CESTAT: ₹5.27 Cr Received by BPL Is Reimbursement, Not Taxable

A Big Win for BPL Ltd: Clarity on What Truly Counts as a Service

In a major relief for BPL Ltd., the Bangalore Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has clarified a long-debated issue in tax law—not every financial transaction between businesses is a taxable “service.” The tribunal ruled that the ₹5.27 crore received by BPL from its joint venture partner was a pure reimbursement for salary and rent expenses incurred during a delayed business transfer—not a case of manpower supply liable for service tax.

Let’s explore what this case was about, what the tribunal decided, and why this judgment matters to corporates, legal professionals, and tax consultants.

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The Story Behind the Dispute

BPL Ltd., a reputed name in the Indian electronics industry, had entered into a Business Transfer Agreement (BTA) with Sanyo BPL Pvt. Ltd. (SBPL) on 14 December 2005. The agreement aimed to transfer BPL’s colour television business—including assets, operations, and employees—to SBPL.

The transfer was supposed to be completed by June 2005, but due to unforeseen and unavoidable delays, the actual handover took place six months later on 15 December 2005.

During this transition period, BPL continued to manage day-to-day operations, which included paying employee salaries and rent for office premises. As per mutual understanding, BPL raised debit notes to SBPL to reimburse these expenses—not for any service rendered, but simply to recover what was paid on SBPL’s behalf.

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What the Tax Department Alleged

Despite the nature of the transaction being reimbursement, the tax department took a different view. In October 2010, BPL received a show cause notice, claiming that the ₹5.27 crore received from SBPL was actually payment for manpower supply services. According to the department, since the transfer was delayed, the employees were effectively being “supplied” to SBPL during that period.

The department not only demanded service tax on the entire amount but also imposed interest and penalties. They argued that even if labeled a “reimbursement,” any payment for services—direct or indirect—was liable to tax under the Finance Act, 1994.

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BPL’s Strong Defense

BPL Ltd. strongly contested the department’s stand before the CESTAT. The company’s counsel presented a well-structured argument based on several key points:

1. No Intention to Provide Manpower Services
   BPL was not in the business of supplying manpower. The payments were only made to manage operations temporarily due to a delay in the legal transfer.
2. Genuine Reimbursements, Not Consideration
   The money received was not a “fee” for services but a reimbursement for expenses already incurred—salaries and rent—on behalf of SBPL.
3. Legal Precedents Backed the Claim
   The defense relied on the Supreme Court’s decision in Intercontinental Consultants, which stated that reimbursements are not subject to service tax. They also cited similar decisions in Spirax Marshall and UTI Asset Management, where reimbursements for deputed staff were not taxed.

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The Revenue’s Counterarguments

On the other side, the tax authorities argued that:

• Since the transfer was delayed, BPL was essentially providing manpower to SBPL during that time.
• Just because a payment is called a “reimbursement” doesn’t make it non-taxable, especially if it relates to a service being rendered.
• The extended limitation period applied since BPL had not paid tax or disclosed this in returns.

They also cited previous tribunal rulings, including in Chemplast Sanmar and Fuji Furukawa, where similar reimbursements were taxed under manpower supply.

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What the Tribunal Decided

The two-member bench of Justice P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) carefully analyzed the facts, agreement terms, and legal precedents.

The key findings of the tribunal were:

• Employee transfer was part of the business sale, not a separate service.
• The payments made to BPL by SBPL were pure reimbursements and were transparently recorded in BPL’s audited books of accounts.
• There was no intention to evade tax or suppress facts—BPL was simply recovering out-of-pocket expenses due to the delay.
• Based on the Supreme Court ruling in Intercontinental Consultants, genuine reimbursements are not liable to service tax.
• Since there was no service rendered, the demand for tax, interest, and penalty could not be sustained.

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Final Verdict: Relief Granted

The CESTAT bench allowed BPL’s appeal and quashed the ₹5.27 crore tax demand, along with interest and penalties. The tribunal granted consequential relief as per law, delivering a major victory to BPL Ltd.

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Why This Case Matters

This ruling is a critical reminder for businesses and tax professionals:

• Label vs. Substance Matters
  Just calling something a “reimbursement” won’t save it from tax—it must genuinely be a non-service transaction, as proven here.
• Documentation is Key
  BPL’s detailed debit notes and audited records played a major role in proving their case.
• Stay Informed on Precedents
  Referring to prior court judgments, like Intercontinental Consultants, can strengthen your legal defense.
• Don’t Delay Your Legal Challenges
  BPL challenged the demand in time and was rewarded for its proactive approach.

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Conclusion

The BPL ruling by CESTAT clears the air around service tax on reimbursements and draws a fine line between manpower supply and business continuity during a transition. This verdict reinforces that genuine operational recoveries aren’t taxable and offers a valuable precedent for companies involved in joint ventures, business transfers, or intra-group support arrangements.

For businesses, the message is clear—document your intentions, record your transactions transparently, and know your legal rights.

Published on: 25 July 2025
Author: CS Chhavi Goyal