CESTAT Delhi Quashes Service Tax Demand On Indian Unit Over Foreign Parent's Un-Invoiced Allocations

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi has quashed a Rs 1.88 crore service tax demand raised on an Indian subsidiary over un-invoiced allocations reflected in its foreign parent company's internal accounting system.

The Tribunal found that the disputed amounts did not relate to any service rendered to the subsidiary and involved no consideration.

A coram of Judicial Member Binu Tamta and Technical Member P. V. Subba Rao dismissed appeals filed by the Revenue against Dana India Private Ltd., its Managing Director Saket Sapra, Head of Finance Sharad Jain, and General Managers (Finance) Sunil Joshi and Manoj Agarwal. It upheld an order that had dropped the tax demand and penalties.

“In the absence of any service and consideration between Dana USA and the respondent, the levy of service tax would not arise,” the Tribunal said.

It further observed, “Sharing of cost and expenditure and reimbursement thereof cannot be subjected to service tax as the basic element of rendering service and the element of consideration are absent.”

The dispute arose after the tax department alleged that Dana India had failed to pay service tax under the reverse charge mechanism on certain Selling, General & Administration (SG&A) expenses allocated by its foreign parent company, Dana Corporation USA.

According to the Revenue, Dana India had paid service tax on invoiced allocations raised by Dana USA. However, it allegedly failed to pay tax on a substantial portion of un-invoiced allocations reflected in the parent company's Hyperion Financial Management (HFM) system.

A show cause notice was issued demanding Rs 1.88 crore in service tax, along with interest and penalties. Penalties were also proposed against the company's Managing Director and senior finance officials.

The adjudicating authority confirmed the demand and imposed penalties. However, the Commissioner (Appeals) later set aside the entire demand and penalties, prompting the Revenue to approach the Tribunal.

Before the Tribunal, Dana India argued that Dana USA internally estimated expenses at the group level and later determined, through transfer pricing analysis, which costs were actually attributable to group entities.

It said expenses that benefited group entities were invoiced with an appropriate markup, and service tax was duly paid on those amounts under the reverse charge mechanism.

However, the disputed un-invoiced allocations were different, the company argued. These related to shareholder activities, investor relations, stewardship functions, and other activities that benefited only the parent company.

Dana India said these amounts were never recorded in its books of account. It also said no payment was ever made towards such allocations.

Accepting the contention, the Tribunal said service tax, being a contractual levy, cannot arise in the absence of service and consideration.

It noted that the un-invoiced allocations were merely internal accounting entries maintained by the parent company. These were not linked to services consumed by Dana India.

The tribunal also rejected the Revenue's reliance on debit entries in the HFM system. It said liability under the Point of Taxation Rules would arise only when debit entries are reflected in the books of the service recipient.

Since the disputed allocations were not recorded in Dana India's books, no service tax liability could be imposed, the Tribunal held.

The Bench also relied on earlier rulings, including Standard Chartered Bank v. Commissioner of CGST, Futura Polyester Ltd. v. CCE, and Intercontinental Consultants and Technocrats Pvt. Ltd.

Accordingly, it dismissed all appeals filed by the Revenue.

For Appellant: Authorised Representative Sangeet Kumar Meena.

For Respondent: Advocates B.L. Narasimhan and Kunal Aggarwal.