The Madurai Bench of the Madras High Court on 16 September held that charitable contributions cannot be treated as taxable sponsorship services where the recipient is not under an obligation to provide anything in return.

A Division Bench of Justices G.R. Swaminathan and M.D. Sumathi set aside the entire service tax demand raised against Karur Vysya Bank Ltd. They held that the Revenue failed to prove most contributions were sponsorship services, while noting that even the two qualifying transactions were time-barred. The judges observed:

“...Section 65(99a) defines sponsorship as including naming an event after the sponsor. There is nothing on record to show that the events in question were named after the appellant-bank. If the sponsor's company logo or trading name had been required to be displayed, that would amount to sponsorship.....Obviously, the question of the appellant having been given exclusive or priority booking rights would not arise. No prizes or trophies for competition had been sponsored in the name of the bank.”

The bank made the payments between October 2013 and June 2017 towards various charitable and social activities, including the construction of toilets, school buildings and temple towers. It treated the payments as charitable donations, while the department treated them as sponsorship services and sought to levy service tax.

The department issued a show cause notice in April 2019 proposing service tax on the transactions. The adjudicating authority subsequently confirmed the demand.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, partly allowed the bank's appeal. It set aside the demands relating to penal interest and liquidated damages but upheld the service tax demand on sponsorship services, along with interest and penalties. The bank then challenged the Tribunal's order before the High Court.

The Court examined the definition of “sponsorship” under Section 65(99a) of the Finance Act, 1994, which excludes donations or gifts where the service provider is under no obligation to provide anything in return to the donor.

It held that the Revenue had to establish the true character of the transactions when seeking to bring the payments within the service tax net. A donor could not be required to prove a negative merely because the department treated a contribution as sponsorship.

Further, the Bench noted that sponsorship would attract service tax where the contribution created an obligation for the recipient to provide something in return, such as displaying the sponsor's logo or trading name, naming an event after the sponsor, or providing exclusive or priority booking rights.

It found that two transactions created such an obligation. The bank contributed Rs. 10 lakh to Lions Club International, District 324A2, subject to a requirement to display its logo on water purifiers. Similarly, it contributed Rs. 4.10 lakh to Key Exports India, Mumbai, subject to a requirement to display the bank's logo on winter jackets meant for Mumbai-Thane traffic police personnel.

The judges held that these two transactions fell within the statutory definition of sponsorship. However, the Court found that the Revenue had not established any such obligation in respect of the other contributions. The department had relied on factors such as the bank's failure to produce original documents or the display of its logo at an event, without establishing that the recipients were contractually or otherwise obliged to provide anything in return.

It therefore held that the Revenue had failed to discharge its burden in respect of the other contributions. Further, it found that the proceedings had commenced beyond the prescribed limitation period.

Lastly, it noted that the Revenue had invoked the extended limitation period by alleging fraud, collusion, wilful misstatement or suppression of facts, but had not placed credible material to establish any such misconduct by the bank. Consequently, even the two transactions that constituted sponsorship could not sustain the demand on account of limitation.

Accordingly, the High Court set aside the CESTAT order to the extent challenged by the bank and allowed the appeal.

For Appellant: Senior Advocate T. Suryanarayana

For Respondent: Advocate R.Gowri Shankar

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Case Title :  Karur Vysya Bank Ltd. v. Commissioner of GST and Central ExciseCase Number :  CMA(MD) NO. 1121 of 2026CITATION :  2026 LLBiz HC(MAD) 284
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