SERVICE TAX - TAXABILITY OF LEASE PREMIUM (PART-2)

[Dr. Sanjiv Agarwal]

Upfront Lease Premium

Upfront lease premium is charged on one time basis but on the other hand annual or monthly lease charges are charged on regular basis. Thus, the premium is the price paid for obtaining the lease of an immovable property. While rent, on the other hand, is the payment made for use and occupation of the immovable property leased.

There is difference between the upfront lease premium and annual / monthly lease charges. A lease is a transaction, which has to be supported by consideration. The consideration may be either premium or rent or both. The consideration which is paid periodically is called rent. The premium is the price paid for obtaining the lease of an immovable property. While rent, on the other hand, is the payment made for use and occupation of the immovable property leased. Since taxing event is renting of immovable property, service tax would be leviable only on the element of rent i.e. the payments made for continuous enjoyment under lease which are in the nature of the rent irrespective of whether this rent is collected periodically or in advance in lump-sum.

Premium as value of Service

Service tax cannot be charged on the ‘premium’ or ‘salami’ paid by the lessee to the lessor for transfer of interest in the property from the lessor to the lessee as this amount is not for continued enjoyment of the property leased. Since the levy of service tax is on renting of immovable property, not on transfer of interest in property from lessor to lessee, service tax would be chargeable only on the rent whether it is charged periodically or at a time in advance.

As such, the lease premium received by the service provider may not be in relation to provision of taxable service provided and such lease premium is not chargeable to service tax but on the other hand the amount received as monthly lease rent is received as consideration for the provision of taxable service and hence, it will be chargeable to Service Tax.

Judicial Pronouncements

In the following cases, it had been held by Court / Tribunal that the upfront lease premium is not subject to service tax as a consideration for renting of property.

1. In Greater Noida Industrial Development Authority v. CCE & ST, Noida 2014 (9) TMI 306 - CESTAT NEW DELHI, it was held that upfront lease premium or salami paid by the lessee to the lessor for transfer of interest in the property from the lessor to the lessee cannot be taxed in terms of Section 65(105) (zzzz) of the Finance Act, 1994. In its final order, Principal Bench of CESTAT at New Delhi held that premium is price paid for obtaining lease of an immovable property while rent is payment made for use and occupation of immovable property leased. Tax is payable on renting of immovable property. Lease premium is not for continued enjoyment of property and as such demand was held to be not sustainable.
2. In City & Indus. Dev. Corpn. of Maharashtra Ltd v/s C.S.T., Mumbai-II, 2014 (11) TMI 127 - BOMBAY HIGH COURT, it was held by Bombay High Court that Service Tax is leviable on quantum of lease charges and not on lease premium.

3. In Infinity Infotech Parks Ltd. v. Union of India 2014 (12) TMI 36 - CALCUTTA HIGH COURT, it was held that prima facie, there is a distinction between premium or salami, being price paid for transfer of a right to enjoy property and rent paid periodically to lessor; while former was a capital income, latter was a revenue receipt. Premium/salami is not advance rent which constitutes revenue receipt. Long-term lease for 99 years has been held to amount to 'transfer' under Income-tax law and premium or salami received was held taxable under head 'Capital Gain'. Even though aforesaid view was rendered in context of Income-tax laws read with Transfer of Property Act, same might have justifiably led assessee to believe that premium was not liable to service tax, same not being rent. Hence, in any case, there was no suppression on part of assessee so as to lead to invocation of extended period. Even as per judgment in Home Solution Retail v. Union of India 2009 (4) TMI 14 - DELHI HIGH COURT rent per se was held to be not taxable service and law had to be amended retrospectively; therefore, extended period could not be invoked, as there was no intent to evade service tax. Adjudicating authority had not properly and independently applied his mind to question of whether conditions for invoking extended period of limitation existed; but he acted mechanically, swayed by report of CERA team, which itself appears to be illegal and unsustainable. Hence, notice was quashed.

4. In Murli Realtors Pvt Ltd v CCE, Pune-II 2014 (9) TMI 461 - CESTAT MUMBAI, where in determining value of renting of immoveable property service provided by assessee landlords, department added notional interest @ 18 percent per annum on interest free security deposits received by them, it was held that section 67 clearly provides that only the consideration received in money for the service rendered is leviable to service tax. The consideration for renting of the immovable property is the amount agreed upon between the parties and on this amount the assessee is discharging service tax liability. The security deposit is taken for a different purpose altogether. It is to provide for a security in case of default in rent by the lessee or default in payment of utility charges or for damages, if any, cause to the leased property. Thus, the security deposit serves a different purpose altogether and it is not a consideration for leasing of the property. The consideration of the leasing of the property is the rent and, therefore, what can be levied to service tax is only the rent charged and no notional interest on the security deposit taken can be levied to tax.

There is no provision in service tax law for deeming notional interest on security deposit taken as a consideration for leasing of the immovable property. Therefore, in the absence of a specific provision in law, there is no scope for adding any notional interest to the value of taxable service rendered. Even in the excise law, under rule 6 of the Valuation Rules, unless the department shows that the deposit taken has influenced the sale price, notional interest cannot be automatically included in the sale price for the purpose of levy. In the absence of a provision in law providing for a notional addition to the value/ price charged, the question of adding notional interest on the security deposit as a consideration received for the services rendered cannot be sustained.

In the instant case, there was not even an iota of evidence adduced by the revenue to show that the security deposit taken has influenced the price, i.e., the rent in any way. In the absence of such evidence, it is not possible to conclude that the notional interest on the security deposit would form part of the rent. There was no reason for adopting a rate of 18 percent per annum as rate of interest, which is neither the bank rate of interest for deposits or loans or the market rate of interest. Adoption of such an arbitrary rate mitigates against the concept of valuation. Hence, notional interest on interest free security deposit cannot be added to the rent agreed upon between the parties for the purpose of levy of service tax on renting of immovable property. There was also no reason for adopting rate@18% per annum as rate of interest as same was neither bank rate of interest for deposits or loan nor market rate of interest which, being arbitrary rate mitigates against the concept of valuation. Thus, notional interest or deposit could not be added to rent for the purpose of levy of Service Tax  CIT v. J.K. Investors (Bombay) Ltd. 2000 (6) TMI 9 - BOMBAY High Court.

Conclusion

On similar basis, it can be said that lease premium is not a consideration for leasing / renting of property. The consideration has to be rent and nothing else. Based on the above judicial pronouncements and strict legal interpretation, it can be construed that the amount received as lease premium may not be chargeable to service tax being in the nature of capital receipt. Renting of immovable property service provided is taxable to the extent of amount received as monthly lease charges / rentals on periodical basis. In other words, the value of taxable service shall be the amount received from service receiver in the form of monthly lease rentals.