The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside a service tax demand of ₹84.63 lakh raised on compensation claimed following the premature termination of a hotel lease and held that the amount represented compensation for breach of contract rather than rent and had never been received by the hotel owner.
The bench of Dr. Rachna Gupta (Officiating President) and P. V. Subba Rao (Technical Member) upheld the demand relating to rent charged to a subsequent tenant and directed recalculation of the tax payable on rent from the original tenant.
Buy Now: 80+ Judgements Indirect Tax – September 2026 E-Magazine
The appellant/assessee owned Hotel Ambrosia, which it leased to Shotz Hospitality Private Limited under an agreement dated April 1, 2013. The agreement prescribed monthly rent of ₹4.5 lakh for an 11-year term.
The contract also provided that, if either party cancelled the agreement, the other party could recover rent for the entire contractual period.
Shotz operated the hotel from April 2013 until August 2014 and vacated the premises on August 8, 2014. Following the early termination, Brijrani issued a legal notice demanding approximately ₹5.84 crore, calculated by reference to the full lease term after deducting rent already paid.
According to the appellants’ submissions recorded in the order, the dispute went before the Madhya Pradesh High Court and the Supreme Court. The parties subsequently entered into a compromise agreement dated April 27, 2024, under which neither side was required to pay compensation, claims or damages to the other.
The department raised a combined service tax demand of ₹1,06,31,026 against Brijrani Hospitality.
The demand comprised ₹84,63,192 on the premature lease termination claim, ₹8,89,920 on rent of ₹72 lakh attributed to Shotz for 16 months, and ₹12,77,914 on rent attributed to the subsequent tenant, Vishwa Mangal Trade Mart Private Limited.
The original adjudication also imposed a ₹50 lakh penalty under Section 78 and a ₹10,000 penalty under Section 77 on the company. A separate ₹50,000 penalty under Section 78A was imposed on its Managing Director.
The Commissioner (Appeals) upheld the adjudication, leading to the two appeals before CESTAT.
The Revenue contended that the lease termination claim attracted service tax under Rule 3(a) of the Point of Taxation Rules, 2011. It argued that liability arose upon issuance of the invoice or demand, or receipt of consideration, whichever occurred earlier.
The department also relied on Section 66E(e) of the Finance Act, 1994, concerning an agreement to tolerate an act or situation. Its position was that Brijrani’s contractual right to recover rent for the remaining lease period made the amount taxable.
The company argued that no money had been received against the claim and that the eventual settlement extinguished any obligation to pay compensation.
Rejecting the demand, the tribunal distinguished between rent payable for occupation of premises and compensation arising from breach of the lease agreement.
It explained that, although the agreement described the recoverable amount by reference to rent, the premises had already been vacated when the breach occurred. The contractual description therefore did not change the substance of the payment.
The amount payable for reneging on the agreement was compensation for breach rather than rent for continued occupation of the hotel.
The tribunal further noted that the claimed amount had never been paid. It consequently set aside the ₹84,63,192 demand on both grounds: the amount was in the nature of compensation, and it had not been received.
The tribunal separately examined the demand on rent attributed to Shotz for April 2013 to August 2014.
Brijrani submitted that it had already deposited ₹2,67,461 in service tax after claiming the ₹10 lakh exemption available to small service providers. It also maintained that no rent was paid for August 2014 because Shotz vacated the property that month.
CESTAT observed that there was no evidence of rent being paid for August 2014 and set aside the demand for that month.
For the remaining period, the tribunal directed recalculation after considering the rent actually received, the applicable small-service-provider exemption and the service tax already deposited. Its acceptance of the submissions regarding payment and exemption was subject to verification.
The tribunal therefore partly sustained this component of the demand, while requiring credit for tax already paid and consideration of the exemption.
The company did not obtain similar relief concerning the subsequent lease to Vishwa Mangal Trade Mart.
Brijrani relied on an agreement dated February 7, 2015, showing monthly rent of ₹60,000. The department, however, had discovered another agreement dated November 28, 2014, effective from December 2014, recording monthly rent of ₹2.9 lakh.
The company argued that the higher-rent agreement was unenforceable. The Revenue maintained that the lower-rent agreement understated the taxable value and relied on a statement confirming the ₹2.9 lakh monthly rent.
After examining both documents, the tribunal noted that each agreement was executed on stamp paper and signed by the parties. It also relied on the statement confirming the higher rental amount.
The bench considered that the hotel had previously been leased to Shotz for ₹4.5 lakh per month. Although a reduction could have been offered to attract another tenant, it found ₹2.9 lakh more realistic than ₹60,000 in the circumstances.
Accordingly, CESTAT declined to interfere with the demand calculated on monthly rent of ₹2.9 lakh.
The department defended invocation of the extended limitation period by alleging suppression of the actual lease agreements, incorrect ST-3 returns, creation of agreements understating rent and evasion of summons.
The tribunal found sufficient grounds, in the factual circumstances, to invoke the extended period for raising the demand.
Following the reduction in the principal tax liability, it directed that interest and the penalty under Section 78 be reduced proportionately. The operative directions did not separately state that the penalties under Sections 77 and 78A were set aside.
Both appeals were disposed of with these modifications. The company thus secured substantial relief on the unpaid termination claim, while liability relating to the subsequent tenant’s rent remained sustained.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
