Grant-in-aid not taxable as service when paid as reimbursement and no contractual obligation to transfer knowhow exists.

Grant-in-aid received as non-repayable financial assistance and reimbursement of project expenditure was not consideration for a declared service under the Finance Act, 1994. The scheme conditions were only general stipulations and did not create a specific contractual obligation to transfer knowhow or intellectual property; no evidence showed any research or IP generation for the Government. In the absence of consideration and a service provider-service recipient relationship, the receipt was not taxable as service, and the service tax demand could not survive.

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Issues: Whether grant-in-aid received under a government scheme for setting up and modernising a rice milling unit was consideration for a taxable declared service under section 66E(e) of the Finance Act, 1994, so as to attract service tax.

Analysis: The grant was sanctioned as non-repayable financial assistance and was expressly stated to be reimbursement of expenditure already incurred on the project. The conditions in the sanction order were general conditions attached to the scheme and did not create a specific contractual obligation to transfer knowhow or intellectual property in return for the money received. No evidence showed that the appellant carried out research or generated intellectual property for the Government. In the absence of consideration, there was no service provider-service recipient relationship, and the receipt could not be treated as a declared service or taxable service under the Finance Act, 1994.

Conclusion: The grant-in-aid was not taxable as consideration for service, and the service tax demand could not survive.

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