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Judgment
The appellant is in appeal against the impugned order for denial of cenvat credit on financial incentive/commission paid to various Financial Institutions.
The brief facts of the case are that the appellant is a manufacture of motor vehicles and accessories thereof. The appellant is having the factories are various locations and having ISD registration on distributing the cenvat credit to various divisions. The appellant also having Sales Offices and Spare Parts Divisions across the country and this case pertain to the Palwal Division (Haryana). One Tata Motor Finance Ltd,, Finance and Mahindra & Mahindra Financial were issuing invoices to recover 'Finance incentive/Commission' from the appellant, which according to the appellant was payment towards services of Financing/Sales Promotion provided to the appellant. The said input Service Distributor had distributed the cenvat credit of service tax charged by these Finance companies, to their manufacturing/spare parts division' units. Therefore, a recurring show cause dated 23.09.2019 for the period Nov 2016 to June 2017 was issued to the appellant. The matter was adjudicated and the cenvat credit was denied. Against the said order, the appellant is before me.
The Deputy General Manager has appeared before me who submits that in the show cause notice as well as in the order in original, it is stated that term "financing" used in the definition of "input service" would refer to issue of stocks, shares, bonds, promissory notes, and arranging of loans for smooth functioning and "sales promotion" would refer only to services such as advertising, personal selling, direct marketing, publicity / public relations. It is also stated that FIs have neither promoted /marketed any of the motor vehicles manufactured by the Appellants nor carried process of evaluation or development of prospective customers but they are only providing finance to the buyers of motor vehicles in which there is no involvement of Appellants. It is also stated that, these activities are taking place beyond the showroom level during the course of selling of motor vehicles which is beyond the place of removal in terms of the definition of 'input service'. It is his submission that as per the MOU, the Appellant would offer the financer from time to time, the sales promotion support as given to the existing preferred alliance finance partners. Further, as per clause 18, certain service levels are agreed to be performed by the financer and these FI's are bound to provide various services to Appellants and the Commissioner (Appeals) has rejected the Appeal filed by the Appellants without proper appreciation of the facts on record and reasons for making payments by Appellants to such FIs. Had they not provided any services to Appellants, there was no need for Appellants to make any payment to them.
From the MOU entered into between the FI, it is clear that, FI is undertaking following activities for Appellants:
M/s Cholahas been given the status of "preferred financier" by Appellants.
M/s Chola would work under the brand name "Chola - TATA Motors", which will be used in all advertising and sales promotion activities
M/s Chola would be undertaking direct marketing efforts to procure Appellants vehicle loan business from the market
M/s Chola would evaluate the needs of various customers and develop appropriate financial packages for them
M/s Chola would undertake effective and appropriate promotional activities in respect of its competitive and innovative schemes and packages for financing Appellants vehicles.
To undertake various sales and promotional activities at Dealer locations, Chola branches, etc.
M/s Chola would display various promotional materials sent by Appellants in its branches Service Levels:
M/s Chola will process customer's requests normally within six working days after receipt of duly completed application forms with the necessary supporting documents
M/s Chola branches will arrange for collection of loan applications from the dealership
The identified resource persons at branches will visit the dealership at least once every day in order to ensure service levels and proper relationship management with the dealer.
It is his submission that the inclusive part of the definition of "Input service" under Rule 2 (l) of the Cenvat Credit Rules, 2004 (in short 'said Rules') makes it clear that credit of service tax paid on 'Advertisement &sales promotion' activity is admissible to the Appellants. The very object of the Cenvat Scheme is to allow credit of taxes paid on inputs used in or in relation to the manufacture of the final product and service tax paid on services used in relation to the manufacture of final products as well as the services used in relation to the business of the manufacture. The expression "such as" in Rule 2(l) of the said Rules is merely illustrative and not exhaustive. Therefore, credit of service tax paid on any service used in relation to the business of manufacturing automobiles has to be allowed. As per Rule 2(l) of the said Rules, the term "input service" has been defined by the method of "means and includes". Such a definition is very specific in its scope. While the "means" part of the definition lays down the meaning of the term, the "includes" portion brings within its ambit certain more activities, though such activities could not be covered under the means part. The "inclusive" part of the definition further expands the scope of the coverage of the definition. Modern day business is becoming more and more complex and innovative ideas are implemented by the business entities to promote the sale of their products. Though the traditional advertising modes continue to exist, various innovative marketing techniques are being adopted by today's business. Online advertising, mutual advertising and sales promotion by joining hands with other parties (co-branded cards, etc.), use of social media in advertising are some of the new methods of sales promotion. In line with this universal phenomenon, Appellants have also joined hands with various FIs whereby the business of both the parties are promoted by each other and depending upon the role of FIs in this regard, Appellants are also making payments to them for the services provided by them in promoting the sale of Appellants products by offering competitive financial packages to the vehicle buyers and also in various other forms, as explained above. Hence, the services provided by such FIs to Appellants would amount to "sales promotion" which is specifically covered in the definition of "input service".
Further, there has to be proper flow of funds for manufacturing activity i.e proper financial management which involves financial arrangement through banking channels by raising capital or by speedy recovery of amounts due from customers. It is thus submitted that arranging financing of funds to customers for purchase of vehicles is also one of the modes of financial management and is directly linked with the manufacturing activity. It is also to be submitted that arranging loans to prospective customers is directly linked to enhancing the sales of the product which is related to clearance of manufactured product. Excise duty is on manufacture and paid at the time of clearance from the factory. For ensuring that the manufactured goods have a market, they have to ensure that the prospective customers are in a position to buy the excisable goods cleared by the manufacturer i.e. the manufacturer has to ensure that there is a demand in the market for the goods. Unless there is a demand in the market, the manufacturer cannot clear excisable goods on payment of duty. Demand signifies the ability and willingness to buy a particular commodity at a given point of time, assuming other variables remain constant. Utility preferences and choices underlying demand can be represented as functions of cost, benefit, odds and other variables. In this case, the FIs arranges loan to the prospective customers so as to ensure that the customers purchase the excisable goods manufactured and cleared by the manufacturer. Thus the activity of arranging loans by the FIs has a direct nexus with the manufacturing activity
In support of above submissions, Appellants is relying upon following judicial pronouncements:
Commissioner of Central Excise, Nagpur vs Ultra tech Cement Ltd. as reported in 2010-TIOL-745-HC-MUM-ST
Bharat Coop. Bank (Mumbai) Ltd vs Coop. bank Employees union as reported in (2007) 4 SCC 685
Collector of Central Excise vs Solaris Chemtech limited as reported in 2007 (214) ELT 481 (SC)
State of Karnataka vs Azad Coach Builders (P) Ltd & ANR as reported in 2010-TIOL-70-SC-CST-CB
Commr. of C. Ex. & Service Tax, LTU, Bangalore v. Micro Labs Ltd. as reported in (2011) 270 E.L.T. 156 (Kar.)
In the identical situation, recently Hon'ble High Court of Madras in the case of Commissioner of GST & Central Excise, Salem vs TVS Motor Company Ltd as reported in 2021-TIOL-771-HC-Mad-CX has allowed Cenvat credit on Finance Incentive/Commission paid to finance company and held that there is direct nexus between the activity of finance company with that of the activity of the assessee. For the valid submission elaborately made above, the alleged demand itself is not sustainable. When the demand itself is not sustainable, as per settled legal position, the interest claim also fails. The proposition to impose penalty under Rule 15 of the CCR, 2004 as well as Section 77 of the Finance Act is unsustainable as there has been no non-compliance on the part of the Appellant for which the said penal provision are sought to be invoked. It is accordingly requested to allow the Appeal filed by the Appellants with consequential relief.
On the other hand, the Ld. AR submits that the service received by M/s TML from Chola/NBFC is not in the nature of input services. Service of Financing/loans was being provided by NBFC to the prospective customers of TML. Consideration for providing such loan and finances was received by NBFC from the prospective customers of TML. Therefore the entire transaction of providing financial services and receiving consideration is between NBFC and prospective customers of appellant. In this background, the credit is not admissible to the appellant per se.
Without prejudice to the above content it is submitted that even if it is assumed that the NBFC had provided any service to the appellant herein, such service has been provided outside the place of removal. And therefore it is not admissible for cenvat credit as provided under rule 2(l) of Cenvat Credit Rules, 2004.
Further, it is submitted that explanation tendered by the appellant that the appellant has received services from NBFC in relation to Finances & business promotion and that the finance companies were issuing invoices to TML is devoid of any legal arrangement and thus not acceptable in the eyes of law. Appellant has failed to bring on record any document which is legally admissible to substantiate that services were received by the appellant from NBFC and that the service tax paid on such services would be admissible as cenvat credit. The only document submitted by the appellant is the MOU signed between appellant and cholamandalam, a NBFC and that too, is silent on the aspect of 'consideration'/'any fixed mechanism for consideration', tendering it void. Thus in absence of any legal documentary evidence that service received(if at all) by the appellant from NBFC is in nature of input service as contemplated under rule 2(l) of CCR,2004 , the appeal may be dismissed in the interest of justice.
Heard the parties and considered the submissions.
The issue before me is that whether the appellant is entitled to take cenvat credit on commission paid to the various financers for selling their vehicles or not in terms of Rule 2 (l) of the Cenvat Credit Rules, 2004.
For better appreciation, Rule 2 (l) of the Cenvat Credit Rules, 2004 is extracted herein below:-
[(l) ―"input service" means any service, -
(i) used by a provider of [output service] for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, 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 upto the 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 upto the place of removal;
[but excludes], -
[(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for -
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or]
[(B) [services provided by way of renting of a motor vehicle], in so far as they relate to a motor vehicle which is not a capital goods; or
[(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by -
(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or
(b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or]
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;]
[Explanation. - For the purpose of this clause, sales promotion includes services by way of sale of dutiable goods on commission basis.]
On going through the above provisions as well as the facts of the case, the appellant is paying commission to the financers for selling their vehicles to various prospective buyers on the vehicles manufactured by the appellant. If these financers do not finance the vehicles manufactured by the appellant, the vehicles of the appellant are not able to be sold in the open market freely. Therefore, these financers are indirectly providing the services of sales promotion to the appellant. Sales promotion is inclusive part of the definition and the same can be availed beyond the place of removal as there is no bar on the same in the definition itself.
Further, I find that in case of TVS Motor Company Ltd. (supra) that the Hon'ble Madras High Court held as under:-
"Thus, the expansive definition requires to be applied in this case and as noted, the Memorandum of Understanding provides for exclusive retail financing of two wheelers manufactured by the assessee, which results in promotion and expansion of sale of two wheelers manufactured by the assessee and payments are received by TVSFS from the assessee and as the services are taxable under Business Auxiliary Services, TVSFS has obtained registration under the Act, as provided under Rule 4 of the Service Tax Rules, 1994. Thus, as long as services of TVSFS in relation to financing of the vehicles manufactured by the assessee promotes the sale of vehicles manufactured by the assessee, such service is taxable under Business Auxiliary Services."
In view of this, I hold that on commission paid to various financers for arranging the prospective buyers to the appellant for sale of vehicles, the appellant is entitled to take cenvat credit as 'sale promotion' is an "input service" .
Therefore, the impugned order is set-aside and the appeal is allowed with consequential relief, if any.
(Operative part of the order pronounced in the open Court)