2026 (1) TMI 390 - AT - Service Tax

MoU funding for sugar mill modernization and power/bagasse benefits held not taxable as 'renting'; service tax demand set aside

Service tax was demanded under 'Renting of Immovable Property' on a sum received under an MoU for modernization/upgradation of a sugar mill. The Tribunal ... Levy of service tax on amount received in terms of MoU for Modernization and upgradation of Sugar Mills - Renting of Immovable Property service - reliability on Circular No.151/2/2012-ST - HELD THAT:- It is found that as per the MoU entered into between the appellant and M/s SIL, the amount of Rs. 2 crores was paid by the M/s SIL to the appellant, which is not a consideration for provision of any service much of leasing of 2 acre land but for upgradation of machinery and plant out of which M/s SIL was to drive compensatory benefits by way of sparing of more quantity of electric energy which was to be sold by M/s SIL and getting bagasse for use by M/s SIL. It is also found that in the present case, no service can be said to have been provided as the project never took-off and the appellant has initiated arbitration proceedings against M/s SIL for violation of the MOU; at the most, the arrangement between the appellants and SIL was in the nature of a joint venture and therefore, there is no component of service between the two parties. In the case of M/s Fazilka Corporative Sugar Mills Ltd. [2024 (3) TMI 1231 - CESTAT CHANDIGARH], the Department sought to demand service tax under the category of business support service which was also rejected by the Tribunal - It is also found that the arrangement between the appellant and M/s SIL was in the nature of a joint venture and therefore, there is no component of service between the parties. The demand of service tax under the category of “Renting of Immovable Property” under Section 65(105)(zzzz) on the amount received in terms of MoU for modernization and upgradation of sugar mills is not sustainable in law - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the amount received under the MoU (including interest) constituted consideration for 'Renting of Immovable Property' so as to attract service tax under Section 65(105)(zzzz) on 'renting of immovable property'. (ii) Whether, on the facts found, any taxable service could be said to have been provided at all, particularly where the contemplated project did not materialise and the arrangement was characterised as a joint venture. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Taxability of amounts received under the MoU as consideration for 'Renting of Immovable Property' Legal framework (as discussed): The demand was raised under Section 65(105)(zzzz) on the premise that the receipts under the MoU were consideration for 'renting of immovable property'. The Department's basis included reliance on a circular referred to in the record; however, the Court's determination turned on the nature of the payment under the MoU and the related agreements. Interpretation and reasoning: The Court examined the MoU and found that the sum of Rs. 2 crores (and the interest component) was paid as an advance for upgradation/modernisation of the sugar mill machinery and plant, aimed at increasing capacity and improving energy efficiency. It was not paid as consideration for leasing/renting of land. The Court noted that a separate lease deed existed which stipulated only a nominal annual rent for the land, reinforcing that the MoU-linked amount was not rent for immovable property. Conclusion: The Court conclusively held that the MoU amount (and related interest) did not constitute consideration for 'renting of immovable property', and therefore the service tax demand under that category was not sustainable in law. Issue (ii): Existence of a taxable service where the project did not take-off and the arrangement was in the nature of a joint venture Legal framework (as discussed): The Court assessed whether any 'service' was provided between the parties in substance, given the character of the arrangement and the factual finding that the contemplated project never commenced. Interpretation and reasoning: The Court found that no service could be said to have been provided because the project 'never took-off' and the appellant had initiated arbitration for violation of the MoU. Additionally, the Court treated the arrangement, at the highest, as being in the nature of a joint venture, and on that basis concluded that there was no component of service between the two parties for service tax purposes. Conclusion: The Court held that, on the facts found, the arrangement did not yield a taxable service; this supported setting aside the demand. Final determination and relief The Court set aside the demand raised under 'Renting of Immovable Property' on merits and allowed the appeal with consequential relief as per law. Since the appeal succeeded on merits, the Court did not examine limitation.