Madras High Court Clarifies Service Tax on CSR: Donations vs Sponsorship in Karur Vysya Bank Case

Overview

The Madras High Court, in Karur Vysya Bank Ltd. Vs Commissioner of GST and Central Excise (Madras High Court), examined whether certain Corporate Social Responsibility (CSR) and charitable contributions made by a bank between October 2013 and June 2017 could be treated as taxable “sponsorship” services under Section 65(99a) of the Finance Act, 1994, and consequently subjected to service tax under the reverse charge mechanism.

The Court ultimately held that:

  • Most contributions were donations and did not amount to taxable sponsorship.
  • Two specific payments involving express logo-display obligations did fall within the definition of sponsorship.
  • However, even for those two transactions, the extended period of limitation could not be invoked in the absence of fraud, collusion, wilful misstatement or suppression.
  • Accordingly, the demand failed on the ground of limitation, and the assessee’s appeal was allowed.

This decision provides important guidance on:

  • How to distinguish between charitable/CSR donations and commercial sponsorship under service tax law.
  • Where the burden of proof lies in such disputes.
  • The strict requirements for invoking the extended period under the proviso to Section 73(1) of the Finance Act, 1994.

Factual Background

Period and Nature of Transactions

  • The assessee, Karur Vysya Bank Ltd., a scheduled private bank, had made several payments between October 2013 and June 2017 to various organisations for activities such as:

    • Construction of toilets
    • Construction of school buildings
    • Construction/renovation of temple towers
    • Other CSR-oriented initiatives

  • According to the assessee, these were pure donations or CSR contributions without any commercial angle.

  • The Department, however, treated them as “sponsorship” services liable to service tax, to be paid by the assessee under the reverse charge mechanism.

Departmental Proceedings

  1. Show Cause Notice

    • A show cause notice was issued on 15.04.2019 by the Commissioner of GST and Central Excise, Trichy.
    • The notice proposed levy of service tax on the impugned transactions by categorising them as sponsorship services.

  2. Order-in-Original

    • The assessee filed a detailed reply contesting the proposed levy.
    • By order dated 30.09.2019, the adjudicating authority:
      • Confirmed the service tax demand on the questioned transactions,
      • Along with interest and penalties.

  3. Appeal before CESTAT

    • The assessee carried the matter to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Southern Zonal Bench, Chennai, in Service Tax Appeal No.40038 of 2020.
    • By order dated 22.01.2026, the Tribunal:
      • Set aside demands relating to penal interest and liquidated damages (Questions 1 & 2).
      • Upheld the demand of service tax on sponsorship services (Question 3), together with applicable interest.
      • Upheld invocation of the extended period of limitation and imposition of penalties under Sections 77 and 78 of the Finance Act, 1994, insofar as sponsorship services were concerned.

  4. Appeal before Madras High Court

    • Aggrieved by the Tribunal’s findings on sponsorship, extended limitation and penalties, the assessee filed a Civil Miscellaneous Appeal before the Madras High Court in CMA(MD) NO. 1121 of 2026.

Substantial Question of Law

The High Court admitted the appeal to decide the following question:

“Whether on the facts and in the circumstances of the case, 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 the same as ‘sponsorship’ services within the meaning of Section 65(99a) of the Finance Act, 1994?”

This framed the core issue as a legal interpretation of Section 65(99a) as applied to CSR/charitable donations.

Statutory Definition

Section 65(99a) of the Finance Act, 1994 defines “sponsorship” as:

“(99a) 'sponsorship' includes naming an event after the sponsor, displaying the sponsor's company logo or trading name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition; but does not include any financial or other support in the form of donations or gifts, given by the donors subject to the condition that the service provider is under no obligation to provide anything in return to such donors”

Key elements of this definition:

  • Inclusive limb:
    • Naming an event after the sponsor
    • Displaying the sponsor’s logo or trade name
    • Granting exclusive/priority booking rights
    • Sponsoring prizes or trophies for a competition