2023 (7) TMI 583 - AT - Service Tax

Levy of Service tax - renting of immovable property service - grant of 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 - extended period of limitation - HELD 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. 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. The issue have been examined in the Coordinate Bench decision in Grand Royale Enterprises 2018 (10) TMI 656 - CESTAT CHENNAI where it was held that 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 VERSUS GRAND ROYALE ENTERPRISES LTD. 2022 (9) TMI 273 - SC ORDER , 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. The matter having been decided in the appellants favour, the question of limitation does not arise - appeal allowed.

Summary

Issues Involved:
1. Nature of the agreement between the appellant and Palmgrove.
2. Applicability of service tax under "Renting of Immovable Property" services.
3. Invocation of the extended period of limitation for issuing the Show Cause Notice.

Summary:

Nature of the Agreement:
The appellant, engaged in the hotel business, entered into an agreement with M/s. Palmgrove Beach Hotels Pvt. Ltd. (Palmgrove) to run, conduct, manage, and market a hotel property. The agreement allowed Palmgrove to operate the hotel for an initial period of 50 years, renewable for another 50 years, and provided for a royalty based on a percentage of operating income. The appellant argued that the agreement was a business arrangement for sharing profits, not rent, and that the use of the immovable property was incidental.

Applicability of Service Tax:
The department issued a Show Cause Notice alleging that the appellant was liable to pay service tax under "Renting of Immovable Property" services. The Adjudicating Authority confirmed the duty liability, stating that the appellant had rented out the property for conducting hotel business and had no involvement in the day-to-day operations. The appellant contended that the amount received was not rent but a share of profits, citing Section 65(105)(zzzz) of the Finance Act, 1994, which excludes hotels from the scope of renting immovable property services. The Tribunal referenced the decision in Spencer International Hotels Ltd., which held that profit-sharing arrangements do not constitute rent.

Invocation of Extended Period of Limitation:
The department invoked the extended period of limitation, arguing that the matter would not have been known without their investigation. The appellant claimed there was no justification for this since they were under a bona fide belief that service tax was not applicable.

Judgment:
The Tribunal held that the agreement between the appellant and Palmgrove was not one of renting but a business arrangement for sharing profits. The method of payment, based on a percentage of annual sales, indicated a business transaction rather than a rental agreement. The Tribunal cited the decision in Grand Royale Enterprises, which was affirmed by the Supreme Court, to support its conclusion. Consequently, the Tribunal set aside the impugned order, stating that service tax was not applicable, and the question of limitation did not arise. The appeal was allowed with consequential relief.

Conclusion:
The Tribunal concluded that the agreement was a profit-sharing business arrangement, not a rental agreement, and thus service tax under "Renting of Immovable Property" services was not applicable. The extended period of limitation was also deemed unjustified. The appeal was allowed, and the impugned order was set aside.