Audit read one balance-sheet column and found Rs 13 lakh of wrong credit: CESTAT frees Kanpur Maruti dealer

Scrap sales and logistics charges are not services, but cancellation fees, insurance commission and mobile-van reimbursements are, the Allahabad bench held, cutting the taxable base from Rs 52 lakh to Rs 12 lakh. It then threw out the Rs 13,00,287 CENVAT demand as built on a half comparison and held that an interpretational dispute could not carry the extended period, so the whole demand fell.

The Allahabad bench of the Customs, Excise and Service Tax Appellate Tribunal has allowed the appeal of My Car Pvt Ltd, a Maruti dealer in Kanpur, against a service tax demand of ₹7,63,984 on dealer incomes and a CENVAT credit disallowance of ₹13,00,287 for 2015-16 to June 2017. Member (Technical) Sanjiv Srivastava, sitting singly, pronounced the order on 29 October.

The order goes head by head through ten streams of income the Commissioner (Appeals) had taxed as business auxiliary services. It frees four, confirms the character of six, and then holds that the extended period under Section 73 could not be invoked for an interpretational dispute. The penalty under Section 78 went with it.

The audit

My Car sells Maruti vehicles in Kanpur, Unnao, Kannauj, Fatehpur, Auraiya, Farrukhabad, Hamirpur, Banda and Jalaun, and runs workshops at Jarib Chowki and Panki. It paid service tax under authorised service station and business auxiliary service heads and took CENVAT credit.

An audit of 2015-16, 2016-17 and April to June 2017 found ₹1,02,39,507 booked under trade incentive and others on which no service tax was paid. The dealer said these were logistics and handling charges, mobile service charges, booking cancellations, paint purchases and the like, none of them a service.

The audit also compared credit utilised as per the balance sheets with credit shown in the ST-3 returns and found the books higher by ₹13,00,287 across the three years. The dealer produced its credit ledger but not the invoices on which the credit was taken.

Show cause and two orders

A show cause notice of 8 September 2020 demanded ₹14,92,181 on the incentive income, ₹13,00,287 of credit under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 73, and ₹2,59,879 of credit carried into GST through TRAN-1, which had already been reversed.

The order-in-original of 20 March 2024 confirmed ₹14,41,906 on a taxable value of ₹99,04,337, the full credit demand, interest, a penalty of ₹27,42,193 under Section 78 and ₹10,000 under Section 77(2).

The Commissioner (Appeals), Allahabad, gave partial relief on 19 March 2025. Castrol incentives, loyalty claims, paint and consumables incentives, RTO facilitation income and an insurance claim on a stolen Dzire were trade discounts or otherwise outside the levy, following Dunac Automobiles and Wonder Cars.

That left ten heads with a taxable value of ₹52,43,947 and tax of ₹7,63,984, all treated as business auxiliary services without separate reasoning. The credit demand was upheld for want of invoices, with penalty under Section 78. The Section 77 penalty was dropped.

Ten heads of income, head by head

Amit Awasthi argued for the dealer; Surendra Ram, authorised representative, reiterated the findings for the department.

Miscellaneous income, miscellaneous income others and other income came from selling kabad: used oil and worn-out parts replaced during servicing, sold to scrap buyers on payment of VAT. The appellate order had recorded this submission but made no finding on it.

A sale of goods on which VAT is paid cannot be charged to service tax and sits in the negative list, the bench held. The demand on these three heads was unsustainable.

Logistic and handling charges, by far the largest head at ₹38,23,980 in 2015-16, were covered by Surjeet Auto Pvt Ltd v. CCE Bhopal, (2024) 24 Centax 115 (Tri-Del), and the coordinate bench in Premier Car Sales Ltd. These are pre-sale charges bundled with the sale of the car, form part of its value and suffer VAT.

Moss charges and pick-and-drop income fared differently. The dealer called them reimbursements from Maruti Suzuki for running a mobile service van, relying on Intercontinental Consultants and Technocrats, 2018 (10) GSTL 401 (SC).

But that judgment itself records that Section 67 was amended by the Finance Act, 2015 from 14 May 2015 to bring reimbursable expenditure into consideration. The period here falls entirely after that date.

Nor was the dealer a pure agent. A pure agent is an intermediary in a tri-party arrangement who passes on amounts unaltered; here the income arose under a bi-party agreement with the manufacturer for providing outdoor service to vehicle owners. Both heads were taxable.

Billing and booking cancellation charges were defended as compensatory, with reliance on Circular No. 178/2014. The bench pointed out that that circular deals with distribution of common input credit under Rule 7(d) of the CENVAT Credit Rules and has nothing to do with the subject.

The relevant guidance is Circular No. 178/10/2022-GST of 3 August 2022, adopted for service tax by Circular No. 214/1/2023-ST of 28 February 2023. It treats cancellation charges as part of the principal supply, to be assessed at the rate applicable to the service contracted for. The cancellation charges were therefore taxable.

Insurance income and endorsement income were described as a share of the commission the insurer pays Maruti Suzuki, passed on to the dealer, and said to be revenue neutral because the manufacturer could take credit. The bench held the dealer had executed insurance policies with retail customers on behalf of the insurer or the manufacturer and been paid for it.

Even if the dealer was a sub-broker, liability survives under the Larger Bench decision in Melange Developers Pvt Ltd, 2020 (33) GSTL 116 (Tri-LB), applied by the Mumbai bench in Om Sai Fabricators and affirmed by the Supreme Court at (2023) 6 Centax 210. Revenue neutrality is no answer to Sections 66 and 68.

The modified table left six heads with a taxable value of ₹5,95,691 for 2015-16, ₹4,87,090 for 2016-17 and ₹1,47,369 for April to June 2017. Service tax short paid on them came to ₹86,375, ₹73,064 and ₹22,105.

The CENVAT demand built on one column

The ₹13,00,287 demand rested on a single comparison: credit utilised as per the audited financial statements against credit shown in the ST-3 returns. The dealer's reconciliation showed that the statements also recorded a higher taxable value, higher tax payable and higher tax paid in cash than the returns, for every year.

For 2015-16, for instance, the audited taxable value was ₹9,86,35,886 against ₹8,50,62,009 in the return, and cash payment ₹1,25,58,247 against ₹1,06,94,740. The bench asked why no inquiry was made into those differences:

Why no demand has been made for the difference in tax liability itself. (para 4.10)

If the financial statements reflected higher credit utilisation, they also reflected higher liability and higher cash payment, and a demand made without complete comparison of the two sets of figures was, in the bench's words, “obnoxious and bad in law”. The impugned order had simply said the dealer failed to produce credit documents.

The bench also accepted that the order sought to deny credit the dealer had never taken through a declaration in its ST-3 returns. Following Cyber Group India Pvt Ltd, (2025) 27 Centax 386 (Tri-All), credit is taken in the books and statutory records; disclosure in the return is a compliance condition, not the act of taking credit.

The entire credit demand was set aside on facts and merits.

Extended period and penalty

The limitation challenge had been pressed mainly on the credit demand, which no longer survived. For the six heads where liability was upheld, the bench held the dispute was purely one of interpreting the statute, and the extended period could not be invoked for such a demand.

It relied on International Merchandising Company LLC, 2022 (67) GSTL 129 (SC), where the Supreme Court confined a notice to the normal period because the issue turned on interpretation, and on the Jharkhand High Court in Central Coalfields Ltd, (2024) 14 Centax 307 (Jhar), which followed it.

With the extended period gone, the penalties under Section 78 were set aside too.

Order

The Tribunal held that service tax could not be levied on miscellaneous income, other income and logistic and handling charges, and confirmed the taxable character of moss charges, billing and booking cancellation charges, insurance income, pick-and-drop income and endorsement income, re-computing the short payment on those six heads at ₹1,81,544 across the three periods.

The CENVAT credit demand of ₹13,00,287 was set aside in totality. The demand could not have been made by invoking the extended period of limitation under Section 73, and the penalties under Section 78 were set aside.

Finding no merit in the order of the Commissioner (Appeals) dated 19 March 2025, the Tribunal allowed the appeal. Final Order No. 70492/2026 was pronounced in open court on 29 October 2026.