Joint venture payment for industrial modernisation is not rent-based consideration and falls outside service tax.

A payment made under a memorandum of understanding for upgradation and modernisation of a sugar mill was held not to be consideration for renting of immovable property, because the separate lease deed covered only nominal rent for the land and the disputed amount was linked to machinery improvement, capacity enhancement and energy efficiency. The arrangement was treated as a joint venture that never materialised into a service transaction, so no service element was found between the parties. On these facts, service tax under renting of immovable property was unsustainable and the departmental circular was inapplicable.

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Issues: Whether the amount of Rs. 2 crores paid under the memorandum of understanding was taxable as consideration for renting of immovable property, and whether the arrangement involved any service element.

Analysis: The amount was found to have been paid for upgradation and modernization of the sugar mill, including improvement of machinery, capacity and energy efficiency, and not as consideration for leasing the land. The separate lease deed provided only a nominal rent for the land, which supported the conclusion that the disputed amount was not linked to renting of immovable property. The project never took off, and the arrangement was treated as being in the nature of a joint venture, in which there was no component of service between the parties. The departmental reliance on the circular was held to be inapplicable on these facts.

Conclusion: The demand of service tax under the category of renting of immovable property was unsustainable and was set aside in favour of the assessee.

Ratio Decidendi: A payment made for modernization and upgradation of industrial assets, where the substance of the arrangement is a joint venture and not a service transaction, cannot be taxed as consideration for renting of immovable property.

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