CESTAT Quashes Reverse Charge Service Tax Demand as Taxable Services Were Not Identified

Mahindra Reva Electric Vehicles Private Limited Vs Commissioner of Service Tax (CESTAT Bangalore)

The appeal concerned the demand of service tax on the appellant under the Reverse Charge Mechanism (RCM) under Section 66A of the Finance Act, 1994 and liability under the category of “Authorised Service Station” under Section 65(105)(zo) read with Section 65(9). The appellant, engaged in the manufacture of electric cars, was issued a demand for the period from April 2005 to March 2008 on expenditure incurred in foreign exchange and on services allegedly falling within the Authorised Service Station category. The adjudicating authority confirmed the demand for consultancy services and Authorised Service Station services and imposed penalties. The Commissioner (Appeals) subsequently set aside only the penalty under Section 76 while otherwise sustaining the order.

The appellant contended that the adjudicating authority invoked Section 66A without identifying the taxable services involved or establishing that the services were imported into India in accordance with the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. It submitted that legal services became taxable only from 1 September 2009 and therefore services received earlier were not liable to tax. It further argued that testing, inspection and certification services had been performed outside India and consequently were not received in India for the purposes of Section 66A. The appellant also contended that product development expenditure did not fall under any taxable service and that one component represented only a provision reversed in the books without any consideration being paid.

Regarding the demand under the Authorised Service Station category, the appellant relied upon Circular No. 699/15/2003-CX dated 05.03.2003 and the Tribunal’s decision in CCE vs. Dynamic Motors, contending that it operated its own service station and that there was no evidence showing that the services fell within the taxable category of an authorised service station.

The appellant also challenged invocation of the extended period of limitation by relying upon Continental Foundation Joint Venture vs. CCE and Jaiprakash Industries Ltd. vs. CCE. It further submitted that even if service tax under RCM had been payable, the entire amount would have been available as CENVAT credit, resulting in a revenue-neutral situation. Reliance was placed on Asmitha Microfin Ltd. vs. CCE and Sarovar Hotels Pvt. Ltd. vs. CST.

The Revenue supported the impugned order and argued that the appellant had suppressed details regarding services received from overseas service providers, justifying invocation of the extended period.

The Tribunal held that, following CCE vs. Dynamic Motors, the services provided by the appellant could not be treated as services rendered by an authorised service station and, therefore, the demand under that category was unsustainable. Regarding the RCM demand, the Tribunal found that the impugned order contained no discussion identifying the taxable services involved. It further observed that if service tax had been paid under RCM, the appellant would have been entitled to avail CENVAT credit. The Tribunal noted that the demand related to April 2005 to March 2008, whereas the show cause notice dated 04.06.2009 was issued after expiry of the normal limitation period. Considering the revenue-neutral situation and following the decisions in Asmitha Microfin Ltd. and Sarovar Hotels Pvt. Ltd., the Tribunal held that invocation of the extended period of limitation and the consequential penalties were unsustainable.

Accordingly, the Tribunal set aside the impugned order and allowed the appeal with consequential relief, if any, in accordance with law.

FULL TEXT OF THE CESTAT BANGALORE ORDER

The issue in the present appeal is regarding demand of service tax on Reverse Charge Mechanism (RCM) under Section 66A of the Act and whether the appellant is liable to pay service tax under the category of Authorised Service Station under Section 65(105)(zo) read with Section 69(9) of the Finance Act, 1994. Appellant is engaged in manufacture of electric cars and alleging that during the period from April 2005 to March 2008, the appellant incurred certain expenditure in foreign exchange taxable under Section 66A, proceedings were initiated and adjudicating authority as per the impugned order confirmed the demand of tax vide order dated 22.09.2010. The adjudicating authority also confirmed the demand on the services rendered as falling under the category of Authorised Service Station. Thus, the adjudicating authority confirmed the demand for the period from 2005-2007 under ‘Consultancy Service’ and also under ‘Authorised Service Station’ for the period 2005-2008. Penalties were also imposed under various provisions of the law. Aggrieved by this order, an appeal was filed before Commissioner (A), who as per the impugned order dated 31.12.2012 modified the order by setting aside the penalty imposed under Section 76 of the Act. Aggrieved by said order, present appeal is filed.

2. When the appeal came up for hearing, as regarding the issue on merit, learned counsel submits that the adjudicating authority had blindly invoked the provisions of Section 66A of the Act on the expenditure incurred in foreign exchange without specifying the activity or service involved on such foreign exchange. When demand has to be confirmed on an assessee, the adjudicating authority is bound to consider whether it is taxable service and if it is taxable service, for demanding the service tax on RCM, such service should be imported to India as per the Taxation of Service (Provided from Outside India and Received in India) Rules, 2006. Since the said aspects are not satisfied, the demand is prima facie unsustainable. Learned counsel also drew our attention to the chart bifurcating the demand, which is reproduced below:

2.1 As regarding legal service, learned counsel submitted that it was brought under the taxable category only with effect from 1.9.2009 and since the appellant had availed the service before 1.9.2009, appellant is not liable to pay service tax. In this regard, the learned counsel drew our attention to the invoices and the following chart showing expenditure incurred in foreign exchange for the period 2006-2007.

FOREIGN CURRENCY – EXPENDITURE OTHER THAN PURCHASES AND SALES 2006 – 2007

2.2 As regarding demand against ‘Testing, Inspection and Certification Service’, learned counsel submits that the above said service is classifiable under Section 65(105)(zzi) and would fall under Rule 3(ii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 which can be said to be received in India only when it is performed in India. Since these testing inspection and certification service was performed outside India, the said service is not received in India and Section 66A is not attracted. He further submitted that Product Development Expenditure is not covered under any of the taxable service in Section 65(105) of the Act. Hence, Section 66A is not attracted and no consideration was paid or payable and this aspect is also accepted in the impugned order.

2.3 As regarding the demand of service tax against Authorised Service Station, learned counsel drew our attention to the Circular No.699/15/2003-CX dated 05.03.2003 wherein “It is clarified that as 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 vehicles.” The learned counsel submitted that appellant being a manufacturer and having its own service station and as there is no admissible evidence to consider the activity carried out by the appellant, as under the category Authorised Service Station. Learned counsel also drew our attention to the decision of the

Tribunal in the case of CCE vs. Dynamic Motors: 2012 (26) STR 145 (Tri.-Del.) wherein it has been held that:

“2. As per facts on records, the respondents are authorised dealers for vehicles manufactured by General Motors and fall under the category of authorized service station. They are registered with the Service tax department under the said category as also under the Business Auxiliary Services. During the period October, 2006 to December, 2007, they also undertook the servicing of vehicles manufactured by the other manufacturers. The Revenue entertained a view that they were liable to pay service tax in respect of such servicing of vehicles i.e. other than the vehicle of General Motors. Accordingly, proceedings were initiated against them by way of issuance of show cause notices which demanded the payment of service tax of Rs. 50,010/-, Rs. 94,463/- and Rs. 35,995/-.

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7. As is seen from the above definition of taxable service, the same is required to be provided by an “authorized service station”. To find out who is authorized service station, I look into the definition of the same as appearing under section 65(9) of the Act. For the purpose of ready reference, the same is reproduced below :-

“authorized service station” means any service, or centre, authorized by any motor vehicle manufacturer, to carry out any [service, repair, reconditioning or restoration] of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer.”

8. The said definition of the “authorized service station” includes centre or station authorized by any motor vehicle manufacturer, to carry out any service, in respect of vehicles manufactured by such manufacturer. The use of phrases “manufactured by such manufacturer” makes it clear that authorization has to be given by the manufacturer of vehicles. As such, authorized service station is required to be authorized for providing services to the vehicles of such manufacturer only and not by any manufacturer. The authorization by the manufacturer of motor vehicle is basic criteria for a person for categorisation of any centre as authorized service station and services provided is only in relation to said vehicle manufactured by those manufacturers. If an assessee has provided services to the vehicle manufactured by other manufacturer for which he is not authorized service station, the same cannot be held authorized service station vis-à-vis by that manufacturer of vehicle. If that be so, services provided in respect of vehicle cannot be held to be taxable services, in the light of the definition of the authorized service station appearing under section 65(9) of Finance Act. The Revenue’s contention is the service station may be authorized by any manufacturer and services provided by them in respect of the vehicle manufactured by other manufacturers for which it will not be authorized are to be held as taxable services, cannot be accepted, in view of the specific definition of the authorised service station in terms of section 65(9) ibid.”

2.4. The learned counsel further submits that the demand confirmed by invoking the extended period of limitation is unsustainable. Learned counsel relied on the decisions of Continental Foundation Joint Venture vs. CCE: 2007 (216) ELT 177 (SC) and Jaiprakash Industries Ltd. vs. CCE: 2002 (146) ELT 481 (SC) in this regard. The learned counsel further submits that even if the appellant had paid service tax under

RCM, appellant was entitled to claim CENVAT credit of entire amount and therefore, there will be revenue neutrality situation. Following the ratio of the decision in the case of Asmitha Microfin Ltd. vs. CCE: 2020 (33) GSTL 250 (Tri.-Hyd.) and Sarovar Hotels Pvt. Ltd. vs. CST: 2018 (10) GSTL 72 (Tri.- Mum.) invoking extended period of limitation in such revenue neutral situation is unsustainable.

3. Learned Authorised Representative (AR) for the Revenue reiterated the findings in the impugned order and submits that since the appellant had suppressed the details regarding the service availed by them from overseas service providers, the adjudicating authority has rightly invoked the extended period of limitation and confirmed the demand.

4. Heard both sides. As regarding demand of duty against authorized service station, following the ratio of the decision of the Tribunal in the matter of M/s. Dynamic Motors (supra) and considering the definition of authorized service station, the service provided by the appellant cannot be considered as carried out by an authorized service station. Accordingly, demand of duty against authorized service station is unsustainable. As regarding confirming the duty under RCM and imposing penalty by invoking the extended period of limitation and penalty, we find that there is no discussion in the impugned order regarding the taxable service involved in such activities. Further we find that even if the appellant had paid service tax under RCM basis as confirmed by the Adjudication Authority, they are eligible for claiming the CENVAT credit against such payment. The demand is for the period from April 2005 to March 2008 and the normal period for issuing show-cause notice expired on 24.4.2009 whereas it was issued only on 04.06.2009. Thus the said demand under RCM is not considered on merit as the entire demand is time-barred. Considering the Revenue neutral situation and following the decision in the matter of Asmitha Microfin Ltd. and Sarovar Hotels Pvt. Ltd. (supra), the demand under RCM confirmed by invoking the extended period of limitation and penalty imposed are unsustainable.

5. Accordingly, impugned order is set aside and the appeal is allowed with consequential relief if any in accordance with law.

(Order was pronounced in Open Court on 09.07.2025.)