No Service Tax on Cost Allocation for In-House Pet-Care R&D: CESTAT Hyderabad Rules in Favour of Mars International
Pranav B Prem
The Hyderabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has ruled that Mars International India Pvt. Ltd. is not liable to pay service tax on cost allocations relating to the development of pet-care products. The Tribunal held that the arrangement between Mars International and its foreign group entities did not constitute a service provider–service recipient relationship and therefore could not be taxed under Section 65(105)(za) of the Finance Act, 1994. The Bench comprising Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) found that the group companies were engaged in research and development of pet-care products for the benefit of the group as a whole and not as third-party service providers to the appellant.
Mars International India is engaged in the manufacture and sale of pet food and related accessories alongside the trading of chocolates. The Tribunal recorded that the foreign affiliates of the group were performing in-house research activities for product development, and the expenditure incurred was apportioned across the group through cost-sharing. Since the research work was not outsourced to an external agency but was undertaken internally within the corporate group structure, the Tribunal held that the cost allocation could not be treated as consideration for taxable services. It concluded that the basic prerequisite of a service provider–service recipient relationship was absent and therefore the levy of service tax under reverse charge was unsustainable.
During the audit conducted by the Service Tax Department for the period April 2006 to October 2011, the Department took the view that the allocation of R&D costs by foreign group companies constituted taxable services under various service categories and that service tax was payable under reverse charge. A show-cause notice was issued proposing demands for the period April 2006 to March 2011. The Commissioner confirmed a service tax demand of ₹34,31,662 under the category of Goods Transport Agency (GTA) services. The assessee disputed the demand, reiterating that there was no hiring of transport services and that the distributors and C&F agents merely received reimbursement of local transportation expenses, for which no consignment notes were issued.
The Tribunal accepted the assessee’s submission that there was no service provided by a Goods Transport Agency and therefore no liability arose under Section 65(105)(zzp). The Bench observed that reimbursement of local delivery charges to distributors and C&F agents could not be construed as taxable GTA services in the absence of consignment notes. It further noted that the agreements relating to development of pet-care products concerned internal group activity and not outsourced scientific or technical services, reiterating that the foreign group companies were not “service providers” within the meaning of the law.
The Tribunal also rejected the allegation of suppression of facts raised by the Department, observing that the assessee could not have declared the information in the ST-3 returns as no reporting field existed for such cost-sharing arrangements. Therefore, the extended period of limitation was held to be unavailable to the Department.
Concluding the matter, the Bench held that the Commissioner’s order confirming the service tax demand was not sustainable in law. It ruled that cost allocations among group entities for in-house development of pet-care products do not attract service tax and that the demand raised under the GTA category also could not survive. Accordingly, the appeal filed by Mars International India Pvt. Ltd. was allowed.
Appearance
Counsel for Appellant/ Assessee: Deepak Suneja and Manish Sachdeva
Counsel for Respondent/ Department: B. Sangameshwar Rao
Cause Title: M/s Mars International India Pvt. Ltd. v. Commissioner Of Central Tax, Hyderabad - II
Case No: Service Tax Appeal No. 22990 of 2014
Coram: Angad Prasad (Judicial Member), A.K. Jyotishi (Technical Member)
