Grant-In-Aid Received from Govt Cannot Be Treated as Consideration for Taxable Service in Absence of Provider-Recipient Relationship: CESTAT [Read Order]

In a recent ruling, the New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that grant-in-aid received from the Government cannot be treated as consideration for taxable service when it is only reimbursement of expenditure and no service provider–recipient relationship exists.

Daawat Foods Limited, the appellant, is a company engaged in the production and supply of rice and related products and was registered under service tax law. The appellant received grant-in-aid from the Ministry of Food Processing Industries under a Government scheme for setting up a rice milling unit.

The appellant treated the grant as reimbursement of capital expenditure and did not pay service tax. During scrutiny, the Department alleged that the grant was given with conditions and created a counter obligation, making it consideration for a declared service under the Finance Act, 1994.

A show cause notice was issued demanding service tax along with interest and penalty. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) upheld the same. Aggrieved by this, the appellant approached the Tribunal.

The appellant’s counsel argued that the grant-in-aid was only reimbursement of expenses incurred for setting up the plant and not consideration for any service. The counsel submitted that no amount was received beyond such reimbursement and no service was provided to the Government.

The Department’s counsel argued that the grant was linked to certain obligations and that agreeing to such conditions amounts to a declared service. They also argued that the grant should be treated as consideration for service under the law.

The two-member bench comprising Dr. Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) observed that grant-in-aid is a form of financial assistance and in this case it was clearly reimbursement of expenditure already incurred by the appellant.

The tribunal observed that the conditions in the sanction order were general in nature and did not create any specific contractual obligation or service to be provided to the Government. It also observed that the appellant was not engaged in any activity that generated intellectual property or technical know-how for the Government.

The tribunal explained that for levy of service tax there must be consideration and a service provider–recipient relationship, which was absent in the present case. It pointed out that mere reimbursement of expenses cannot be treated as consideration.

The tribunal held that the grant-in-aid received by the appellant is not taxable as service and set aside the impugned order. The appeal was allowed.