Service Tax Demand on Vacant Land Lease Set Aside as Pre-2010 Law Did Not Tax Such Leases

Bhilai Steel Plant Vs Commissioner of Central Excise (CESTAT Delhi)

The appeal challenged an Order-in-Original dated 30.08.2013 whereby the Commissioner demanded service tax of ₹84,16,343 for the period 2007-08 to 2011-12 on consideration received from leasing land to a joint venture company. The amount of ₹3,26,080 already paid by the appellant was appropriated in the order.

Background of the dispute: The appellant, a subsidiary of Steel Authority of India Limited engaged in manufacturing iron and steel products, generated blast furnace slag, which could be used for manufacturing cement. It entered into a joint venture with another company and formed Bhilai JVC Cement Limited (BJCL). Under the arrangement, the appellant leased 34.59 acres of vacant land to BJCL for 30 years through a long-term lease and supplementary lease deed, and separately licensed certain buildings for office use. The appellant paid service tax on the licence fee received for the office buildings under the category of Renting of Immovable Property Service. The dispute related only to the consideration received for leasing the vacant land.

Dispute regarding the tax period: The appellant accepted service tax liability from 01.07.2010 onwards because of an amendment to Section 65(105)(zzzz) of the Finance Act, 1994, which specifically brought within the tax net vacant land leased or licensed for construction of a building or temporary structure to be used for business or commerce. However, it disputed the levy of service tax for the period prior to 01.07.2010, contending that vacant land was not taxable under the unamended provision.

Appellant’s submissions: The appellant argued that the Commissioner had incorrectly concluded that buildings existed on the leased land by reading together the lease deed, supplementary lease deed and separate licence agreement. It maintained that the lease agreements covered only vacant land, while the buildings licensed for office use were governed by an entirely separate agreement on which service tax had already been discharged. It further submitted that service tax for the period after 01.07.2010 had been paid within the time prescribed under Section 80(2) of the Finance Act, 1994, making penalties under Sections 76, 77 and 78 inapplicable. The appellant also relied upon Tribunal decisions holding that leasing vacant land prior to 01.07.2010 was not taxable under the category of Renting of Immovable Property Service.

Revenue’s stand: The Department supported the findings recorded in the impugned order and defended the demand confirmed by the Commissioner.

Tribunal’s findings on taxability before 01.07.2010: The Tribunal examined the statutory provisions before and after the amendment effective from 01.07.2010 and observed that the amendment expressly expanded the scope of the taxable service by including vacant land leased for construction of buildings or structures to be used for business or commerce. It held that prior to this amendment, such leasing of vacant land was not covered within the taxable category. The Tribunal relied on its earlier decisions in New Okhla Industrial Development Authority and Greater Noida Industrial Development Authority, which had held that the amendment was prospective and enlarged the scope of taxation rather than clarifying the existing law.

Findings on the Commissioner’s factual conclusions: The Tribunal found that the Commissioner had incorrectly treated the transaction as involving buildings or a building complex. On examining the lease deed and supplementary lease deed, it concluded that the agreements related solely to vacant land, with no lease of buildings or structures. The separate licence agreement for office buildings pertained to different premises, and service tax had already been paid on the licence fee received for those buildings. Likewise, work orders relied upon by the Commissioner for demolition and construction activities related only to the separately licensed office premises and not to the disputed vacant land.

Decision on service tax demand: The Tribunal held that the appellant was not liable to pay service tax prior to 01.07.2010 on the lease of vacant land to BJCL. Consequently, the demand, along with the related interest and penalties for that period, could not be sustained and was set aside.

Decision on penalties for the post-01.07.2010 period: For the period after 01.07.2010, the Tribunal noted that the appellant had already paid the service tax and that Section 80(2) of the Finance Act, 1994 specifically granted immunity from penalties under Sections 76, 77 and 78 where service tax on Renting of Immovable Property Service payable as on 06.03.2012 was paid within six months from the Presidential assent to the Finance Bill, 2012. Since the appellant had made the payment within the prescribed period, the Tribunal held that no penalties were leviable and accordingly set aside all penalties.

Final order: Having decided the appeal on merits, the Tribunal found it unnecessary to examine the appellant’s additional contentions relating to the extended period of limitation, revenue neutrality and cum-tax benefit. The appeal was allowed with consequential relief, if any.

FULL TEXT OF THE CESTAT DELHI ORDER

1. This appeal has been filed by M/s Bhilai Steel Plant, Bhilai assailing the Order-in-Original¹ dated 30.08.2013 passed by the Commissioner of Customs, Central Excise and Service Tax, Raipur demanding service tax amounting to Rs. 84,16,343/- for the period 2007-08 to 2011-12 of which Rs. 3,26,080/- had already been paid by the appellant which was appropriated.

2. The facts of the case, in brief, are that the appellant is a subsidiary of Steel Authority of India Limited and is engaged in manufacture of iron and steel items which it clears on payment of central excise duty. The appellant also provides and receives various taxable services and for that purpose is registered with the service tax authorities. The main waste generated in the steel plant is blast furnace slag which can be used to manufacture cement. The appellant entered into an agreement with M/s Jai Prakash Associates and formed a joint venture company in the name of M/s Bhilai JVC Cement Limited² to manufacture cement. The appellant entered into a long term lease deed with BJCL leasing 34.59 acres of open land for a 30 year period on payment of one time non-refundable premium and an annual rent. The appellant also gave on licence some buildings to BJCL to use as office. For this purpose the appellant entered into the following agreements with BJCL;

(i) Long term of lease land deed executed at Bhilai on 05.06.2007 leasing 34.59 acres of land;

(ii) Supplementary lease deed on 23.11.2007 which modified the locations of the leased land without altering the total area leased so as to facilitate construction of a railway siding required by BJCL;

(iii) A licence agreement dated 23.11.2007 for providing buildings on temporary basis for office use of BJCL.

3. The appellant has been paying service tax under head of ^„Renting of Immovable Property Service‟ on the rent received for the buildings providing for office purpose to BJCL.

4. Under dispute is the amount received towards the lease of 34.59 acres of land to M/s BJCL. The relevant period is 1.06.2007 to 31.02.2012. The appellant had not disputed the service tax liability from 01.07.2010 to 31.2.2012 as there was an amendment to the relevant charging section making “vacant land given on lease or licence for construction of a building or a temporary structure at a later stage to be used for furtherance of business or commerce” exigible to service tax. The appellant is disputing the service tax liability for the period prior to 01.07.2010.

5. The relevant portion of Section 65 (105) (zzzz) of Chapter V of the Finance Act. 1994, read as follows before and after 01.07.2010:

Before 1.07.2010

“Section 65 (105)(zzzz) to any person, by any other person in relation of immovable property for use in the course of furtherance of business or commerce.

Explanation 1-For the purpose of this sub-clause, “immovable property” includes-

(i) Building and part of a building and the land appurtenant thereto;

(ii) Land incidental to the use of such building or part of a building;

(iii) The common or shared areas and facilities relating thereto; and

(iv) In case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,

but does not include-

(a) Vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;

(b) Vacant land, whether or not having facilities clearly incidental to the use of such vacant land;

(c) Land used for educational sports, circus, entertainment and parking purposes; and

(d) Building used solely for residential purposes and buildings used for the purpose of accommodation, including hotels, hostel, boarding, houses, holiday accommodation, tents, camping facilities.

Explanation 2. For the purposes of this sub-clause, an immovable property partly for use in the course of furtherance of business or commerce and partly for residential or any other purpose shall be deemed to be immovable property for use in the course of furtherance of business or commerce.”

After 1.07.2010

“Section 65 (105)(zzzz) to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or for furtherance of, business or commerce.

Explanation 1.-for the purpose of this sub-clause, “immovable property” includes-

(i) Building and part of a building, and the land appurtenant thereto;

(ii) land incidental to the use of such building or part of a building;

(iii) the common or shared areas and facilities relating thereto; and

(iv) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate;

(v) vacant land given or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce.-

but does not include-

(a) Vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;

(b) Vacant land, whether or not having facilities clearly incidental to the use of such vacant land;

(c) Land used for education, sports circus, entertainment and parking purpose; and

(d) Building used solely for residential purposes and buildings, used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

Explanation 2- For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce;”

6. The service tax paid by the appellant for the period post 01.07.2010 has been appropriated by the Commissioner in the impugned order. For this period, the appellant is only contesting the penalty imposed on it under Section 78 on two grounds;

(i) None of the elements required for imposition of penalty under Section 78 such as fraud/collision/wilful misstatement or suppression of facts or violation of provisions of the Act or Rules with intent to evade the payment of duty were present;

(ii) There was a separate provision under Section 80(2) of the Finance Act, 1994 with respect to service tax on Renting of Immovable Property Service according to which if there was a failure to pay service tax as on 6th day of March, 2012 on taxable service under Section 65 (105)(zzzz) and the same is paid within six months from the date on which the Finance Bill, 2012 received assent of the President, no penalty under Section 76, 77 and 78 is imposable. The assent of the President to the Finance Bill was received on 28.05.2012. Accordingly, if the service tax is paid before 28.11.2012, no penalty can be imposed under Section 76, 77 and 78 and the appellant paid the service tax well before this date.

7. As far as the period prior to 1.07.2010 is concerned, the appellant submits that no service tax was chargeable during this period as is evident from the section itself. He also relies on the decisions of the Tribunal in New Okhla Industrial Development Authority vs. CCE & ST, Noida³ and Greater Noida Industrial Development Authority vs. CCE & ST, Noida⁴.

8. The Commissioner did not accept the appellant’s contention that no service tax was payable prior to 01.07.2010 and confirmed the demand of service tax for this period and also imposed penalties. Hence, this appeal on the following grounds

(a) The basis on which the demand was confirmed against the appellant is factually incorrect. In para 9.8 of the impugned order the Commissioner has confirmed the demand for the period prior to 01.07.2010 by reading together the original lease dated 05.06.2007, the supplementary lease deed dated 23.11.2007 and the licence agreement dated 23.11.2007 and thereby concluding that:

(i) the land has been used by the BJCL to set up plant in split locations and, therefore, the land was not a single piece of land but had split locations; and

(ii) that there were buildings or structures on the land.

(b) The lease of vacant land by the appellant up to 01.07.2010 does not fall under the head of “Renting of Immovable Property Service” as can be seen from the definition of Section 65 (105) (zzzz).

(c) The entire exercise is Revenue neutral because if the appellant had paid service tax, BJCL would have been able to enjoy CENVAT credit on the same.

(d) No interest is chargeable and no demand is imposable.

(e) The computation of service tax is incorrect in service tax is held to be payable because of cum service tax benefit was not given to the appellant.

9. Learned Counsel for the appellant took us through various clauses of the lease agreements and submitted that the fact is that it only leased vacant land which fell under various khasra numbers by the lease deed dated 05.06.2007. The parcels of land leased were modified without altering the total area by the supplementary lease deed dated 23.11.2007 so as to facilitate construction of a railway siding which BJCL needed. After taking us through the lease agreements learned Counsel demonstrated that neither of these agreements have any mention of the buildings which the Commissioner supposed to be present.

10. In so far as the allegation that BJCL was setting up a split location cement plant is concerned, learned Counsel submits that as per the agreement BJCL will set up two plants-(a) 2.0 MTPA Plant for production of Portland slag cement (PSC) at Bhilai in Chhattisgarh and (b) 0.2 MTPA Plant to produce ordinary Portland cement (OPC) at Satna in Madhya Pradesh based on limestone deposits available at Satna. Thus, the plant in Bhilai will use their waste product slag while the one in Satna will use the limestone deposits. The land has been leased for both. Nevertheless, neither of these pieces of land have any building on them and they were merely vacant lands leased to BJCL. The fact that two plants were to be set up does not make the lease exigible to service tax.

11. Learned Counsel also submitted that for period post 01.07.2010, service tax was payable and it had deposited the same on 5^th and 6^th June, 2012 for the period 2011-12 and on 6th _and 7^th June, 2011 for 2010-11. Their case is squarely covered by Section 80(2) of the Finance Act, 1994 and no penalty under Section 76, 77 and 78 can be imposed upon them for this period.

12. As far as period prior to 01.07.2010 is concerned, relying on New Okhla Industrial Development Authority and Greater Noida Industrial Development Authority, learned Counsel submitted that no service tax was chargeable prior to 01.07.2010. He also submits that the factual findings of the learned Commissioner that there were buildings on them are incorrect and what was leased was only vacant land as may be seen from the lease deeds. Therefore he prays that appeal may be allowed and the impugned order may be set aside with consequential relief.

13. Learned Authorised Representative for the Department reiterated the discussion and findings of the impugned order.

14. We have considered the arguments on both sides and perused the records.

15. The dispute in this case is regarding the exigibility to the service tax on the consideration received for leasing vacant land by the appellant to BJCL during the period 01.06.2007 to 31.03.2012. The show cause notice was issued on 04.06.2012. The appellant is not disputing the liability of service tax with effect from 01.07.2010 and has already paid the service tax so payable for this period. It is only contesting the penalties imposed under section 76, 77 and 78 for this period. For the period prior to 01.07.2010, it is also contesting the demand of service tax.

16. We find that the Section 65 (105)(zzzz) was amended with effect from 01.07.2010 and “vacant land given on lease or licence for construction of a building or a temporary structure at a later stage to be used for furtherance of business or commerce” has been included in this definition and hence such leases became exigible to service tax under the category “renting of immovable property service”. It is undisputed that the appellant has leased about 35 acres of land to BJCL so that latter could set up cement plants and carry on business. Prior to 01.07.2010, such leases were not exigible to service tax. In New Okhla Industrial Development Authority, the question as to whether the service tax can be levied under this clause for the period prior to 01.07.2010 was examined and it was held in negative. Paragraphs 11 to 15 of this order are reproduced below:

“11. In our considered view, clause (zzzz) of Section 65(105), prior to 1-7-2010 does not embrace renting of land within scope of the enumerated taxable service. On true and fair construction of the main part of clause (zzzz) it is clear that renting of any immovable property for use in course for furtherance of business or commerce is the taxable service and this would clearly include a lease of vacant land as well. Explanation 1 to this clause (prior to the amendatory exercise in 2010) signalled, through the inclusionary clause various facets of transactions which would also amount to renting of “immovable property”. On established principles of statutory interpretation, normally an inclusionary clause does not limit the plentitude of an enacting provision couched in broad terms. Thus the illustrations of what are “immovable property”, set out in the inclusionary clause in Explanation 1 would not derogate from “vacant land” being comprehended within the expression “renting of immovable property”. However, clause (zzzz) has an exclusionary clause as well, enumerating the subjects excluded from the ambit of “immovable property”. Under this exclusionary dispensation; in sub-clause (a) vacant land solely used for agricultural, aquaculture. farming, forestry, animal husbandry, mining purposes; in sub-clause (b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land; and in sub-clause (c) land used for educational, sports, circus, entertainment and parking purpose, are excluded from the purview of”immovable property‟. On a true and fair construction of the exclusionary clause, the legislative intent is compelling that vacant land whether having facilities clearly incidental to its use as such or otherwise does not constitute immovable property. As a consequence of the interplay between the enumeration of renting of immovable property as the taxable event read with the inclusionary and exclusionary clauses (in particular sub-clause (b) of the exclusionary clause) in Section 65(105)(zzzz), renting of vacant land was clearly outside the purview of the taxable service, prior to 1-7-2010.

12. Introduction of sub-clause (v) in Explanation I has significantly altered and extended the scope of the taxable service, with effect from 1-7-2010 and consequently vacant land given on lease or licence, for construction of a building or a temporary structure, to be used at a later stage for furtherance of business or commerce, would be “immovable property” and renting of this immovable property would be the taxable service, since 1-7-2010.

13. In view of clear exclusion of vacant land from the ambit of immovable property prior to 1-7-2010 it cannot gainfully be contended by Revenue, that clause (v) to Explanation I (introduced in 2010), was a mere clarificatory endeavour, explicating the implicit and inherent meaning of Section 65(105)(zzzz). Clause (v) is clearly an amendment which expands the scope of the taxable service; and prospectively.

14. Clause 75 of the Bill (which later came to be enacted as Finance Act, 2010) has proposed insertion of sub-clause (v) in Explanation I in Section 65(105)(zzzz) of the Act. The memorandum explaining the provisions in Finance Bill, 2010 also indicates that the amendments are being made in the definition of “renting of immovable property” service inter alia levy of service tax on renting of vacant land where there is an agreement between lessor and lessee for undertaking construction of building or structure on such land for furtherance of business or commerce during the tenure of the lease. The Board Circular No. 334/1/2010-TRU, dated 26-2­2010 (in paragraph 3) explains the purpose of the amendments to Section 65(105)(zzzz). Accordingly, the Circular explains that amendments are being made in the definition of this taxable service to provide that renting of vacant land where there is an agreement or contract between the lessor and lessee for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subjected to service tax. The statement of objects and reasons accompanying the Finance Bill, 2010 also clarify that clause 75 of the Bill seeks to amend Chapter V of the Finance Act, 1994; to modify the scope of certain taxable services including the taxable service defined and enumerated in Section 65(105)(zzzz), of the Act. These several contemporaneous exposition and administrative constructions and the scope of sub-clause (v) of Explanation I in Section 65(105)(zzzz) fortify the conclusion and the scope of sub-clause (v). To modify and expand the scope of the taxable service to cover and include vacant land on lease or licence for construction of a building or a temporary construction at a later stage to be used for furtherance of business or commerce, within the ambit of “immovable property” is thus the taxable service. Since the introduction of this sub-clause in Explanation I expands the scope of the taxable service and renders the taxable (a) hitherto non­taxable transaction, and absent of explicit retrospective reach provided to the amendment and insertion of this sub-clause, these transactions covered by this sub-clause of the Explanation have only the prospective operation.

15. On the above analysis, renting of vacant land by way of lease or licence (irrespective of the duration or tenure), for construction of a building or a temporary structure for use at a later stage in furtherance of business or commerce is a taxable service only from 1­7-2010, and not so, earlier to this date.”

17. This decision was followed in Greater Noida Industrial Development Authority by the Tribunal, which decision was confirmed by the High Court of Allahabad.

18. The finding of the Commissioner in the impugned order with respect to this period (i.e., prior to 01.07.2010) is that what was leased by the appellant was not vacant land but it had buildings on it. He thus viewed it as ^„lease of land as land incidental to the use of building or a part of a building‟ which was covered under clause (iv) of Explanation -1 and NOT as ^„lease of vacant land‟. The relevant paragraphs of the impugned order are as follows:

“9.7. Thus, one question for discussion is whether a vacant land leased on rent for setting up a factory was specifically covered in the exclusion clause of the definition of ^„Renting of Immovable Property Services‟ during the period from 01.06.2007 to 30.06.2010.

I observe that clause (iv) to the Explanation 1 of sub-clause (zzzz) of clause 105 of Section 65 of the Act specified the following exclusion categories:-

“A vacant land solely used for agriculture, farming, forestry, animal husbandry, mining purpose and; land used for educational, sports, circus, entertainment and parking purpose and; building used solely for residential purposes and building used for the purpose of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents camping facilities.”

From the above, I find that a vacant land leased on rent for setting up a factory is nowhere mentioned/covered in the above exclusion category.”

19. Thus, the Commissioner has considered this as a lease as per clause (iv) of Explanation-1 Section 65 (105) (zzzz), i.e., ^„lease of building or complex or estate’. In such a lease, certain types of land are not included and the Commissioner states that the land in question does not fall under the excluded category. For the sake of clarity, we reproduce the Explanation below:

Explanation 1-For the purpose of this sub-clause, “immovable property” includes-

(i) Building and part of a building and the land appurtenant thereto;

(ii) Land incidental to the use of such building or part of a building;

(iii) The common or shared areas and facilities relating thereto; and

(iv) In case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,

but does not include-

(a) Vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;

(b) Vacant land, whether or not having facilities clearly incidental to the use of such vacant land;

(c) Land used for educational sports, circus, entertainment and parking purposes; and

(d) Building used solely for residential purposes and buildings used for the purpose of accommodation, including hotels, hostel, boarding, houses, holiday accommodation, tents, camping facilities. “

20. We find that the Commissioner’s finding is contrary to the facts. The contract was for vacant land and not for a building or complex. Vacant land, even if it has some facilities incidental to the use of such land, was clearly excluded by sub-clause (c) to clause (iv) to the Explanation.

21. In other words, if building or building complex were rented and there was vacant land incidental to such buildings, the consideration of such lease was taxable. On the other hand, if vacant land was leased and there were a few structures on it, such lease was not taxable prior to 1.7.2010.

22. Further, we find from the lease deed entered into by the appellant on 5^th June, 2007 with BJCL and the supplementary lease deed entered into on 23rd November, 2007 that the lease was only for the land there was no lease of any building or structure as presumed by the Commissioner.

23. The Commissioner has relied on the licence agreement dated 23.11.2007 entered into between the appellant and BJCL for providing building on temporary basis to BJCL for office purpose and erroneously concluded that this was the same as the contract for the land. Learned Counsel has shown us that this was a separate licence agreement for different premises and not located on the land which was leased. Service tax has been paid on the rent received on these buildings licensed to BJCL and ST-3 returns have also been filed.

24. We also find that the Commissioner has relied on the work order given by BJCL to M/s Kuldeep Dhiman and M/s Motilal Brothers for construction at Maroda, Sector-6, Sector-1 to demolish existing structure and construct new structures as per the requirement of BJCL. Learned Counsel has demonstrated through the relevant papers that these work orders were entered into between BJCL and the contractors for making changes in those buildings which were licensed by the appellant to BJCL. They were not related to disputed vacant land leased to BJCL.

25. In view of above, we find that the appellant is not liable to pay service tax prior to 01.07.2010 on the land leased to BJCL. The demand to this extent cannot be sustained and needs to be set aside along with interest and any penalty pertaining to such demand. So far as a period post 01.07.2010 is concerned, the appellant has already paid service tax and is only paying for waiver of penalty.

26. We find that Section 80 (2) of the Finance Act 1994 specifically provided for waiver of penalty under Section 76, 77 and 78 for failure to pay service tax payable as on 6^th day of March, 2012 on taxable service referred to in sub-clause (zzzz) of clause 105 of Section 65 (i.e. renting of immovable property service) if the service tax was paid within six months from the date of presidential assent to the Finance Bill. This Bill was assented to by the President on 28.05.2012. The appellant has paid the service tax well before six months from this date. Therefore, in terms of 80(2) no penalty can be imposed upon on the appellant. All penalties, therefore, need to be set aside and are set aside.

27. As we have found the case to be in favour of the appellant on merits, other submissions on extended period of limitation, cum tax benefit and revenue neutrality are not required to be examined.

28. The appeal is allowed with consequential relief, if any, to the appellant.

(Order pronounced on 24.02.2022)

Notes:

¹ impugned order

² BJCL

³ 2014-TIOL-67-CESTAT-DEL

⁴ 2015 (38) STR 1062 (Tri.-Del)