Consultancy for Pet Products Must Be Provided by Scientist or Institution: CESTAT Quashes Service Tax Demand Against Mars International [Read Order]

In a significant relief to Mars International India Pvt Ltd, the Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal set aside multiple Service Tax demands against Mars International, holding that consultancy for pet products must be provided by scientist or institution.

The proceedings originated after an audit carried out between 2006-2011, resulted in a show-cause notice alleging tax due on freight reimbursements, seconded staff from international group organizations, and allocations of R&D expenditures.

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The appellant maintained that it had not benefited from GTA services at all, as freight for local deliveries was paid by distributors and C&F agents who later demanded reimbursement, and no consignment note was ever given. It was further asserted that reimbursements could not be included in taxable value prior to 2015 in view of the SupremeCourt’s finding in Intercontinental Consultants.

Regarding expatriate employees, the appellant contended that the secondment arrangement comprised employment and not consultancy, and in any instance could not be taxed as Management or Business Consultancy in the absence of an allegation under manpower supply.

The respondent, on the other hand, concurred with the adjudicating authority's conclusions and claimed that freight reimbursements amounted to GTA services under reverse charge, that the appellant was receiving managerial and consulting services from the seconded employees, and that R&D expenditures provided by foreign entities qualified as scientific and technical consultancy under Section 65(105)(za).

After evaluating the rival submissions, the Tribunal, comprising Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member), held that GTA taxability could not arise without a consignment note and that the freight was not paid by the appellant.

On the question of management consultancy, the Bench found that the secondment arrangement did not fit within the category alleged in the show-cause notice, especially in light of the Supreme Court’s ruling in Northern Operating Systems which clarified the proper classification of such secondment models. As the notification had not evoked workforce supply, the demand could not be sustained under management consultancy.

The Tribunal further held that the R&D cost-sharing agreement involved group entities not recognised as scientists, technocrats or scientific institutes under the Finance Act, and that mere cost allocation without a commensurate service could not result in taxability.

Consequently, imposition of penalties underSection 78 and invocation of the extended period were both held to be unjust.

Finding the demands unsustainable both on facts and in law, the Tribunal set aside the tax, interest and penalties in their entirety and allowed the appeal filed by Mars International.