CESTAT Chandigarh Denies Service Tax Exemption Under Notification No. 12/2003-ST: Lovely Autos vs Commissioner of Central Excise

Background and Facts of the Case

In a significant ruling pronounced on 01/08/2023, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh Bench, adjudicated upon the matter of Lovely Autos Vs Commissioner of Central Excise, settling important questions around the availability of service tax exemption on the value of goods supplied during service, the invocation of extended period of limitation, and the applicability of penalties under the Finance Act, 1994.

The appellant, M/s Lovely Autos, was an authorised service station of M/s Bajaj Auto, duly registered under two service categories — "Authorized Service Station" and "Business Auxiliary Service". The enterprise operated a customer loyalty programme called the "Lovely Service Club", under which a fixed subscription amount of ₹474 was collected from every customer who purchased a Bajaj product.

Upon enquiry, the appellant disclosed that the ₹474 subscription was broken down as follows:

  • ₹200 — towards guaranteed servicing charges
  • ₹124 — towards free engine oil change during servicing
  • ₹50 — towards free replacement of certain parts
  • ₹100 — towards a complimentary gift

During a departmental audit, the Revenue identified that these collections had not been appropriately disclosed in the appellant's ST-3 Returns, nor had service tax been duly deposited on the full amount collected. Consequently, a Show Cause Notice dated 07.01.2009 was issued demanding service tax of ₹4,46,078 along with applicable interest and penalties.

The Appellant's Position

The appellant, represented by Shri Ravi Chopra, took the following stands:

  1. Partial Acceptance of Liability: The appellant admitted service tax liability only on ₹200 per subscription (the service component) and accordingly paid service tax of ₹1,88,220 on that portion.

  2. Exemption Claimed on ₹274: The appellant contended that the remaining ₹274 per subscription — covering engine oil, spare parts, and gift — represented the value of goods and materials sold to service recipients and was therefore exempt from service tax under Notification No. 12/2003-ST dated 20.06.2003.

  3. Limitation Challenge: The appellant asserted that the Show Cause Notice was time-barred, arguing that there was no suppression of material facts that could justify invocation of the extended period of limitation under Section 73 of the Finance Act, 1994.

  4. **Benefit of Section 73(3)😗* The appellant claimed benefit under Section 73(3) of the Finance Act, 1994, stating that payment of the admitted service tax along with interest and 25% penalty within thirty days of receipt of the Original-in-Order (OIO) entitled it to relief from further penalties.

  5. Cum-Duty Benefit: It was also argued that neither the Original Adjudicating Authority nor the Commissioner (Appeals) had extended the benefit of cum-duty calculation while computing the service tax payable, which was required in law.

  6. Penalty Waiver: The appellant sought waiver of penalties under Section 76 and Section 77 of the Finance Act, 1994.

The appellant placed reliance on the following decisions:

  • Chemphar Drugs & Liniments — 1989 (40) ELT 276 (SC)
  • Aditya College of Competitive Exams — 2009 (16) STR 154 (Tri.)
  • Omega Financial Service — 2011 (24) STR 590 (Tri.)
  • First Flight Courier Ltd. — 2011 (2) STR 622 (P&H)

Revenue's Counter-Arguments

The Department's Authorised Representative, Shri Narinder Singh, put forth the following contentions:

On Exemption Under Notification No. 12/2003-ST