TMI BlogTAXABILITY OF UP FRONT LEASE PREMIUMX X X X Extracts X X X X X X X X Extracts X X X X ..... TAXABILITY OF UP FRONT LEASE PREMIUM - By: - Dr. Sanjiv Agarwal - Goods and Services Tax - GST - Dated:- 24-3-2018 - - Leasing out the immovable property by the assessee was a taxable service under the category of Renting of Immovable Property under Section 65(105)(zzzz) of the Finance Act, 1994 , as amended with effect from 01-07-2010. The CBEC vide DO F. No. 334/1/2010-TRU dated 26-02-2010 had clarified that it has been reported in many states, the local industrial corporation of PSUs or even private organization rent vacant land on a long terms leases with an explicit understanding that lessee would construct factory or commercial building on that land. In such cases, the ownership of the land is not transferred to the less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and thus it is a service provided by the lessor to the lessee. The situation is similar to renting out a constructed structure for commercial purposes except that at the time of executing the lease agreement the land is in a vacant state and that later the lessee constructs commercial structure thereon after executing the lease deed. Such lease agreements escape Service Tax because of the exclusion mentioned above. The CBEC again clarified vide Circular No. 151/2/2012-ST dated 10-02-2012 vide Para No. 2.6 that Government or its agency transfers the right to use and/or develop the land, to the concessionaire, for a specific period, for construction of a building for furtherance of business or commerce (partly or wholly). Consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for this taxable service may be in the nature of upfront lease amount or annual charges paid by the concessionaire to the Government or its agency. Here the Government or its agency is providing 'renting of immovable property service' i.e. renting of vacant land to be used for furtherance of business or commerce and in such cases the concessionaire becomes the service receiver. Normally lessor charges two types of amounts from lessees, viz, one time upfront lease premium and consideration in the form of other charges against such provisioning of lease / renting service. Consideration means any amount that is payable for any service provided or to be provided. Lessor receives the amount in the form of upfront lease premium and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her charges as consideration for lease. Upfront lease premium is charged on one time basis but on the other hand other charges are charged on regular basis (annual or otherwise). The premium is the price paid for obtaining the lease of an immovable property. While rent, on the other hand, is the payment made for use and occupation of the immovable property leased. Service tax on renting activity as stipulated under Section 65B (41) of the Finance Act, 1994 read with Rule 2(1)(f) of the Service Tax Rules, 1994 cannot be charged on the amount of premium or salami paid by the lessee to the lessor for transfer of interest in the property from the lessor to the lessee as this amount is not for continued enjoyment of the property l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased out. Since the levy of service tax is on renting of immovable property and not on transfer of interest in property from lessor to lessee, service tax would be chargeable only on the rent whether it is charged periodically or at a time in advance. This position is also backed by and supported by judicial pronouncements. There are many judicial pronouncements where in it has been decided that the upfront lease premium (salami) is not liable to / subject to service tax. Reliance can be placed on following case laws: In Greater Noida Industrial Development Authority v. CCE ST, Noida 2014 (9) TMI 306 - CESTAT NEW DELHI , where it was held that upfront lease premium or salami paid by the lessee to the lessor for transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest in the property from the lessor to the lessee cannot be taxed in terms of Section 65(105) (zzzz) of the Finance Act, 1994 . In its final order, Principal Bench of CESTAT at New Delhi held that premium is price paid for obtaining lease of an immovable property while rent is payment made for use and occupation of immovable property leased. Tax is payable on renting of immovable property. Lease premium is not for continued enjoyment of property and as such demand was held to be not sustainable. In City Indus. Dev. Corpn. of Maharashtra Ltd vs. CST, Mumbai-II, 2014 (11) TMI 127 - BOMBAY HIGH COURT , it has been held by Bombay High Court that Service Tax is leviable on quantum of lease charges and not on lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premium. In Infinity Infotech Parks Ltd. v. Union of India 2014 (12) TMI 36 - CALCUTTA HIGH COURT , it was held that prima facie, there is a distinction between premium or salami, being price paid for transfer of a right to enjoy property and rent paid periodically to lessor; while former was a capital income, latter was a revenue receipt. Premium/salami is not advance rent which constitutes revenue receipt. Long-term lease for 99 years has been held to amount to 'transfer' under Income-tax law and premium or salami received was held taxable under head 'Capital Gain'. Even though aforesaid view was rendered in context of Income-tax laws read with Transfer of Property Act, same might have justifiably led ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to believe that premium was not liable to service tax, same not being rent. However, in RIICO Ltd. v. CCE, Jaipur-I 2017 (5) TMI 673 - CESTAT NEW DELHI . substantial part of the demand against the appellant in various proceedings, related to their Service Tax liability on lump-sum premium amount, received by them from the allottees on allotment of land on long term basis. It was held that the one-time payment received for grant of long-term lease of 30 years or more of industrial plots, is not liable to Service Tax for all the periods covered in the present proceedings. However, the appellants were held to be liable to pay Service Tax in respect of such one-time amounts received in respect of lease granted for less than 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 years. The Tribunal observed that there was no justification to consider the one-time payment on a different footing when compared to the regular lease rent, received in a periodical manner. On identical set of facts, with reference to lease granted by Tripura Industrial Development Corporation, the High Court of Tripura in the case of Hobbs Brewers India Pvt. Ltd. v. Union of India reported in [ 2016 (4) TMI 1173 - TRIPURA HIGH COURT ] held as below: 4. We are not at all inclined to even issue notice in the writ petition. A perusal of Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994 as quoted in the letter dated 23-11-2015 clearly shows that Renting of Immovable Property Service includes renting, let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting, leasing, licensing or other similar arrangements amounts to providing service and under Section 65(105)(zzzz) it is a taxable service. 5. It is urged on behalf of the petitioner that what is taxable is the rent and not premium. This argument is without any basis whatsoever. What is taxable is the consideration for the transfer. Even if premium is charged that is like charging of one time rent and then rebate is given for the yearly rent to be paid. Premium is also part of the lease money. Therefore, the entire transaction both premium and rent are amenable to Service Tax and Service Tax will have to be paid on the same. 6. Another submission has been made by Mr. Bhattacharji, that this premium includes capital investment. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not understand what is the meaning of this argument? It is true that the payment of premium will be treated as a capital investment but this does not mean that it is not the consideration for the lease Thus, in view of this legal position, it was held that assessee was liable to Service Tax on premium received on land lease for the period of less than 30 years. On regular rent, it was held that assessee was liable for Service Tax on the lease rent/economic rent received periodically, on the lands allotted for industrial purpose for the period post 1-7-2010. Special provision for exemption relating to long term lease of industrial plots ( Section 104 ) Finance Act, 2017 had inserted a section 104 as special provision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act, 1994 for retrospective exemption to lease premium/upfront fee in relation to long term lease of industrial plots. This provision sought to insert section 104 in the 1994 Act so as to exempt service tax leviable on one-time upfront amount (premium, salami, cost, price, development charge or by whatever name called) in respect of taxable service provided or agreed to be provided by a State Government industrial development corporation or undertaking to industrial units by way of grant of long-term lease of thirty years or more of industrial plots, during the period commencing from the 1st day of June, 2007 and ending with the 21st day of September, 2016 (both days inclusive). Earlier, vide Notification No. 41/2016-ST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 22.09.2016 , taxable services provided by State Government Industrial Development Corporations/ Undertakings to industrial units by way of granting long-term (thirty years, or more) lease of industrial plots from so much of service tax leviable thereon as is leviable on the one time upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for such lease were exempt from levy of Service Tax. In view of the above, the taxability of lease premium still remain an issue as to whether all lease premiums would not be or only those leases which are of less than 30 years period will be taxed. Under GST regime, it appears that lease premium, by whatever name called, shall be liable to taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One would have to look at exact nature of payment of lease premium and then look into its taxation. If it is a consideration for a service rendered or to be rendered, it should certainly be liable to tax. The same would apply under the GST regime. = = = = = = = = = - Reply By Surender Gupta as = Now, Bombay High Court has said the one time lease premium shall be subject to tax. See: 2018 (4) TMI 461 - BOMBAY HIGH COURT Builders Association of Navi Mumbai, Neelsidhi Realties Versus Union of India Through the Secretary, Ministry of Finance, The Commissioner of Goods and Service Tax, Thane Others Dated: 10-4-2018 Reply By Dr. Sanjiv Agarwal as = Yes , I agree . The Bombay High Court has recently upheld this. This art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle was sent prior to judgement was put in public domain. Thanks for updation. Dated: 14-4-2018 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... 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