Quashing the service tax demand, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), ruled that the grant of licence to operate and run hotel business is not taxable under the category of ‘Renting of Immovable Property Service’.
M/s.Spencer International Hotels Ltd, the appellant, is engaged in the business of running hotels and is also licensee of three hotels. These three hotel properties were earlier run as hotels by M/s.Spencer and Company Ltd. for more than 100 years. Later on, as part of business restructuring, these three hotels were transferred on a Going Concern basis to the appellant in June 1978 vide Business Transfer Agreement dated 28.06.1978.
On investigation, it revealed that an agreement was entered into by the appellant with M/s. International Hotels Company Ltd. (IHCL). In the said agreement, the appellant granted licence to M/s.IHCL to run, conduct and operate the above three hotels together with all the related facilities and business appertaining thereto from the date of execution of the agreement.
It appeared to the department that the appellant is receiving rent from M/s.IHCL for renting out immovable property (hotels) to M/s.IHCL. Appellant had not discharged service tax for the period 01.06.2007 to 31.03.2011. Show cause notice was issued to the appellant proposing to demand the service tax along with interest and also for imposing penalties.
The issue whether grant of licence to operate and run the entire hotel business would be covered under the category of taxable service viz. ‘Renting of Immovable Property Service’.
Counsel Manasi Patil along with Siddharth Sriram, Advocate appeared and argued for the appellant. The Counsels submitted that the transaction is of sharing of business profits and not renting of immovable property. If it was mere renting of the immovable property, the rent charged in whatever form would be fixed, and not variable and would never be in the form of percentage of the business profits.
In the case of Grand Royal Enterprises v. CST Chennai, it was held that “the transaction between the appellant and IHCL is definitely not one of “renting of immovable property” but a business transaction between the two, where the consideration is not like a regular rent but is dependent on the annual performance and profits of the hotel; the legislative intent is clear, namely not to tax immovable property used for hotels; and that the definition of renting of immovable property excludes buildings used for the purpose of hotels.”
A Two-Member Bench of the Tribunal comprising CS Sulekha Beevi, Judicial Member and M Ajit Kumar, Technical Member observed that “After appreciating the facts, evidence and applying the decision in the case of Grand Royale Enterprises, we are of the considered view that the demand cannot sustain both on merits as well as on limitation and requires to be set aside which we hereby do.”
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