Whether leasing of land for running hotel leviable to service tax under Renting of Immovable property?

PJ/Case law/2014-15/2220

Case:- M/s JAI MAHAL HOTELS PVT LTD Vs COMMISSIONER OF CENTRAL EXCISE, JAIPUR

Citation:-2014-TIOL-992-CESTAT-DEL

Brief facts:-The material facts of the case are that the Appeals were preferred against two orders of the appellate Authority dated 21.10.2011 and 15.01.2013 confirming the levy and service tax of Rs.6,62,885/- plus interest; and Rs. 1,28,751/- plus interest, for the periods 01.06.2007 to 30.11.2009 and December 2009 to March 2010, respectively. The appellate orders rejected appeals preferred by the appellant herein against primary adjudication orders dated 18.01.2011 and 03.06.2011. It was noticed that the adjudication order dated 18.01.2011 was the culmination of the show cause notice dated 02.02.2010 and proceedings were initiated invoking the extended period of limitation, under the proviso to Section 73(1) of the Finance Act, 1994.

The concurrent orders passed by the authorities below concluded that the appellant had provided the taxable "renting of immovable property" service, defined in Section 65(90a) read with Section 65(105)(zzzz) of the Act because the appellant had entered into an agreement with M/s Indian Hotels Company Limited wherein the appellant provided land to M/s IHC Ltd. to expand and run hotel on the said land in lieu of which the appellant was to receive share in its profits. It was concluded that the profits received by the appellant were nothing but consideration for renting of immovable property and consequently service tax demands were confirmed against them along with interest and penalties.

Appellant’s contention:- Appellant in response to the show cause notices issued, contested the liability to tax on two principal grounds:

(a) That it had entered into an agreement dated 28.08.1985 with M/s Indian Hotels Company Limited where under the parties entered into a joint venture to run the hotel and therefore to share profits and losses alike, hence there was no question of renditionof service by one person/ entity to another; there existed no relationship of serviceprovider and service recipient; and that sharing of profits and losses between jointventures would not amount to receipt of consideration for rendition of any taxableservice; and

(b) That qua provisions of Section 65(105)(zzzz) and the exclusionary clause therein, a building or buildings used for hotels falls outside the purview of the taxable service.

Respondent’s contention:- The respondent reiterated the findings of the lower authority.

Reasoning of judgment:-It was noticed that the appellant had leased its buildings to M/s Indian Hotels Company Limited and it is not in dispute that the purpose of the transfer of the property in favour of the other party is establishment of a hotel. The issue is whether in such circumstances the transaction falls outside the purview of the taxable service. Clause (zzzz) of Section 65 (105) enumerates the taxable service as any service provided or to be provided to any other person, by any person in relation to renting of immovable property for use in the course of or furtherance of business or commerce. Explanation 1 thereto enacts that for the purposes of this clause "immovable property" includes the categories of properties enumerates in sub-clauses (i) to (iv) thereto. Thereafter an exclusionary clause is enacted comprising sub-clauses (a) to (d). For the purposes of this casewe are concerned with exclusionary sub clause (d).

Relevant to our context, sub-clause (d) under Explanation 1 to clause 65(105)(zzzz) reads as: ''immovable property" does not include buildings used for the purpose of accommodation, including hotels. On a true and fair construction of the relevant provisions of the exclusionary clause adverted to above, the interpretation is compelling that buildings used for or as hotels do not amount to immovable property. The legislative provision in question i.e. the exclusionary clause (d), to the extent relevant and material, excludes from the purview of immovable property, buildings used for the purposes of accommodation including for hotels.
The view that has found favour with the authorities below for rejecting the appellant's claim that leases for accommodating hotels is outside the purview of the taxable service, is set out in paragraph 6.5 of the order of the learned Appellate Commissioner dated 21.10.2011 (the subject matter of Service Tax Appeal No. 16 of 2012). The reasoning runs thus:

The legislative intent [sub clause (d)] is explicit and clear, not to tax immovable property used (not meant) for accommodation which includes hotels; only the service of accommodation provided by a hotel is outside the purview of the taxable service, while other services provided by a hotel such as services like mandap keeping, gym, spa, health club etc, are all taxable services.

In our considered view the above interpretation adopted by the Authorities below is fundamentally flawed. The taxable service falling within the scope of Section 65(90a) and enumerated to be a taxable service under Section 65(105) (zzzz) is the renting of immovable property. A reading of clause (90a) and clause (zzzz) would indicate that a complex drafting methodology is adopted. Even in clause (90a) there are inclusionary and exclusionary clauses. Under this provision renting of immovable property or similar arrangement for use in course of or furtherance of business or commerce but excluding renting of immovable property by a religious body or to a religions body; renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre, are excluded. The Explanation under clause (90a) further defines the expression for use in the course or business or commerce and also incorporate a clarificatory clause for removal of doubts, not necessary for the purposes of these appeals. Similarly, in clause (zzzz) there are inclusionary or exclusionary clauses embedded.

On a true and fair construction of provisions of the exclusionary clause under Explanation 1 to Section 65 (105) (zzzz); and in particular sub-clause (d) thereof, they were compelled to the conclusion that renting of buildings used for the purpose of accommodation including hotels, meaning thereby renting of a building for a hotel, was covered by the exclusionary clause and does not amount to an "immovable property", falling within the ambit of the taxable service in issue.

This Tribunal in Ambience Construction India Ltd. vs. Commr. of S.T. Hyderabad - 2013 (31) STR 343 (Tri. Bang.),having considered the identical provision categorically ruled that renting of immovable proper for a hotel is expressly excluded from the ambit of the taxable service in Section 65(105) (zzzz). We are in respectful agreement with the said judgment passed by a learned single Member of this Tribunal.

It also requires to be noticed that in respect of the same appellant as herein, the appellate Authority, namely the Commissioner (Appeals), Central Excise and Customs, Jaipur-I vide the order dated 19.12.2013 in Order-in-Appeal No. 222/BC/ST/JPR-I/2013 has recorded a diametrically contrary conclusion, that the legislative intent of sub-clause (d) of Explanation 1 under Section 65(105) (zzzz) is not to tax immovable property used for accommodation which includes hotels; the legislative intent is clear, namely not to tax immovable property used for hotels; and that the definition of renting of immovable property excludes buildings used for the purpose of hotels.

Since we have concluded that the transaction in issue falls wholly outside the ambit of the taxable service, is not necessary to deal with the other contention urged on behalf of the appellant to impeach the impugned order namely, that since the appellant had entered into a joint venture with M/s Indian Hotels Company Limited there is no relationship of a service provider and a service recipient, that is susceptible to the levy of service tax, qua the agreements between the parties.
On the aforesaid analyses, the appeals were allowed and the impugned orders were quashed but in the circumstances without costs.

Decision:- Appeal allowed.

Comment:- The gist of this case is that clause 65(105)(zzzz) defining immovable property clearly states that ''immovable property" does not include buildings used for the purpose of accommodation, including hotels. Therefore, property given on rent for running hotels are not leviable to service tax. However, with the negative list regime, as the statutory definitions given in positive list scenario are of no relevance now, the said transaction would be taxable to service tax from 01.07.2012.

Prepared by: Prayushi Jain.

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PJ/Case law/2014-15/2220

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