By TIOL News Service

MUMBAI, FEB 10, 2015: M/s Lokhandwala Hotels Pvt. Ltd. (LHL) was running a hotel in the name of 'Regent Hotel' situated at Bandra, Mumbai. As the said hotel was incurring losses and there was a huge demand against them of about Rs. 331 crores from various persons and about Rs.95crores from ICICI Trustship Services Ltd., the hotel business of 'Regent Hotel' was acquired by M/s Indian Hotels Company Ltd. (IHCL) - the applicants/appellant. An agreement was entered into between the applicants, LHL and ICICI Trustship Services Ltd., as ICICI was ready to pay the loans of various other parties payable by LHL to the tune of Rs.331Crores for settlement of repayment of loans and transaction of transfer of the ownership right to the applicants. As per the agreement, the share of the ICICI Trustship Services Ltd. was 80.1% and the share of the applicant was 19.9% and a new Company was formed and named as 'Taj Lands End Ltd'. As per the said agreement, the applicants took over the activities of the hotels such as develop, conduct, operate, manage, renovate, modernize and carry out all activities incidental and ancillary to the business of hotelier.

Be that as it may, the clause pertaining to "sharing of the profit" was what caught the eagle eyes of the departmental officers. The jurisdictional authorities were of the view that the activity undertaken by the applicant M/s Indian Hotels Company Ltd. falls under the category of 'Management Consultancy Service'.

A service tax demand of Rs.4.86Crores was raised for the period 01.10.2002 to 31.03.2006. Since the demand was confirmed by theCommissioner of Service Tax, Mumbai, along with imposition of interest and various penalties, the applicant filed a stay application/appeal before the CESTAT.

The Division Bench, Member (J) writing for the Bench, while granting a stay in the matter inter alia observed -

"On going through the definition of 'Management Consultancy Service', it is clear that a person who is engaged in providing any service in connection with the management of any organization which means he should provide a service for managing the day to day affairs of the organization. If he himself is managing the affairs of the organization, prima facie, it does not fall under the 'Management Consultancy Service'. The issue was dealt by this Tribunal in the case of Basti Sugar Mills Co. Ltd. - 2007-TIOL-657-CESTAT-DEL wherein this Tribunal has held that "the appellant engaged in sugar manufacture took over management of another sugar mill. The agreement was treated as management consultancy and service tax demanded. The agreement was interred entrusting operation of factory and not for advice or consultancy. The advisory service of consultant is necessary for taxability. Appellant being in-charge of operation of factory was performing management functions. The activity was not falling within the scope of taxable service."

We reported this order as 2012-TIOL-781-CESTAT-MUM.

The appeal was heard in May 2014.

The Member (J), who had penned the Stay order earlier, concluded -

"In that case [Basti Sugar Mills Co. Ltd. - 2007-TIOL-657-CESTAT-DEL], after analysing the terms of agreement, and this Tribunal referring to the definition of "Management Consultant" observed that a consultant is advisory service and not the actual performance of the management function. In this case also, the appellant are performing the activity of Management of hotel and they are not doing any advisory service to LHL, it was further observed that in the said case, that an ocean separate a manager from a management consultant, a performer from an advisor or a coach. That ocean exists in the present case also. Thereafter, it was held that the appellant are not providing Management Consultancy Service and the said order was affirmed by the Hon'ble Apex Court. Therefore, in this case also we have not hesitation to hold that the appellants are doing the activity of managing the hotel in question in the process of acquisition of hotel as issuing invoices in their own name. Therefore, the appellant are not providing Management Consultancy Service to LHL. Accordingly, they are not liable to pay service tax under the category of Management Consultancy Service."

It was also held that the demand is hit by limitation as - "Moreover, in this case the investigation was started in the month of March 2005 and all the details were provided by the appellant by December 2005 and the show-cause notice was issued in 2008 only by invoking the extended period of limitation."

The Member (Technical) had a differing view. In an elaborate order, he concluded - the executor functions undertaken by the appellant in the present case would certainly fall within the scope of management consultancy service.

It was inter alia mentioned that the Supreme Court did not uphold the decision in the Basti Sugar Mills case on merits; it is a settled position in law that the principle of res judicata will not apply in matters of classification in a tax dispute; the scope of the work involved in the present case is substantially wider than that in the Basti Sugar Mills Co. Ltd.'s case. Therefore, the ratio of the said decision has no relevance, whatsoever, to the facts of the present case.

On limitation, the Member (T) had the following to say -

++ The department is not expected to come to know of the activities of the appellant by reading about it in newspapers. Media will report various matters based on their understanding. Whether an activity falls within the statutory definition of a taxable service or not has to be discerned from the contracts entered into. So long as the contracts were not made available to the department, it is difficult for the department to find out whether the activity undertaken is a taxable activity or non-taxable activity. Further, invocation of extended period of time under Section 73 of the Finance Act, 1994 does not envisage reading of newspapers and gathering information…. If the activities are not disclosed either by way of clear indication in the ST-3 returns or by way of letters, it cannot be said that the assessee has informed the department of its activities.

In fine, excepting the imposition of penalty u/s 78, the demand was upheld. The appeal was partly allowed.

In the result, in view of the difference in opinion, the matter came to be referred to the Third Member for a Majority decision.

This was on 05.08.2014. Kindly see 2015-TIOL-298-CESTAT-MUM

The Third Member on reference, viz. Member (Technical) has given his findings on 24/12/2014 thus -

++ Had IHCL being doing consultancy service, the profit as a percentage of the income would have been much more. Although, the amount of profit earned does not decide the nature of activity, yet it is a good indication that management consultancy service was not provided.

++ From the facts of the case, it is clear that the IHCL are running the hotel. They are not providing consultancy. The definition of Management Consultancy includes service in connection with management of any organization. The interpretation of this definition can only mean services in relation to consultancy. If it is held otherwise then all cases of factories given on lease to be run by others under a license agreement will be termed as provision of management consultancy service etc. which is obviously not correct.

++ Even the Board Circular (1/1/2002-ST (Section 37-B), dated 27.6.2001) indicates that it is advisory services which are includible under the taxable service rendered by a management consultant. …The Board Circular never intended to nor expressly states that running a business such as a hotel would amount to a service being rendered to the owner of the asset.

++ Reliance has been placed by the appellant on the decision of the Tribunal which was affirmed by the Hon'ble Apex Court in the case of Basti Sugar Mills Co. Ltd. (supra). In its order the Hon'ble Apex Court stated that the earlier decision of Tribunal in Rolls Royce Indus Power Ltd was not appealed against and therefore, dismissed the appeal of Revenue in the case of Basti Sugar (supra). I note that in the case of Rolls Royce Indus Power Ltd the issue was based on similar facts as in the present case. In that case the operation and maintenance of the power plant by the appellant was considered as outside the scope of Consulting Engineer Service. In the present case also, IHCL are operating the hotel. The present case is stronger footing because the appellant are not receiving any consideration in the form of fees or commission only; they are actually receiving the entire sales amount themselves. Therefore, the case of Basti Sugar (supra) supports the appellant.

++ It cannot be said that Hon'ble Supreme Court did not decide the Basti Sugar (supra) case on merits. The apex Court dismissed the Civil Appeal filed against CESTAT Order. Matters decided in Civil Appeal lay down the law of the land which must be followed.

++ In my view, the activities of IHCL in operating the hotel cannot be called as a service rendered under the category of Management Consultancy Service.

++ On the issue of extended time period, I note that the Ld. Member (T) has not imposed penalty for the reason that there is no mens rea on the part of IHCL. For the same reason, I hold that extended time period is also not invokable once mens rea is not established.

So, in view of the majority decision, the appeal was allowed.

(See 2015-TIOL-299-CESTAT-MUM)