CESTAT Holds CAs’ Executory Services Outside Scope of ‘Management Consultancy’, Export and Out-of-Pocket Expenses Not Taxable [Read Order]

The Chandigarh Bench ofthe Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed the appeals of B S R & Co. and B S R & Associates, setting aside the service tax demands raised under Management Consultancy Services, on export of services, and on out-of-pocket expenses.

The appellants-assessee, engaged as Chartered Accountancy firms providing tax compliance, representation services, audit, and related work, were issued a Show Cause Notice (SCN) demanding service tax of ₹5,71,04,507 under the Management Consultancy Services category for the period from 01.10.2002 to 31.03.2007.

In addition, service tax was demanded on out-of-pocket expenses of ₹1,12,55,083 and ₹8,07,142 for the period 01.10.2002 to 18.04.2006, and ₹1,18,85,704 on export of services. The demands were confirmed by Order-in-Original dated 31.10.2011, along with interest and penalties, leading to the present appeals.

The appellants argued that they were engaged in the execution of work and not mere consultancy or advice, and therefore their activities could not be classified as “Management Consultancy Services.”

The appellants relied on earlier CESTAT rulings, holding that only advisory services for improving business fall under the definition, and not executionary type services. They also highlighted that Notification No. 59/1998-ST and Notification No. 25/2006-ST exempted most of the activities carried out by Chartered Accountants during the relevant period.

On the issue of export of services, the appellants contended that services were provided to clients located outside India, and reports were delivered abroad. They cited the decision in B A Research India Ltd.(2010), where the Tribunal held that the destination of service is to be decided based on the place of consumption, not performance.

With respect to out-of-pocket expenses, the appellants submitted that the amounts were incurred on behalf of clients and reimbursed on actuals. They relied on the Supreme Court ruling in Intercontinental Consultants and Technocrats (2018), which settled that reimbursements cannot be included in the taxable value of services.

After hearing both sides, the Tribunal comprising S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member), found that only consultancy or advisory services are covered under Management Consultancy, not executionary responsibilities, and reports delivered to clients abroad amounted to export of services, hence not taxable. The issue of inclusion of out-of-pocket expenses stands settled in favour of the appellants.

Accordingly, the CESTAT allowed both appeals, setting aside the demands of service tax, interest, and penalties.

The appellant was represented by Krati Singh and Samiksha Uniyal, while Siddharth Jaiswal, along with Aneesh Dewan and Yashpal Singh, represented the department.

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