CESTAT: Revenue Sharing Arrangements Not Taxable As Service U/S 65(90a) Of Finance Act
Pranav B Prem
The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi Bench, comprising Ms. Binu Tamta (Judicial Member) and Mr. P.V. Subba Rao (Technical Member), has held that revenue-sharing arrangements are not taxable as a service under Section 65(90a) of the Finance Act, 1994, observing that such transactions are in the nature of business operations and not renting of immovable property.
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The Bench held that the agreement between Indian Railway Catering and Tourism Corporation Limited (IRCTC) and private licensees for operation of Food Plazas and catering units was a business arrangement based on revenue sharing, and not a service agreement for renting immovable property. The Tribunal, therefore, set aside the demand of service tax, along with interest and penalties, raised against IRCTC.
Background
The appellant, IRCTC, a Government of India enterprise under the Ministry of Railways, was authorized to award licenses for various catering stalls, Food Plazas, and other facilities under the Catering Policy, 2005, and the Memorandum of Understanding (MoU) executed with Indian Railways. Based on intelligence inputs, the Department alleged that IRCTC had leased out Food Plazas and fast-food units to private contractors, collected license fees, and failed to pay service tax under the category of “Renting of Immovable Property Service”, taxable from June 1, 2007.
A show cause notice was issued alleging that the properties belonging to Indian Railways were handed over to IRCTC for further licensing to private parties, and that the amounts collected by IRCTC as “user charges” and “license fees” were taxable under Section 67 of the Finance Act. The Adjudicating Authority confirmed the service tax demand of ₹2.83 crore, along with interest and penalties under Sections 75, 76, 77, and 78, prompting IRCTC to file the present appeals before the Tribunal.
Appellant’s Contentions
Appearing for IRCTC, counsel argued that the arrangement between Indian Railways and IRCTC was purely for operation and management of Food Plazas and catering units, and not for renting or leasing of immovable property. It was pointed out that the ownership of all railway land and premises continued to rest with Indian Railways, and the space made available to IRCTC and subsequently to licensees was merely ancillary to the primary objective of providing passenger amenities.
The counsel stressed that the license fee was not a fixed rent, but was computed as a percentage of sales turnover, making the arrangement a revenue-sharing business model rather than a rental contract. It was further submitted that there was no relationship of service provider and service recipient between the parties; instead, the agreements were on a principal-to-principal basis. Challenging the invocation of the extended limitation period, it was contended that the issue of taxability under the “renting of immovable property” category was under litigation across various forums, and that the Department had already issued earlier show cause notices for previous periods, showing there was no suppression or intent to evade tax.
Revenue’s Stand
The Department defended the demand, arguing that the properties owned by Indian Railways were effectively licensed or rented to private entities through IRCTC, and that the amounts received by IRCTC were consideration for renting of immovable property. The Department claimed that IRCTC deliberately failed to disclose such taxable receipts, showing an intention to evade payment of service tax.
Tribunal’s Analysis and Findings
The Tribunal framed the central question as whether IRCTC’s licensing of Food Plazas and catering outlets amounted to “Renting of Immovable Property” under Section 65(90a) read with Section 65(105)(zzzz) of the Finance Act. After an extensive review of the Catering Policy, 2005, the MoU dated 17.01.2007, and the sample license agreements, the Bench found that the essential character of the agreements was not of renting but of operation and management of catering units. The Tribunal observed that the Policy itself contemplated revenue sharing between Indian Railways and IRCTC, and explicitly stated that no separate rent was payable for land or building in the case of static catering units.
Quoting the relevant clause of the Policy, the Bench noted: “In the case of static units, there will be no separate charges payable towards rent for building/land... nominal license fee for land leased to IRCTC will be payable by IRCTC and revenue sharing will be as per the MoU between IR and IRCTC.” The Tribunal emphasized that the agreement’s dominant intent was to ensure operation and management of Food Plazas, not to rent space for profit. The consideration payable to IRCTC was variable and linked to turnover — a feature inconsistent with rental arrangements, which typically involve fixed consideration.
Referring to earlier rulings such as Grand Royale Enterprises Ltd. v. Commissioner of Service Tax, Chennai, the Bench reiterated that transactions based on turnover-linked revenue sharing cannot be treated as renting of immovable property, as there is no service provider–service recipient relationship. The Tribunal observed that “neither the activity performed can be stretched to rendering services nor the amount received can be stretched to consideration in the technical sense under Section 65(90a) of the Act.”
The Bench further relied on judicial precedents, including Mormugao Port Trust v. Commissioner of Customs, Central Excise & Service Tax, Goa, and Gujarat State Fertilizers & Chemicals Ltd. v. Commissioner of Central Excise, to reinforce that revenue sharing or joint business arrangements are not taxable as services unless a clear service relationship exists. On limitation, the Tribunal found merit in the appellant’s argument that earlier show cause notices had already been issued, making the transactions known to the Department. Citing Nizam Sugar Factory v. Collector of Central Excise (2006) 197 ELT 465 (SC), the Bench held that the extended period could not be invoked when all material facts were within the Department’s knowledge.
Holding that the transactions were purely on business terms under a revenue-sharing model, the CESTAT concluded that no service tax liability arises under Section 65(90a) or Section 65(105)(zzzz) of the Finance Act. The Tribunal observed: “The agreement purely relates to the transaction of business whereby the appellant was actually performing the activity of operation of catering and was not providing any service of renting of immovable property.” Accordingly, the Bench set aside the impugned order confirming the demand of service tax, interest, and penalties, and allowed the appeals filed by IRCTC.
Appearance
Counsel for Appellant/ Assessee: Sanjeev Sachdeva
Counsel for Respondent/ Department: V.K. Jain
Cause Title: M/s. Indian Railway Catering & Tourism Corporation Ltd., Versus Commissioner of Service Tax, Delhi-I
Case No: Service Tax Appeal No. 52667 OF 2015
Coram: Ms. Binu Tamta (Judicial Member), Mr. P.V. Subba Rao (Technical Member)
