Car Dealer’s Rs 13 Lakh CENVAT Demand Set Aside As Allahabad CESTAT Finds Audit Compared Credit Figures Alone

The appellant, an authorised Maruti Suzuki dealer providing vehicle servicing and related services, appealed against an order confirming service tax on certain receipts classified as “Trade Incentive & Others,” disallowing CENVAT credit of ₹13,00,287, and imposing penalties.

The adjudicating authority had confirmed tax on ten categories of receipts and disallowed the credit; the Commissioner (Appeals) upheld a revised tax demand of ₹7,63,984, the credit disallowance, and penalty under Section 78.

The appellant challenged the taxability of the receipts, the credit disallowance, and invocation of the extended limitation period.

Section 65B(44) of the Finance Act, 1994 defines “service” as an activity carried out by one person for another for consideration, subject to the stated exclusions.

Section 67, as amended with effect from 14 May 2015, includes reimbursable expenditure or cost in the value of taxable services; the amendment is prospective.

Section 66E(e) covers an agreed obligation to refrain from an act, tolerate an act or situation, or do an act, where there is a contractual arrangement and a sufficient nexus between the agreement and consideration; the Board’s service-tax Circular No. 214/1/2023-ST adopted the relevant clarification in GST Circular No. 178/10/2022-GST.

Under Rule 14 of the CENVAT Credit Rules, credit disallowance must be supported by evidence of credit actually taken; disclosure in an ST-3 return is not itself the act of taking credit.

*Surjeet Auto Pvt. Ltd.*, 2024 (24) Centax 115 (Tri.), supports treating logistics/handling charges connected with vehicle sales as part of the sale where the activity is bundled with the sale and VAT is paid.

Under *International Merchandising Company, LLC v. CST*, 2022 (67) G.S.T.L. 129 (S.C.), an interpretative dispute does not, without more, justify the extended limitation period or penalty.

The Tribunal held that receipts from selling replaced, used parts as scrap were proceeds from sale of goods, not consideration for a taxable service; it therefore set aside the demand on “Misc Income,” “Misc Income Others” and “Other Income.”

It rejected the reimbursement argument for moss charges and pick-up/drop income because Section 67, as amended from 14 May 2015, includes reimbursable costs in taxable value, and the appellant was not acting as a pure agent under a tripartite arrangement.

It also rejected the challenge to tax on cancellation charges, insurance income and endorsement income, finding the former taxable under the applicable clarification and the latter consideration for activities undertaken in connection with insurance policies.

By contrast, logistics/handling charges associated with vehicle sales were not taxable as a separate service in the circumstances, particularly where they were connected with the sale and VAT had been paid.

The CENVAT demand was unsupported by a complete reconciliation: the Department compared credit figures but did not address corresponding differences in taxable value, tax payable and tax paid. The Tribunal therefore set aside the disallowance.

Finally, it found no sufficient basis for invoking the extended period on the interpretative tax issues and set aside the Section 78 penalties.

The Tribunal set aside the demand relating to scrap-sale receipts and logistics/handling charges, as well as the disallowance of ₹13,00,287 in CENVAT credit.

It upheld the taxability of moss charges, pick-up/drop income, billing and booking cancellation charges, insurance income and endorsement income, but held that the extended limitation period was unavailable and set aside the penalties under Section 78.