No Service Tax Payable By Research Institutes On Grants-In-Aid Received From Government: CESTAT

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that grants-in-aid received by a government-funded research institution from various Central and State Government departments cannot be subjected to service tax under the category of “Scientific or Technical Consultancy Service.” The bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) observed that grants-in-aid do not constitute “consideration” for taxable services and therefore fall outside the scope of levy under the Finance Act, 1994. The appeals were filed by M/s National Centre for Earth Science Studies (formerly Centre for Earth Science Studies), Thiruvananthapuram, against orders confirming service tax demands for different periods. The dispute revolved around whether grants received from government agencies for research and scientific studies could be treated as taxable receipts. The department had alleged that the institution had short-paid service tax during the period from April 2001 to December 2006 and issued a show cause notice demanding tax for the financial years 2002-03 to 2005-06. The adjudicating authority confirmed the demand by invoking the extended limitation period and also imposed penalties under Sections 70, 76 and 78 of the Finance Act, 1994. The Commissioner (Appeals) partly modified the order by setting aside the penalty under Section 76 while sustaining the remaining liabilities. Another demand was raised for the period April 2010 to March 2011 through a separate show cause notice dated 15 September 2011. The adjudicating authority again confirmed the demand, and the Commissioner (Appeals) rejected the assessee’s appeal, leading to the second appeal before the Tribunal. Before the Tribunal, the appellant submitted that it undertook three categories of activities — Core Projects, Externally Funded Projects and Consultancy Projects. According to the appellant, Core Projects were fully funded by the Government of Kerala and the institution retained exclusive rights over the data and findings generated through such studies. It argued that these activities were not in the nature of commercial consultancy services and therefore could not be subjected to service tax. The appellant further pointed out that it had already disclosed taxable services and paid service tax wherever applicable through ST-3 returns. A table produced before the Tribunal showed that during the period from 2002-03 to 2005-06, the institution had reported taxable turnover and paid service tax and education cess amounting to more than ₹32 lakh. The institution argued that grants-in-aid are fundamentally different from commercial payments because they are financial assistance provided by governments for specific public purposes without any element of quid pro quo. It explained that such grants are governed by conditions relating to utilization, audit and reporting, and may even require refund in case of non-compliance. The Tribunal noted the appellant’s reliance on observations from the Comptroller and Auditor General of India explaining the nature of grants-in-aid as assistance released by governments to institutions and agencies for public functions and operational purposes. The appellant also relied upon several earlier judicial precedents, including the Tribunal’s decision in Apitco Ltd. v. CST, Hyderabad, where it was held that grants received by an implementing agency from the Government were not liable to service tax. The Tribunal noted that the Supreme Court had dismissed the Revenue’s appeal against that ruling. Various other decisions involving research institutions and consultancy organisations were also cited in support of the argument that grants-in-aid cannot be equated with taxable consideration. Importantly, the appellant pointed out that in its own case for a later period from 2005-06 to 2009-10, the department itself had accepted that grants-in-aid received from Government Ministries and Departments could not be subjected to service tax because they did not amount to consideration. The Tribunal recorded that this finding had attained finality and observed that the Revenue could not adopt a contradictory stand for earlier periods involving the same facts and issues. With respect to the demand for the period April 2010 to March 2011, the appellant contended that documentary evidence including agreements, project approvals and departmental sanctions had been produced before the authorities to establish that the receipts were grants-in-aid. It submitted that only one project relating to an environmental impact study for the Water Resources Department of Kerala could arguably fall within taxable services and involve a limited service tax liability. The Tribunal also considered the issue of limitation and observed that the demand for the period 2002-03 to 2005-06 had been raised by invoking the extended period despite the appellant being a government entity operating under a bona fide belief regarding taxability. The appellant argued that government institutions could not ordinarily be accused of suppression or wilful misstatement for the purpose of invoking extended limitation. The CESTAT held that the entire demand relating to Appeal No. ST/21752/2015 was barred by limitation. The Tribunal further held that the amounts received as grants-in-aid from Government Departments and Ministries could not be treated as taxable consideration for consultancy services. The Tribunal reiterated that grants-in-aid received from Government Departments and Ministries are not liable to service tax because they do not constitute consideration. It directed the adjudicating authority to examine the documentary evidence relating to grants-in-aid and exclude such amounts while re-determining any tax liability in accordance with law. The Tribunal allowed the first appeal by setting aside the demand and penalties entirely, while the second appeal was partly allowed by way of remand. Case Details Case Title: M/s. National Centre for Earth Science Studies Versus Commissioner of Central Excise, Customs and Service Tax, Thiruvananthapuram Citation: JURISHOUR-1195-CES-2026(BANG) Case No.: Service Tax Appeal No. 21752 of 2015 Date: 08.05.2026 Counsel For Appellant: Anil Kumar B., Advocate Counsel For Respondent: Rajashekar B.N.N., Superintendent (AR) Click Here To Read Order Read More: Interest On Delayed Excise Refund Payable After 3 Months From Refund Application, Not From Appellate Order: CESTAT

No Service Tax Payable By Research Institutes On Grants-In-Aid Received From Government: CESTAT

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