2026 (3) TMI 199 - AT - Service Tax

Accommodation exclusion in renting of immovable property: integral hotel facilities do not trigger the deeming rule, exclusion upheld.

The question concerns whether premises leased as a hotel, including on-site restaurant, banquet hall, conference hall, bar and health club, fall within ... Building leased out for use as a hotel - Renting of Immovable Property Service for furtherance of business or commerce - Explanation 2 to Section 65(105)(zzzz) deeming partial business use - Whether the building leased out for use as a hotel with other facilities like a restaurant, banquet hall, conference hall, bar and health club, qualifies for the specific exclusion/exemption provided under Section 65(105)(zzzz) in respect of buildings used as hotels. Renting of immovable property exclusion for buildings used for accommodation - Explanation 2 to Section 65(105)(zzzz) deeming partial business use - HELD THAT: - The Tribunal held that the leased premises, although containing facilities such as restaurant, banquet hall, conference hall, bar and health club, constitute a hotel where such facilities are integral and incidental to the activity of running the hotel rather than separate, independent commercial deployments. There is no material showing of bifurcation of use of the premises or that those facilities operated so as to convert portions of the property into distinct commercial establishments; consequently Explanation 2 (which deems an immovable property partly used for business to be used for business) is not attracted. The Tribunal applied the plain-text exclusion for buildings used for accommodation under the definition in Section 65(105)(zzzz) and followed the reasoning of the Coordinate Bench in GRAND ROYALE ENTERPRISES [2018 (10) TMI 656 - CESTAT CHENNAI], which addressed the same question and was affirmed by the Supreme Court [2022 (9) TMI 273 - SC ORDER]. On these grounds the impugned demand and consequential findings were held unsustainable. [Paras 6, 7, 8, 9] The premises qualify as a building used for accommodation (hotel) and are excluded from the taxable service; Explanation 2 is not attracted and the impugned orders are set aside with consequential relief as per law. Final Conclusion: The Tribunal set aside the impugned orders holding that the leased premises qualify for the exclusion as buildings used for accommodation and that Explanation 2 does not render the property taxable; consequential relief is granted to the appellant. Issues: Whether a building leased out for use as a hotel, which includes facilities such as restaurant, banquet hall, conference hall, bar and health club, falls within the exclusion from taxable 'renting of immovable property' under Section 65(105)(zzzz) of the Finance Act, 1994, notwithstanding Explanation 2 to that provision.Analysis: The exclusionary language of Section 65(105)(zzzz) exempts buildings used for accommodation, including hotels. Clause (90a) of Section 65 defines 'renting of immovable property' with inclusionary and exclusionary elements and explanatory clauses. Facilities such as restaurant, banquet hall, conference hall, bar and health club, when functioning as part of hotel operations, are integral and incidental to accommodation services rather than constituting independent commercial deployment of the premises. Explanation 2, which deems an immovable property partly used for business to be for business, does not apply where the additional facilities are integral to the hotel use and do not demonstrate a bifurcation of the premises into distinct commercial activities.Conclusion: The leased premises qualify as a building used by a hotel and therefore fall within the specific exclusion in Section 65(105)(zzzz) of the Finance Act, 1994; the impugned service tax demand is unsustainable and is set aside in favour of the assessee.