Ruling that the burden lies on the revenue to establish sponsorship under Section 65(99a) of the Finance Act, 1994, the Madras High Court (Madurai Bench) has set aside the CESTAT order save for two transactions where the bank’s own Board resolutions mandated display of the KVB logo. The Court held that a financial contribution qualifies as sponsorship only where the donee is under an obligation to provide something in return to the contributor. Mere voluntary acknowledgement by the donee does not convert a donation into a taxable sponsorship.
The Court clarified that mere use of the word ‘sponsorship’ in the internal records of either party is not determinative, and the revenue cannot rely on stereotyped reasons such as non-production of documents or absence of proof to discharge its onus. Further, where a bank’s own Board resolution stipulates that the donee must display the bank’s logo or trade name, the transaction falls squarely within the statutory definition of sponsorship and attracts service tax under the reverse charge mechanism.
Even where a transaction qualifies as sponsorship, invocation of the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994, requires credible material establishing fraud, collusion, wilful misstatement, or suppression of facts, failing which the demand is time-barred, added the Court.
The Division Bench comprising Justice G.R. Swaminathan and Justice M.D. Sumathi framed the substantial question of law as to whether the Tribunal was justified in upholding the levy of service tax under the reverse charge mechanism on the CSR contributions made by the appellant by treating them as ‘sponsorship’ services within the meaning of Section 65(99a) of the Finance Act, 1994.
The Court noted that Section 65(99a) defines ‘sponsorship’ as including naming an event after the sponsor, displaying the sponsor’s company logo or trading name, giving the sponsor exclusive or priority booking rights, and sponsoring prizes or trophies for competition, but crucially excludes any financial or other support in the form of donations or gifts given by donors subject to the condition that the service provider is under no obligation to provide anything in return to such donors.
The Court observed that since the revenue was seeking to bring the transactions within the service tax net, the onus lay squarely on the revenue to demonstrate that the payments constituted sponsorship, and not on the assessee. The Court explained that the key word in the statutory definition is ‘obliged’, if the recipient of the financial contribution is under an obligation to do something in return for the contributor, it would amount to sponsorship attracting service tax, but if the recipient merely acknowledges the contribution on its own, that will not invest the transaction with the character of sponsorship in the statutory sense.
Briefly, Karur Vysya Bank (KVB), a scheduled private bank, made payments to various organisations during the period October 2013 to June 2017, claiming these were donations for charitable purposes such as construction of toilets, school buildings, temple towers, and similar activities. The Department of GST and Central Excise, Trichy, however, treated these payments as ‘sponsorships’ and issued a show cause notice proposing levy of service tax on the transactions.
The appellant’s detailed reply was rejected, and an order was passed confirming the demand. KVB then approached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which partly allowed the appeal by setting aside demands on penal interest and liquidated damages but upheld the levy of service tax on sponsorship services along with applicable interest, and sustained the invocation of the extended period of limitation and penalties under Sections 77 and 78 of the Finance Act, 1994.
