CESTAT Rules Testing Centre Reimbursements Beyond MCS Scope, Sets Aside Service Tax Demand on Eduquity Career Technologies [Read Oredr]

Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Bangalore bench has ruled that reimbursements received by Eduquity Career Technologies Pvt. Ltd. from BITS Pilani for setting up and maintaining testing centres to conduct the BITSAT online admission test cannot be taxed under Management Consultancy Services.

The dispute arose from an audit of Eduquity’s records for the period 2004–2006, which revealed that the company had received substantial reimbursements from BITS Pilani for conducting computer‑based admission tests.

Under an agreement dated 6 February 2005, Eduquity was tasked with establishing and maintaining seven dedicated centres and additional third‑party centres across India, providing infrastructure such as computers, hubs, networking, and related facilities.

Eduquity incurred expenses on real estate, equipment, maintenance, and travel, which were reimbursed by BITS. The Department issued a show‑cause notice in June 2008 demanding service tax of ₹31.15 lakh, alleging that these reimbursements formed part of the taxable value under Management Consultancy Services. On adjudication, the demand was confirmed, with partial relief granted by the Commissioner (Appeals). Eduquity challenged the levy before the Tribunal.

Appearing for the appellant, Mr Bhanu Murthy J.S. argued that the bulk of the amounts received, ₹2.97 crore, were reimbursements for expenses incurred in establishing and maintaining seven dedicated testing centres and additional third‑party centres.

These reimbursements covered real estate costs, computers, hubs, networking equipment, rentals, and travel expenses. He submitted that such reimbursable expenses could not be included in the taxable value, as Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 had been declared ultra vires by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. (2018).

Mr M. Sreekanth, Superintendent (AR), appearing for the Revenue, reiterated the findings of the Commissioner (Appeals). He maintained that reimbursements formed part of the gross amount charged and were taxable under Section 67 of the Finance Act, 1994, read with Rule 5(1). He also argued that licence fees for customised software were taxable under Management Consultancy Services.

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The two-member bench comprising D Bhagya Devi (Technical Member) and DM Misra (Judicial Member), after considering the submissions and perusing the records, held that the demand for reimbursements could not be sustained.

It noted that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, had been struck down by the Supreme Court, and therefore, the reimbursable expenses could not be artificially included in the taxable value.

On the issue of customised software, the Tribunal relied on its earlier decision in IBM India Pvt. Ltd. v. CCE [2010], which had been affirmed by the Supreme Court. That decision had categorically held that customised software supply was excluded from service tax under MCS/BAS before 16 May 2008. Since IT software services became taxable only thereafter, the demand for licence fees was also unsustainable.

In conclusion, the Tribunal set aside the impugned order to the extent of confirming service tax demands on reimbursements and customised software licence fees, and allowed the appeal in favour of Eduquity Career Technologies Pvt. Ltd.

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