2025 (7) TMI 412 - AT - Service Tax

Application for rectification of mistake - error apparent on the face of record - levy of service tax on the property rented to be a hostel - exclusion clause of the definition was not considered in the Final Order - HELD THAT - By virtue of the exclusion part in Explanation 1 to section 65(105) (zzzz) services provided in relation to renting of buildings used for residential purposes including hostels and hotels were specifically excluded from the definition of taxable service under section 65(105)(zzzz). This Explanation was not considered in the Final Order and hence the demand of service tax on the property rented to be used as hostel was upheld. This mistake that is apparent on record needs to be rectified. The final order is modified - The Miscellaneous Application filed for rectification of mistake is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this judgment are:

- Whether the demand of service tax on renting of immovable property used for running a hostel is sustainable under section 65(105)(zzzz) of the Finance Act, 1994.

- Whether the exclusion clause in the definition of taxable service under section 65(105)(zzzz) exempting renting of immovable property used as residential accommodation including hostels and hotels was properly considered in the earlier Final Order.

- Whether the Final Order dated 08.04.2024 requires rectification to correct the mistake apparent on record regarding the above exclusion.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Taxability of Renting of Immovable Property Used for Running a Hostel under Section 65(105)(zzzz) of the Finance Act, 1994

Relevant Legal Framework and Precedents:

Section 65(105)(zzzz) of the Finance Act, 1994 defines "taxable service" to include services provided by renting of immovable property or any other service in relation to such renting for use in the course of or for furtherance of business or commerce. The section includes detailed explanations that clarify the scope of "immovable property" and explicitly exclude certain categories from taxable services. Notably, Explanation 1(d) excludes buildings used solely for residential purposes and buildings used for accommodation including hotels, hostels, boarding houses, holiday accommodation, tents, and camping facilities from the definition of taxable service under this clause.

Court's Interpretation and Reasoning:

The Tribunal initially in the Final Order dated 08.04.2024 had upheld the demand of service tax on the appellant's property rented for running a hostel, reasoning that renting of the property for running a hostel constitutes a commercial activity and is therefore taxable under section 65(105)(zzzz). The Tribunal observed that the appellant had rented the property to run a hostel and not merely for residential stay, which was considered a commercial use.

However, upon review in the rectification application, the Tribunal acknowledged that the exclusion clause in Explanation 1(d) of section 65(105)(zzzz) specifically excludes renting of immovable property used for accommodation purposes such as hostels from taxable services. This exclusion was not considered in the earlier Final Order, which led to an apparent error requiring rectification.

Key Evidence and Findings:

The appellant's own admission that the property was rented to run a hostel was undisputed. The Revenue's representative conceded the existence of the exclusion clause for properties rented as hostels. The Tribunal examined the statutory language of section 65(105)(zzzz), including the detailed explanations, and found that the exclusion is explicit and unambiguous.

Application of Law to Facts:

Given that the rented property was used for running a hostel, which falls under the category of accommodation excluded from taxable services under Explanation 1(d), the demand for service tax on such renting was not sustainable. The Tribunal applied the statutory exclusion to set aside the demand of Rs. 8,33,522/- on this ground.

Treatment of Competing Arguments:

The earlier reasoning emphasized the commercial nature of running a hostel, suggesting it should be taxable. However, the Tribunal gave precedence to the specific statutory exclusion over the general commercial activity argument, holding that the legislative intent was to exempt such accommodation services from service tax under this clause.

Conclusions:

The Tribunal concluded that the demand of service tax on renting of immovable property for running a hostel was erroneously upheld and must be set aside in light of the exclusion clause in section 65(105)(zzzz).

Issue: Rectification of Mistake in the Final Order dated 08.04.2024

Relevant Legal Framework:

The rectification of orders by appellate authorities is permissible to correct mistakes apparent on the face of the record that affect the correctness of the order. This includes errors arising from oversight of relevant statutory provisions.

Court's Interpretation and Reasoning:

The Tribunal found that the failure to consider the exclusion clause in Explanation 1(d) of section 65(105)(zzzz) constituted a mistake apparent on record. The omission led to an incorrect confirmation of demand which was contrary to the statutory framework.

Key Evidence and Findings:

The statutory provision itself and the submissions of both parties confirmed the existence of the exclusion. The Tribunal relied on the statutory text rather than extraneous evidence.

Application of Law to Facts:

The Tribunal exercised its power to rectify the Final Order by substituting paragraph 10 with a corrected analysis reflecting the exclusion, and consequentially amended paragraph 14 to set aside the demand of Rs. 8,33,522/- along with interest and proportionate penalty.

Treatment of Competing Arguments:

The Revenue's acceptance of the exclusion clause facilitated the rectification. The Tribunal did not find any justification to maintain the demand in face of the clear statutory exclusion.

Conclusions:

The rectification application was allowed, and the Final Order was modified accordingly to correct the mistake.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Renting of immovable property was chargeable to service tax under section 65 (105) (zzzz) of the Finance Act during the relevant period, except where such renting of property was for residential purposes. According to the appellant itself, it had rented its property to run a hostel and it had not rented it to somebody to stay. What is taxable under section 65 (105) (zzzz) of the Finance Act is a service rendered by any person by renting of immovable property or any other service in relation to such renting for use in the course of or for furtherance of business or commerce. However, renting of the property for running a hostel is specifically excluded from the definition of taxable service of renting of immovable property under section 65 (105) (zzzz) of the Finance Act. The demand of Rs. 8,33,522/-, therefore, needs to be set aside and we do so."

Core principles established include:

• The explicit exclusion in Explanation 1(d) to section 65(105)(zzzz) exempts renting of immovable property used for residential accommodation including hostels from service tax liability.
• The commercial nature of the activity (running a hostel) does not override the statutory exclusion for residential accommodation.
• Appellate authorities have the power to rectify mistakes apparent on record, including failure to consider relevant statutory exclusions, by modifying earlier orders accordingly.

Final determinations on each issue:

• The demand of service tax on renting of immovable property used for running a hostel under section 65(105)(zzzz) is not sustainable and is set aside.
• The Final Order dated 08.04.2024 is rectified to reflect the statutory exclusion and to set aside the related demand, interest, and proportionate penalty.