CBEC has clarified on certain issues in relation to the taxable service of ‘Authorised Service Station’s Service’ vide Circular No.87/05/2006-ST, dated 6-11-2006

The Circular further provides clarifications regarding service tax liability on commissions received by the authorized sales dealers from banks/NBFCs.

The article explains the above clarifications in light of other provisions in service tax.

Definitions

Some important definitions are reproduced herewith for reference to the readers.

Section 65(9) of the Finance Act, defines ‘Authorized Service Station’ as:–

"'Authorized Service Station’ means any service station, or centre, authorized by any service 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;"

Further, as per section 65(105)(zo) of the act taxable service rendered by ‘Authorized Service Stations’ 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".

Section 65(72) states that, the term ‘motor car’ shall have the meaning assigned to it in section 2(26) of the Motor Vehicles Act, 1988.

Section 2(26) of the Motor Vehicles Act, 1988 defines ‘motor car’ as:–

"any motor vehicle other than a transport vehicle, omnibus, road-roller, tractor, motor cycle or invalid carriage".

Section 65(73) of the Act provides that the term ‘motor vehicle’ shall have the meaning as assigned to it in section 2(28) of the Motor Vehicles Act, 1988.

As per section 2(28) of the Motor Vehicles Act, 1988 ‘motor vehicle’ means "any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five cubic centimetres".

Section 65(62) states that a ‘light motor vehicle’, means "any motor vehicle constructed or adapted to carry more than six passengers, but not more than twelve passengers, excluding the driver."

Clarifications vide Circular No. 87/05/2006-ST, dated 6-11-2006

The issues and the clarification as provided is summarized as below:–

Issue (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?

Issue (b) Whether exemption can be claimed on the cost of consumables that get consumed during the course of providing service?

Clarification vide para No. 2 of the Circular: "Notifications No. 12/2003-ST. dated 20-6-2003, 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."

It should be noted that this position of department to not levy service tax on the mark-up on the ‘sale’ of spare parts is not in contradiction of conditions specified in Rule 5 and the definition of a ‘pure agent’ of the ‘Service Tax (Determination of Value) Rules, 2006’. The readers may refer the Article on service tax for the May issue for a detailed explanation on the Service Tax (Determination of Value) Rules, 2006. This is basically due to the reason that the transaction of such sale is a trading activity of goods. It must be noted that the Service Tax (Determination of Value) Rules, 2006’ will apply only in relation to cost/expenses incurred in relation to providing services and not in relation to trading of goods. Thus, the clarification for levy of service tax in relation to ‘consumption’ of consumables is justified in light of the ‘Service Tax (Determination of Value) Rules, 2006’ and Notification 12/2003-St dated
20-6-2003

Issue (c) Whether ‘free services’ given by the authorized dealers (for which they are reimbursed by the vehicle manufacturers) are subjected to service tax?

Clarification vide para No. 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".

Issue (d) Whether service tax is chargeable on the amounts received for servicing/repair of the commercial vehicles?

Clarification vide para No. 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

Issue (e) 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?

Clarifications vide para No. 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".

Conclusion