2022 (7) TMI 1030 - AT - Service Tax

Appellant wins service tax dispute, granted Cenvat credit for construction and event management services.

The tribunal ruled in favor of the Appellant in all aspects of the case. The demand for service tax on refundable security deposits, reimbursement of ... Applicability of service tax on refundable security deposits - Reimbursements and determination of value of taxable service - Notional interest and inclusion in value of taxable supply - Service tax on termination charges as compensation/penalty - Eligibility of Cenvat credit on input services used in construction of immovable property - Eligibility of Cenvat credit on business promotion/event management services - Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006-ultra vires (as applied)Applicability of service tax on refundable security deposits - Notional interest and inclusion in value of taxable supply - Refundable security deposits collected by the assessee are not liable to service tax as consideration for renting of immovable property services. - HELD THAT: - The Tribunal found the amounts in question were admitted refundable security deposits returned at the end of the lease without interest and not collected as consideration for any service. Relying on relevant precedents of the Tribunal and reasoning that security deposits serve as a separate purpose (security against default or damage) and lack nexus with the lease consideration, the deposits cannot form part of the gross value of renting services. Consequently, the service tax demand premised on inclusion of security deposits (or notional interest thereon) in taxable value was quashed. [Paras 16, 17, 18]Demand of service tax on refundable security deposits set aside.Reimbursements and determination of value of taxable service - Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006-ultra vires (as applied) - Amounts reimbursed by tenants towards diesel, water and electricity (cross charged on actuals) are not includible in the value of taxable service and are not liable to service tax. - HELD THAT: - The Tribunal applied the Supreme Court's ruling that struck down Rule 5(2) and held that reimbursements which are mere pass-through of actual costs with no profit element and no nexus as consideration for the taxable service cannot be taxed as part of the service value. The record showed reimbursements were on actuals apportioned by floor area/sub metering and that demand in respect of water and electricity had already been dropped in one impugned order which was not appealed, further supporting finality. Therefore the service tax demand on such reimbursements was quashed. [Paras 19, 20, 21]Demand of service tax on reimbursements for diesel, water and electricity quashed.Service tax on termination charges as compensation/penalty - Applicability of service tax on amounts characterised as liquidated damages - Termination charges collected for premature termination of lease are not consideration for renting service and are not liable to service tax. - HELD THAT: - The Tribunal held that termination charges were compensatory/penal in nature and not payment for provision of renting services. There was no service rendered corresponding to those receipts and taxing them as rent would amount to double taxation in view of adjustments already made against security deposits. The adjudicating authority's linkage of termination charges to rental consideration was rejected and the demand sustained on this ground was set aside. [Paras 22]Service tax demand on termination charges quashed.Eligibility of Cenvat credit on input services used in construction of immovable property - Eligibility of Cenvat credit on business promotion/event management services - Cenvat credit on input services used for construction of immovable property subsequently let out is admissible; Cenvat credit on event management/business promotion services is also admissible. - HELD THAT: - For the period under dispute (noting June 2007 to March 2011 and amendment to Rules w.e.f. 01.04.2011), the Tribunal followed binding precedents of High Courts and the CESTAT which held that inputs and input services used in construction that is ultimately used to provide an output service (renting) qualify for Cenvat credit. The Tribunal observed that construction services were integral to enable renting, and therefore credit could not be denied. Further, Rule 2(l) does not exclude event management or promotion services; such business promotion expenses incurred in the course of business were held eligible for Cenvat credit. [Paras 23, 24, 25]Cenvat credit availed on construction-related input services and on event management/business promotion services allowed.Final Conclusion: All four appeals allowed: demands of service tax on refundable security deposits, reimbursements for diesel/water/electricity and on termination charges quashed; Cenvat credit availed on input services used in construction of immovable property and on event management/business promotion services held eligible, with consequential relief to the appellant. Issues Involved:1. Applicability of service tax on refundable security deposit collected by the Appellant from its customers.2. Applicability of service tax on reimbursement of expenses from its customers on account of water, electricity, and diesel expenses incurred for the provision of services.3. Applicability of service tax on termination charges collected from customers for early termination of the lock-in period of the lease.4. Eligibility of Cenvat credit of works contract services and other services for the construction of immovable property and Cenvat credit on event management services for the promotion of the business of the Appellant.Issue-wise Detailed Analysis:1. Applicability of Service Tax on Refundable Security Deposit:The tribunal found that the refundable security deposit collected by the Appellant from its customers is not in dispute and is returned to the customers at the end of the lease period without interest. The amounts are not collected towards any provision of service but as a refundable deposit, and thus cannot be treated as consideration for renting/leasing of immovable property services. This position is supported by the Tribunal's judgment in the case of SAMIR RAJENDRA SHAH v. COMMISSIONER OF CENTRAL EXCISE, KOLHAPUR and ELECTRONICS TECHNOLOGY PARK v. COMMISSIONER OF CUS., C. EX. & S.T., TRIVANDRUM. Therefore, the demand of service tax on security deposits was set aside.2. Applicability of Service Tax on Reimbursement of Expenses:The tribunal referred to the Supreme Court's ruling in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., which held Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 as ultra vires section 67 of the Finance Act, 1994. The Appellant's case showed that the expenses are mere reimbursements based on the total cost incurred and the total floor area of the customers, with no profit element involved. The department did not contradict this fact. Thus, the tribunal quashed the demand of service tax on reimbursements for water, electricity, and diesel charges.3. Applicability of Service Tax on Termination Charges:The tribunal found that the termination charges collected by the Appellant were misinterpreted by the Adjudicating authority. These charges were in the nature of a penalty for early termination of the lease and not a consideration for renting of immovable property. The department had also considered these amounts in the demand under security deposit, leading to potential double taxation. Hence, the tribunal quashed the demand on termination charges.4. Eligibility of Cenvat Credit on Construction and Event Management Services:The tribunal noted that the period covered in the appeals was prior to the amendment of the Cenvat Credit Rules, 2004 effective from 01.04.2011. The issue of eligibility of Cenvat credit on input services used for construction of immovable property was settled in favor of the Appellant by the Principal Bench of the CESTAT, New Delhi in REGENCY PARK PROPERTY MANAGEMENT SERVICES P. LTD. v. COMMR. OF S.T., DELHI. The tribunal allowed the Cenvat credit of input services for construction of immovable property which was let out to various customers. Additionally, Cenvat credit on event management services was deemed eligible as these expenses were incurred in the course of furtherance of business and are considered business promotion expenses.Conclusion:a. Applicability of service tax on refundable security deposit collected by the Appellant from its customers - Not Applicable.b. Applicability of service tax on reimbursement of expenses from its customers on account of water, electricity, and diesel expenses incurred for provision of services - Not Applicable.c. Applicability of service tax on termination charges collected from customers for early termination of lock-in period of lease - Not applicable.d. Eligibility of Cenvat credit of works contract services and other services for construction of immovable property and Cenvat credit on event management services for promotion of business of the Appellant - Cenvat credit eligible.All four appeals were allowed with consequential relief to the appellant as per law.