Big relief to Honda Cars India as Service Tax demand quashed by CESTAT

Big relief to Honda Cars India as Service Tax demand quashed by CESTAT

The Customs, Excise, Service Taxes Appellate Tribunal (CESTAT), New Delhi Bench granted a big relief to Honda Cars India by quashing the Service Tax demand based on transaction relating to the Termination Agreement.

M/s Honda Cars India Ltd. (appellant) is a manufacturer of motor vehicles in India. On 1 April 2010, it had entered into a "Technical Collaboration Agreement" with Honda Motor Co. Limited Japan. It was done with the purpose to receive technical and proprietary information for the manufacturing of new models of cars.

Later, both the parties entered into a "Model Agreement" for launching a new model of the car named "Honda Civic" in India. The Model Agreement contained a clause according to which the model fee and royalty fee would be determined as per the Technical Agreement.

The appellant contended that it decided not to launch the new model of Honda Civic car in India as there was less demand of petrol cars as compared to the diesel cars. Hence, on 30 March 2012, the Model Agreement was terminated by a "Model Termination Agreement".

It was further averred by the appellant that they had paid Japanese Yen 130,000,000/- to Honda Japan for compensating all costs, expenses, and non-cancellable commitments that were incurred by Honda Japan, according to clause 3 of the Termination Agreement.

In this case, the issue was whether the amount paid to Honda Japan by the appellant was subjected to service tax. The appellant averred that the amount paid by them as per clause 3 of the Termination Agreement to Honda Japan was in the form of a cancellation fee and, hence it would not be considered to be charged as a service and no tax can be charged for the same.

The appellant further stated that the amount was paid to restitute Honda Japan for the cost incurred, once the Model Agreement to provide the service was terminated.

The matter was listed before the CESTAT, the Coram headed by the President, Justice Dilip Gupta. He held that the amount paid by the appellant to Honda Japan was not towards any consideration for a taxable service.

The CESTAT referred to the judgment in Ford India, of a Division Bench of the Tribunal, where it was held that no identifiable service can be attributed for payments made if the agreement is terminated since the consideration is to make good the loss.

It held that no service other than of a consulting engineer service was provided to the appellant by Honda Japan. Hence, the appellant could not be subjected to pay any service tax on a reverse charge basis. It stated, "In the absence of any evidence to the contrary, the Commissioner, Central Exercise and Service Tax (Respondent) could not have concluded that the aforesaid amount was paid by the appellant to Honda Japan for rendering any taxable service."