Service Tax Not Payable on Un-Invoiced Allocations By Foreign Parent Company Without Service And Consideration: CESTAT [Read Order]

Tribunal (CESTAT) held that service tax cannot be demanded on un-invoiced allocations made by a foreign parent company when there was no identifiable service and no consideration paid by the Indian entity.

Dana India Private Ltd., the appellant, is engaged in manufacture and sale of automobile components. During audit, the department noticed that the appellant made certain accounting entries towards Selling, General and Administrative (SG&A) expenses allocated by its foreign parent company and associated enterprises.

The department alleged that these allocations represented consideration for services received from foreign entities and service tax was payable by the appellant under reverse charge mechanism. A show cause notice was issued demanding service tax along with interest and penalties.

The adjudicating authority confirmed the demand. Aggrieved by the order, the appellant approached the CESTAT.

The appellant’s counsel argued that the entries were only accounting allocations made by the parent company and no actual services were rendered to the appellant. It was further argued that no invoices were raised by the foreign entities and there was no evidence showing provision of any taxable service.

The appellant also argued that the department failed to identify the exact nature of service allegedly received by the appellant. It was contended that mere book entries between associated enterprises cannot automatically become taxable consideration for services.

The revenue argued that the appellant and foreign entities were related parties and the allocations represented expenses incurred for the benefit of the Indian company. According to the department, the appellant was liable to pay service tax under reverse charge on the allocated expenses.

The two-member bench comprising M. Ajit Kumar (Technical Member) and Vasa Seshagiri Rao (Judicial Member) observed that the department failed to establish existence of any specific taxable service rendered by the foreign entities to the appellant.

The tribunal further observed that no invoices were issued for the alleged services and the allocations were made only through accounting adjustments. The tribunal pointed out that there must be clear evidence of service provider-service recipient relationship and identifiable consideration before levying service tax.

The tribunal explained that mere allocation of common expenses by a parent company among group entities does not automatically establish taxable service in absence of supporting evidence. The tribunal also observed that the department failed to prove that the appellant actually received any service for consideration.

The tribunal set aside the impugned order and allowed the appeal.

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