2024 (11) TMI 615 - AT - Service Tax

Brewery license transfer creates deemed sale under Article 366(29A)(d), not taxable service for four years

CESTAT Delhi held that transfer of brewery license rights constituted a deemed sale under Article 366(29A)(d) of the Constitution, not a service. The ... Service tax liability - “deemed sale” under article 366(29A)(d) of the Constitution had taken placed under the License Agreement - inclusion of amount paid to the appellant under the License Agreements in the assessable value of “renting of immovable property service” because without the license endorsement the plant and machinery leased to the appellant could not have been put to use by Skol for brewing beer HELD THAT:- A Lease Deed was executed between the appellant and Skol for renting of land, building plant and machinery by the appellant to Skol. The appellant has been described as the “Lessor” and the Skol has been described as the “Lessee” in the said Lease Deed. As clear from the terms of the License Agreement that it is not merely the use of the License that has been transferred to Skol/Sab Miller by the appellant. What has been transferred by the appellant is the right to use the License. As can be seen from the Agreement, Skol/Sab Miller have been transferred the right to use the brewery license and the permitted capacity for a period of 4 years free from any charges, encumbrances, liens or third party rights. Skol/Sab Miller shall also enjoy the freedom to utilize the brewery license and operate during the entire term without any hindrance, obstruction or limitation from the appellant. In fact, the appellant also agreed to indemnify, defend and hold Skol/Sab Miller harmless from any actions, causes of actions, claims, demands, costs, liabilities, expenses and damages arising out of or in connection with any claim that would constitute a breach of any of warranties and/ or obligations, relating to the period prior to the commencement of the License Agreement dated 30.01.2008. The agreement also provides that the promoters shall not do or cause to be done any act that will result in breach of the License Agreement. The appellant does not, with the transfer of the right to use by Skol/Sab Miller, have any right to itself use the brewery license. There is, therefore, no manner of doubt that a “deemed sale” under article 366(29A)(d) of the Constitution had taken place when the appellant granted the right to use the License to Skol/Sab Miller. The findings to the contrary recorded by the Commissioner cannot be sustained. Commissioner placed much emphasis on the Lease Deed executed between the appellant and Skol for renting of land, building, plant and machinery and in particular to clause 3 which provides that the appellant shall procure a valid endorsement/sub-license of the brewery license in favour of Skol. According to the Commissioner, the License Agreement that was subsequently executed was only to complete or validate the Lease Deed and, therefore, renting of the factory along with the brewery license is an integral part of the “renting of immovable property” services. Two documents, namely, the Lease Deed and the License Agreement have to be separately examined and merely because there is a recital in the Lease Deed that the appellant shall procure a valid endorsement/sub-license of the brewery license in favour of Skol does not mean that the subsequently executed License Agreement becomes an integral part of the Lease Deed. Contention of the appellant that a deemed sale had taken place has also been repelled by the Commissioner for the reason that leasing of brewery license was subject to certain restrictions. Only a bald statement had been made. In fact, the terms of the License Agreement give complete freedom to Skol/Sab Miller to operate the brewery and the License Agreement does not cause any hindrance. A finding had also been recorded by the Commissioner that no “sale” had taken place. The contention of the appellant was that a “deemed sale” contemplated under article 366(29A)(d) of the Constitution had taken place. There is a marked difference between “sale” and “a deemed sale” as was pointed out by the Supreme Court in Quick Heal Technologies [2022 (8) TMI 283 - SUPREME COURT] A deemed sale had taken place when the appellant transferred the right to use the brewery license issued to the appellant in favour of Skol/Sab Miller on execution of the License Agreement. The consideration received by the appellant on the execution of the License Agreement cannot, therefore, be subjected to service tax nor can such consideration be clubbed with the consideration received by the appellant under the Lease Deed so as to be subjected to service tax under “renting of immovable property” service. The impugned order passed by the Commissioner adjudicating the three show cause notices, therefore, deserves to be set aside. It will, therefore, not be necessary to examine the contention of the learned counsel for the appellant that the extended period of limitation contemplated under the proviso to section 73(1) of the Finance Act could not have been invoked. The impugned passed by the Commissioner is, accordingly, set aside and the appeal. Issues Involved:1. Whether the License Agreement constituted a 'deemed sale' under Article 366(29A)(d) of the Constitution.2. Whether the consideration received under the License Agreement should be included in the assessable value for 'renting of immovable property service' for service tax purposes.3. Whether the extended period of limitation for service tax demand was applicable.Issue-wise Detailed Analysis:1. Deemed Sale under Article 366(29A)(d) of the Constitution:The primary issue was whether the License Agreement constituted a 'deemed sale' under Article 366(29A)(d) of the Constitution, which pertains to the transfer of the right to use goods. The appellant argued that the License Agreement, which involved the endorsement of a brewery license to Skol/Sab Miller, was a deemed sale, and therefore, service tax could not be levied on the consideration received. The appellant contended that the transfer of the right to use the brewery license was free from interference or hindrance and was akin to a sale. The Tribunal examined the terms of the License Agreement, noting that Skol/Sab Miller had the right to use the brewery license and the permitted capacity without any hindrance or encumbrance from the appellant. The Tribunal concluded that the transaction met the criteria for a deemed sale, as it involved the transfer of the right to use the brewery license, thus falling within the ambit of Article 366(29A)(d). Consequently, the consideration received under the License Agreement could not be subjected to service tax.2. Inclusion of Consideration in Assessable Value for Service Tax:The department argued that the consideration received under the License Agreement should be included in the assessable value for 'renting of immovable property service' because the License Agreement was integral to the Lease Deed. The Commissioner had concluded that the License Agreement was a natural extension of the Lease Deed, and the consideration should be clubbed for service tax purposes. However, the Tribunal found that the License Agreement and the Lease Deed were separate transactions. The Tribunal emphasized that the License Agreement involved a deemed sale, and the consideration received could not be clubbed with the rental income from the Lease Deed for service tax purposes. The Tribunal set aside the Commissioner's order, which had erroneously included the consideration from the License Agreement in the assessable value for service tax.3. Extended Period of Limitation:The appellant challenged the invocation of the extended period of limitation under the proviso to Section 73(1) of the Finance Act, arguing that the circumstances did not warrant such an extension. However, since the Tribunal concluded that the consideration under the License Agreement was not subject to service tax, it found it unnecessary to address the issue of the extended period of limitation. The Tribunal's decision to set aside the service tax demand rendered the limitation issue moot.Conclusion:The Tribunal allowed the appeal, setting aside the Commissioner's order dated 27.04.2018. It held that the License Agreement constituted a deemed sale under Article 366(29A)(d) of the Constitution, and the consideration received could not be subjected to service tax. Consequently, the inclusion of the License Agreement's consideration in the assessable value for 'renting of immovable property service' was incorrect. The Tribunal's decision provided consequential relief to the appellant.