2025 (10) TMI 731 - AT - Service Tax

Agreements to operate food plazas treated as commercial catering contracts, not 'renting of immovable property' for service tax

CESTAT New Delhi - AT held the agreements for license to set up and operate Food Plazas at railway stations did not constitute 'renting of immovable ... Classification of services - Renting of Immovable Property service or not - activity performed by IRCTC to award lisensees for setting-up and operation of Food Plaza and other stalls by the licensees - HELD THAT:- In the present case, the parties are governed by the MOU and the license agreement and as per the principles of interpretation of documents, the nomenclature of any contract or document is not decisive of its nature, but an overall reading of the document and its effect is to be seen-State of Orissa versus Titaghur Paper Mills Company Ltd. [1985 (3) TMI 226 - SUPREME COURT]. The Courts have, therefore, consistently applied the test of substance over form, requiring a close look at the contents of the agreement. As discussed above, IR is the owner of the railway land and apart from its primary function of transportation of passengers and goods, they have been engaged in providing essential public utility services for which railway premises are used. The later activity is purely ancillary to the main activity without any profit element. Pursuant to the introduction of the Catering Policy, IR entrusted the catering activities to IRCTC, however to enable the implementation of this Policy, some space has to be provided within the vicinity of the railway station which by no stretch of imagination can be termed as rendering services of renting. Agreements were executed by IRCTC titled as, “Agreement for License to Set-up and Operate Food Plaza at Vijayawada Railway Station with the successful bidders”. Similar agreements have been executed with respect to other railway stations in favour of third parties - IRCTC/IR was free to grant license to any other Caterer in the neighbourhood of the Food Plaza. Under the heading Obligation and Rights of the IRCTC, it is stated that the space has been provided by IRCTC ‘on as is where is basis’ and free from all encumbrances to the licensee on leave and license basis. Thereafter, other obligations have been specified to be taken care of by IRCTC solely with reference to the operation of the Food Plaza. Similarly, the Obligation and Rights of the licensee clearly enumerates that the licensee will construct Food Plaza as per building bylaws of the State and operate the Food Plaza in terms of other specifications provided therein. Having examined the various clauses of the agreement, it is crystal clear that the agreement purely related to the transaction of business whereby the appellant was actually performing the activity of operation of catering and was not providing any service of renting of immovable property. The terms of the agreement makes it abundantly clear as to what is the true and actual purpose of the agreement and the relationship between the parties. This Tribunal has repeatedly held in series of decisions that operation and management of any hotel, unit or other activity does not amount to rendering services. Somewhat similar issue had arisen with reference to the agreement between the producer/distributor of the films and the exhibitor who owned the Multiplex theatres which was alleged by the Department to be an agreement for renting of immovable property as defined under section 65(90a) of the Act. In M/s. M2K Entertainment (P) Ltd. [2025 (7) TMI 213 - CESTAT NEW DELHI], it was ruled that the purpose of the agreement and the intention of the parties is for screening of the film in the theatre, which cannot be treated as ‘renting of immovable property service’. The element of consideration, i.e. the quid pro quo for services, which is a necessary ingredient of any taxable service is present. In the absence of any consideration, no service can be said to have been provided. Merely because the parties arrive at an understanding by way of an agreement to share the expenditure for availing certain facilities or for performing any activity does not amount to rendering ‘services’ and in the course of it, just because some amount is being charged by one party to another it cannot be treated as ‘consideration’. Neither the activity performed can be stretched to rendering ‘services’ nor the amount received for performing the activity can be stretched to ‘consideration’ in the technical sense to be covered under the provisions of Section 65(90a) of the Act - it is clear that the agreement between the parties was essentially for setting-up and operating the Food Plaza at the railway stations with a view to ensuring the availability of public utility facilities. There is nothing unusual in this kind of an arrangement as such business transactions are very much common in today’s economic world. The transaction is purely on business terms on revenue sharing basis, the demand of service tax is not sustainable either on merits or on the ground of limitation. There are no merit in the impugned order, and hence the same is set aside. The appeals are, accordingly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether granting licenses to third parties to set up and operate Food Plazas, kiosks and similar units on railway station premises by a corporate entity authorised by the owner railway amounts to 'renting of immovable property' as defined in clause (90a) of Section 65/read with Section 65(105)(zzzz) (taxable service) for levy of service tax. 2. Whether amounts received by the corporate entity from licensees (labelled as license fee/user charges and/or revenue-sharing) constitute taxable consideration under Section 67 for the period in dispute. 3. Whether extended period of limitation (proviso to Section 73(1)) could be invoked on the ground of suppression, fraud or wilful mis-statement when show cause notices did not allege such deliberate conduct and earlier notices/records were in departmental knowledge. 4. Whether penalties and interest under the relevant sections are sustainable where the activity is found not to be a taxable service or where extended period is improperly invoked. ISSUE-WISE DETAILED ANALYSIS - 1. Characterisation: Licensing of Food Plazas as 'Renting of Immovable Property' Legal framework: Clause (90a) of Section 65 defines 'renting of immovable property' to include renting/letting/leasing/licensing or similar arrangements for use in furtherance of business or commerce; Section 65(105)(zzzz) makes services related to renting of immovable property taxable; Explanations clarify inclusion of use of space irrespective of transfer of possession or control. Precedent treatment: The Tribunal relied on authorities holding substance over form as controlling (State of Orissa v. Titaghur Paper Mills) and decisions distinguishing business/licensing arrangements from renting (cases involving hotels, multiplexes, storage/warehousing jurisprudence and Grand Royale/Indian Hotels line of decisions). Some precedents emphasise existence of a service provider-service recipient relationship and presence of fixed rent as indicators of renting service. Interpretation and reasoning: The MOU, Catering Policy and license agreements were examined in bulk. The dominant object (essential character) of the MOU and licences is professional operation and management of catering services, provision of passenger amenities, and revenue-sharing to promote upgradation and investment - not transfer of estate rights or granting of exclusive possession. Relevant contractual terms (license to operate, 'as is where is' space, leave and licence basis, licence period, obligation to construct/operate, exit provisions, hygiene and operational controls, revenue-linked consideration, and clause requiring delivery of vacant possession on expiry) indicate a business transaction where space is incidental to the commercial activity. Policy expressly disavowed separate rent for static units and prescribed revenue sharing; tender documents and eligibility criteria focused on catering expertise, hygiene, turnover and managerial capability - reinforcing operational, not locational, focus. The absence of a 'fixed rent' and presence of consideration tied to turnover or revenue sharing weighs against classification as renting for business/commerce. The Tribunal emphasised the absence of a service provider / service recipient relationship and treated the arrangement as principal-to-principal commercial transaction rather than a taxable renting service. Ratio vs. Obiter: Ratio - where a licensor (authorised corporate entity acting for owner) grants licences for operation/management of Food Plazas with revenue-sharing, subject to detailed operational obligations and without fixed rent or transfer of possession, such transactions do not constitute 'renting of immovable property' under clause (90a) and are not taxable under Section 65(105)(zzzz). Obiter - comparative observations on other sectors (multiplex, hotels, ports) serve as supportive precedents but are not the core factual ratio. Conclusion: The activity of awarding licences for setting up and operating Food Plazas and similar units on railway station premises is not 'renting of immovable property' within the taxable entry; amounts received as license fee/user charges or revenue share are not taxable consideration under that head. ISSUE-WISE DETAILED ANALYSIS - 2. Taxable Value and Section 67 Application Legal framework: Section 67 prescribes valuation for taxable services; taxable consideration must be for services as defined under Section 65(105). Precedent treatment: Authorities cited (including hotel and multiplex decisions) hold that consideration which is part of a business transaction dependent on turnover/profits and not a fixed rent does not automatically amount to consideration for renting service; joint cost-sharing or revenue sharing without service provider/recipient nexus is not taxable consideration. Interpretation and reasoning: Given conclusion that the underlying arrangement is a business licence for operation/management and not a renting service, the amounts recorded as income/revenue sharing are proceeds of a commercial licence/operation and not consideration for a taxable renting service; therefore Section 67 valuation for renting service is not applicable. Ratio vs. Obiter: Ratio - valuation under Section 67 cannot be applied because the taxable service entry does not arise; Obiter - discussion on elements of consideration (fixed rent vs. turnover-linked fee) elaborates the test. Conclusion: The demand computed under Section 67 for 'renting of immovable property' is unsustainable on merits. ISSUE-WISE DETAILED ANALYSIS - 3. Extended Period of Limitation under proviso to Section 73(1) Legal framework: Proviso to Section 73(1) permits extended period where duty is evaded by fraud, suppression, willful mis-statement, collusion, or contravention with intent to evade. Precedent treatment: Authorities (including Nizam Sugar Factory) establish that extended limitation cannot be invoked where the department already had knowledge of relevant facts or show cause notices did not allege deliberate suppression; mere failure to pay does not automatically import fraud or suppression. Interpretation and reasoning: Earlier show cause notices and departmental knowledge of transactions negated any claim of suppression; the show cause notices in the instant matter did not allege fraud, suppression or wilful mis-statement; the issue of taxability was subject to litigation and divergent views, supporting a bona fide belief. The Tribunal found that the adjudicating authority went beyond the scope of the show cause notice in invoking the proviso. Ratio vs. Obiter: Ratio - extended limitation cannot be invoked in absence of specific, pleaded and established suppression/fraud/collusion or where department had prior knowledge; Obiter - contextual remarks on bona fide litigation position. Conclusion: Invocation of extended period for the demand is unsustainable; limitation defence succeeds. ISSUE-WISE DETAILED ANALYSIS - 4. Penalties and Interest Legal framework: Interest under Section 75 and penalties under Sections 76-78 attach to confirmed tax liabilities and to cases involving misstatement/fraud as per statutory scheme. Precedent treatment: Penalties are contingent on sustaining liability or established mala fides; where tax demand fails on merits or extended period is wrongly invoked, corresponding penalties/interest cannot stand. Interpretation and reasoning: As tax demand and extended period findings were unsustainable, the factual and legal foundation for imposition of interest and penalties collapses. No culpable conduct (suppression/fraud) was established. Ratio vs. Obiter: Ratio - penalties and interest contingent on valid demand and proven culpability are impermissible where demand is set aside; Obiter - comments on government undertaking status and bona fide compliance. Conclusion: Interest and penalties imposed in the impugned order are unjustified and are set aside along with the demand. FINAL DISPOSITIONAL RATIO The Tribunal held that the scheme of the MOU, Catering Policy and the license/tender documents demonstrate that licences to operate and manage Food Plazas and similar units are commercial/business licences with operational obligations and revenue-sharing, not arrangements of renting immovable property; therefore the service tax demand, extended period invocation, interest and penalties are unsustainable and the impugned order is set aside.