Externally Funded Research projects do not attract Service Tax: CESTAT [Read Order]

The Hyderabad bench of the Customs Excise and Service Tax Appellate Tribunal ( CESTAT ) ruled that externally funded research projects not attract service tax

The issue to be decided was whether externally funded research projects attract service tax

The appellant was the 1st autonomous International Institute of Information Technology (IIIT) set up under the non-profit public-private partnership model under the Central Government’s policy to set up institutes of Advanced Technology. The appellant is a deemed university conducting recognised educational programs with a strong research focus in which students are involved in research as part of the educational programs. Mastering science by research is a recognised degree awarded by the appellant. The appellant provides opportunities to the students to learn by way of research in collaboration with industry, in addition to classroom lectures.

The present controversy is about the taxability of its research projects and one of its educational programs. Revenue initiated enquiry and verified the returns and records of the appellants which culminated in issue of show cause notice in October 2018. The show cause notices were adjudicated on contest vide separate Orders-in-Original as mentioned hereinabove with confirmation of demand and imposition of penalty

The company has the sole right on the entire IP developed under the agreement. Neither the RSP nor triple IT will have any right to IP development. Further clause 4.2 provides – patents will be filed and obtained/issued on the company name with the name of all inventors from both parties. Neither the RSP nor triple IT will have any rights to the patents. Thus it is apparent that the results of the research, IPR et cetera remains with the sponsors and IIIT does not have exclusive rights over the subject of research and results of the research/consultancy projects

Similarly the fund of Rs. 2,76,000 granted by the DRDO project – LBCT, specifies that IIIT have obligation to carry out a particular research namely theoretical study and stimulation design of laser beam combination techniques: and to submit the research report to DRDO

In respect of all projects of SERB (Scientific and Engineering Research Board) the overhead expenses are intended to take care of IIIT expenses for providing infra facilities and general administrative support. There is also a condition that not more than Rs.1.5 lakhs should be spent for travel and contingency. Utilization certificates were required to be produced in almost all cases. It has also been held that in the facts of the instant case undisputedly there are 2 persons who are independent entities namely the funder/grantor and the appellant. The claim of the appellant that there are no 2 persons involved in the activity between the appellant and funder/grantor is erroneous. And thus they fit in the definition of activity by one person for another. Further there is consideration which is in the form of money/grant sanctioned by the funder.

The bench found that the appellant’s objectives and focus are on its academic activity which is carried out through conventional classroom teaching as well as through participation of students in the research projects that form part of academic engagement in this institution. These facts have not been disputed by Revenue.

The two member bench of the tribunal comprising Anil Chodhary ( Judicial member) and A.K Jyotishi ( Technical member)  held that “service” in terms of section 65B(44) of the Finance Act 1994 was not provided by the appellant to its funders for research projects,  further observe that there was no “suppression” of facts. The ratio of the case law cited by the appellant squarely applies to the case. Hence neither extended period of limitation nor penalties under section 78 were justifiable. All penalties were set aside, Appeals were allowed

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