amended);
2.9Allegations raised in the impugned Show Cause Notice based on the Show Cause Notices Nos. STC-37/O&A/SCN/ IFB/ADC/10-11 dated 22.10.2010 and STC-527/Demand/ IFB/D-III/11-12 dated 21.10.2011 in terms of section 73(1A) of the Act.
IFB Industries Ltd. was not centrally registered with the service tax department and their Ahmedabad branch is separately registered with the service tax department. The Ahmedabad branch obtained service tax registration under section 69(1) of the Finance Act, 1994 read with Rule 4(1) of the Service Tax Rules, 1994. Therefore, in the eye of law the Ahmedabad branch should be treated as a separate legal entity. During the course of departmental audit it was observed that the Noticee sold the goods manufactured by the Goa factory of IFB Industries Ltd. For providing ‘repair and maintenance’ service during the period of warranty in respect of the goods sold by them, the Noticee did not charge anything from the customers for the taxable service provided under ‘Management, Maintenance & Repair’ service nor did they charge anything for the spare parts used while providing such taxable service. On the other hand for rendering the warranty services to the customers through the net work of the franchisees the latter raised bills on the Noticee on the basis of which the Noticee also availed CENVAT Credits. It was alleged in the SCN that the Noticee received moneys from its manufacturing unit in Goa by way of warranty period repair and maintenance charges income for providing such services; although no service tax was paid by the Noticee on such income. The warranty incomes so received from the manufacturing unit in Goa for the period 2011-12 is Rs. 64,05,534/- . It has been alleged in the SCN that as per Circular No. 59/8/2003 dated 20.06.2003 for services provided free of cost to the buyer of goods during the period of guarantee for which payments are received from the supplier of the goods, service tax should be leviable irrespective of the fact that the person making the payment is different from the person receiving the service. It was therefore, alleged in the SCN that for the services provided free of cost during the period of warranty, service tax should be leviable on the Noticee on the taxable value of services being the moneys received by them from their Goa factory. In view of the foregoing, it was ultimately alleged in the SCN that the Noticee has contravened the provisions of :
(i) Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 as amended;
(ii) Section 70 of the Finance Act, 1994; and
(iii) Rule 3(1) of the Cevat Credit Rules, 2004.
2.10They further submitted that
:
As per rule 2(e) of the Cenvat Credit Rules, 2004 -
“exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of the value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service shall be taken.
Explanation: For the removal of doubts, it is hereby clarified that “exempted services” includes trading.
Input Services :
As per rule 2(l) of the Cenvat Credit Rules, 2004 -
“input service” means any service,—
(i)used by a provider of taxable service for providing an output service; or
(ii)used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,
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 upto the place of removal;
but excludes services,—
(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for—
(a)construction of a building or a civil structure or a part thereof; or
(b)laying of foundation or making of structures for support of capital goods,
except for the provision of one or more of the specified services; or
(B) specified in sub-clauses (d) (o) (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of a taxable service for which the credit of motor vehicle is available as capital goods; or
(C)such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;
Input:
As per rule 2(l) of the Cenvat Credit Rules, 2004 -
“input” means–
(i)all goods used in the factory by the manufacturer of the final product; or
(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or
(iii) all goods used for generation of electricity or steam for captive use; or
(iv) all goods used for providing any output service;
but excludes-
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) “any goods used for -
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of any taxable service specified in sub-clause (zn), (zzl), (zzm), (zzq), (zzzh), and (zzzza) of clause (105) of section 65 of the Finance Act;
(C)capital goods except when used as parts or components in the manufacture of a final product;
(D)motor vehicles;
(E)any goods, such as food items, goods used in a guest house, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and
(F)any goods which have no relationship whatsoever with the manufacture of a final product.