2014 (12) TMI 1235 - AT - Service Tax

Appellant IHCL not liable for service tax on hotel business under License Agreement. Time-barred demand. No penalties imposed.

The Tribunal held that the appellant, Indian Hotels Co. Ltd. (IHCL), running the hotel business of Taj Lands End Ltd. under a License Agreement did not ... Liability of Service tax - Management Consultancy Service - Whether the running, operating and managing the entire hotel business of M/s. Taj Lands End Ltd., Bandra under a ‘License Agreement’, from the date of agreements up to completion of final purchase of the hotel, would be covered under ‘Management Consultancy Service’ and service tax would be payable on the quantum of Gross Operation Profits earned/retained by the appellants or not. Held that:- the contention of the appellant is convincing that IHCL had entered into a License Agreement with LHPL (later the name of LHPL was changed to Taj Lands End Ltd.) to the effect that the hotel which stood in the name of LHPL was given to IHCL on a license basis to enable the latter to run the hotel on its own. So, although the owner of asset is LHPL, whereas the owner of business of running the hotel is IHCL. Service can be said to be provided by one entity to another only when the first entity undertakes an activity or performs a service for another for a consideration. From the Agreements, it does not appear that IHCL was running the hotel as a service to LHPL. In fact IHCL was part owner of the asset, i.e., LHPL, the remaining part owner being ICICI I-Venture who had parted with a huge loan of ₹ 330 crores which was primarily utilized to repay the existing debt of LHPL. If IHCL was part owner of LHPL, it can hardly be said that IHCL was providing service to itself to the extent of its ownership of LHPL. The other owner, i.e., I-Venture was essentially a lender who was eased out of the ownership in 2006. Thus there is sufficient evidence to show that IHCL was running the hotel on its own and was not doing any service for another entity. Therefore, it is clear that the IHCL are running the hotel and are not providing consultancy as mere holding of joint discussions between two entities does not mean that one entity is providing service to the other. Also the agreement states unambiguously that, for mutual benefit, IHCL shall run, develop, conduct, operate manage …. carry out all activities of running the hotel. The activities of IHCL in operating the hotel cannot be called as a service rendered under the category of Management Consultancy service results in no service tax payable. Invokation of extended period of limitation - Held that:- by relying on the decision of Tribunal in the case of I2IT Pvt. Ltd. v. Commissioner of Central Excise, Mumbai [2014 (9) TMI 345 - CESTAT MUMBAI], the extended time period is not invokable once mens rea is not established. Imposition of penalties - Section 76 & 77 of the Finance Act, 1994 - Held that:- Penalty is not imposable as there is no mens rea on the part of IHCL. - Matter remanded back Issues Involved:1. Whether the activity of running, operating, and managing the entire hotel business of Taj Lands End Ltd. (TLEL) under a 'License Agreement' falls under 'Management Consultancy Service' and is subject to service tax.2. Whether the demand is barred by limitation.3. Whether penalties under Sections 76 and 77 of the Finance Act, 1994 are imposable.Issue-wise Analysis:1. Management Consultancy Service:- The appellant, Indian Hotels Co. Ltd. (IHCL), ran the hotel business of TLEL under a License Agreement. The Revenue argued that this activity constituted 'Management Consultancy Service' as defined under Section 65(53) of the Finance Act, 1994.- IHCL contended that they were running the hotel on their own account, not providing consultancy services to TLEL. They emphasized that IHCL bore all operational expenses, collected revenues, and paid taxes, indicating ownership of the business, not consultancy.- The Tribunal examined various clauses of the License Agreement, including IHCL's right to use assets, manage operations, and bear costs. It found that IHCL was essentially operating the hotel as its business.- The Tribunal compared similar agreements with Piem Hotels and found significant differences. In the Piem Hotels agreement, IHCL provided consultancy services, whereas, in the TLEL agreement, IHCL was running the hotel.- The Tribunal concluded that IHCL was not providing 'Management Consultancy Service' to TLEL but was running the hotel on its own account.2. Limitation:- The Revenue issued a show cause notice demanding service tax for the period from 1-10-2002 to 31-3-2006, invoking the extended period of limitation.- IHCL argued that the demand was time-barred as all relevant facts were disclosed to the Revenue, and there was no suppression of information.- The Tribunal noted that the investigation began in March 2005, and all details were provided by December 2005. The show cause notice was issued in 2008, beyond the normal period of limitation.- The Tribunal relied on decisions in Hindalco Industries and Kirloskar Oil Engines, which held that the extended period is not invocable if the facts were known to the Revenue during the investigation.- The Tribunal concluded that the demand was barred by limitation.3. Penalties:- The Revenue imposed penalties under Sections 76 and 77 of the Finance Act, 1994, for failure to pay service tax and comply with procedural requirements.- IHCL argued that penalties were not imposable as there was no mens rea (intent to evade tax).- The Tribunal found that IHCL acted under a bona fide belief that they were not liable to pay service tax, as they were running their own business.- The Tribunal held that penalties under Sections 76 and 77 were not imposable in the absence of deliberate intent to evade tax.Conclusion:- The Tribunal, by majority decision, held that IHCL's activity of running the hotel business under the License Agreement did not fall under 'Management Consultancy Service' and was not subject to service tax.- The demand was barred by limitation, and penalties under Sections 76 and 77 were not imposable.- The appeal was allowed, and the impugned order was set aside.