2025 (6) TMI 519 - AT - Service Tax

Taxable service or revenue sharing arrangement - whether the appellant has provided the taxable service of renting of immovable property service in respect of the lands that the appellant has leased out to Shri. M. Palanisamy (lessee)? - demand of service tax made on the appellant along with applicable interest and penalties - invocation of extended period of limitation. HELD THAT - The appellant has leased 22.68 acres of vacant land owned by it to Shri. M. Palanisamy the lessee by way of a registered lease deed dated 11th February 2010 with the lease agreement being valid from 29.01.2010 for a period of five years and a yearly lease amount of Rs.22, 680/- to be paid at the beginning of every year. On 29.01.2010 itself the appellant enters into a separate notarized agreement in respect of the same 22.68 acres of vacant land owned by it evidencing the agreement that as there are some sources and assets in the above-mentioned property apart from the above mentioned yearly lease amount to the appellant Mr. Palanisamy assures that seventy five percent of the receipts will be paid to the appellant every month as additional lease amount. It is also pertinent that the said notarized agreement of 29.01.2010 also stipulates that that if Mr. M. Palanisamy wishes to extend the duration and validity of the lease it can be informed to the appellant and with the decision from the board of the appellant it can be extended. The quantification of the lease amount in terms of the receipts of the lessee and as seventy five percent of the receipts cannot and does not divest the said additional lease amount of its intrinsic character of rent when the said additional lease amount is paid by the lessee to the appellant. The agreement executed by the appellant along with the lessee Mr. Palanisamy and the District Collector Coimbatore is at the behest of the mandate of the Government and the title reflects the purpose of the agreement entered into namely as that for quarrying and carrying away minor minerals by Lessees which in this case is Mr. M. Palanisamy and which minerals in such ryotwari lands belong to the Government. This agreement too bears out the fact situation that the appellants are the registered holders of the land which the appellants have leased out to the lessee Mr. Palanisamy and it is to Mr. Palanisamy pursuant to his application to the collector of Coimbatore District seeking grant of quarrying lease for quarrying Rough Stone in the said lands that the said Collector on behalf of the Government has granted a quarrying lease to the lessee for the purpose applied for. The quantification of the lease amount in terms of the receipts of the lessee and as seventy five percent of the receipts cannot and does not divest the said additional lease amount of its intrinsic character of rent when the said additional lease amount is paid by the lessee to the appellant in terms of an agreement which characterizes the transaction between the parties not only as lease of land detailed therein but also stipulates further that if Mr. M. Palanisamy (the lessee) wishes to extend the duration and validity of the lease it can be informed to the appellant and with the decision from the board of the appellant it can be extended. Further all subsequent documents including the certificate for exemption from payment of TDS on rent reveal that the transaction has only been presented as renting of immovable property before statutory authorities such as Income Tax Authorities as well as State Authorities such as the District Collector of Coimbatore. Evidently it is such presentation of facts that has been reflected as such in the joint agreement entered into by the appellant the lessee and the District Collector wherein it is indicated that appellant is the owner and lessor of the land which is being leased out to the lessee Shri. M. Palanisamy. The contention of the appellant that it is a revenue sharing agreement has been shown to be without any basis. Further the contention of the appellant that liability is solely on the nomenclature and accounting treatment is incorrect - On a plain reading of the agreements nowhere is it forthcoming that the appellant and the lessee have understood the said agreements being entered into as contracts for mining and sale of minerals on a principal-to-principal basis. The agreements do not state that they are a contract for joint business enterprise of mining and selling of minerals. The appellant Trust has averred before the Collector Coimbatore that it is only the registered Holder of land and it is Shri. M. Palanisamy as the Lessee who has sought permission for quarrying rough stones. The agreement nowhere reflects that the appellant has a say in the management of mining operations by the lessee or in the administrative decision making related to day-to-day mining operations by the lessee when it carries out the mining activities. Thus as per Section 65B(44) Service means any activity carried out by a person for another for consideration and includes a declared service; Section 66E(a) stipulates renting of immovable property as a declared service; and Section 65B(41) renting means allowing permitting or granting access entry occupation use or any such facility wholly or partly in an immovable property with or without the transfer of possession or control of the said immovable property and includes letting leasing licensing or other similar arrangements in respect of immovable property. Thus the leasing of the vacant lands by the appellant to the lessee Mr. M. Palanisamy comes within the ambit of the definition of renting as defined in Section 65B(41). Since the term activity means something that a person does the leasing of vacant lands done by the appellant is an activity being carried out by the appellant - such activity of leasing of vacant lands by the appellant to Mr. Palanisamy for receipt of annual lease amount and additional lease amount qualifies as any activity carried out by a person for another for consideration and thus comes within the ambit of the definition of service. The vacant lands being immovable property such leasing of vacant lands by the appellant to Mr. Palanisamy fall more specifically under renting of immovable property and is thus a declared service under Section 66E(a). Further since the negative list of services given in Section 66D (d) (iv) in so far as renting is concerned lists only services relating to agriculture or agriculture produce by way of renting it is evident that the renting of immovable property carried out by the appellant in respect of the vacant lands leased out to Mr. M Palanisamy does not come under the negative list of services - the demand of service tax confirmed by the adjudicating authority in the impugned order in original is correct and tenable in law. Extended period of limitation - HELD THAT - The deliberate act of withholding the fact of receipt of additional lease amount is the positive act of suppression that the appellant has indulged in and such act coupled with the appellant s failure to declare the receipt of additional lease amount and pay the service tax due thereon while declaring only the remaining rent amount collected for the relevant period of the return and paying tax only to that limited extent is clearly tantamount to willful suppression and misstatement of facts with intent to evade payment of duty especially when such additional lease amount that the appellant has received runs into crores of rupees - thus the extended period of limitation has been rightly invoked in respect of the first show cause notice. Levy of penalty - HELD THAT - The indisputable fact is that the appellants are acquainted with the provisions of law relating to renting of immovable property being an assessee registered for providing precisely the said service and therefore cannot feign ignorance of law on this aspect. It is an indisputable fact that the agreements entered into indicate that the lessee has to pay additional lease amounts - there is no rationale rhyme or reason for the appellant not to declare such additional lease amounts as rent in the ST-3 returns and pay tax thereon. Thus neither was there any scope to consider the matter as an issue involving interpretation nor was there any scope to claim that there was a reasonable cause for not discharging the service tax dues on such additional lease amounts received by the appellant for such renting of vacant lands - This is not a fit case to invoke section 80 and extend the benefits thereof. The adjudicating authority noticing that the details of the transactions and that of the lease rent payments were available in the financial records have extended the benefit of reduced penalty of fifty percent of the service tax not paid as has been provided for in such circumstances under the first proviso to section 78 (1) of the Finance Act 1994 in respect of the penalty imposed with respect to the first show cause notice - As regards the second show cause notice the adjudicating authority has imposed a penalty under Section 76 of the Finance Act 1994 which stipulates that the penalty shall not exceed 50% of the service tax payable. It is also pertinent that this is not the case of invoking Section 78 and 76 simultaneously as there are two SCNs spanning two different periods and the separate penalties under Section 78 and Section 76 have been invoked for the different periods - The penalty imposed under Section 77(2) of the Finance Act is also commensurate with the violations found. Conclusion - The Department has discharged its onus and has brought home the charges as alleged. The appellant has provided the taxable service of renting of immovable property service in respect of the lands that the appellant has leased out to Shri. M. Palanisamy (lessee) and consequently the demand of service tax made on the appellant along with applicable interest and penalties as imposed are tenable in law. Appeal dismissed.

Summary

The core legal questions considered in this judgment are:

1. Whether the appellant provided taxable service under the category of "Renting of Immovable Property" as defined under Section 65B(44) and declared under Section 66E(a) of the Finance Act, 1994, in respect of leasing vacant lands to the lessee.

2. Whether the demand for service tax including interest and penalties imposed on the appellant for the period from 01.01.2013 to 31.03.2014 is tenable.

3. Whether the transaction between the appellant and the lessee constitutes a joint venture or revenue-sharing agreement exempt from service tax.

4. Whether the receipts characterized as "additional lease amounts" are consideration for service or part of a sale transaction liable to VAT.

5. Whether the extended period of limitation for demanding service tax is invokable in the facts of the case.

6. Whether penalties imposed under Sections 76, 77, and 78 of the Finance Act, 1994 are justified.

Issue-wise Detailed Analysis:

1. Taxability of Leasing Vacant Land as "Renting of Immovable Property" Service

The relevant legal framework includes Section 65B(44) defining "service" as any activity carried out by a person for another for consideration, including declared services; Section 65B(41) defining "renting" as allowing or granting access or use of immovable property; Section 66E(a) declaring renting of immovable property as a declared service; Section 66B imposing service tax on taxable services; and the negative list under Section 66D(d)(iv) excluding agricultural land leasing but not other immovable property leasing. Rule 5 of the Place of Provision of Services Rules, 2012, places the service location at the immovable property's location.

The appellant leased two parcels of vacant land (22.68 acres and 14.86 acres) to the lessee under registered lease deeds dated 11.02.2010 and 19.07.2010 respectively, for five years with annual lease rents of Rs.22,680 and Rs.14,860. Separate notarized agreements dated 29.01.2010 and 17.05.2010 stipulated payment of an additional lease amount equal to 75% of the lessee's receipts from quarrying activities.

A joint agreement involving the appellant, lessee, and District Collector recognized the appellant as registered landholder and the lessee as quarrying leaseholder authorized by the government for mining rough stone.

The Court interpreted these documents collectively, applying the principle that multiple documents forming part of a contract must be read together. It held that the appellant's activity of leasing vacant land to the lessee, for which the appellant received annual and additional lease payments, constituted an activity carried out for another for consideration. This activity falls squarely within the definition of renting immovable property and is a declared taxable service under the Finance Act.

The Court rejected the appellant's contention that the additional lease amount was not rent but a revenue share or sale proceeds, emphasizing that the agreements and accounting treatment by both parties characterized these receipts as rent. The appellant's own representation of these receipts as rent before income tax and state authorities, including obtaining TDS exemption certificates treating the payments as rent, corroborated this view.

The Court further noted that the negative list exemption for agricultural land leasing does not apply here, as the lands were vacant and used for mining, not agriculture. The appellant's claim of exemption under charitable activities was also dismissed as the leasing of land for mining did not fall within the definition of charitable activities under the Mega Exemption Notification No. 25/2012-ST.

2. Nature of Transaction: Joint Venture or Revenue Sharing Agreement

The appellant argued that the agreements constituted a joint venture or revenue-sharing arrangement, which is not taxable under service tax law, relying on the doctrine of mutuality and various Supreme Court and Tribunal decisions.

The Court analyzed the agreements and found no evidence of joint control, shared responsibility, profit and loss sharing, or a business enterprise undertaken jointly by the parties. The lessee bore the operational risks and responsibilities for mining, and the appellant was merely the lessor receiving rent. The agreements did not reflect a joint venture but a lease arrangement with additional rent linked to the lessee's receipts.

The Court distinguished the cited precedents on joint ventures as factually inapplicable, noting that those cases involved explicit joint business enterprises with shared risks and profits, unlike the present case where the appellant is a charitable trust not engaged in mining or business activities.

The Court also rejected the appellant's reliance on circulars and case laws relating to revenue sharing on a principal-to-principal basis, finding them irrelevant to the facts where the agreements and conduct of parties demonstrated a lease relationship.

3. Characterization of Receipts as Consideration for Service or Sale Transaction

The appellant contended that the payments received were proceeds from sale of minerals by the lessee and thus subject to VAT, not service tax. It argued that the entire receipts were turnover liable to VAT and that VAT and service tax are mutually exclusive.

The Court clarified that two separate transactions existed: (a) the leasing of land by the appellant to the lessee, and (b) the mining and sale of minerals by the lessee. The service tax demand related only to the first transaction of leasing land, which is a taxable service. The mining and sale activities by the lessee were outside the scope of the show cause notices and not subject to service tax in this proceeding.

The Court held that the appellant's attempt to conflate the two transactions to avoid service tax liability was specious and without merit. The VAT liability of the lessee on mineral sales did not exempt the appellant from service tax on its leasing activity.

4. Extended Period of Limitation

The appellant challenged the invocation of extended limitation period, contending no suppression or intent to evade tax existed, and that the issue involved statutory interpretation with judicial precedents.

The Court found that the appellant was registered for renting of immovable property service and had been paying service tax on other properties but had deliberately withheld information regarding leasing of vacant lands and receipt of additional lease amounts from the lessee. The appellant failed to disclose these facts in ST-3 returns despite characterizing the receipts as rent in other statutory filings.

The Court held that such withholding amounted to willful suppression of facts with intent to evade tax, justifying invocation of the extended period under Section 73(1) read with Section 73(2) of the Finance Act. The detailed investigation and documents obtained from the lessee and appellant further supported this conclusion.

5. Penalty Imposition

The appellant claimed bona fide belief that no service tax was payable and sought benefit under Section 80 of the Finance Act, arguing that the issue involved interpretation of law.

The Court rejected this plea, observing that bona fide belief must be reasonable and based on prudent grounds. The appellant's arguments regarding joint venture and manufacturing were found to be baseless and contrary to the agreements and conduct.

Since the appellant was a registered service tax assessee for renting immovable property and had deliberately suppressed facts regarding additional lease amounts, no reasonable cause existed for non-payment of service tax. The Court upheld penalties imposed under Sections 76, 77, and 78 of the Finance Act as within prescribed limits and justified by the facts.

6. Accounting Treatment and Nomenclature

The appellant argued that tax liability cannot be imposed solely based on nomenclature or accounting treatment of receipts as "additional lease amounts."

The Court held that the character of the transaction must be determined from the substance and terms of the agreements and conduct of parties. Here, the agreements expressly termed the payments as lease rent, and both parties accounted for them as rent in statutory filings. The appellant could not approbate and reprobate by treating the same transaction differently before different authorities to avoid tax liability.

Significant Holdings:

"The quantification of the lease amount in terms of the receipts of the lessee, and as seventy five percent of the receipts, cannot and does not divest the said additional lease amount of its intrinsic character of rent, when the said additional lease amount is paid by the lessee to the appellant."

"The leasing of the vacant lands by the appellant to the lessee Mr. M. Palanisamy, comes within the ambit of the definition of 'renting' as defined in Section 65B(41). Since the appellant is leasing the vacant lands to Mr. Palanisamy, it becomes an activity by the appellant for another person... and the amounts so received are the consideration received by the appellant for such activity of leasing of vacant lands. Therefore, such activity qualifies as a declared service under Section 66E(a)."

"The agreements nowhere reflect that it is intended as a revenue sharing agreement or joint venture. There is complete absence of mention of any shared responsibilities and risks, rather it is the lessee who has been saddled with the entire risks associated with the quarrying activities."

"The appellant has deliberately suppressed the fact of receipt of additional lease amount and has failed to declare the same in ST-3 returns despite being registered for the service of renting of immovable property. Such act coupled with failure to pay service tax is clearly tantamount to willful suppression with intent to evade payment of duty."

"The appellant cannot approbate and reprobate on the same transaction by representing the receipts as rent before income tax and state authorities while denying its character for service tax purposes."

"The extended period of limitation has been rightly invoked and penalties imposed are within limits and justified."

The Tribunal upheld the demand of service tax on the appellant for leasing vacant lands to the lessee under the category of renting of immovable property service, including the additional lease amounts characterized as rent. It rejected the appellant's contentions that the transaction was a joint venture, revenue sharing, or sale transaction liable only to VAT. The invocation of extended limitation period and imposition of penalties were also affirmed. The appeals were dismissed in entirety as devoid of merits.