Circular No. 87/05/2006-ST
6th November, 2006
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
Subject: Service tax issues relating to authorized motor vehicle dealers and service stations -reg.
It has been brought to the notice of the Board that certain doubts have arisen in respect to activities undertaken by authorized motor vehicle dealers and service stations. The issues are as mentioned below:-
(a) Whether the mark-up (profit) on the spare parts sold by a service station during the servicing of vehicles is liable to payment of service tax?
(b) Whether exemption can be claimed on the cost of consumables that get consumed during the course of providing service?
(c) Whether ‘free services’ given by the authorized dealers (for which they are reimbursed by the vehicle manufacturers) are subjected to service tax?
(d) Whether the commission received by the automobile dealers from Banks /Non Banking Financial Companies (NBFC), for introducing the customers seeking finances / loans to such banks / NBFCs is to be subjected to service tax? Further, in case part of these incentives are passed on by the dealers to the customers, whether tax would be leviable only on that part of incentive, which is retained by the dealers or whether it would be on full amount?
(e) Whether service tax is chargeable on the amounts received for servicing /repair of the commercial vehicles?
2. The issues have been examined. As regards, the issue relating to sale of spare parts and consumables, notification No. 12/2003-ST. dated 20.06.2003, exempts service tax to the extent of value of the goods and materials sold by the service provider to the service recipient, if documentary proof of such sale exists and no credit of excise duty paid on such spares or consumables have been taken. It may, however be pertinent to note that for availing such exemption, the goods must be sold and consequently, they must be available (whether independently or as a part used for repair of a vehicle) for sale. In other words, the exemption would not be available to such consumables which have been consumed during the process of providing service and are not available for sale.
3. As regards ‘free servicing’ (where the customer does not pay any charges) of the motor vehicles, normally the service charges are reimbursement by the vehicle manufacturers, who promises such a facility to attract customer. As the law does not in any way restricts the levy of service tax only on the service charges received from the recipient of the service, therefore, such reimbursements are subject to service tax.
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 he passes on to the customer.
5. As regards the applicability of service tax on the activity of servicing /repairing of the commercial vehicles, it is clarified that as regards ‘authorized service stations’, the taxable service, means any service provided or to be provided, to a customer, by an authorized service station, in relation to any service, repair, reconditioning or restoration of motor cars, light motor vehicles or two wheeled motor vehicles, in any manner. Further, a ‘light motor vehicle’ means any motor vehicle constructed or adapted to carry more than six messengers, but not more than twelve passengers, excluding driver. Similarly, as per the ‘Motor Vehicle Act’, a ‘motor car means any motor vehicle other than a transport vehicles, omnibus, road-roller, tractor, motor cycle or invalid carriage’. In other words, servicing, repair, reconditioning or restoration of specified types of vehicles (whether they are used for commercial purposes or not) fall under the category of taxable services. However, servicing of vehicles like trucks is not within the ambit of service tax.