2025 (9) TMI 1537 - AT - Service Tax

Lease effective from 25 April 2014 means pre-2014 lease payments in escrow not taxable as rent; extended-period and penalties quashed

M/s. Rajasthan Tourism Development Corporation Limited Versus Commissioner of Central Excise and Service Tax, Jaipur

CESTAT upheld that, in light of the SC's finding that the lease became effective from 25.04.2014, there was no taxable 'renting of immovable property' ... Liability to pay service tax - renting of immovable property in respect of Jal Mahal Tourism Project and Tijara Fort to M/s Neemrana Hotel Pvt. Ltd. - lease rental money credited in a separate Escrow Account maintained with Indian Bank - relationship of landlord and a tenant - non speaking and ex parte order - extended period of limitation - penalty - HELD THAT:- For a service to be taxable, there has to be service provider, service recipient, taxable service provided with the taxable territory for a consideration. In this context, it is noted that under the Finance Act, 1994, a taxable service refers to any service on which service tax is leviable as specified in Section 65(105) (prior to 2012) and, thereafter, under Section 66B of the Act. This means any activity carried out by a person for another for consideration, including declared services, except for those listed in the “negative list” outlined under Section 66D. In addition, the Act defines “service” as any activity carried out by a person for another for consideration, but not including a transfer of title in goods or immovable property, a mere transfer, delivery, or supply of goods considered as a sale, and transactions in money or actionable claims. In the instant case, it is a fact that the original agreement had leased the land for 99 years to Jal Mahal Resorts. In view of the categorical directions of the Supreme Court in Jal Mahal Resorts Pvt Ltd [2015 (11) TMI 1288 - SUPREME COURT], it is established that the lease for the Jal mahal and the Mansagar lake was effective from 25.04.2014 only. This, therefore, clearly negates any demand confirmed under the ‘Renting of immovable property’ service for the period prior to this date. It has also been categorically submitted that all lease payments received were credited in an escrow account, which was not utilised in view of the continued litigation in this matter. In view of the discussions, it is clearly established that no service was provided prior to the decision of Supreme Court, and consequently, it is held that the demand for the period October 2008 to March 2014 cannot be upheld - it is also noted that it has been submitted that the rental cheques were withheld till the receipt of the said clearance. Even though cheques were received initially, the consideration so received was not encashed. So, it was equivalent to no payment or receipt of consideration, and does not satisfy the four limbs of provision of taxable services. There was a service provider, service recipient but no taxable service was provided for the period prior to November 2015. Hence, the demand in this regard also cannot be sustained. The invocation of the extended period and penalties imposed on the appellant cannot be sustained - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether taxable service of 'Renting of Immovable Property' was rendered by the Nodal Agency in respect of the Mansagar Lake / Jal Mahal project for the period 01.10.2008 to 31.03.2014. 2. Whether receipt of lease rentals credited to an escrow account (and not utilized) or issuance/receipt of cheques (not encashed) constitutes receipt of consideration / supply of taxable service for purposes of service tax. 3. Whether a lease purported for a period in excess of twenty years (originally 99 years) amounts to a transfer of ownership under the relevant stamp law and thereby falls outside the scope of 'renting of immovable property' service. 4. Whether the invocation of the extended period of limitation and imposition of penalties (including under sections 75, 77(2) and 78 of the Finance Act) was sustainable in view of the facts and judicial orders affecting the effectiveness of the lease(s). ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of renting of Mansagar Lake / Jal Mahal project for 01.10.2008-31.03.2014 Legal framework: Service tax is leviable only on activities constituting 'service' as defined under the Finance Act (activity for another for consideration, subject to negative list). Specific taxable entry for renting of immovable property appears under definitions (Section 65(90a) / Section 65(105)(zzzz) and post-2012 under Section 66B). Precedent treatment: The Supreme Court's judgment reducing the lease period and fixing the commencement date (lease to run for 30 years commencing from date of that judgment) was relied upon by the Tribunal. A High Court (Delhi) decision reasoning that mere renting of immovable property for use in business does not involve value addition and hence may not be a taxable 'service' without ancillary services was cited. Interpretation and reasoning: The Tribunal examined whether the essential elements of a taxable service were present prior to 25.04.2014 (provider, recipient, taxable service rendered for consideration within taxable territory). The Supreme Court's order made the lease effective only from the judgment date, thereby negating the legal efficacy of the earlier lease period. All lease receipts for the project were credited to a separate escrow account and, due to prolonged litigation and the High Court order, were not utilized; the project remained legally non-effective until the Supreme Court declared otherwise. Ratio vs. Obiter: Ratio - where a judicial decree renders the lease effective only from a later date, no taxable renting service can be held to have been provided before that effective date. Obiter - discussion of value-addition concept and general citation of the Delhi High Court's reasoning on renting as non-value-adding may be persuasive but is ancillary to the holding. Conclusion: Demand for service tax in respect of the Mansagar Lake / Jal Mahal project for the period prior to the Supreme Court-fixed commencement date is unsustainable; no taxable service was provided prior to 25.04.2014. Issue 2: Effect of escrow receipts and unencashed cheques - whether receipt of consideration occurred Legal framework: Point of Taxation Rules and general principles require existence of consideration and supply of service for tax liability; for continuous services, tax arises on invoice, receipt of payment, or completion - whichever is earlier (Rule 6, Point of Taxation Rules, 2011). Precedent treatment: The adjudicatory material and Statements of parties regarding receipt and handling of funds were relied upon; no direct contrary authoritative precedent was treated as overruling this factual-applicative point. Interpretation and reasoning: For the Jal Mahal project, receipts were placed in escrow and not applied to the appellant's accounts due to litigation - the Tribunal treated credited escrow sums (held in escrow and not utilized) as not amounting to an effective provision of taxable service before the lease became effective. For the Tijara Fort lease, although cheques were issued, they were not encashed/accepted due to pending Forest Department clearance; therefore, there was no receipt of consideration and no supply of taxable service for the demanded period. Ratio vs. Obiter: Ratio - where cheques/receipts are withheld, not encashed or placed in escrow pending litigation/clearance, they do not constitute receipt of consideration equating to provision of taxable service; accordingly, service tax cannot be levied for the period prior to actual operative acceptance/encashment or effective commencement. Obiter - application of Point of Taxation Rules to continuous supplies as a general principle. Conclusion: Escrowed funds not applied and unencashed/withheld cheques do not establish receipt of consideration or provision of taxable renting service for the periods in question; therefore demands based on such receipts are unsustainable. Issue 3: Legal effect of leases exceeding twenty years - transfer of ownership under Stamp Law and exclusion from renting service Legal framework: Transfer of Property Act (definition of lease) and the Rajasthan Stamp Act schedule (notification under Section 3) treat leases for a term in excess of twenty years (or in perpetuity) as chargeable with duty equivalent to conveyance on the market value - reflecting treatment akin to transfer of ownership for stamp duty purposes. Post-1.7.2012, the negative list regime excludes certain transactions from service tax. Precedent treatment: The Supreme Court noted that a 99-year lease effectively converted the arrangement into a perpetual lease and reduced it to 30 years as beyond the rules. The Tribunal relied on that judicial treatment to infer absence of ordinary landlord-tenant relationship earlier asserted. Interpretation and reasoning: A lease purporting to exceed twenty years (here originally 99 years) was treated, under the State stamp law schedule, as amounting to transfer characteristics; consequently, the conventional landlord-tenant relationship required to characterize 'renting of immovable property' as a service is absent if the arrangement is effectively a transfer. Further, once classified as a transfer or akin to conveyance and under the negative list regime, such transactions fall outside service tax ambit. Ratio vs. Obiter: Ratio - where a lease is of such duration and character that it amounts to a transfer of ownership under applicable stamp laws, classification as 'renting of immovable property' service is not sustainable and falls outside service tax. Obiter - detailed interplay between stamp duty classification and service tax principles where not determinative of the outcome. Conclusion: The nature of the long-term lease (original 99 years) precluded treating the transaction as ordinary renting of immovable property for service tax purposes; combined with the Supreme Court reducing the lease and fixing commencement, the renting service classification for the prior period fails. Issue 4: Validity of invoking extended period of limitation and imposition of penalties Legal framework: Extended period of limitation under proviso to Section 73(1) can be invoked where duty has been knowingly concealed or suppressed with intent to evade payment. Penalties under sections 75, 77(2), 78 attach where statutory requirements and mens rea (suppression/intent) are present. Precedent treatment: The Tribunal evaluated invocation of extended period against factual matrix, judicial orders and whether suppression/intent could be established. Interpretation and reasoning: Given (a) judicial nullification/delaying effect on lease effectiveness until Supreme Court judgment; (b) funds being held in escrow and not utilized; (c) cheques not encashed due to pending statutory clearances; and (d) demonstrable litigation and administrative processes affecting operation, the Tribunal found no suppression or deliberate intent to evade duty. The factual circumstances led to absence of deliberate concealment warranting extended limitation or penalties. Ratio vs. Obiter: Ratio - extended period and penalties cannot be sustained where there is no evidence of suppression/intent to evade and where fundamental legal/administrative impediments prevented the service from being provided or consideration from being effectively received. Obiter - application of these principles to different factual scenarios. Conclusion: Invocation of the extended limitation and imposition of penalties is unsustainable on the facts; the extended period and penalties were set aside. Overall Disposition On the combined grounds above - absence of effective lease operation before the Supreme Court-fixed commencement date, escrowing/withholding of receipts and unencashed cheques, character of long-term lease as tantamount to transfer for stamp law purposes, and lack of suppression/intent - demands for service tax for the period 01.10.2008-31.03.2014 and attendant extended period and penalties were set aside by The Tribunal.