2025 (7) TMI 703 - AT - Service Tax

Free telecom services to employees not liable for service tax under Section 67(1) as constitutes service to self

CESTAT NEW DELHI held that appellant was not liable for service tax on free telecom services provided to employees. The Tribunal relied on its earlier ... Levy of service tax - free telecom services provided by the appellant to their employees - HELD THAT:- The said issue has been decided by the Tribunal in the case of the appellant themselves, titled as M/s. BSNL Vs. Commissioner of Service Tax, Delhi [2019 (12) TMI 338 - CESTAT NEW DELHI] relating to their Gurgaon Unit, where it was held that 'The service recipient being the employees of the appellant no other object then that of efficiency of appellant services is found to be a reason for given services to the employees. In the given circumstances, there is no separate service recipient then the employees of appellant itself. Resultantly, the impugned service here in is the service to self Section 67(1) of the Service Tax Act is held to have wrongly invoked as since there is no consideration to question of any taxation at all arises. The demand on this count is, therefore, hereby set aside.' Since the issue on merits stands decided in favour of the appellant, it is not necessary to consider the issue of limitation. In view of the decision of the Tribunal in the case of the appellant of their Gurgaon Unit, the appellant is not liable to pay service tax on the usage of mobile phone facility provided to their employees free of cost to a certain limit. The impugned order deserves to be set aside and is hereby quashed - appeal allowed. The core legal question considered by the Tribunal is whether service tax is leviable on free telecom services provided by the appellant to their employees. This issue arises from the observation during audit that the appellant provided free telecom services up to a certain limit on postpaid mobile connections without generating bills or depositing service tax on such free services. The Department contended that the value of these free services should be computed under Section 67 of the Finance Act, 1994 read with Valuation Rules, and tax should be payable on the computed amount. The appellant disputed this demand.The Tribunal's analysis centered on the applicability of service tax on services provided free of cost to employees, specifically whether such provision constitutes a taxable service under the Finance Act.Regarding the relevant legal framework, Section 67 of the Finance Act, 1994 governs the valuation of taxable services for the purpose of service tax. The Department invoked this provision to argue that the value of free services provided should be included in the taxable value. However, the Tribunal referred to established principles and precedents that clarify the nature of taxable services and the requirement of consideration and distinct service recipients.The Tribunal relied heavily on its prior decision involving the appellant's Gurgaon Unit, wherein it was held that telephone services provided free of cost to employees do not constitute a taxable service. The Tribunal reasoned that since the services were provided to the appellant's own employees without any charge, the transaction lacked the element of consideration essential for levy of service tax. The service recipient and provider were effectively the same entity, and the purpose of providing the service was to enhance employee efficiency rather than to render a service to a third party. This was characterized as a 'service to self,' which under the law does not attract service tax.Further, the Tribunal emphasized that the essence of a taxable service under the Finance Act requires the presence of both a service provider and a distinct service recipient. In the instant case, the employees receiving free telecom services are not independent service recipients in the commercial sense but are part of the appellant's organizational structure. This interpretation aligns with the principle that contractual privileges arising from employer-employee relationships fall outside the scope of service tax, a position supported by the Tribunal's earlier ruling in the case of Gondwana Club Vs. CCE, Nagpur.The appellant's counsel also referred to Circular No. 23/3/97-ST dated 13.10.1997 issued by the Revenue, which explicitly states that where services are provided free and no amount is received by the telegraph authority, service tax liability does not arise. The Circular clarifies that only charges actually received, such as line laying charges, are liable to tax, whereas free services extended to employees or friendly users without recovery of charges are not taxable. This administrative instruction reinforced the appellant's contention that free telecom services to employees do not attract service tax.The Department's argument that valuation under Section 67 should apply to free services was countered by the Tribunal's interpretation that since no consideration was received, the valuation provisions could not be invoked. The Tribunal found no merit in the Department's contention and declined to extend the levy of service tax to free services provided to employees.Regarding the issue of limitation invoked by the Department for recovery under an extended period, the Tribunal deemed it unnecessary to consider this aspect since the substantive issue of tax liability was decided in favor of the appellant.In conclusion, the Tribunal held that the appellant is not liable to pay service tax on free telecom services provided to employees up to a certain limit. The impugned order confirming the demand was set aside and quashed, and the appeal was allowed.Significant holdings from the judgment include the following verbatim excerpt encapsulating the Tribunal's legal reasoning:'Telephone service provided to the employees cannot be held to be a service against some consideration which is not in cash but any kind. The service recipient being the employees of the appellant no other object than that of efficiency of appellant services is found to be a reason for given services to the employees. In the given circumstances, there is no separate service recipient than the employees of appellant itself. Resultantly, the impugned service herein is the service to self. Section 67(1) of the Service Tax Act is held to have been wrongly invoked as since there is no consideration, the question of any taxation at all arises. The demand on this count is, therefore, hereby set aside.'The core principles established are that for service tax to be leviable, there must be a taxable service rendered for consideration to a distinct service recipient. Services provided free of cost to employees as part of employment benefits do not constitute a taxable service. Administrative circulars and prior judicial pronouncements support the exclusion of such employer-employee contractual privileges from the ambit of service tax.Thus, the final determination is that free telecom services provided by the appellant to its employees are not subject to service tax, and no tax demand can be sustained on this ground.