2025 (6) TMI 122 - AT - Service Tax

Taxability of services - nature of the activity - activity of renting of immovable property - Whether the components of conversion charges i.e. interest and depreciation paid by BIL under a job work agreement can be treated towards taxable service under the category of renting of immovable property under the provisions of the Finance Act 1994 - applicability of negative list of services - extended period of limitation - HELD THAT - It is a settled principle of law that the terms of the written contract cannot be varied and cannot be interpreted contrary to the express provisions made in the contract. Following the principle reiterated by the Supreme Court in a recent decision in Haryana Power Purchase Centre 2023 (4) TMI 1425 - SUPREME COURT that where a case is governed by the express terms of the contract it is not open to go beyond those express terms/disregard the terms of the contract we are of the view that as per the terms of the agreement the appellant and BIL never contemplated the agreement to be for an activity of renting of immovable property. The basic ingredient of an activity to be taxed under service tax is that the activity should be for a consideration as an element of contractual relationship wherein the person doing an activity for a consideration does so on the desire of the person. Therefore in order to levy service tax the payment should be attributable to a particular service. In this context we would like to refer the observations of the Larger Bench of the Tribunal in Kafila Hospitality and Travels Pvt. Ltd. Vs. Commissioner of ST 2021 (3) TMI 773 - CESTAT NEW DELHI (LB) that consideration which is taxable under Section 67 of the Act should be transaction specific. The concept activity for a consideration involves an element of contractual relationship. An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an activity for consideration even though such an activity may lead to accrual of gains to the person carrying out the activity. We therefore hold that the conversion charges in the form of interest and depreciation does not qualify as a consideration for renting. The appellant is not a service provider and has not provided any type of service to BIL in the nature of renting of immovable property. In view of our discussion that the agreement is solely and exclusively for the purpose of manufacturing of goods by the appellant we have no hesitation in accepting the said argument of the appellant based on section 66D(f) read with the Exemption Notification No. 25/2012 ST dated 20.06.2012 as amended vide Notification No. 7/2017 dated 2.02.2017 whereby the services of any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption continues to be exempt from payment of service tax. While confirming the demand of show cause notice under the impugned order the Adjudicating Authority has not considered the actual nature of the activity to be performed by the appellant. In Reliance Infratel Ltd. versus Commissioner of Central Excise 2015 (11) TMI 106 - CESTAT MUMBAI the Tribunal in the context of lease rent equalisation considered the issue whether such an entry is a payment or consideration for the service provided by the appellants therein and observed that the amount shown in the balance sheet is not an income for the purpose of computing tax under the Income Tax Act and it is also not a payment actually received or receivable and therefore is neither consideration nor the gross amount charged in terms of clauses (a) and (c) of the explanation to Section 67 of the Act and is therefore not liable to pay service tax on the amount of lease rent equalisation shown in the balance sheet. Following the dictum laid down in the aforesaid decisions we therefore hold that the revenue cannot rely on the entries made in the balance sheet to raise a demand of service tax by attributing the amount received as conversion charges (interest and depreciation) to be towards rental income without proving that the parties had entered into renting of immovable property. The activity under the contract is essentially towards the activity of manufacturing packaging etc. Since we have decided the issue on merits in favour of the appellant it is not necessary to go into the alternate arguments raised that the arrangement between the parties is a bundled service where manufacturing is the essential character or on the invocation of the extended period and imposition of penalty. Thus it is clear that the amount received towards the component of interest and depreciation is not for any service rather the actual nature of receipt of the said amount is on account of the manufacturing activity which the appellant has carried out on job work basis for BIL. We therefore set aside the impugned order. The appeals are accordingly allowed.

Summary

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

1. Whether the components of "conversion charges" specifically the "interest" and "depreciation" elements paid by the appellant under a job work agreement can be classified as consideration for the declared service of "renting of immovable property" under Section 66B(41) of the Finance Act, 1994.

2. Whether the appellant's activity under the agreement is essentially manufacturing and hence covered under the negative list of services under Section 66D(f) of the Finance Act, exempting it from service tax.

3. Whether the accounting treatment of the said components as "rental income" pursuant to Indian Accounting Standard (Ind-AS 17) can determine the taxability of the transaction as renting of immovable property service.

4. Whether the extended period of limitation and penalty imposed by the authorities are sustainable in the facts of the case.

5. The alternative plea of the appellant that the arrangement is a bundled service with manufacturing being the essential character, thus not liable to service tax on renting component.

Issue-wise Detailed Analysis

Issue 1: Taxability of "interest" and "depreciation" components of conversion charges as "renting of immovable property" service

Legal framework and precedents: The Finance Act, 1994, defines "service" under Section 65B(44) as any activity carried out for another for consideration, including declared services under Section 66E. "Renting of immovable property" is a declared service under Section 66E(a). The definition under Section 65B(41) includes allowing, permitting or granting access, entry, occupation, use or any such facility in immovable property, with or without transfer of possession or control.

Court's interpretation and reasoning: The Tribunal examined the "Job Work Agreement" between the appellant and BIL, noting that the appellant is the sole legal and beneficial owner of the factory premises, including plant and machinery. The agreement's primary purpose is manufacturing, packaging, and delivery of biscuits on job work basis using materials supplied by BIL. Clauses 4.2 and 6.1 were scrutinized. Clause 4.2 mandates the appellant to use the factory exclusively for BIL's products, but does not grant BIL any right to use or occupy the premises. Clause 6.1 permits BIL limited rights of entry and inspection for quality control, which are standard commercial practices and do not amount to granting possession or control.

The Tribunal held that the agreement does not evidence any lease or rental arrangement, nor does it transfer any right to use the immovable property to BIL. The mere exclusive use of the factory by the appellant for BIL's manufacturing does not equate to renting of immovable property. The absence of fundamental lease terms such as commencement and expiry dates further negates the existence of a lease. The Tribunal relied on the principle that the express terms of the contract govern the relationship and cannot be overridden by extraneous interpretations.

Key evidence and findings: The contract's express terms, the defined role of the appellant as contract manufacturer, ownership of the factory, and the nature of the rights granted to BIL (inspection only) were pivotal. The Tribunal emphasized that no separate agreement or clause provides for renting or leasing of the factory premises.

Application of law to facts: The Tribunal applied the statutory definition of renting and the contractual provisions, concluding that the appellant did not provide renting of immovable property service and thus the "interest" and "depreciation" components cannot be treated as consideration for such service.

Treatment of competing arguments: The Revenue's argument that BIL had de facto exclusive rights and inspection rights amount to renting was rejected as an overreach and misinterpretation of the contract. The appellant's argument that the activity is manufacturing and not renting was accepted.

Conclusion: The components of conversion charges labeled as interest and depreciation do not qualify as consideration for renting of immovable property service.

Issue 2: Applicability of Negative List under Section 66D(f) to the appellant's activity

Legal framework: Section 66D(f) exempts from service tax "services by way of carrying out any process amounting to manufacture or production of goods." Notification No. 25/2012-ST (as amended) exempts such services except alcoholic liquor for human consumption.

Court's reasoning: Since the agreement exclusively contemplates manufacturing, packaging, and delivery of biscuits on job work basis, the Tribunal held the appellant's activity squarely falls within the negative list exemption. The manufacturing process is the essence of the appellant's service, and no separate taxable service of renting exists.

Conclusion: The appellant's activity is exempt from service tax under Section 66D(f) read with the exemption notifications.

Issue 3: Effect of accounting treatment (Ind-AS 17) on taxability

Legal framework and precedents: Ind-AS 17 provides guidance on lease accounting, requiring recognition of arrangements conveying right to use an asset as leases. However, accounting standards are for financial reporting and do not determine the legal nature of transactions for tax purposes.

Court's interpretation: The Tribunal accepted the appellant's submission that the classification of interest and depreciation as "rental income" in financial statements from 2015-16 onwards was due to Ind-AS 17 compliance and does not transform the nature of the transaction into renting. It emphasized that the substance of the transaction, not the accounting nomenclature, governs taxability.

Key evidence: Transition from GAAP to Ind-AS 17, the appellant's consistent disclosure of conversion charges, and the absence of any lease agreement.

Application of law: The Tribunal held that accounting entries alone cannot create a taxable service where none exists. It relied on precedents where balance sheet entries were held insufficient to establish service tax liability without corroborative evidence.

Competing arguments: Revenue's reliance on Ind-AS 17 to assert lease existence was rejected as the legal definition of lease under the Act and Transfer of Property Act is distinct and more stringent.

Conclusion: Accounting treatment as rental income does not establish a taxable renting service.

Issue 4: Invocation of extended period of limitation and penalty

The Tribunal did not adjudicate this issue in detail as it decided the appeal on merits in favor of the appellant, rendering these points moot.

Issue 5: Bundled service plea

The Tribunal found it unnecessary to decide on the alternative plea that the arrangement is a bundled service with manufacturing as the essential character since the main issue was resolved in favor of the appellant.

Significant Holdings

"The terms of the contract are plain and simple with the sole objective of authorising the appellant to manufacture biscuits on job work basis for BIL... This is not a case where the appellant has entered into any contract or even an understanding with BIL to let out the factory premises on rent."

"Merely because the premises are being used for manufacturing the product exclusively for BIL and BIL has the right to inspect the premises does not imply that the premises itself have been let out to them on rental basis."

"Just because the component of conversion charges, i.e., interest and depreciation are shown under the head 'rental income' in the books of accounts, it cannot be said that same is towards renting of immovable property and is, therefore, exigible to service tax."

"The objective of the accounting standard is to ensure accurate disclosures in accounting principles and it cannot be utilised for classifying it as a transaction of lease for the purpose of taxation."

"Consideration which is taxable under Section 67 of the Act should be transaction specific... An activity done without such a relationship, i.e. without the express or implied contractual reciprocity of a consideration would not be an activity for consideration."

"The appellant is not a service provider and has not provided any type of service to BIL in the nature of renting of immovable property."

"The appellant's activity is covered under the negative list of services under Section 66D(f) read with exemption notifications and is exempt from service tax."

"Accounting entries made in the balance sheet cannot be used to raise a demand of service tax by attributing the amount received as 'conversion charges' (interest and depreciation) to be towards rental income without proving that the parties had entered into renting of immovable property."

Accordingly, the Tribunal set aside the impugned orders and allowed the appeals.