Relief for MRF: CESTAT Rules Reimbursements of Salaries, Rent and Branch Expenses to Overseas Offices Not Taxable as Services under BAS [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that reimbursements made by MRF Ltd. to its overseas branch offices could not be treated as taxable services under Business Support Services (BAS), except for consultancy fees which the appellant admitted as taxable.

MRF Limited, the appellant, is a manufacturer of tyres, tubes, and flaps under Chapter 40 of the Central Excise Tariff Act 1995. The company operates overseas offices in Australia, Dubai, Vietnam, and Sri Lanka.

During an audit in 2013, the department observed that expenses of these overseas offices, such as salaries, rent, and administrative costs, were booked in the appellant’s accounts in India.

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The department argued that these expenses represented services provided by overseas branches to the Indian head office and raised a demand of Rs. 58,38,707 under reverse charge, invoking extended limitation.

The adjudicating authority confirmed the demand with interest and equal penalty, though MRF had already paid part of the liability under protest. Aggrieved, the appellant approached the tribunal, challenging the bulk of the demand except for Rs. 11,01,745 paid to consultants abroad.

The appellant's counsel argued that overseas branches are part of the same legal entity as the head office and that no taxable service exists between them. They argued that the reimbursements were made at actual cost without any markup and could not be treated as consideration.

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They relied on several tribunal rulings and also cited the Supreme Court judgment in Intercontinental Consultants & Technocrats Pvt. Ltd., where Rule 5(1) of the Service Tax Valuation Rules was struck down as ultra vires. They argued that this was an interpretational issue and no penalty could be imposed.

The revenue counsel maintained that branches were deemed separate persons under Section 66A and their activities of marketing and customer interaction amounted to business support services to the head office.

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They argued that the appellant had concealed facts, justifying extended limitation. The counsel also requested that the matter be remanded to verify whether the payments were genuine reimbursements.

The two-member bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that reimbursements of expenses such as salaries, rent, and office costs to overseas branches could not be treated as taxable services rendered to the head office.

The tribunal explained that Section 66A created a legal fiction only to determine whether services were provided and consumed in India or abroad, and it did not authorize taxation of self-to-self transactions.

The tribunal pointed out that both the show cause notice and the order in original had themselves described the impugned payments as reimbursements. On this basis, the apprehension of the revenue that verification was needed was found to be misplaced.

The tribunal also observed that the reliance on Rule 5(1) of the Service Tax Valuation Rules was unsustainable, since the Supreme Court had already struck down the provision as ultra vires.

The tribunal set aside the demand, interest, and penalty except for the portion conceded by MRF relating to consultancy fees. The appeal was allowed in these terms, granting consequential relief to the appellant.

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