Reimbursement Of Stipend Paid To Apprentices Not Liable To Service Tax: CESTAT Chennai

The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that reimbursement of 50% of the stipend paid to apprentices by the Board of Apprenticeship Training (BOAT) is not liable to service tax.

It held that the reimbursement is akin to a statutory welfare grant rather than consideration for any taxable service.

A bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao allowed the appeal filed by India Nippon Electricals Ltd. against the service tax demand for April 2012 to December 2014.

"We are of the considered view that essential for a service to be taxed under the Finance Act 1994 is the requirement for a service provider and service recipient relationship founded on a commercial consideration. To our mind, the stipend being paid by the appellant upfront, fifty percent of which when reimbursed by the Government, would be akin to a statutory grant as a welfare mandate under the Apprentices Act. This then does not acquire the character of a service charge and is not a payment or commercial consideration for any service that is being rendered by the appellant and thus the activity does not cross the threshold to enter the taxable net," the tribunal held.

The company manufactures motor vehicle parts and is registered under the service tax law. During scrutiny of its accounts, the Department found that it had received about ₹30.47 lakh from BOAT towards apprenticeship training imparted to graduate and diploma holders. Treating the amount as consideration for taxable services, the department demanded service tax, interest, and penalty.

The company argued that it was under a statutory obligation to engage apprentices and pay them a stipend under the Apprentices Act. BOAT merely reimbursed half of the stipend already paid, without any mark-up.

It contended that the payment merely reimbursed part of the stipend paid under a statutory mandate and was not consideration for any service. Therefore, it could not form part of the taxable value under Section 67 of the Finance Act, 1994. The company also relied on the Supreme Court's ruling in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd.

The tribunal found that the Department had failed to identify any consideration for the alleged service. It noted that the company's stand that BOAT reimbursed only 50% of the stipend paid under the statutory apprenticeship scheme remained uncontroverted. It also observed that the adjudicating authority had accepted that the training was imparted pursuant to a legal obligation.

"We find that indisputably the Show Cause Notice as well as the impugned order seeks to demand service tax on the amount which is stated to be 50% of the stipend paid to the apprentices by the appellant on providing technical training as required under the apprentices Act.", the tribunal ruled.

The tribunal further observed that the company merely acted as a conduit for passing the reimbursed amount to the apprentices. At best, the payment represented reimbursement of expenditure.

Referring to the Supreme Court's decision in Intercontinental Consultants, the tribunal reiterated that reimbursable expenditure could not be included in the value of taxable services before the amendment to Section 67 came into effect on May 14, 2015.

Since the dispute related to April 2012 to December 2014, it held that the demand was unsustainable.

Accordingly, the tribunal set aside the impugned order and allowed the appeal with consequential relief.

For Appellant: Advocate N. Ieswaraya,

For Respondent: G. Krupa, Authorized Representative