Relief for Blue Star: CESTAT Rules Centralized Air-Conditioning Systems Qualify for Higher Abatement [Read Order]

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ruled that centralized air-conditioning systems installed at sites form part of immovable property and qualify for a higher abatement of 60% under the Service Tax (Determination of Value) Rules, 2006.

Blue Star Ltd., engaged in the installation and maintenance of air-conditioning systems, was audited by the department, which alleged short payment of service tax on Annual Maintenance Contract (AMC) services, non-payment on rental income, and wrong availment of CENVAT credit.

The Commissioner of Central Tax (Audit-I), Bengaluru, confirmed the demands with penalties. The appellant challenged the order before the CESTAT.

The appellant’s counsel argued that once installed, centralized air-conditioning systems become part of the building and cannot be dismantled without substantial damage, thus constituting immovable property eligible for 60% abatement under Rule 2A(ii)(C).

They further argued that service tax on renting was already paid after excluding reimbursable expenses such as water and electricity charges, following the Supreme Court’s ruling in Intercontinental Consultants and Technocrats Pvt. Ltd.

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The appellant also argued that it had already reversed proportionate CENVAT credit of Rs. 42,19,262 for trading activity under Rule 6(3A) of the CENVAT Credit Rules, 2004, and had voluntarily reversed ineligible credit except for minor amounts related to photocopying charges used for office work.

The revenue argued that the appellant was not entitled to 40% taxable value (60% abatement) and that the Commissioner’s order was correct.

The two-member bench comprising Mr. P.A. Augustian (Judicial) and Mrs. R. Bhagya Devi (Technical) observed that centralized air-conditioning systems, being permanently fixed and non-removable without damage, are immovable property.

The tribunal referenced CBEC Circular No. 58/1/2002-CX and explained that such systems cannot be treated as movable goods and held the appellant eligible for 60% abatement under Notification No. 24/2012-ST. The demand on this count was set aside.

The tribunal remanded the issue of reimbursable expenses for verification, set aside the demand on CENVAT reversal for trading, and deleted the small demand related to photocopying charges. All penalties were also removed. The appeal was partly allowed, granting substantial relief to the appellant.

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