Service Tax Demand on Amount Received for Modernisation and Upgradation of Sugar Mills Found Unsustainable: CESTAT Allows Appeal [Read Order]

The Chandigarh Bench of the Customs, Exciseand Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand raised under the category of Renting of Immovable Property, holding that amounts received for upgradation and modernisation of a sugar mill cannot be treated as consideration for any taxable service.

The appeal was filed by M/s Nawanshahr Cooperative Sugar Mills, engaged in the manufacture of sugar. The dispute arose from a Memorandum of Understanding for setting up a co-generation plant on a BOOT basis. Under this, a sum of ₹2 crore was paid to the sugar mill for upgradation and modernisation of its existing plant.

The Department alleged that the amount received under the MoU, along with the interest, formed consideration for renting of immovable property. Therefore, it was liable to service tax under Section 65(105)(zzzz) of the Finance Act, 1994.

Relying on a CBIC circular, the adjudicating authority confirmed the demand along with interest and penalties. This was later upheld by the Commissioner (Appeals), leading to the present appeal before the Tribunal.

The appellant contended that the amount of ₹2 crore was purely an advance for modernisation and expansion of the sugar mill and not for leasing of land. It was further argued that a separate lease deed existed for the land, on rent of ₹1,000 per annum. The appellant also submitted that the arrangement was in the nature of a joint venture.

The Tribunal, comprising S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) observed that the payment received was not related to leasing of land but was intended for upgradation and modernisation of the sugar mill. The intent was to derive commercial benefits such as improved energy output and access to bagasse.

The Tribunal held that the arrangement between the parties was in the capacity of a joint venture and, therefore, lacked the essential element of service provider and service recipient. In the absence of any taxable service, the demand under Renting of Immovable Property was found to be unsustainable in law.

Accordingly, the appeal was allowed and the service tax demand was set aside with consequential relief.

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