Custom, Excise & Service Tax Tribunal
Honda Motor India Private Limited vs Alwar on 4 October, 2019
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CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
West Block No.2, R.K.Puram, New Delhi
Date of hearing/Decision:04.10.2018
Excise Appeal No.51512/2018 with Misc. No.51073/2018
[Arising out of Order-in-Original No.ALW-EXCUS-000-COM-03-04-18-19 dt. May 10, 2018
passed by the Commissioner, Goods & Service Tax, Alwar]
M/s .Honda Cars India Ltd. ...Appellants
[Formerly known as "Honda Motor India Pvt. Ltd.]
Vs.
CCE, Alwar ...Respondent
Appearance:
Present Shri Puneet Bansal, Advocate for the appellant. Present Shri S.K. Bansal, DR for the respondent.
Coram: Hon'ble Mr. Anil Choudhary, Member (Judicial) Hon'ble Mr. Bijay Kumar, Member (Technical) Final Order No. 53560/2018 Per Anil Choudhary:
The present appeal arises from Order-in-Original No. ALW-EXCUS-000-COM-03-04- 18-19 dated May 10, 2018 („Impugned Order‟)passed by Commissioner of Central Goods & Services Tax, Customs and Central Excise, Alwar („Adjudicating Authority‟). The Adjudicating Authority vide its Impugned Order has denied cenvat credit on various services received by Appellant from Honda Motorcycle and Scooter India Private Limited(„HMSI‟) during June 2012 to June 2017 (relevant period).
2. The facts that arise for consideration in the present case are thatprior to the incorporation of Appellant, HMSI [a subsidiary of Honda Motor Company Limited, Japan („Honda Japan‟)], undertook manufacture of two-wheelers and parts thereof. The Appellant (also a subsidiary of Honda Japan)commenced its operations in 2006. In 2009, the spare parts division of HMSI was hived off to Appellant, considering its specialization in spare parts operation management. The Appellant subsequently executed Service Agreement dated February 21, 2009 („Service 2 Agreement‟) with HMSI. The Service Agreement was amended vide Amendment to Service Agreement dated December 24, 2010.
3. The Appellant receives various services from HMSI, the scope of which is detailed in Clause 2.1 of the Service Agreement (as amended). In terms of the Service Agreement, HMSI is entitled to a consideration computed at 8.5 percent of Appellant‟s net sales. The Appellant avails cenvat credit of the service tax paid on impugned services. Salient aspects of these services as referred in Service Agreement are as under:
Development of vendor network;
Development of dealer network;
Support for quality management;
Marketing and promotion support;
Assistance in statutory compliance;
Assistance in collection of funds;
Market information service;and
Business support service
4. The Adjudicating Authority vide its Impugned Order has denied the benefit of credit basis ground that impugned services do not qualify as „input service‟.
5. We have heard Shri Puneet Bansal, Ld. Advocate appearing on behalf of the Appellant. The Ld. AR furnished a detailed chart referring to broad service head, nature of services received and the relevant part of the definition of „input service‟ under which the same is covered. The chart is reproduced as under:
Nature of Relevant clause under
Activities undertaken by
service as per consideration
HMSI
agreement Means Clause Inclusive clause
Development HMSI identifies potential Services used in Procurement of
of vendor vendors for supply of raw or in relation to inputs, Quality
network materials; and manufacture and control
HMSI undertakes scrutiny of clearance of final potential vendors by inspecting products raw materials, quality and 3 processes undertaken by them Development HMSI assesses the dealers on Services used in of dealer the various parameters, such as or in relation to network (i) Exterior retail outlet; manufacture and
(ii) Reception / office; clearance of final
(iii) Warehouse; and products up to
(iv) Manpower place of removal Support for HMSI upon receipt of customer Services used in Quality control quality complaint, undertakes or in relation to management inspection of the two-wheelers; manufacture and HMSI communicates the clearance of final quality issue to the Noticee. products The Noticee tests the parts kept in stock for presence of any such defect and upon identification undertakes suitable action;
HMSI advices the Noticee to cease (temporary/permanent) of procurements from concerned vendor(s), or to change in vendor(s); and HMSI advices the Noticee to hold dispatches of the NG condition parts Marketing and HMSI promotes use of Honda Sales promotion Promotion genuine parts and accessories Support manufactured by Noticee on its website;
HMSI provides spare parts specific placards and standees at dealers‟ showrooms;
HMSI undertakes dealer
training program wherein the
management of dealers are
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informed about the benefits of
using Honda genuine parts and
accessories; and
HMSI also conducts market
surveys and field checks to
ensure use of Honda genuine
spare parts
Assistance in HMSI follows up with dealers Accounting
statutory for collection of statutory C-
compliance Forms; and
HMSI also intimates Noticee
about termination or transfer of
dealerships and advices Noticee
to check liabilities of pending
C-Forms and accordingly offers
to collect same from such
dealers
Assistance in Noticee takes recourse to Services used in
collection of HMSI‟s field staff for follow up or in relation to
funds with dealer for settlement of manufacture and
accounts and balance clearance of final
reconciliations; and products
HMSI intimates Noticee before
termination of dealership. The
Noticee accordingly ensures
recovery of balance payable for
closure of accounts
Market HMSI undertakes market Services used in Procurement of
information research activities of collating or in relation to inputs, Market
service data of dealer‟s performance manufacture and research
(sales) and prepares a Key clearance of final
Performance Indicator Report products
(„KPI Report‟);
The KPI Report further records
performance of Honda
dealership network as against
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that of competitors;
HMSI provides data in respect
of two-wheelers on road which
helps Noticee to effectively
map resources to achieve short-
term and long-term business
plans; and
HMSI intimates Noticee of its
plans to terminate a model.
Noticee manages its
procurements on basis of such
data
Business HMSI provides such other Services used in
support services which enable and assist relation to
service Noticee in carrying on its manufacture of
business of manufacture; final products
Noticee utilizes sales network
of HMSI to issue trade notices
to its dealers;
Noticee participates in dealers /
vendors meet organised by
HMSI; and
HMSI shares relevant issues /
concerns of dealers pertaining
to spare parts business with
Noticee.
6. We have heard Shri S.K. Bansal, Ld. Departmental Representative appearing on behalf of the revenue. The Ld. DR has reiterated the findings in the impugned order.
7. We have heard both sides and carefully examined their contentions. At the outset, wenote that the Adjudicating Authority erred in determining the nature of services concerned herein. The Appellant in its appeal has discussed the nature of services received from HMSI in great detail. The Appellant has also enclosed evidences in form of photographs and e-mail correspondences which duly evidence the nature of services received. These services are referred above do not tantamount to sales commission agency.
68. The Adjudicating Authority has merely relied upon the manner of determining consideration, i.e. percentage of sales, to arrive at the decision. In this context, wenote that nature of a service depends on the activity undertakenand its intended object. The parties to contract are free to determine the consideration. If the revenue‟s contention is accepted, the nature of services will be sales commission wherever consideration is determined basis the sales percentage regardless of the activity undertaken. The contention flies in face of logic.
9. Before weexamine whether the impugned services qualify as input service, it is pertinent to understand the true import of definition of „input service‟ as contained in Rule 2(l) of the Cenvat Credit Rules, 2004 („Credit Rules‟). In the present instance, the issue pertains with period post 2011. The extract of definition (during relevant period) is reproduced as under:
"input service means any service,-
(i) used by a provider of output service for providing an output service; or
(ii) ...
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 up to 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 up to the place of removal, but excludes......;"
10. The definition of „input service‟ is divided into three parts:
Means clause, covering services used directly or indirectly, in or in relation to manufacture or clearance of final product; Inclusive clause, covering wide range of services used in relation to the broad heads specified therein; and Exclusion clause, covering specific services excluded from the definition 7
11. The above definition is contained in Credit Rules, whose overall objective is to eliminate cascading effect. The cascading effect has degenerative effect on the economy and burdens the ultimate consumer. The beneficent intent of Credit Rules calls for a liberal approach to interpretation of provisions contained therein. This is also evident from the terms „in relation to‟ and „indirect‟ employed in Means clause and „in relation to‟ in Inclusive clause. Evidently, the term „in relation to‟ is of wide amplitude and extends the scope of definition to cover a wide range of services.
12. The Means clause is not merely restricted to processing and clearing of goods. The activity of manufacture is not possible without use of inputs, capital goods and input services. Thus, services received for procurement of inputs and capital goods will also fall within the sweep of Means clause. Similarly, rent paid towards factory is essential for undertaking the manufacturing activity. Hence, this too shall qualify under Means clause. Correspondingly, the term „clearance‟ refers to physical act of clearance. However, clearance from factory is undertaken pursuant to a sale. In all practicalities, no clearance will be undertaken in absence of sales. Accordingly, services received for conducting sales will qualify as „input service‟.
13. The Inclusive clause further extends the scope of input service to cover services used in relation to broad heads mentioned therein. These broad heads cover, legal, accounting, credit rating, share register, financing. These broad heads cover a range of services which are not theoretically essential for undertaking manufacturing activitybut are important for infusing commercial feasibilities and practicalities in the business of manufacture.
14. Wenow proceed to discuss each facet of impugned service in light of the above discussion.
Development of vendor network
15. HMSI identifies potential vendors and undertakes scrutiny by inspecting their premises, raw materials, quality and processes employed. As noted above, the activity of manufacture is not possible without vendors supplying raw materials.Thus, the above service qualifies under Means clause and „procurement of inputs‟ under Inclusive clause. The detailed scrutiny undertaken by HMSI helps the Appellant ensure the quality of raw materials employed and hence the quality of final products supplied. Hence, the above services also qualify under „quality control‟ covered under Inclusive clause.
Development of dealer network 8
16. HMSI identifies potential dealers and undertakes a detailed scrutiny by assessing them on various parameters. As noted above, the activity of clearance is not possible without presence of dealers in favour of whom sales can be conducted. Wehave been informed that these dealers form the major source of customers to whom Appellant supplies its final products. Thus, the above activity is squarely covered under the Means clause. The above services also qualify under „sales promotion‟ specifically mentioned under Inclusive clause.
Support for quality management
17. HMSI inspects two-wheelers upon receiving a complaint. In case defect is found in any of the parts, HMSI issues an alert to Appellant for undertaking necessary measures. The Appellant may on such alert identify the stocks kept, cease procurements from certain vendors and hold dispatches. The above services form advance alert mechanism helping the Appellant ensure quality of manufactured final products supplied. Thus, these services squarely qualify under „quality control‟ specifically mentioned under Inclusive clause.
Marketing and promotion support
18. HMSI promotes use of Honda genuine parts and accessories on its website, through provision of standees at dealers‟ showroom andorganising dealer training programs. Black market erodes the sales of genuine products and thence has an adverse effect on manufacture of genuine products undertaken by a supplier. Evidently, Appellant forms the only supplier of Honda genuine parts and accessories. The above services help the Appellant in securing the sales of its final products. Accordingly, these services qualify under „sales promotion‟ specifically mentioned under Inclusive clause.
Assistance in statutory compliance
19. The Appellant undertakes inter-state sales charging central sales tax at the rate of 2 per cent. In terms of the Central Sales Tax Act, 1956, the Appellant is required to obtain duly certified Form-C from its dealers and furnish the same to its jurisdictional sales tax authorities. HMSI assists the Appellant by following up with dealers for From-C and intimating the Appellant about status of such dealers. The above services are safely covered as services received in relation to „legal‟ and „accounting‟ under Inclusive clause.
Assistance in collection of funds 9
20. The Appellant takes recourse to field staff of HMSI for undertaking follow-ups with dealers for settlement of accounts and balance reconciliations. HMSI also intimates Appellant with respect to impending termination of dealer to ensure timely recovery of sale proceeds. It is trite that sales proceeds form a major source of internal finances. Thus, above services are squarely covered under „financing‟ in Inclusive clause.
Market information service
21. HMSI prepares detailed reports with respect to its sales performance of various models of its two-wheelers in different parts of India. HMSI shares such valuable data with Appellant which in turn allows it to plan its production and sales. HMSI also intimates the Appellant with respect to termination of a model, which allows it to ensure timely clearance of its stocks. The above services fall within the sweep of „market research‟ specifically mentioned under Inclusive clause.
Business support service
22. The Appellant also receives help from HMSI for issuing notices to its dealers and vendors and addressing their concerns. The sustenance of a strong vendor and dealer network is vital for continuous manufacturing activity. The Appellant through such interactions can ensure that the concerns highlighted by vendors and dealers can be rectified in timely manner without having an adverse impact on manufacturing activity. The above services are part and parcel of business of manufacturing activity covered under Means clause. The above services are also covered under „procurement of inputs‟, „sales promotion‟ and „quality control‟ specifically mentioned under Inclusive clause.
23. Wealso do not find any merit in the revenue‟s contention that services must be received within the factory in order to qualify as „input service‟. In this regard, Rule 3 of the Credit Rules allows a manufacturer to avail cenvat credit on „input services received‟. It is noteworthy, that the availment of credit on input service is not qualified by the condition that such service must be received within the factory. The above view has been upheld in following judicial precedents:
CCE v. Ultratech Cement Limited, 2010 (260) ELT 369 (Bom.); CCE v. Ultratech Cement Limited, 2012 (278) ELT 523 (Tri-Mum.); and 10 Golden Tobacco Limited v. CCE, 2013 (32) STR 474 (Tri-Mum.)
24. Accordingly, wehold that Appellant rightly availed cenvat credit on impugned services in terms of the Credit Rules. Consequently, the impugned order denying cenvat credit to the Appellant is untenable nor any demand of interest will sustain.
25. Since, we have already held that impugned services do not qualify as „sales commission agent‟ and further observed that impugned services fall within the sweep of definition of „input services‟, there is no need to examine the admissibility of credit on services of sales commission agent.
26. In respect of penalty, we hold that since the Appellant has rightly availed credit on impugned services, there is no question of imposition of penalty in the present case. Wefurther find that details of credit availed on impugned services were duly declared in cenvat register and ER-1 returns duly filed by the Appellant. Thus, there is nopositive activity on the part of Appellant to avail inadmissible credit or defraud the revenue. For this reason, neither any penalty is imposable nor extended period is invokable. With these terms, the appeal is allowed in full with consequential relief to the Appellant.
27. The misc. application for change of name of appellant in cause title is also allowed.
[Operative portion already pronounced in open court] (ANIL CHOUDHARY) MEMBER (JUDICIAL) (BIJAY KUMAR ) MEMBER (TECHNICAL) Ckp.