2025 (7) TMI 212 - AT - Service Tax

Levy of service tax on or after 1.7.2010 - Renting of Immovable Property Service - upfront fee received by the appellant from various customers under the Concession Agreements entered prior to 1.7.2010 - Levy of penalty u/s 78 of FA - HELD THAT - There are no doubt that the contention raised by the appellant that the definition of Renting of Immovable Property under Section 65(90a) of the Act only includes leasing and not an agreement to lease and since a premium is received by the appellant for entering into agreement to lease this amount would not be exigible to service tax stands answered by the Larger Bench in Rajasthan State Industrial Development Investment Corpn. Ltd. 2025 (2) TMI 211 - CESTAT NEW DELHI - LB and the same needs to be followed where The Bench noted that the term lease has not been defined in the Finance Act and hence reliance was placed on the provisions of Sectiond 105 of the Transfer of Property Act 1882 which defined lease . It was observed that the definition of Renting of Immovable Property includes leasing which under Section 105 of TPA includes both premium and periodical rent and therefore one time premium amount received by the lessor from the lessee for transfer of interest in the property would be leviable to service tax under Section 65(105)(zzzz) of the Act. There are no doubt that the contention raised by the appellant that the definition of Renting of Immovable Property under Section 65(90a) of the Act only includes leasing and not an agreement to lease and since a premium is received by the appellant for entering into agreement to lease this amount would not be exigible to service tax stands answered by the Larger Bench and the same needs to be followed. Imposition of equivalent amount of penalty under Section 78 of the Act on the ground that the impugned order does not even allege that the appellant has not paid service tax by reason of fraud or collusion or willful mis-statement or suppression of facts or contravention of any of the provisions of this Chapter or of the Rules made thereunder with intent to evade payment of service tax - HELD THAT - The Tribunal in the case of Greater Noida Industrial Development Authority Vs. Commissioner of Central Excise and Service Tax 2014 (9) TMI 306 - CESTAT NEW DELHI dealt with the similar issue and decided that service tax would be leviable only on the element of rent and not on the value of premium or salami . At the same time it was held that it is a fit case where by invoking Section 80 of the Act penalties under Section 76, 77 and 78 have to be waived if the assessee proves that there was reasonable cause for the said failure and the appellant being an organization functioning under the Government of Uttar Pradesh and the obvious reason for non-payment of service tax is their bonafide belief that the activity rendered by them would not attract service tax therefore set aside the penalties imposed under Section 78 by the impugned order. Following the said decision the equivalent penalty imposed under Section 78 of the Act is unsustainable and is hereby set aside. On merits the impugned order is affirmed the same being in consonance with the decision of the Larger Bench however on the issue of penalty the same is set aside to the extent referred above. The impugned order is accordingly modified. The appeal stands allowed partly.

Summary

The primary legal question considered by the Tribunal was whether the "upfront fee" or "one time premium" received by the appellant under Concession Agreements executed prior to 1.7.2010 is subject to service tax under the category of "Renting of Immovable Property Service" as defined under the Finance Act, 1994, particularly in light of amendments effective from 1.7.2010.

Related issues included the applicability of service tax retrospectively on such upfront fees, the interpretation of "renting of immovable property" and "lease" under the Finance Act vis-`a-vis the Transfer of Property Act, 1882, and the validity of imposing penalty under Section 78 of the Finance Act where no fraud or willful suppression was alleged.

Regarding the core issue of taxability of the upfront fee, the Tribunal relied heavily on the Larger Bench decision in the Rajasthan State Industrial Development & Investment Corporation Ltd. case. The Larger Bench examined whether a "premium" or "salami" received for granting leasehold rights falls within the ambit of "renting of immovable property" under Section 65(90a) of the Finance Act. Since "lease" is not defined in the Finance Act, the Larger Bench referred to Section 105 of the Transfer of Property Act, 1882, which defines "lease" to include both a one-time premium and periodic rent.

The Larger Bench held that the "premium" paid by the lessee to the lessor, even if paid prior to the execution of the lease deed, constitutes consideration for leasing and is exigible to service tax. The Tribunal quoted the Larger Bench's observation: "premium is a consideration paid for being let into possession prior to the creation of the tenancy so as to enable the person to enjoy the benefits so granted... the premium paid by the lessee to the lessor would also be exigible to service tax."

The appellant's argument that the upfront fee was consideration for an "agreement to lease" rather than an actual lease, and hence not taxable, was rejected on the basis that the Larger Bench had explicitly addressed and negated this distinction. The Tribunal emphasized that the definition of "renting of immovable property" includes leasing or similar arrangements for use in business or commerce, thereby covering upfront fees received for grant of leasehold rights.

Further, the Tribunal examined post-1.7.2012 provisions, including Section 65B(44) (Negative List) and Section 66E (Declared Services), which include renting of immovable property. The contention that "renting of immovable property" was excluded from service tax liability under these provisions was dismissed, reinforcing that premium or upfront fees remain taxable.

On the question of retrospective levy, the Tribunal held that service tax on upfront fees received prior to 1.7.2010 could not be levied retrospectively. However, for amounts received on or after 1.7.2010, the taxability stands affirmed in line with the statutory amendments and judicial interpretations.

Regarding the imposition of penalty under Section 78 of the Finance Act, the appellant contended that no allegation of fraud, collusion, willful misstatement, or suppression of facts was made. The appellant, being a Public Sector Undertaking, had a bona fide belief that the upfront fees were not subject to service tax. The Tribunal agreed with this submission, relying on precedents where penalties were waived in cases of reasonable cause and bona fide belief, especially involving government entities.

The Tribunal cited decisions where penalties under Sections 76, 77, and 78 were set aside due to the absence of mala fide intent and the presence of genuine dispute over tax liability. It held that the equivalent penalty imposed under Section 78 was unsustainable and accordingly set it aside.

In conclusion, the Tribunal affirmed the demand of service tax on the upfront fees received by the appellant under the "Renting of Immovable Property Service" category, following the Larger Bench ruling that such premiums constitute consideration for leasing and are taxable. However, the penalty imposed under Section 78 was quashed due to the appellant's bona fide belief and absence of fraudulent intent.

Key legal principles established include:

• The definition of "lease" under Section 105 of the Transfer of Property Act includes both one-time premium and periodic rent, both of which fall within "renting of immovable property" under the Finance Act.
• Service tax is exigible on upfront fees or premiums received for grant of leasehold rights, including those received prior to lease execution.
• Retrospective levy of service tax on upfront fees received before 1.7.2010 is not permissible; taxability applies prospectively from the date of amendment.
• Penalties under Section 78 require proof of fraud, collusion, willful misstatement, or suppression of facts; absent such elements and in cases of bona fide belief, penalties may be waived.

The Tribunal's final determination was to partly allow the appeal by modifying the impugned order to uphold the service tax demand but set aside the penalty imposed under Section 78. This balanced approach upheld the revenue's claim while protecting the appellant from punitive measures in the absence of malafide conduct.