By TIOLNews Service

MUMBAI, OCT 03, 2017: THE appellant is a State Co-Op. Bank. They granted various credit facilities from time to time to M/s. Raje Vijay Singh Dafale Sahakari Sakhar Karkhana Ltd. The borrower committed defaults in repayment of the credit facilities and these accounts have been declared as non-performing by the appellant.

After due process under SARFAESI Act, 2002, appellant took over the exclusive possession of the immovable property along with plant and machinery.

To recover balance dues, the appellant decided to lease out the seized property and for which the appellant received the lease rent.

The department issued a SCNraising demand of service tax on rent received from the lessee and also on the repair and maintenance expenditure incurred by the lessee for the leased premises.

The CCE, Kolhapur confirmed the demand of service tax under the head of Renting of Immovable property.

Aggrieved, the appellant is before the CESTAT.

It is submitted that the rent received from the lessee is for recovery of dues from the borrower and this is permissible under the SARFAESI Act, 2002, therefore, the same cannot be treated as service charges and accordingly they will not be liable to service tax. Moreover, repair and maintenance was got carried out by the lessee as per their discretion and requirement, which is not the responsibility of the appellant being the lessor and, therefore, the same cannot be treated as additional consideration. Reliance is placed on the decision in the case of Raje Vijay singh Dafale SSK Ltd - 2015-TIOL-535-CESTAT-MUM.

The appellant further submitted that two properties were leased out, one belonging to M/s. Raje Vijay Singh Dafale Sahakari Sakhar Karkhana Ltd. and another property belonged to Tasgaon Palus Taluka SSK Ltd. and as far as the rent paid by Ganapati to the appellant in respect of property of Tasgaon Palus Taluka SSK Ltd . the service tax was in fact paid by the Ganapati in the name of Tasgaon Palus Taluka SSK Ltd.'s assessee code. And this is evidenced by the service tax challan enclosed of Rs.46,62,492/- which is more than the service tax payable of Rs.44,35,604/- on the rent received from that property on cum tax basis. That, being a question involving interpretation of law, extended period could not have been invoked. Reliance is placed on the decision in Persistent System Ltd. - 2016-TIOL-1756-CESTAT-MUM. It is also submitted that the cum tax demand works out to Rs.2,13,770/- in respect of M/s. Raje Vijay Singh Dafale Sahakari Sakhar Karkhana Ltd .; that penalties also cannot be imposed for the said reason.

The AR while reiterating the findings of the impugned order submitted that irrespective of the fact whether the rent received by the appellant is against the recovery of outstanding dues or otherwise the service of renting of immovable property and consideration received there against is sufficient to demand the service tax; that default of re-payment of loan and recovery thereof does not avoid the taxability on the service; that the reference made to SARFAESI Act, 2002 is a mechanism for recovery of the outstanding dues, which will not affect the service tax liability on the service of renting of immovable property.

The Bench observed -

"4. … As regards the demand on service tax on repair and maintenance expenditure, we find that this amount is not towards lease rent. After leasing of the property it is up to the lessee to carry out the necessary repair and maintenance and the consideration on that count does not flow from lessee to lessor (appellant). Therefore, the said expenditure cannot be considered as extra consideration towards the lease rent. Lease rent is the only amount which is received by the appellant on account of lease of the premises to the lessee. Therefore, the demand on expenditure towards repair and maintenance is not sustainable…

4.1 … submission of the appellant is that since the lease rent is towards the recovery of outstanding dues, the same should not be taxed. We do not agree with the appellant's contention for the reason that admittedly there is a lease agreement between the appellant and the lessee. According to agreement there is a lease rent fixed between the appellant as a lessor and the lessee. Therefore, the arrangement is nothing other than renting of immovable properties. The process of recovery of dues is in accordance with the SARFAESI Act, 2002 through rental income against the property of the defaulter of the loan of the appellant. There is no provision in the Finance Act, 1994 for granting any exemption in respect of receipt of service charges, which is towards the recovery of outstanding loan. Therefore, the arrangement of lease is squarely covered under the services of renting of immovable property. In our considered view, the same is taxable…"

Nonetheless, as regards the submission of the appellant that in respect of the second property belonging to Tasgaon Palus Taluka SSK Ltd., tax was paid by Ganpati in the name of Tasgaon Palus Taluka SSK Ltd ., the CESTAT observed that this fact was not properly verified by the adjudicating authority and, therefore, the matter was remanded.

The appeal was disposed of.

(See 2017-TIOL-3558-CESTAT-MUM)