CESTAT Delhi Says Govt Reimbursement Grant For Daawat Foods Plant Not Taxable As Service

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has granted relief to Daawat Foods Ltd., holding that grant-in-aid received by it from the Government as reimbursement of expenditure is not liable to service tax as it does not constitute consideration for any service.

A Bench of Judicial Member Dr. Rachna Gupta and Technical Member Hemambika R. Priya ruled that the financial assistance did not give rise to any service provider–recipient relationship.

“As the grant-in-aid was a reimbursement of expenses already incurred, hence, no consideration flowed from the Government to the appellant. Consequently, there was no provision of service under Section 65B (44) of the Act, and no service providerrecipient relationship existed between the appellant and the Government”

Daawat Foods Ltd. had received financial assistance from the Ministry of Food Processing Industries under a government scheme for setting up a rice milling unit.

The Department treated the grant as consideration for a “declared service” under Section 66E(e) of the Finance Act, 1994 and raised a demand of Rs. 6.59 lakh along with interest and penalty, which was confirmed by the adjudicating authority and upheld by the Commissioner (Appeals).

Before the Tribunal, the company argued that the grant was only a partial reimbursement of capital expenditure incurred on setting up the plant and was not linked to any service. It also contended that no amount over and above such reimbursement had been received.

Accepting the contention, the Tribunal found that the grant merely reimbursed capital expenditure and did not involve any service being rendered to the Government. It also held that the conditions in the sanction order did not create any counter-obligations amounting to a taxable service.

“It is also essential to note that the conditions in the sanction order are general and does not make any contractual obligations, nor create any counter obligations."

Holding that no consideration flowed and no service nexus existed, the Tribunal set aside the demand of service tax, interest and penalty, and allowed the appeal.

Accordingly, the Tribunal set aside the impugned order and allowed the appeal.

For Appellant:  Shri A.K. Batra, Ms. Sakshi Khanna (CAs)

For Respondent: Shri Rakesh Kumar (Authorised Representative)