Windmills Not Immovable Property: CESTAT Quashes Service Tax Demand on Sundaram Fasteners [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal, Chennai Bench (CESTAT), set aside the service tax demand raised on the leasing of windmills, holding that windmills do not qualify as immovable property and therefore cannot be subjected to service tax under the category of renting of immovable property under the Finance Act, 1994.

Sundaram Fasteners Ltd., the appellant, is engaged in the manufacture of automotive fasteners. During departmental scrutiny, it was noticed that the company had leased windmills to its group entity for generation of electricity and had received lease income for the same. The Department alleged that the windmills constituted an immovable property and that such leasing of windmills amounted to “renting of immovable property” under Section 65 of the Finance Act, 1994.

On this basis, show cause notices were issued proposing demand of service tax along with interest and penalties. The adjudicating authority confirmed the demand reasoning that the windmills were permanently affixed to the earth and therefore qualified as immovable property. The Commissioner (Appeals) upheld the order, leading to the present appeal before the Tribunal.

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Before the CESTAT, appellant contended that windmills are movable goods and does not become an immovable property merely as they are installed on a foundation. Subsequently, such windmills can be dismantled and re-erected at another location without altering their essential character.

It was argued that since electricity generated through windmills is not excisable goods and, therefore, the windmill cannot be treated as a “factory”. Further, pointed out that the show cause notice itself was vague and did not disclose proper reasoning for treating windmills as immovable property, thereby violating principles of natural justice.

The bench of Ajayan T.V., Judicial Member and M. Ajit Kumar, Technical Member held that mere attachment of an item to the earth does not make it an immovable property, reasoning that if an asset can be dismantled and relocated without altering its character, it cannot be treated as an immovable property.

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The Tribunal observed that electricity is not excisable goods and a windmill cannot be treated as a “factory”. Consequently, the Department had gone beyond the scope of the show cause notice by introducing new reasoning at the adjudication stage.

Accordingly, the CESTAT ruled that leasing of windmills does not attract service tax under the category of renting of immovable property and set aside the entire demand along with penalties.

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