Hindustan Shipyard Not Liable to Include Travel & Accommodation Costs of Foreign Consultants in Service Tax Value: CESTAT [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Bench, has dismissed the Department’s appeal, confirming that expenses incurred towards air travel, accommodation, and local facilities for foreign specialists deputed by a Russian vendor are not includable in the taxable value of Consulting Engineering Services under the reverse charge mechanism.

The dispute arose from a contract dated October 6, 2005, between Hindustan Shipyard Ltd. and Rosoboronexport, Moscow, for the modernization of the Indian Navy’s yard. Under the contract, the shipyard was obliged to bear the costs of travel, accommodation, and related facilities for Russian engineers.

While the shipyard paid service tax on consultancy fees charged by the foreign vendor, the Department alleged that these additional expenses should also form part of the taxable value, issuing a show cause notice in April 2014.

The revenue argued that expenses on travel and accommodation were integral to the consulting service and must be included in taxable value under Section 67 of the Finance Act, 1994 and maintained that double taxation was not a valid objection since different taxable events were involved, citing Harveen & Co. to support this view.

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The department also stated that hotel accommodation became taxable only from May 2011, so expenses incurred before that date had not suffered service tax, making the Commissioner’s finding erroneous. Relying on Bhayana Builders and Aggarwal Colour Advance Photo System, the Revenue emphasized that service tax is levied on the gross value of taxable services, including indispensable costs necessary to bring the service to the stage of performance.

On the other hand respondent argued that the expenses incurred for air travel, accommodation, local conveyance, food, medical aid, and related facilities for Russian engineers were contractual obligations borne directly by Hindustan Shipyard and not part of the consideration charged by the foreign vendor.

Since these amounts were paid to Indian service providers and not invoiced or reimbursed by Rosoboronexport, they could not be included in the taxable value under Section67, and the Service tax was already discharged on consultancy fees invoiced by Rosoboronexport.

They relied on Toyota Kirloskar Auto Parts Pvt Ltd. (CESTAT Bengaluru, 2024) and Devyani International Ltd. (CESTAT Delhi, 2024), which held that travel and stay costs of foreign trainers are not includable in taxable value.

The tribunal observed that Section 67 mandates that only the “gross amount charged” by the service provider for “such service” can be taxed, and Expenses incurred by Hindustan Shipyard were not charged by the foreign vendor, nor reimbursed,d and thus had no nexus with the taxable service.

The bench of Angad Prasad(judicial member )and A.K. Jyotishi (technical member ) held that Supreme Court precedents (Intercontinental Consultants and Bhayana Builders) clarified that costs not forming part of the consideration cannot be added to the taxable value.

It was also pointed out that Revenue’s reliance on Harveen & Co. and Aggarwal Colour was distinguishable on the facts.

Accordingly, the Tribunal upheld the Commissioner’s order and dismissed the Department’s appeal.

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