Kuttukaran Trading Ventures vs Commissioner of Central Excise, Customs and Service Tax

A.M. Shaffique, J.—This appeal is filed by M/s. Kuttukaran Trading Ventures, a partnership firm having three divisions. One such division is Kuttukaran Engine Rebuilders which carries on the business of general automobile repair including engine reconditioning, engine parts repair and repair of vehicles and other vehicle parts as well. The appellant was served a letter dated 05/12/2007 by the Superintendent (Audit) inter alia stating that the appellant was not paying service tax on the income received from the Customers for reconditioning of motor vehicle engines/repairing vehicle engines and other parts on the ground that the said service does not amount to reconditioning/repairing of motor vehicles which is excluded from the purview of ''Maintenance and Repair service''. The appellant controverted the said stand on the ground that the activity of rebuilding or repair of engines and other parts of motor vehicles inter alia means maintenance or repair service of motor vehicles, and excluded from the purview of service tax liability.

However, without accepting the explanation offered by the appellant, they were imposed with service tax for an amount of Rs. 67,28,530/- for the period from 16/06/2005 to 30/09/2007. It was inter alia alleged that there was deliberate suppression on the ground that the amount involved in respect of repair of motor vehicles/parts were not included in the returns and penalty was proposed.

After hearing the appellant, the Commissioner of Central Excise confirmed the demand and the appellant was called upon to pay service tax with interest and penalty.

The appellant preferred an appeal before the Customs, Excise and Service Tax Appellate Tribunal.

The Tribunal found that in respect of motor vehicles brought to authorised service stations or workshops by the vehicle owners for repairs/maintenance, the appellant was getting only the dismounted engines or other parts from such authorised service stations/workshops for undertaking the job works of repair/rebuilding etc. Such an activity falls within the ambit of ''maintenance or repair including reconditioning or restoration or servicing of any goods or equipment'' and therefore it does not amount to repair or maintenance of "motor vehicle". Further, the Tribunal observed that in respect of vehicles brought to the appellant''s premises are concerned, the same amounts to maintenance or repair of motor vehicles, whereas if the engine or any other part is brought in a knock down condition for repair/maintenance/reconditioning etc., the appellant is not entitled for any exemption.

The appellant also has a case that the demand made was beyond the period of limitation. The Tribunal found that when there is suppression of material facts deliberately with intent to evade payment of service tax, the department is entitled to invoke the extended period of limitation. Hence the Tribunal upheld the findings of the Commissioner. However, the Tribunal made it clear that if motor vehicles are brought to the premises of the appellant and thereafter repairs/reconditioning etc. has been done in respect of such vehicles, the appellant will be entitled for exemption.

The appellant has raised the following substantial questions of law in the above case:

(i) Is the Tribunal right in its finding that the Appellant is liable to service tax under maintenance or repair service upto 30/04/2006 and under "Management maintenance or repair service from 01/05/2006 with respect to the repair of parts of motor vehicles received by the Appellant from authorised service stations and workshops.

(ii) IS the Tribunal right in its findings that to qualify for the benefits of exclusion of motor vehicle under the definition of maintenance or repair service up to 30/04/2006 and management maintenance or repair service from 01/05/2006, the motor vehicle itself had to be physically brought to the Appellant''s workshop and that consequentially engine''s or other parts of the motor vehicle brought by itself the workshop would not qualify for the exclusion and would therefore be liable to Service Tax.

(iii) Is the Tribunal right in its findings that the demand of service tax on the services rendered by the Appellant to authorized service stations and workshops in respect of IC engines and other parts of motor vehicles is to be upheld.

(iv) Is the Tribunal right in its finding with respect to limitation and invocation of the extended period under the proviso to Section 73(1) of the Finance Act, 1994 in the present case.

(v) Is the Tribunal right in its findings that the penalty under Section 78 of the Finance Act, 1994 has been correctly levied in the present case.

(vi) Is the Tribunal right in its findings that interest under Section 75 of the Finance Act is payable in the present case.

Primarily two questions arise for consideration. One is whether maintenance or repair service of motor parts are entitled for exclusion in terms of Clause (64) of Section 65 of the Finance Act, 1994 with effect from 16/06/2005 and secondly whether the department is entitled to invoke the extended period of limitation as per proviso to Section 73(1) of the Finance Act, 1994 from the facts and circumstances of the case.

Section 65(64) of the Finance Act, 1994 with effect from 16/06/2005 defines maintenance or repairs as under:

Maintenance or Repairs" means any service provided by:

(i) any person under a contract or an agreement; or

(ii) a manufacturer or any person authorised by him, in relation to,--

(a) maintenance or repair including reconditioning or restoration or servicing of any goods or equipment, excluding motor vehicle; or

(b) maintenance or management of immovable property.

With effect from 01/05/2006 the definition of service of "Maintenance or Repairs" was further amended and the service was renamed as Management, maintenance or repair which reads as under:

"Management, maintenance or repair" means any service provided by;

(i) any person under a contract or agreement; or

(ii) a manufacturer or any person authorized by him, in relation to

(a) management of properties, whether immovable or not

(b) maintenance or repair of properties, whether immovable or not; or

(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding motor vehicles.

As far as authorised service stations are concerned, the charging provision is Section 65(105)(z) which reads as under:

65 (105)(zzg): [to any person], by any person in relation to management, maintenance or repair;

Authorised service station is defined under Section 65(9) as under:

(9) "authorized service station" means any service station, or centre, authorized by any motor vehicle manufacturer, to carry out any service, repair, reconditioning or restoration of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer,

The short question therefore is when maintenance and repair including reconditioning or restoration or servicing of any goods is chargeable to service tax and excludes motor vehicles whether the intention of the legislature is to exclude maintenance or repair of motor vehicle parts as well.

Learned senior counsel appearing on behalf of the appellant argues that if a part of a vehicle is not repaired, it does not amount to repair of the motor vehicle and therefore in all probability when there is a specific exclusion by which repair of motor vehicle is excluded, it equally applies to parts of motor vehicle also.

On the other hand, the learned Standing Counsel appearing on behalf of the department supports the view taken by the Tribunal and contends that repair of motor vehicle apparently means a motor vehicle as defined under the Motor Vehicles Act, 1988. On a reading of the definition of motor vehicle, it would be clear that a completed vehicle which could be taken on road alone is a motor vehicle and separate parts of a motor vehicle cannot be termed as motor vehicle. If the intention of the legislature was to exempt repairing, reconditioning, maintenance etc. in respect of parts of a motor vehicle, it was not difficult for the legislature to have specifically mentioned that repair, maintenance etc. of parts of a motor vehicle are also eligible for exemption.

The learned senior counsel for the petitioner argued that there was dispute as to whether there is an obligation to pay service tax on account of the specific exclusion of motor vehicles from the liability to pay tax. Therefore, it is not a case where the department was entitled to invoke proviso to Section 71(3) to have the benefit of the extended period of limitation. Reference is made to the judgment in Collector of Central Excise, Hyderabad Vs. Chemphar Drugs and Liniments, Hyderabad, . Specific reference is made to paragraph 8 in which the Supreme court held as under:

Something positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.

Another judgment relied upon is Uniworth Textiles Ltd. Vs. Commissioner of Central Excise, Raipur, . In the said judgment it was held that mere non-payment of duty is not equivalent to collusion or wilful misstatement or suppression of facts. In order to invoke limitation of five years, it has to be shown that there is positive action betraying negative intention of wilful/deliberate default which is a mandatory pre-requisite. The learned Standing Counsel relied upon paragraph 12 which reads as under:

The conclusion that mere non-payment of duties is equivalent to collusion or wilful misstatement or suppression of facts is, in our opinion, untenable. If that were to be true, we fail to understand which form of non-payment would amount to ordinary default? Construing mere non-payment as any of the three categories contemplated by the proviso would leave no situation for which, a limitation period of six months may apply. In our opinion, the main body of the Section, in fact, contemplates ordinary default in payment of duties and leaves cases of collusion or wilful misstatement or suppression of facts, a smaller, specific and more serious niche, to the proviso. Therefore, something more must be shown to construe the acts of the appellant as fit for applicability of the proviso.

Another judgment relied upon is Continental Foundation Jt. Venture v. CCE 2007 taxmann.com 532 (SC). In that case the Supreme Court had occasion to observe that when the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. In other words, mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Further, it is held that as far as fraud and collusion is concerned, it has to be shown that there is an intent to evade duty. It is therefore held that:

Therefore, there cannot be suppression of mis-statement of fact, which is not wilful and yet constitute a permissible ground for the purpose of the proviso to Section 11A. Mis-statement of fact must be wilful.

In order to contend that a situation for imposing penalty had not arisen in this case, the learned senior counsel relied upon the judgment in Commissioner of Service Tax, Service Tax Commissionerate Vs. Motor World, . That was a case in which the Division Bench of Karnataka High Court has considered an instance where penalty is imposed under Sections 76, 78 and 80 of the Finance Act, 1994. It was held that imposition of penalty under the Act is not automatic. In order to impose penalty, the ingredients mentioned in the Section should exist and there should be absence of reasonable cause for the said failure. It is further found that even if the ingredients stipulated in Sections 76 and 78 of the Act are established, if the assessee shows reasonable cause for such failure, then the authority has no right to impose penalty in view of Section 80 of the Act. It is argued that even assuming that there is an obligation to pay service tax, in so far as the appellant has a valid case to substantiate based on the interpretation given by the appellant, it cannot be said that the appellant had evaded the liability to pay service tax and there is no wilful inaction on the part of the appellant. Hence, even assuming for the sake of argument that service tax was liable to be paid, there is no reason to impose penalty on the appellant.

But, according to the department, the appellant deliberately failed to show the income derived in respect of the repairs done by him and as a result, the department was totally unaware of the work that was being carried on by the appellant. Only after inspection it was noticed that there was large scale evasion of service tax and even having known about the same, the appellant did not pay service tax and therefore there is deliberate inaction on the part of the appellant and a clear intention to evade payment of service tax and therefore the department was justified in levying penalty. As far as limitation is concerned, it is argued that the appellant had not given the correct information regarding the repairs carried out for knock down motor vehicle parts and the same was brought to the notice of the department only when an inspection was conducted. Therefore, this is a case which squarely comes within the purview of proviso to Section 71(3) of the Act and hence the department is entitled for a longer period of limitation.

Motor vehicle is not defined under the Finance Act. It is defined under the Motor Vehicles Act as under:

"motor vehicle" or "vehicle" means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding [twenty-five cubic centimetres];

The Tribunal has proceeded on the basis that if a Motor vehicle was brought to the service centre of the appellant and thereafter the engine is dismounted and repaired, the appellant will be entitled for the benefit of exclusion as the appellant, in the process of repairing the vehicle, is repairing the engine of the vehicle as well. But, if a person brings the engine alone for repairs or for that reason any other part and necessary repairs are carried on, in that event, the appellant cannot claim the exclusion provided under the Statute. Therefore, in order to claim the exclusion, maintenance, repair, reconditioning, overhauling etc. should be "on the" motor vehicle and not in respect of "individual parts" of motor vehicle. In this case, it is evident that the petitioner was repairing, reconditioning, overhauling parts of a motor vehicle like I.C. engines and other parts. What exactly is charged for service tax is evident from the Statute itself. It is, maintenance or repair including reconditioning or restoration or servicing of any goods or equipment. Apparently, such goods or equipment includes motor vehicles also, but, in order to give the benefit to persons involved in maintenance or repair etc. of motor vehicles, such an exclusion is granted. The word exclusion apparently means excluding any maintenance or repair relating to a motor vehicle. A motor vehicle has several parts and if only a part of the motor vehicle requires maintenance or repair, can it be said that it is not maintenance or repair of a motor vehicle? The motor vehicle in question has to be dismounted at some place either in the workshop of the appellant or in the workshop of any other person or even at the residence of the customer in order to effect repairs. Once a part is repaired and it is thereafter fitted to the motor vehicle, it will have the character of a motor vehicle, which can be used on road. It is not in dispute that if the motor vehicle was brought to the service centre of the appellant and they themselves had dismounted the engine and repaired it and then refitted it to the motor vehicle, they are entitled for the exclusion. But exclusion is not given by stating that dismounting has taken place at a different place. Such a view, according to us, cannot be accepted on account of the fact that motor vehicle apparently includes all its parts as well. Without its individual parts, it does not become a motor vehicle. Such part cannot be used for any other purpose as well and it is normally fitted to the same vehicle from which it is dismounted. Therefore, if any service centre or maintenance centre or workshop does maintenance or repairs to any part of the motor vehicle, it is also entitled to get the benefit of exclusion, as provided under Section 65(64) of the Finance Act, 1994.

The argument that unless the engine or any other part is completely fitted to a motor vehicle, it cannot be qualified as a motor vehicle, might be true, when viewed from the angle of definition given to Motor Vehicles Act, 1988. Here, we are concerned with "exclusion" of the maintenance and repair of motor vehicle from service tax. If this view is taken, any workshop or small industry who carries on the repairs of either engine parts or any other part of a motor vehicle will not be eligible for exclusion. It is apparent that authorised service stations are not excluded from the purview of service tax. Therefore, the exclusion is intended for workshops which carry on the maintenance and repairs of motor vehicles. The word "exclusion" clearly indicates an act of preventing from entering a place or taking part in something. In tax parlance, it is an item of income excluded from gross income. When the Statute clearly intended to exclude motor vehicle, it is apparent that it excludes parts of motor vehicle also. If such an interpretation is not given, the very purpose of such exclusion will be rendered ineffective.

Now coming to the question of limitation, the department is of the view that there was deliberate suppression of the materials. Section 71(3) read with proviso reads as under:

Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded.--(1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the Central Excise Officer may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice:

Provided that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of--

(a) fraud; or

(b) collusion; or

(c) wilful mis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this chapter or of the rules made thereunder with intent to evade payment of service tax, by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words "one year", the words "five years" had been substituted.

Explanation.--Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in computing the aforesaid period of one year or five years, as the case may be.

Adjudicating authority found that the assessee has not furnished all material details in their ST-3 returns and such details came to be disclosed only as a result of audit conducted by the department. This is a finding of fact, which we do not think can be ignored and there is no material to come to a different finding. In that view of the matter, we are of the view that the department was justified in invoking the extended period of limitation.

As far as the imposition of penalty is concerned, we are of the view that there was a bona fide dispute as to whether maintenance or repair of engines and other parts of motor vehicle was service eligible for tax or not. The Tribunal proceeded on the basis that the dispute was not bona fide. We do not think so. We have taken a view that the question as to whether repair of a motor vehicle part is also excluded as maintenance and repair, service of motor vehicles is excluded, is definitely a question to be answered. There was no decision against the said contention. It is pointed out by learned counsel for the department that the appellant did not produce the materials to show that they were undertaking such repairs. In fact, if the appellant has a case that repair of engines and other parts of a motor vehicle are excluded from the liability to pay service tax, definitely the issue ought to have been decided by a proper authority. Unless such a decision is taken in accordance with the procedure prescribed, it cannot be treated that there is a deliberate attempt to evade tax. Therefore, the imposition of penalty for that reason was itself bad in law. Having regard to the aforesaid finding of ours that exclusion of motor vehicle as provided under Section 65(64) of the Finance Act, 1994 excludes part of the motor vehicle also, this appeal is only to be allowed setting aside the order passed by the Tribunal and answering questions 1, 2, 3, 5 and 6 in favour of the assessee.

Hence the appeal is allowed as above.