CESTAT Bengaluru Quashes Service Tax Demand On Grants-In-Aid, Allows Earth Science Institute Appeal

On 8 May, the Bengaluru Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) held that grants-in-aid received from government departments do not constitute “consideration” and therefore cannot be subjected to service tax under Scientific or Technical Consultancy Services under the Finance Act, 1994.

Judicial Member P.A. Augustian and Technical Member R. Bhagya Devi allowed two tax appeals (21752 and 21754 of 2015) filed by the National Centre for Earth Science Studies. It held:

“.....wherever the Appellants receives grants-in-aid from Government Departments/Ministries, those grants-in-aid amounts cannot be subjected to service tax since they cannot be treated as 'consideration'.....”

The dispute arose from show cause notices issued to the National Centre for Earth Science Studies alleging short-payment of service tax for the periods 2002–03 to 2005–06 and 2010–11.

The Revenue contended that grants-in-aid received from various Central and State Government departments for scientific research projects fell within the ambit of taxable “Scientific or Technical Consultancy Services” and were therefore liable to service tax.

The adjudicating authority confirmed the demand for the earlier period by invoking the extended period of limitation and also imposed penalties. The Commissioner (Appeals) partially upheld this order. For the subsequent period, the appellate authority again confirmed the demand, citing insufficient evidence regarding the nature of receipts.

The appellant, however, argued that grants-in-aid constitute sovereign financial assistance extended by the Government for specified public purposes and cannot be treated as consideration for services. It submitted that such funds remain subject to strict governmental control, utilisation conditions, and audit requirements, and do not involve any commercial quid pro quo.

The Tribunal accepted these submissions and held that grants-in-aid received from Government Departments or Ministries cannot be treated as consideration for taxable services. It observed that such funding represents financial assistance for public projects and not payment for services rendered to the grantor. The Bench further noted that judicial precedent had already settled the issue and rejected the Revenue's attempt to reclassify grants-in-aid as taxable consideration.

On limitation, the Tribunal held that the demand for the period 2002–03 to 2005–06 remained barred by time. It further observed that the Revenue had no justification to invoke the extended period, particularly since the assessee functioned as a government-linked scientific institution operating under a bona fide belief.

Accordingly, the Tribunal set aside the entire service tax demand and penalties in Service Tax Appeal No. 21752 of 2015.

In Service Tax Appeal No. 21754 of 2015, the Tribunal partly allowed the appeal and remanded the matter for limited re-examination, directing exclusion of grants-in-aid while recomputing any taxable liability in accordance with law.

For Appellant: Anil Kumar B., Advocate

For Respondent: Rajashekar B.N.N., Superintendent