Revenue sharing arrangements are liable to service tax: AAR

Brief of the case :

In the above cited AAR ruling it was held that a revenue sharing arrangement by creating a partnering person shall be liable to service tax if the partners are providing taxable service to one another in execution of partnering purpose even if the purpose of creating partnering person is non-taxable.

Facts of the case:

• M/s Choice Estates and Constructions Limited (applicant) is a Public Limited Company having its registered office at Kochi. Applicant proposes to enter into a Partnering Agreement with Choice Foundation, a society registered under Travancore-Cochin Literary, Scientific and Charitable Societies.
• Registration Act, 1955 to combine their mutual areas of expertise for the setting up and operation of an educational institution at Thiruvalla in Kerala. As per said Agreement, applicant would be responsible for the entire infrastructural requirement of the educational institution while Choice Foundation would be responsible for the entire academic aspect and related requirements of the educational institution.
• The agreement is for a term of thirty years and it has been agreed between the Parties that any revenue generated from the project, during the term, will be shared by the parties in the ratio agreed in the Agreement. For this purpose, the entire revenue relating to the school will be received in a joint account operated by the applicant and Choice Foundation jointly and revenue share would be drawn from this account by the applicant and Choice Foundation.

Questions raised before the Advance Ruling Authority:

• Whether Service Tax is applicable on the revenue share relating to the Applicant?
• Whether Service Tax is applicable on the revenue share relating to Choice Foundation?
• Whether Service Tax is applicable on the fees collected from the students?
• If answer to any of the above questions is yes, then whether the applicable Service Tax can be recovered from the students?

AAR’s ruling:

• It was observed that applicant submits that they i.e. Choice Estates & Constructions Ltd and Choice Foundation are coming together to jointly provide services to the students. Therefore, partnering of applicant with Choice Foundation (referred as Partnering Person) would come under the ambit of “person” as defined under Section 65B (37) (VII) of the Finance Act, 1994, which includes an association of persons or body of individuals, whether incorporated or not.
• Applicant, Choice Foundation and “partnering person” are all 3 separate persons. Therefore, service provided by the applicant (a person) to “partnering person” (another person) for consideration will be a service.
• Both Applicant and Partnering person are different persons , therefore, services provided to another person i.e. “partnering person”, who is a separate person will be liable to service tax if the services so provided are taxable under the service tax law.

• Applicant and Choice Foundation would be formed for a specific purpose of providing education to students up-to higher secondary school, wherein role of both the parties have been specified in said Agreement. Further proposed Agreement clearly mentions that the applicant and Choice Foundation would partner together to combine their mutual expertise for setting up and operation of an educational institution at Thiruvalla. Therefore, service provided by the “partnering person” would come under the Negative List and would not be liable to Service Tax.
• As per Sec 66E of the Act construction of civil structure etc., shall be a declared service and thus liable to Service Tax provided it is intended for sale to a buyer except when the entire consideration is received after issuance of completion certificate. In the case before us, civil structure is not intended for sale and further, no amount shall be received by the applicant before issuance of completion certificate by the competent authority. Therefore,  the construction of complex etc., in this case will not come under the ambit of declared service and not be liable to Service Tax. Renting of Immovable Property.
• But renting of immovable property is a taxable service provided by applicant to the partnering person the consideration for renting said property would be received as per the “Revenue Share” clause in the said Agreement. Therefore, renting of immoveable property would be liable to Service Tax.
• Applicant in their written submissions has stated that they are engaging contractors, architects etc. for construction of building, which is a separate and distinct service and would be liable to Service Tax. As architects, engineers etc., would be providing service to the applicant, in construction of building for consideration, the same would be liable to Service Tax. Further, service of maintenance and other infrastructural services rendered by the applicant (person) to “partnering person” (another person) would be liable to Service Tax unless same is exempted or in the Negative List.

Answers to the questions raised above:

• Service Tax is applicable on the revenue share relating to the applicant to the extent it is relatable to rendering of taxable service.
• Service Tax is applicable on the revenue share relating to Choice Foundation to the extent it is relatable to rendering of taxable service.
• Service Tax is not leviable on the fees collected from the students to the extent it is covered under the Negative List in terms of Section 66D (l) of the Finance Act, 1994.
• Service tax can be charged to the receiver of taxable service , receiver is either partnering person or the partners and not students who are receiving education service listed in negative list.