Case Law Details
Hotel Shreelekha Regency Limited Vs Commissioner of GST & Central Excise (CESTAT Chennai)
The CESTAT, Chennai in M/S. Hotel Shreelekha Regency Limited [Service Tax Appeal No. 40073 of 2014 dated July 14, 2023] set aside the order demanding service tax on rental property and held that, income received from rent by assessee is not subject to levy of service tax.
Facts:
M/s. Hotel Shreelekha Regency Ltd (“the Appellant”) is engaged in hotel business. The Appellant was running a three-star hotel in the name of Hotel Shreelekha Regency since May 10, 2000.
The Appellant entered into an agreement with M/s. Palmgrove Beach Hotels Pvt. Ltd. (Palmgrove) dated February 19, 2005 granting Palmgrove a solely and exclusive right to recommence the hotel to run, conduct, manage, operate, market the same in the name and style as Palmgrove. The right was vested with the possession of the hotel for an initial period of 50 years and renewable for another 50 years.
As per the terms of Clause 9A of the agreement the Appellant is eligible for royalty which is a percentage of operating income. Apart from this, the Appellant is also eligible for an interest free refundable deposit of Rs.11 crores which will be refunded on the expiry of the initial period of the agreement or the renewal.
A Show Cause Notice No.605/2011 was issued to the Appellant dated December 13, 2011 (“the SCN”) for the period June 01, 2007 to September 30, 2011 by the Revenue Department to show cause the levy of service tax under renting of immovable property services by invoking the extended period of limitation.
Revenue Department alleged that the Appellant has rented out the immovable property for conducting hotel and other businesses and therefore the Appellant is liable to pay service tax under renting of immovable property service.
The Appellant submitted that the amount received is in the nature of sharing of profits and cannot be considered as rent as the main object of the agreement is to exploit the commercial potential of the hotel business and the use of the immovable property is only incidental and the same cannot be considered as letting of immovable property.
The Adjudicating Authority confirmed duty liability under taxable service ‘Renting of Immovable Property’ and passed an order (“the Impugned order”) and held that the consideration is for leasing out the building and the Appellant do not have a say in the day to day / normal running of the hotel in the said property, apart from letting the property to be used by Palmgrove for running hotel in their name.
Aggrieved by the Impugned order the Appellant filed an appeal before the CESTAT, Chennai.
Issue:
Whether renting of Immovable property in nature of sharing profit is leviable for service tax?
Held:
The CESTAT, Chennai in Service Tax Appeal No. 40073 of 2014 held as under:
- Relied upon the judgement of the Hon’ble Supreme Court in Commissioner of Service Tax-1, Chennai Vs Grand Royale Enterprises Ltd. [2022(63) GSTL 412 (SC)], wherein the Court held that no service tax is liable for renting the property and this is untenable in law.
- Held that, the amount received is in the nature of sharing of profits and the same cannot be considered as rent received for renting / licensing of immovable property as the intention is not merely to permit the use of space and that the consideration is based on the annual sales.
- Set aside the Impugned order.
FULL TEXT OF THE CESTAT CHENNAI ORDER
This appeal is filed by M/s. Hotel Shreelekha Regency Ltd. Chennai against Order in Original No. 31/2013 dated 29.3.2013 passed by the Commissioner of Service Tax, Chennai.
2. The facts of the case are that the appellant is engaged in hotel business. The appellant had constructed a multi-storied building and was running a three-star hotel called Hotel Shreelekha Regency. The hotel was being operated by appellant up to 10.05.2000. Thereafter appellant entered into an agreement dated 19.02.2005 with M/s. Palmgrove Beach Hotels Pvt. Ltd. (Palmgrove) granting them sole and exclusive right to recommence the hotel and to run, conduct, manage operate and market the same in the name and style as Palmgrove may from time to time in its absolute discretion deem fit. The appellant has vested the possession of the said property with Palmgrove for an initial period of 50 years and renewable for another 50 years. Palmgrove was permitted to run, conduct, manage and operate the hotel on its own or grant it to third parties of its choice. In terms of Clause 9A of the agreement the appellant is eligible for royalty which is a percentage of operating income. Apart from this the appellant is also eligible for an interest free refundable deposit of Rs.11 crores which will be refunded on the expiry of the initial period of the agreement or the renewal thereof. The department based on investigation issued Show Cause Notice No.605/2011 dated 13.12.2011 for the period 01.06.2007 to 30.09.2011 proposing to levy service tax under renting of immovable property services by invoking the extended period of limitation. The department alleged that the appellant has rented out the immovable property for conducting hotel and other business and therefore the appellant is liable to pay service tax under renting of immovable property service. The Adjudicating Authority after following due proceedings has vide the impugned order confirmed duty liability under taxable service ‘Renting of Immovable Property’ on the ground that the consideration is for leasing out the building and that the assessee do not have a say in the day to day / normal running of the hotel in the said property, apart from letting the property to be used by Palmgrove for running hotel in their name. Aggrieved by the said order the appellant is before us in appeal.
3. No cross objection has been filed by the respondent-department.
4. We have heard learned counsel Smt. Radhika Chandrasekar for the appellant and learned AR Shri M. Ambe, Deputy Commissioner for Revenue.
5. The learned counsel for the appellant submitted that the agreement entered into with Palmgrove is a business arrangement wherein the appellant has permitted Palmgrove to recommence the hotel and run, conduct, manage and operate and market the same as per the terms of the agreement. The amount received is in the nature of sharing of profits and cannot be considered as rent. The main object of the agreement is to exploit the commercial potential of the hotel business and the use of the immovable property is only incidental and the same cannot be considered as letting of immovable property. In terms of Section 65(105)(zzzz) hotels are specifically excluded under clause (d) to Explanation 1 of Section 65(105)(zzzz). The words ‘including hotels’ used in the Explanation to Section 65(105)(zzzz) of the Finance Act, 1994 while listing out the exclusions from the scope, has to be given its plain meaning. The issue is squarely covered by the decision in the case of Spencer International Hotels Ltd. vide Final Order No.40461-40462/2023 dt.26.02.2023 wherein this Hon’ble Tribunal has held that there cannot be a demand of service tax under renting of immovable property service when the amount received is in the nature of sharing of profits and the same cannot be considered as rent received for renting / licensing of immovable property as the intention is not merely to permit the use of space and that the consideration is based on the annual sales. Reliance was also placed on the decision in the case of Grand Royale Enterprises Vs CST, Chennai (2019) 31 GSTL 453. She stated that CBEC vide Circular No. 334/1/2007 – TRU dated 28.02.2007 has clarified that residential / accommodations such as hotels are excluded from the scope of renting of immovable property services. It was submitted that there is no justification for invoking the extended period of limitation since none of the ingredients of proviso to Section 73 are present. The appellant was under a bonafide belief as to non-applicability of service tax.
6. The learned AR on behalf of Revenue submitted that this is a case in which the appellant has handed over immovable and movable property to M/s. Palm Grove for running the hotel business. All the employees have left the services or their services have been terminated. The agreement clearly shows that the appellant has no say in the day-to-day business of the hotel right from the appointment of staff and running of the hotel. Therefore, there is no merit in the appellants argument that there is a business arrangement with Palm Grove. Although the appellant has contended that only a percentage of operating income is received and therefore no service tax is payable by them is not correct. It is relevant to state that just because the consideration is termed as ‘royalty’ and the quantum of consideration as agreed upon as a variable percentage of the operative income, it does not mean that the assessee is participating in the day-to-day business of the hotel. He also referred to the judgment of the Hon’ble Supreme Court in the case of Moped India Limited v. Assistant Collector of Central Excise Nellore and Others [1986 (23) E.L.T. 8 (S.C.) / (1986) 1 SCC 125], wherein it was held that the amount allowed to the dealer has been referred to in the agreement as commission was a trade discount and the label given by the parties would not be a determinative factor to call it as a trade discount or a commission. He also drew attention to the coordinate Bench of this Tribunal’s judgment in the case of M/s. Spencer International Hotels Ltd. Vs. CGST & Central Excise vide Final Order No. 40461 to 40462 of 2023 dated 22.6.2023 wherein the Tribunal had examined the argument that the amount received by the appellant from M/s. IHCL (company that had taken the hotel for doing business) is not in the nature of rent received for permitting to use the immovable property and that “it is in the nature of joint venture agreement where both parties have agreed to share the profits in particular manner”. He drew attention to para 28 of the Joint Venture Agreement between the appellant and Palm Grove Beach Hotels Pvt. Ltd. wherein it was stated as under:-
It is hereby clarified and confirmed that:-
(a) No transfer is being affected or is intended to be effected from the owner in favour of the Conductor / operator as contemplated by section2(4&) of the Income Tax Act, 1961.
(b) The transaction contemplated by this agreement is neither in the nature of a partnership or joint venture as contemplated either by the Indian Partnership Act, 1932 or the Income Tax Act, 1961 nor an Association of Persons (AOP) as contemplated by the Income Tax Act, 1961.”
He hence prayed that the decision of holding that a contract is not one of renting but one of profit sharing just based of the mode of payment is not correct. One has to read the agreement on its whole and it shows that it was one of letting the premises on rent. He also submitted that since the matter would not have been known without the department gathering intelligence on this activity, the extended time limit for issue of Show Cause Notice has been rightly invoked by the department. He prayed that the impugned order may be upheld.
7. We have gone through the appeal papers and have heard the opposing parties. We find that it involves a case of the appellant allowing a hotel company, as per a written agreement, to run the hotel owned by it at an annual fee equivalent to a certain percentage of the annual turn-over of the said hotel. We agree with Revenue that a principle for interpretation of an activity, is that the nomenclature assigned to it is not decisive of its nature. Further the fact that a method of payment is worked out or calculated in a particular manner, as a consideration for the agreement, as per the convenience of the parties involved, is not in itself determinative of the nature of the service being offered. The method of collection of consideration does not affect the essence of the service so long as a service is actually rendered. We also note Revenue’s averments with reference to the coordinate Bench of this Tribunal’s judgment in the case of M/s. Spencer International Hotels Ltd. Vs. CGST & Central Excise vide Final Order No. 40461 to 40462 of 2023 dated 22.6.2023 that, the amount received by the appellant from M/s. IHCL (company that had taken the hotel for doing business) is not in the nature of rent received for permitting to use the immovable property and that “it is in the nature of joint venture agreement where both parties have agreed to share the profits in particular manner”, is not the position in this case as the agreement specifically states that the transaction contemplated by this agreement is neither in the nature of a partnership or a joint venture. We however note that as per the agreement the hotel is run, conducted, maintained and managed by the conductor / operator at the costs, risks, expenses and responsibility of the conductor / operator alone and on a principal-to-principal basis. The appellant has also averred that Section 65(90a) of the Finance Act, 1994 as amended defines ‘renting of immovable property’ and Section 65(105)(zzzz) of the Finance Act, 1994 defines ‘taxable service’ provided in relation to renting of immovable property. In terms of Section 65(105)(zzzz) ‘hotels’ are specifically excluded under clause (d) to Explanation 1 of Section 65(105)(zzzz). The words ‘including hotels’ used in the Explanation to Section 65(105)(zzzz) of the Finance Act, 1994 while listing out the exclusions from the scope, has to be given its plain meaning.
7.1 All these issues have been examined in the Coordinate Bench decision in ‘Grand Royale Enterprises’ (supra). Relevant portion is extracted below;
5.1 The renting of immovable property as defined in Section 65(90a) of the Finance Act includes renting, letting leasing, licensing or similar arrangements of immovable property. What is immovable property is defined in Section 65(105)(zzzz) ibid is as under :
“Explanation 1. – For the purposes 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 on lease 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 educational, sports, circus, entertainment and parking purposes; 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.”
5.2 From an analysis of the above definitions, in our opinion, to fall within the taxable entry of “renting of immovable property”, the immovable rented out should be the genre exemplified in Explanation 1 reproduced supra. In the present case, however, the agreement between the appellant and IHCL is not merely for renting of the hotel or land appurtenant thereto etc., but is “license to run, conduct and operate Connemara hotel together with all the related facilities and business appertaining thereto”. It appears to reason that not just the immovable property portion of the hotel, but also, the employees and other staff, goodwill and other paraphernalia are also taken into consideration by the two parties involved while framing the license agreement. It is also relevant to note that there is no “fixed rent” that is payable as would be expected in a normal renting of immovable property transaction. On the other hand, the consideration for license to run, conduct and operate the hotel is a “license fee” equivalent to 15%/20% of the annual sales from the operation of the hotels. This being so, the license fee that would accrue to the appellant is only a percentage of the turnover. Since the turnover is never static but is dynamic and will go up or down in every succeeding year, the “lease license fees” would also wax or wane in resonance. The license fees are accruing to the appellants therefore have an umbilical card relation with the turnover and profits of the hotel business under IHCL. In our view therefore, the transaction between the appellant and IHCL is definitely not one of “renting of immovable property” but a business transaction between the two, where the consideration is not like a regular rent but is dependent on the annual performance and profits of the hotel.
The said judgment was affirmed by the Hon’ble Apex court in Commissioner of Service Tax-1, Chennai Vs Grand Royale Enterprises Ltd. [2022(63) GSTL 412 (SC)], hence the same is binding on us and we respectfully follow the ratio of the said case laws and hold that Revenue’s stand that Service Tax is liable for renting of the impugned property is not correct and is untenable in law.
8. The matter having been decided in the appellants favour, the question of limitation does not arise.
9. In view of the discussions and findings above the impugned order is set aside. Appeal is allowed with consequential relief, if any, as per law.
(Pronounced in open court on 14.7.2023)
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