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Mou fees applicability of service tax

CS.Sreejan (CA finalist) (91 Points)

23 December 2011

A Government company enters into Memorandum of Understanding (MoU) with other organisations (strategic partners) for the purpose of increasing the scope of business of both. Thorough this MoU, the strategic partner will be able to participate in the Tenders which are exclusively earmarked for Public sectors like, projects of national importance, defence, Government Projects etc. The Government Company is charging an amount as MoU fee from strategic partners. ( fee depends upon the nature and size of business ).

My doubt is whether Mou fee is chargeable to Service tax under ST Laws? It seems to be covered under Business Auxiliary Service, since promotion or marketing of service of client is specifically includible in BAS. Kindly clarify..

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CA Prabhat Gupta (Manager (Indirect Taxes)) (821 Points)
Replied 24 December 2011

In my opinion, MOU fee charged by the government company should not be subjected to Service Tax. The word promotion stands for furtherance of something already in existence. The purpose of MOU, as I understood, is to enable the strategic partners to participate in the Tenders which are exclusively earmarked for Public sectors. Hence, the MOU fee charged would be fee for eligibility (that did not existed earlier) rather than for promotion of client’s business. Hope, for the concerns that have not entered the above mentioned MOU, it won’t be possible to participate in the Tenders which are exclusively earmarked for Public sectors.

The case would have been different, if it was possible to participate in tenders and the MOU was meant to increase the chance of getting the tenders, or for giving priority over non strategic partners.

Please post your comments.

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CS.Sreejan (CA finalist) (91 Points)
Replied 25 December 2011

Thanks CA Prabhat Gupta.... The objective of MoU is not only for participation of tenders. It is like the empanelment of an organisation as strategic partner of Government company for a period of say, 3 or 5 years (depending upon the nature of business). The privilege of the strategic partner is that, they can indirectly participate in the tenders floated by other Government agencies, like defence, space research etc, in project having National importance. It means, they can use the brand name of Government Company as a strategic partner. Virtually, the Government company along with this strategic partner, participate in the tender for projects of National importance. Once the project is awarded , the Government company enter into a back to back contract with the strategic partner, and project is handed over to them, and act as a quality controller or supervisor.

This is the reason why, i feel that the government company is promoting the business of strategic partner. If any opinion kindly share......