CESTAT Quashes Service Tax Demand Against IBM India On Warranty Expense Reimbursements

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 6 February set aside service tax demands raised against IBM India Pvt. Ltd., holding that reimbursements received from overseas IBM entities towards warranty costs, in the absence of consideration for any service, cannot be taxed under “management, maintenance or repair” service.

A Bench comprising Dr. D.M. Misra (Judicial Member) and Mrs. R. Bhagya Devi (Technical Member) passed the order allowing the appeals filed by IBM India. It recorded that:

“the show-cause notices itself admit that these are reimbursable expenses relating to salaries, transport, etc., and the reimbursable expenses cannot be levied to service tax is settled by the Hon'ble Supreme Court's decision in the case of Intercontinental Consultant and Technocrats Pvt. Ltd.”

The dispute related to the period 2006–07 to 2010–11 and April 2013 to June 2017. During audit, the Department noticed that IBM India had reflected certain amounts under “Earnings in Foreign Currency” in its balance sheet. According to the Department, these amounts represented reimbursements received for carrying out maintenance or repair of goods during the warranty period and were therefore taxable as “management, maintenance or repair service.”

The Commissioner held that IBM India had provided warranty services and confirmed the service tax demand with penalties, invoking the extended period of limitation. It observed that although no consideration was received from end customers, compensation was paid by overseas IBM entities towards the financial loss incurred in repairing defects. The Commissioner also concluded that “the 'intention of parties in the present case was to provide the warranty service to the end customers who had purchased Machines/IT products from IBM India.”

The Tribunal, however, rejected this reasoning. It noted that it was undisputed that the amounts received were reimbursable expenses and that no invoices or bills were raised towards warranty services to customers in India. It held that service tax cannot be levied merely by deriving intention from agreements in the absence of consideration for a taxable service. The Bench observed:

“since the service tax cannot be levied unless there is a consideration received for the service being rendered and not by deriving intention of the parties based on the Agreement.”

The Tribunal further held that both prior to and after 1 July 2012, the existence of a taxable service rendered for consideration was essential, which was absent in the present case.

On limitation, the Tribunal held that suppression could not be invoked in the second show cause notice. Relying on settled law, it observed that the extended period of limitation cannot be repeatedly invoked for the same issue. It therefore held that the demand was unsustainable on limitation as well.

In this context, the Tribunal stated that it was “not inclined to sustain the above impugned orders either on merit or on limitation, hence, the impugned orders are set aside.”

Accordingly, the Tribunal allowed the appeals with consequential relief.

Appearance for the Appellant: Ms. Disha G, Advocate 

Appearance for the Respondent: Mr. M.A. Jithendra, Assistant Commissioner (AR)