In a significant ruling, the Telangana Authority for Advance Rulings (AAR) delivered a split verdict on the taxability of electricity and water charges collected by Holiday Inn along with license fees.
While the central member held that these charges should be treated as part of ‘renting of immovable property’ and thus taxable, the state member dissented.
With the difference in opinion, the Telangana Authority for Advance Rulings (AAAR) ultimately upheld the central member’s view, affirming that such charges would be subject to GST under renting services, setting a precedent for the hospitality sector.
The appellant, Duet India Hotels (Hyderabad) Private Limited (Duet India/Lessor) are engaged in the business of running hotels. They are owners of ‘Holiday Inn – Express & Suits Hyderabad’ (“the Hotel”). The hotel is managed by the Intercontinental Hotel Group, having its principal place of business in Gurgaon, India. M/s. The Curry House Food’s Private Limited (Lessee) is engaged in the business of operation of restaurants. A Leave and License Agreement (Agreement) has been entered between the Lessor and Lessee. As per the terms of the agreement, the Lessor has granted licence to the Lessee to use the specified area (“Licensed Premises”) of the hotel for operating a restaurant.
For this purpose, Lessee has agreed to pay monthly licence fee as a consideration to the Lessor.
In addition to the license fees, the Lessor is collecting other charges from the Lessee towards common facilities for security, cleaning of facade and common areas, 1e., entrance, etc. as per the agreement. These charges are being collected from the Lessee, in the ratio of the area of licensed premises to the total area. Further, the Lessor is also collecting electricity and water charges as per the actual meter readings.
Presently, the Lessor is charging GST @18% on licence fee. Space Rental, Common charges, electricity charges and water charges are payable by the Lessee. The Lessor is issuing separate invoices towards supply of renting of immovable property (‘space rental’) service and reimbursement of electricity and water charges.
However, Lessee is said to be not paying the GST charged by the Lessor on electricity and water charges ostensibly on the ground that electricity and water charges are reimbursement of expenses by the Lessee to the Lessor and these do not qualify as a supply under GST. Further, the Lessee has also contended that even if these qualify as supply, the supply of electricity and water are specifically exempted from payment of GST.
The appellant sought the advance ruling on the issue whether GST is applicable on electricity and water charges, which are being collected actually by the Lessor from the Lessee?
The state member has held that no GST is applicable on electricity and water charges which are being collected actually by the Lessor from the Lessee.
However on the other hand the central member held that GST is applicable on electricity and water charges which are being collected actually by the Lessor from the Lessee.
The AAAR while rejecting the State Member’s ruling held that the services of transmission of electricity and distribution of electricity are exempted under Notification No: 12/2017-CT(R). The exemption entry covers consideration received for services supplied by way of transmission or distribution and not services in relation to transmission or distribution. Further, the exemption at entry at SI No: 25 of notification
12/2017-CT(R) is only available if the person is a Transmission or Distribution Licensee under the Electricity Act, 2003. The Lessor in this case, is neither a Distribution Licensee nor a Transmission Licensee.
In any case, even if the view of the Member-State was to be treated as correct, it would not impact the rate at which tax is chargeable in the present case. As already held, it is a case of composite supply where ‘renting of immovable property’ is the principal supply. Therefore, as per Section 8(a) of the CGST Act, the supply in the present case has to be treated as a supply of service of ‘renting of immovable property’, i.e., the principal supply and shall be leviable to tax accordingly.
Ruling Details
Applicant Name: Duet India Hotels
Date: 20.02.2025
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