HAL Need Not Pay Service Tax On Technology Transfer From Russian Agency For SU-30 Production: CESTAT Hyderabad

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that Hindustan Aeronautics Limited (HAL) was not liable to pay service tax under the reverse charge mechanism on payments made to Russian state agency Rosoboronexport. The payments are related to the transfer of technology and technical assistance for the manufacture of SU-30 MKI aircraft in India.

The ruling was delivered by a bench comprising Judicial Member Angad Prasad and Technical Member A.K. Jyotishi. The tribunal partly allowed HAL's appeals against service tax demands raised by the department on the alleged import of “Scientific or Technical Consultancy Services”.

The dispute arose from agreements executed between HAL and Rosoboronexport pursuant to an inter-governmental arrangement between India and the Russian Federation. The arrangement concerned the licensed production of SU-30 MKI fighter aircraft in India.

The agreements covered transfer of technology, supply of technical documentation, training of employees, and assistance in setting up manufacturing facilities.

The Department alleged that these activities amounted to taxable “Scientific and Technical Consultancy Service” received from a foreign service provider. It accordingly sought to levy service tax under the reverse charge mechanism.

The department argued that Rosoboronexport qualified as a scientific or technical organisation for the purposes of the statutory definition.

HAL contended that Rosoboronexport was a Russian government-owned intermediary agency engaged in defence exports. It could not be classified as a scientist, technocrat, or scientific or technical institution under the statutory definition of Scientific and Technical Consultancy Service.

The company also relied on earlier tribunal rulings in its favour involving similar agreements and identical issues.

Accepting HAL's submissions, the tribunal held that Rosoboronexport was essentially an exclusive state intermediary agency for defence exports and technology transfers. It did not qualify as a scientific or technical institution or organisation under the Finance Act provisions governing service tax.

“Therefore, from the agreement, as well as from the judgments cited, supra, it is obvious that Rosoboronexport, Moscow is a Governmental organization and therefore, the said entity cannot be termed as a Science or Technocrat or scientific or technology institution or organisation and hence it the activity cannot fall under the category of 'Scientific and Technical Consultancy Service'.”, the tribunal observed.

The bench observed that the statutory definition required consultancy or technical assistance to be rendered either by a scientist, a technocrat, or a science and technology institution.

However, the material on record showed that Rosoboronexport was a government-controlled defence export corporation. It was not a scientific consultancy body.

The tribunal also noted, “There is no other evidence on record to support that appellant had received any service by way of any advice, consulting or technical assistance by any individual scientist or technocrat and payments have been made to them in individual capacity.”

The tribunal held that the service tax demand under the category of Scientific and Technical Consultancy Service could not be sustained in the facts of the case.

It also noted that the Revenue's appeal against an earlier tribunal ruling involving similar facts had been disposed of by the Supreme Court as “not pressed." The tribunal said this meant the earlier view had attained finality.

While setting aside the service tax demand, penalties, and related findings on the Scientific and Technical Consultancy Service issue, the tribunal upheld the limited tax demand relating to Management, Maintenance and Repair services, along with the penalty on that component. It noted that HAL had not disputed that portion either before the adjudicating authority or during the hearing.

The department's separate appeal challenging waiver of penalties was also dismissed by the tribunal.

For Appellant: Advocate Disha Gursahaney,

For Respondent: M. Anukathir Surya, Authorized Representative