RENTING OF BUILDING FOR HOTEL USE IS NOT TAXABLE UNDER ‘RENTING OF IMMOVABLE PROPERTY’

Section 65(105)(zzzz) of the Finance Act, 1994 defines the expression, ‘taxable service’ means any service provided or to be provided 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 to this section defines the expression ’immovable property’ as including-

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. and 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 to this section provides that 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;

In ‘R. Rajinikanth v. Commissioner of GST & Central Excise’ – 2026 (3) TMI 199 - CESTAT CHENNAI, Shri Rajikanth, a Tamil Nadu Cine Actor owns a multi storey building at Chennai. He gave lease the said building to Vasanth Bhavan Hotels Private Limited for rent as a hotel. The said premises was used for furtherance of their business. Service Tax has not been paid to the Department. It was alleged the service tax in this case comes under the category of ‘Renting of immovable property service for furtherance of business or commerce under Section 65(105)(zzzz) of the Finance Act, 1994.

The Department issued a show cause notice to Shri Rajinikanth and also issued Statement of Demand for the period from June 2007 to December 2011 and also for the period from January 2012 to June 2012 to the tune of Rs. 46.81 lakhs and Rs. 10.02 lakhs respectively along with interest and also the show cause notice proposed for imposing penalty. The Adjudicating Authority, after observing due formalities under the provisions of Finance Act, 1994 confirmed the demand of service tax along with interest and also imposed penalty. The actor filed an appeal against the order of Adjudicating Authority before Commissioner (Appeals) who dismissed the appeal but set aside the penalty imposed under section 77 of the Finance Act, 1994, on 23.02.2016.

Against the order of Commissioner (Appeals), the actor filed an appeal before Customs, Excise and Service Tax Appellate Tribunal (‘CESTAT’ for short). The appellant submitted the following before the CESTAT-

• The dispute arised from a lease deed executed in favour of Vasantha Bhavan Hotels India Private Limited for running a hotel.
• The transaction constitutes renting of immovable property for use as a hotel, which is specifically excluded from service tax under Section 65(105)(zzzz) of the Finance Act, 1994.
• The authorities below erred in invoking Explanation II to Section 65(105)(zzzz).
• The said Explanation is not applicable to the facts of the present case.
• The statutory exemption was available to buildings used by hotels and the revenue’s interpretation unduly narrows the scope of the exemption.

The appellant relied on the following decisions of CESTAT, in ‘Raj Mahal Hotels Private Limited v. Commissioner of Central Excise, Jaipur’ – 2014 (7) TMI 540 - CESTAT NEW DELHI and the decisions of Chennai CESTAT in ‘Grand Royal Enterprises Limited v. Commissioner of Service Tax, Chennai – 1’ – 2018 (10) TMI 656 - CESTAT CHENNAI in which the decisions were in favour of the assessees. Therefore, the appellant prayed CESTAT to set aside the impugned order and also to refund the amount paid as pre-deposit while filing the appeal.

The Department submitted the following before CESTAT-

• The contention of the appellant that the impugned service is exempted from the service tax is not acceptable.
• The contention of the appellant is based on an isolated reading of clause (d) and ignores the statutory mandate of Explanation 2 to Section 65(105)(zzzz) of the Act.
• Explanation 2 clearly provides that where an immovable property is used partly in the course of or for the furtherance of business or commerce and partly for residential or any other purpose, such property shall be deemed to be used in the course of or for the furtherance of business or commerce.
• The leased premises, in the present case, were not used solely for providing accommodation as a hotel.
• The premises were also used for various commercial activities such as running a restaurant, banquet hall, conference hall, bar and health club.
• Therefore, the property in question is rightly classifiable as an immovable property used in the course of or for the furtherance of business or commerce.
• Since the activity of renting of the said property by the assessee is correctly held to be a taxable service under clause (90a) of Section 65 read with Section 65(105)(zzzz) of the Act, the appeal ought to be rejected.

The CESTAT heard the appeals. The CESTAT considered the issue to be decided in the present appeal is as to whether the building leased out for use as a hotel with other facilities like a restaurant, banquet hall, conference hall, bar and health club, qualifies for the specific exclusion/exemption provided under Section 65(105)(zzzz) in respect of buildings used as hotels. The CESTAT analysed the provisions of Section 65(105)(zzzz) of the Finance Act, 1994 and Explanations to the said section.

The CESTAT found that the term ‘hotel’ has not been defined in the Finance Act, 1994. In the trade parlance, hotels providing additional facilities such as restaurants, banquet hall, conference hall, bar and health club are recognized as ‘Full-Service Hotel’ - which is the opposite of a ‘Limited-Service Hotel’ or a ‘Budget-Friendly Hotel’, with bare or limited facilities. Hence the degree of services offered by a hotel varies depending upon its category or class. These facilities like, restaurant, banquet hall, conference hall, bar and health club etc., are not stand alone but are integral and incidental to the activity of running a hotel to cater the needs of hotel guests. the existence of the impugned facilities has not been shown to results in a bifurcation of the use of the premises nor supports the inference that the property is partly deployed for independent or distinct commercial activities. They are hence a part of the hotel. Therefore, the CESTAT held that the premises continue to qualify as a building used by a hotel, squarely falling within the specific exclusion provided under Section 65(105)(zzzz) of the Finance Act, 1994.

The CESTAT relied on the decision in ‘Ambience Construction India Limited v. Commissioner of Service Tax, Hyderabad’ - 2012 (11) TMI 653 - CESTAT BANGALORE, in which it was held that the legislative intent is clear, namely not to tax immovable property used for hotels; and that the definition of renting of immovable property excludes buildings used for the purpose of hotels. The same has been affirmed by the Supreme Court. The CESTAT bound by the decision of Co-ordinate bench, which has not been distinguished on facts, held that the impugned orders are not sustainable and therefore set aside the impugned orders.