Lease Premium for Land Transfer Not A Taxable Service: CESTAT
Pranav B Prem
In a significant relief to the Raipur Development Authority (RDA), the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has held that the transfer of development rights and lease premium collected for long-term land leasing do not attract service tax, as such transactions amount to a sale of immovable property rather than provision of taxable service under the Finance Act, 1994.
The bench comprising Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) delivered the ruling in an appeal filed by RDA against a service tax demand of over Rs. 21.28 crores, which had been imposed by the Commissioner of Central Excise and Customs, Raipur through an order dated 30 April 2015. The department had alleged that RDA failed to pay service tax on various transactions such as lease premiums, transfer fees, construction services, and water supply, and had also wrongly availed Cenvat credit.
At the heart of the dispute was a 2005 Project Agreement between RDA and Gupta Infrastructure (India) Pvt. Ltd. (GIPL) for the development of the City Centre Mall (CCM) in Raipur. RDA had leased out land for a period of 30 years (extendable up to 90 years) to GIPL and received a lease premium of Rs. 41 crore along with ground rent over subsequent years. The department treated these receipts as consideration for renting of immovable property and sought to impose service tax under relevant provisions of the Finance Act.
CESTAT, however, held that such a transfer of development rights conferred upon the developer a benefit arising from land, and thus constituted a transaction in immovable property, which is excluded from the definition of “service” under Section 65B(44) of the Finance Act, 1994. Citing decisions such as DLF Commercial Projects Corp. v. CCE [(27) G.S.T.L. 712 (Tri.-Chan.)] and Chheda Housing Development Corp. v. Bibijaan Shaikh Farid [2007 (2) Bom CR 587], the Tribunal clarified that development rights are in the nature of immovable property and their transfer cannot be subjected to service tax.
The Tribunal also examined the issue of service tax demand on the lease of vacant land for commercial development prior to July 1, 2012. It ruled that such transactions did not qualify as “Renting of Immovable Property Services” under Section 65(105)(zzzz) of the Act, especially given that the lessee was granted possession, control, and even rights of sale—indicative of a deemed sale rather than a mere lease.
With respect to the construction of residential complexes, CESTAT upheld the applicability of service tax but allowed RDA the benefit of 75% abatement under Notification No. 29/2010, since the cost of land was included in the gross amount charged and Cenvat credit had already been reversed. The Tribunal found no evidence on record suggesting violation of the conditions stipulated in the abatement notification.
Further, the interest received from allottees for deferred payments on residential units was not treated as taxable, as it was considered a form of liquidated damages or penalty for delayed payment rather than consideration for service. This position was supported by CBEC Circular No. 96/7/2007, which clarifies that such interest is not includible in the value of taxable service.
Regarding the charges collected for water supply, the Tribunal concluded that the activity formed part of the sovereign functions entrusted to municipalities, especially since RDA was constituted under the Chhattisgarh Nagar Tatha Gram Nivesh Adhiniyam, 1973. Accordingly, supply of water could not be subjected to service tax under Management, Maintenance or Repair Services.
The CESTAT also disagreed with the Commissioner’s finding that RDA was not a government authority. Citing statutory notifications and the decision of the Supreme Court in Shapoorji Pallonji & Co. Pvt. Ltd., the Tribunal held that RDA qualifies as a “governmental authority”, as it was constituted under a state legislation to carry out functions akin to those assigned to municipalities under Article 243W of the Constitution.
On the issue of wrongful availment of Cenvat credit, the Tribunal noted that the ineligible credit had already been reversed, and there was no justification for further recovery or imposition of penalties in this regard. Ultimately, the CESTAT set aside the majority of the tax demand, except for the portion related to construction of residential complexes, which must now be recalculated after applying the abatement. The appeal was thus partly allowed, providing substantial relief to RDA from the Rs. 21 crore tax demand.
Appearance
Mr. A.K. Batra, Chartered Accountant for the Appellant
Shri R.P. Sharma, Special counsel for the Respondent
Cause Title: M/s. Raipur Development Authority V. Commissioner of Customs, Central Excise and Service Tax, Raipur
Case No: Service Tax Appeal No. 53203 of 2015
Coram: Hon’ble Dr. Rachna Gupta [Member (Judicial)], Hon’ble Mr. P.V. Subba Rao [Member (Technical)]
