Provision as per GAAP towards Sharing Expenditure on Receipt of Sponsorship Services, not Subject to Tax: CESTAT rules in Favour of Vodafone idea [Read Order]

In a significant ruling in favour of Vodafone idea ltd, the Chennai bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that provision as per the Generally Accepted Accounting Principles (GAAP) towards sharing expenditure on receipt of sponsorship services is not subject to tax.

 M/s. Vodafone Idea Limited (formerly known as ‘M/s. Vodafone Cellular Ltd.’), passed by the Commissioner of Central Excise, Customs and Service Tax, Coimbatore confirming the demand of Service Tax of Rs.59,12,035/- under proviso to Section 73(1) of the Finance Act, 1994 along with recovery of appropriate interest under Section 75 of the Finance Act, 1994, imposing penalty under Section 77(2) for not filing S.T.-3 returns within the appropriate time and equal penalty under Section 78 of the Finance Act, 1994.

The appellant is a telecommunication network provider rendering telecommunication services in Tamil Nadu (except Chennai), Maharashtra (except Mumbai) and the State of Kerala. The appellant is a subsidiary of M/s. Vodafone India Limited carries on pan India operations through other group concerns such as M/s. Vodafone Digilink Limited, M/s. Vodafone Essar Limited, etc., for providing network services within specially demarcated telecommunication circles.

The Revenue noticed that the appellant had incurred an expenditure of Rs.5,19,49,020/- on sponsorship services during the period from 01.05.2006 to 31.03.2010. Scrutiny of the S.T.-3 returns filed by the appellant for the relevant period indicated that appropriate Service Tax was not paid by the appellant in respect of the sponsorship service received by them, leading to the issuance of a Show Cause Notice vide SCN Sl.No.:07/2011Commr. dated 22.09.2011, which came to be adjudicated demanding Service Tax and imposing penalties

Shri Raghavan Ramabadran appeared for the appellant and submitted that the appellant maintained their books of account as per GAAP and created provisions in their books of account towards anticipated expenses along with the expenses incurred during the financial year for which the bills would be received only during the subsequent months when the next financial year would commence; such provision of expenses was done in March during the closure of accounts for the financial year based on estimates and was reversed subsequently in April and also that as and when the bills were received in subsequent months, the expenses were booked. He has argued that the provisions are not about any actual expenses incurred or any consideration received for services. 

In many decisions of the Tribunal, it has been held that no Service Tax is payable on sponsorship of IPL and ICC cricket tournaments during the impugned period.  In light of judgements,  the two-member panel comprising of Mr P  Dinesha, Member (Judicial) and Mr Vasa Seshagiri Rao, Member (Technical) held that “the provisions made in the books of account by the appellant as per the GAAP towards sharing the expenditure on account of receipt of sponsorship services cannot be subjected to tax as the ingredients for levy of tax are not fulfilled in the absence of any provision of service and when payments were made only about sponsorship of the IPL Cricket tournament.”

To Read the full text of the Order CLICK HERE

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