Service tax cannot be levied for warranty services without consideration received, and reimbursable expenses are not taxable.

Per: Dr. D.M.Misra

These two appeals are filed against the respective impugned orders passed by the Commissioner of Central Excise and Service Tax (LTU), Bangalore, since common issues involved, both appeals are taken up for hearing and disposal.

2. Briefly stated the facts of the case are that the appellant are engaged in the manufacture, trading and servicing of computer systems, CPU, servers etc., falling under Chapter 84 of Central Excise Tariff Act, 1985. During the course of audit, it was noticed that the appellant was providing output services under the category of ‘Management, Maintenance or Repair Service’ (MMR service for short) either under warranty period or under Annual Maintenance Contract (AMC). They procured parts and spares on which cenvat credit was availed. The appellants are discharging service tax on AMC service; however, no service tax was paid for services rendered during warranty period even though defective components were replaced and the cost of the said components charged from their overseas entities, who in-turn, recovered the cost of the same from the Original Equipment Manufacturer (OEM). Consequently, show-cause notices dated 30.09.2011 for the period April 2006 to March 2008 and dated 22.10.2013 for the period April 2008 to March 2013 were issued to the appellant for recovery of the service tax for services rendered during the warranty period even though no consideration was received from the service receivers but the value of the said services has been arrived at on the basis of Rule 3 of Service Tax (Determination of Value) Rules, 2006 read with Section 67 of the Finance Act, 1994 equivalent to spare parts value, replaced free of cost. On adjudication, demands have been confirmed with interest and penalty was imposed. Hence, these appeals.

3.1. Learned advocate for the appellant, at the outset, has submitted that during the periods in dispute, they have discharged service tax in respect of AMC service; however, no service tax was paid for services rendered during the warranty period of the sold equipment as no consideration was received. In respect of AMC service, the appellant upto July 2012 paid service tax on the entire value charged to the customers and availed cenvat credit on inputs and input services used in such AMC services. From 01.07.2012, they paid service tax on the gross-value in terms of Rule 2A of the Service Tax Valuation Rules and not availed cenvat credit on the duty paid spares / inputs used in providing such services. Also, the Department has been raising periodical demands on the indent commission received by the appellant for the warranty services provided to foreign entities from March 2005 to September 2014 under BAS and MMR service. The first show-cause notice was issued to them on 30.09.2011 for providing warranty support services during April 2006 to March 2008 under the category of MMR service. The second show-cause notice was issued on 22.10.2013 demanding service tax on warranty support service for the period April 2008 to March 2013 and the said demand was on the value of cost of spares used in providing support service.

3.2. The learned advocate vehemently argued that since the appellant has not received any consideration for providing the warranty services; therefore, no service tax is attracted on the services provided during the warranty period. It is his contention that for the period prior to 01.07.2012, Section 65 of the Finance Act provides for levy of service tax only where the provision of service is against consideration of the service provided. In absence of any consideration, no service tax is leviable. For the period after 01.07.2012, Section 66B read with B (44) of the Finance