Cost Sharing for Joint Advertisement Not Taxable as Sponsorship Service: CESTAT Sets Aside ₹15.58 Lakh Demand [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench has set aside a service tax demand of ₹15.58 lakh holding that cost sharing for joint advertisement does not amount to Sponsorship Service under the Finance Act, 1994.

The Tribunal held that the agreement between G.R. Thanga Maligai (GRT) and the World Gold Council (WGC) was a joint promotional activity through cost-sharing and hence could not be classified as a taxable sponsorship service. The impugned order was set aside and the appeal was allowed.

The GRT was engaged in the business of selling gold jewelry, it entered into a ‘Co-Op Partner Agreement’ with the World Gold Council (WGC) for promoting 22K gold jewelry through advertisements.

However, the GRT agreed to include the advertisement in the newspapers, while the WGC agreed to sponsor up to 25% of the advertisement costs, provided the WGC logo was included in the advertisement in accordance with their branding requirements. The Department treated the agreement as a sponsorship service, resulting in the demand of ₹15.58 lakh along with penalties.

The assessee’s contention was that it was merely a cost sharing arrangement and there was no relationship between service provider and client. It was contended that both parties benefited from the advertisements placed, and the contribution made by WGC was merely in the nature of reimbursing expenses incurred and not in consideration for any service.

The Department’s contention was that the inclusion of the logo and branding of WGC in the advertisements constituted a sponsorship service, which was taxable.

The Tribunal comprising Ajayan T.V .[Judicial Member] and M.Ajit Kumar [Technical Member] observed that in order for service tax to apply there must be a relationship between the service provider and the recipient of the service and consideration for the service must have been provided.

Further, the bench found that the agreement was merely a joint effort in promoting gold jewelry and the expenses were shared between the two parties. It was found that the payment made by WGC was merely in the nature of reimbursing the expenses incurred for advertising.

The Bench further held that the essential ingredients of sponsorship service were absent, as there was no exclusive benefit or service rendered by GRT to WGC.

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