2025 (8) TMI 1556 - AT - Service Tax

Interest-free refundable deposit not taxable as rent consideration for pre-1 July 2010 land lease; appeal allowed

CESTAT, Mumbai allowed the appeal and set aside the impugned order, holding that an interest-free deposit refundable to the lessee did not constitute ... Taxability - renting of immovable property service - interest free deposit received from the lessee was consideration for the service or not - HELD THAT:- The first appellate authority had not examined the nature of the impugned consideration which, admittedly, was ‘deposit’ that had to be returned at some point or the other; that it was ‘interest free’ would only imply that the ‘notional’ income thereon accrued to the appellant. Nonetheless, the first appellate authority, by relying upon a subsequent amendment to the ‘taxable service’ under Finance Act, 1994 and clarifications issued thereof by the Central Board of Excise & Customs, had also failed to take note of the fact that impugned consideration related to the original enumeration. The scope of ‘taxable service’ of ‘renting of immovable property service’, consequent to amendment of 1st July 2010, was examined by the Tribunal in re Greater Noida Industrial Development Authority [2014 (9) TMI 306 - CESTAT NEW DELHI] and it has been held that 'giving of vacant land on licence, rent or lease for construction of structure at a later stage for furtherance of business or commerce became taxable only w.e.f. 1-7-2010 under Clause (v) of Explanation 1 to Section 65(105)(zzzz) and this activity was not taxable during the period prior to 1-7-2010.' The impugned order is without basis in law and is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an interest-free deposit received from a lessee constitutes consideration for the taxable service of 'renting of immovable property'. 2. Whether giving vacant land on lease for construction of port and marine-related activities falls within the exclusion for 'vacant land' under Explanation 1 to section 65(105)(zzzz) as it stood prior to 1-7-2010, or became taxable only with insertion of clause (v) w.e.f. 1-7-2010. 3. Whether the amendment introducing clause (v) to Explanation 1 operates retrospectively to attract service tax on leases executed prior to 1-7-2010, and consequentially whether a show-cause notice issued for extended/limited period was time-barred. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of the consideration: whether an interest-free deposit is consideration for renting of immovable property service Legal framework: Tax liability for 'renting of immovable property' depends on whether the consideration received constitutes payment for the taxable service as defined in section 65(105)(zzzz) and its Explanations. The nature of a 'deposit' (refundable, interest-free) is relevant to decide whether it is a consideration. Precedent treatment: The first appellate authority treated the 'interest free security deposit' as consideration for the service, relying on administrative standpoints that regard deposits as part of consideration where substance indicates payment for service. Interpretation and reasoning: The Court noted that the first appellate authority did not examine the nature of the impugned consideration in sufficient detail. It observed that the impugned amount was an admitted refundable deposit and that the fact it was interest-free only affected the notional income thereon; such characteristics militate against treating it unequivocally as consideration for the taxable service without proper analysis of the substantive transaction. Ratio vs. Obiter: Observations about the need to examine the nature of deposit are ratio to the extent the Court relied on the correct identification of taxable consideration to remit the matter; specifics regarding deposit treatment that were not necessary to decide timing of taxability are obiter. Conclusion: The first appellate authority erred in treating the interest-free deposit as consideration without analyzing its nature; the point requires proper factual and legal examination consistent with the actual enumeration of taxable services. Issue 2 - Taxability of lease of vacant land for construction of port activities: whether taxable prior to 1-7-2010 or only thereafter Legal framework: Prior to the 2010 amendment, Section 65(105)(zzzz) defined 'renting of immovable property' with an Explanation listing what constituted 'immovable property' and an exclusion clause expressly excluding 'vacant land' (sub-clauses including (b): 'vacant land, whether or not having facilities clearly incidental to the use of such vacant land'). Clause (v) was added to Explanation 1 by amendment w.e.f. 1-7-2010 to include 'vacant land, given on lease or licence for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce'. The legislative memorandum and Board Circulars explain the intent of that amendment. Precedent treatment: The Tribunal's earlier decision (New Okhla Industrial Development Authority v. Commissioner) and subsequent Tribunal authority were followed by the Court. The first appellate authority relied on a later Board circular and a High Court decision to support taxability prior to 1-7-2010; the Court examined and distinguished these treatments in light of the statutory text and amendment history. Interpretation and reasoning: The Court undertook a textual and contextual construction of clause (zzzz) as it stood pre-2010. It held that the inclusive enumerations in Explanation 1 do not limit the broad head but the express exclusionary sub-clauses (notably sub-clause (b)) manifest legislative intent to exclude vacant land from 'immovable property' before the 2010 amendment. The insertion of clause (v) in 2010 materially expanded the scope by specifically bringing within 'immovable property' certain leases of vacant land for future construction for business/commerce. The Court relied on contemporaneous materials (memorandum to Finance Bill, Board Circular) to conclude the amendment was substantive and not merely clarificatory, and in the absence of explicit retrospective operation, must be given prospective effect from 1-7-2010. Ratio vs. Obiter: The conclusion that leases of vacant land for construction for business became taxable only w.e.f. 1-7-2010 is ratio, being determinative of whether the tax demand for the relevant period could be sustained. Statements about principles of statutory interpretation (inclusionary vs exclusionary clauses) are ratio insofar as they underpin the interpretive outcome. Conclusion: Renting/lease of vacant land for construction of structures for furtherance of business or commerce was not within the taxable service under Section 65(105)(zzzz) prior to 1-7-2010; such transactions became taxable only from 1-7-2010 upon insertion of clause (v) to Explanation 1. Issue 3 - Prospective operation of the 2010 amendment and validity of extended period demand Legal framework: Amendments that expand taxable scope are, absent explicit retrospective language, to be treated as prospective. Contemporaneous legislative history and administrative circulars assist in construing whether an amendment was intended to have retrospective effect. Precedent treatment: The Tribunal decisions cited (including New Okhla) were relied upon to hold that clause (v) is an expansion and operates prospectively; decisions holding otherwise or administrative circulars asserting coverage were considered but not followed where inconsistent with statutory construction and absence of retrospective enactment. Interpretation and reasoning: The Court found that clause (v) introduced a new category of taxable transactions and that the explanatory memorandum and Board Circular clarified that the amendment intended to modify and expand the taxable scope. Because the amendment expanded the taxable ambit and lacked express retrospective effect, it cannot be applied to leases executed before 1-7-2010. Accordingly, a show-cause notice seeking tax for periods prior to that date is without basis insofar as it relies on clause (v). The Court also rejected the first appellate authority's reliance on a later circular and findings that the transaction was concealed so as to justify extended limitation, finding those approaches legally untenable in light of the primary issue of taxability. Ratio vs. Obiter: The determination that clause (v) is prospective and that demands premised on it for pre-1-7-2010 periods are unsustainable is ratio. Observations on limitation and concealment are consequential to the principal finding and are ratio to the extent they were necessary to dispose of the appeal. Conclusion: The 2010 amendment (clause (v)) is prospective in operation; therefore renting/lease transactions of vacant land executed prior to 1-7-2010 cannot be taxed under that clause. The impugned demand based on clause (v) for the pre-amendment period is without basis in law and set aside. Overall Disposition The Court held that the impugned order sustaining tax demand (based on classification of vacant land lease as taxable prior to 1-7-2010 and on treating the deposit as consideration) lacked legal basis; following statutory construction, precedents, and contemporaneous legislative material, the Court set aside the impugned order and allowed the appeal.