By TIOL News Service

MUMBAI, APRIL 19, 2018: THE appellant had modernized its premises at Mumbai in the year 2008 with a view to let out the same for commercial use to firms/companies on licence along with various equipment and furniture. The completion of the modernization/renovation work at the said factory was completed in July 2009 and thereafter the appellant entered into a lease and licence agreement with M/s. Toyo Engineering (I) Pvt. Ltd. on 07.07.2010 whereby the appellant agreed to permit the licensee i.e. M/s. Toyo Engineering (I) Pvt. Ltd . to use the said commercial building along with equipment and fixtures as per the terms and conditions of the agreement.

The appellant also availed CENVAT credit of various input services used during the period of modernization of premises. Appellant is collecting service tax on the said activity and paying the same under the category of renting of immovable property service. Further, the appellant under the lease and licence agreement has also received an interest-free security deposit of Rs.3,29,80,000/-.

The department entertained a view that the appellant has availed irregular CENVAT credit on construction of immovable property.

SCN followed and in adjudication, the CST, Mumbai confirmed the demand of Rs.88,29,424/- [Rs.77,03,338/- (CENVAT) + Rs.11,26,086/-(ST on notional interest on security deposit] [Total Period is October 2007 to July 2012] on the following grounds:-

(a) CENVAT credit has been availed in respect of various input services which had been used in relation to construction of immovable property and, therefore, the same is not admissible.

(b) The construction of immovable property and its subsequent renting are independent transactions and, therefore, the credit for construction cannot be allowed.

(c) Reliance placed on the judgment in the case of Bharti Airtel Ltd. vs. CCE Pune – 2014-TIOL-1452-HC-MUM-ST.

(d) Taking of security deposit is a pre-condition for providing service and thus has nexus with the output service.

The following demand was dropped – CENVAT credit of Rs.1,31,02,383/- availed on (a) input services of brokerage, service management, insurance etc., (b) CENVAT credit availed on invoices which are addressed to other than registered premises of the appellant and (c) reduction in the rate of notional interest from 36% to 13%% and 18%.

Apparently, there is no appeal filed by the department against this order.

In appeal before the CESTAT, the assessee inter alia submitted -

++ Definition of input service as prevailing during the relevant period specifically includes the services of modernization,therefore, the credit has been rightly availed by the appellant. [Circular No. 943/4/2011-CX dated 29.4.2011 relied upon]

++ All these services in dispute have been considered by this Bench of the Tribunal in the case of City Centre Mall Nashik Pvt. Ltd. – 2017-TIOL-4322-CESTAT-MUM wherein credit was allowed on various input services used for construction of immovable property which were subsequently rented out.

++ Demand of service tax on notional interest is not sustainable in law in view of the decision in Magarpatta Township Developers & Construction Co. Ltd. - 2014-TIOL-1728-CESTAT-MUM and K. Raheja Corp. Pvt. Ltd. – 2015-TIOL-100-CESTAT-MUM.

The Bench considered the submissions and observed -

CENVAT:

++ We find that this issue has been considered in detail in the case of City Central Mall Nashik Pvt. Ltd., wherein the Tribunal has considered all the judgments relied upon by the Commissioner while denying the cenvat credit and has also considered the circular relied upon by the adjudicating authority and has held that the appellant is entitled to cenvat credit on input services used for construction of immovable property which is ultimately rented out. Therefore, we hold that denial of cenvat credit on the input services is not sustainable in law.

ST on Notional Interest earned on Security Deposit:

++ We find that the issue is squarely covered by the judgment of the Tribunal in the case of Magarpatta Township Developers & Construction Co. Ltd. and K. Raheja Corp. Pvt. Ltd., wherein the Tribunal has held that notional interest cannot be included in the value and will not be taxable under the category of renting of immovable property services. We also find that the department has accepted the judgment on merits and has not filed appeal against the said judgment.

Concluding that the impugned order is not sustainable in law, the same was set aside and the appeal was allowed.

(See 2018-TIOL-1249-CESTAT-MUM)