Honda Dealer's Sales Incentives, Customer Discounts Not Liable To Service Tax: CESTAT Allahabad

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has held that a car dealer extending customer discounts under promotional schemes floated by a manufacturer does not, by that act alone, render an independent taxable service to the manufacturer.

A Bench of Judicial Member P.K. Choudhary and Technical Member K. Anpazhakan observed,

“We are, therefore, unable to accept the proposition that the appellant's act of extending a customer discount, or its decision to sell a vehicle at a price lower than the maximum selling price permitted under the dealership arrangement, constitutes an independent taxable service to HCIL. Such conduct forms part of the ordinary commercial operations of a dealer. The sharing or reimbursement of the commercial burden arising from a promotional scheme may affect the ultimate economics of the sale transaction, but does not, in the absence of an identifiable and independent service element, change the character of that transaction.”

The tribunal accordingly set aside a service tax demand of ₹1,18,40,547 against Smart Cars Limited, an authorised dealer of Honda Cars India Limited (HCIL). The dispute concerned incentives received for meeting sales targets and reimbursements received from HCIL after the dealer extended discounts to customers.

The department had treated these amounts as consideration for services allegedly provided by the dealer to HCIL. It invoked Section 66E(e) of the Finance Act, 1994, which covers activities involving an agreement to refrain from an act, tolerate an act or situation, or do an act.

The show cause notice issued in October 2019 proposed the demand for the period from 2014-15 to June 30, 2017. It covered incentives, discounts, and reimbursements totalling ₹8,64,12,281 received from HCIL.

The department's case was that the dealer received these amounts for meeting wholesale and retail sales targets, achieving accessories sales targets and implementing promotional discount schemes for customers.

The tribunal, however, found that the underlying arrangement was one of purchase and resale of vehicles. Smart Cars bought vehicles from HCIL and sold them to customers on a principal-to-principal basis. It was not acting as HCIL's agent.

It observed that the dealer's sales targets and performance-linked incentives were part of the commercial arrangement between the manufacturer and the dealer. The achievement of specified sales volumes could determine the financial benefits available to the dealer, but that did not, by itself, establish that the dealer had rendered a separate service to HCIL.

The tribunal also examined the customer discount schemes. Under these schemes, Smart Cars extended discounts to customers purchasing vehicles and subsequently claimed support from HCIL. The manufacturer reimbursed the eligible amounts after verification through credit notes.

It held that these reimbursements represented a commercial adjustment arising from the discount offered in the sale transaction. They could not be treated as consideration for an independent service merely because the manufacturer shared the financial burden of the promotional scheme.

The Bench further observed that the dealership agreement's requirement that the dealer make its best efforts to achieve sales targets reflected commercial expectations between the parties. It did not establish a separate service obligation for which the incentives were paid.

Relying on the Larger Bench decision in Kafila Hospitality & Travels Ltd. v. Commissioner of Service Tax, Delhi (2021), the tribunal held that performance-linked incentives could not automatically be treated as consideration for a taxable service.

It concluded that the activities relied on by the department arose from, and were incidental to, the dealer's business of selling vehicles. The department had not established an independent service rendered by Smart Cars to HCIL for consideration.

The tribunal also held that the extended period of limitation could not be invoked. It noted that the dealer had filed its service tax returns and furnished records when called upon. The material did not establish fraud, wilful misstatement, or suppression of facts with an intent to evade tax.

The tribunal therefore allowed the appeal and set aside the demand of ₹1,18,40,547, along with the penalties imposed on the company under Sections 77 and 78 of the Finance Act, 1994, granting consequential relief.

For Appellant: Advocate Rajesh Chibber

For Respondent(s): Santosh Kumar, Authorised Representative