The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata has set aside a Service Tax demand of ₹42.78 lakh imposed on Belle Vue Clinic in connection with reimbursement of common expenses shared with an eye-care hospital operated by M.P. Birla Netralaya (MPBN).
The bench of R. Muralidhar, Member (Judicial), and K. Anpazhakan, Member (Technical) has observed that the reimbursements received towards electricity, municipal taxes, maintenance and other common expenses could not be added to the taxable value for the period October 2010 to March 2015, as the statutory provision applicable during the relevant period did not include such reimbursable expenditure within “consideration”.
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The appellant/assessee was registered with the Service Tax Department and had been regularly discharging its Service Tax liabilities and filing statutory returns. In furtherance of its objective of expanding ophthalmic care, the clinic collaborated with M.P. Birla Netralaya, another charitable institution established by the M.P. Birla Group.
The two institutions entered into a Memorandum dated June 1, 2006 for operating and maintaining the Priyamvada Birla Aravind Eye Hospital (PBAEH). Under the arrangement, approximately 35,000 square feet of space within Belle Vue Clinic’s premises was allotted for operation of the eye hospital.
The assessee incurred various common expenses relating to the premises, including maintenance charges, electricity charges, municipal taxes and other outgoings. Under Clause 6 of the Memorandum, MPBN was required to reimburse its proportionate share of those expenses based on the area allotted and expected utilisation of common facilities.
Significantly, the Memorandum expressly stated that Belle Vue Clinic would not charge any rent from MPBN for the earmarked area. It also recorded that no transfer of any right, title or interest in the allotted premises was intended in favour of MPBN.
The department objected to the treatment of the amounts recovered from MPBN as mere reimbursement of expenses.
According to the department, the amounts should form part of the taxable value under Section 67 of the Finance Act, 1994 read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006.
A Show Cause Notice proposed recovery of Service Tax amounting to ₹42,78,828, along with interest and penalty. The department principally alleged that the arrangement constituted “Renting of Immovable Property” and that the reimbursements represented consideration for the alleged renting service.
The adjudicating authority confirmed the entire demand along with interest and an equal penalty. The Commissioner (Appeals) subsequently dismissed Belle Vue Clinic’s appeal, prompting the assessee to approach CESTAT.
According to the appellant, the arrangement was collaborative rather than a conventional landlord-tenant arrangement. Clause 1 provided that the eye hospital would be maintained and operated by MPBN in the allotted area, while Clause 2 recorded the collaboration between the parties for creation of the eye-care facilities.
Most importantly, Clause 6 specifically provided that monthly maintenance charges, electricity charges, municipal rates and taxes and other outgoings incurred or paid by Belle Vue Clinic would be reimbursed by MPBN. The same clause expressly stated that Belle Vue Clinic would not charge rent for the earmarked area.
Clause 15 further stated that no right, title or interest in the allotted area was transferred to MPBN.
The Tribunal noted that the parties had specifically demarcated the manner in which common expenses were to be shared.
The expense-sharing arrangement included different proportions for electricity, corporation tax, water charges, generator fuel, fire-system AMC, UPS AMC, air-conditioning plant AMC, lift maintenance, telephone EPABX maintenance and fire insurance.
For example, the share of the electricity bill for No. 9 Loudon Street was fixed at 7% of the total bill, while the share of electricity for No. 10 Loudon Street was 30%. Corporation tax was shared at 44.10%, water charges at 20%, and several maintenance expenses at specified proportions.
The Tribunal found that the expense-sharing details supported the appellant’s contention that the amounts were linked to common expenditure rather than rent.
The central legal issue before CESTAT concerned whether such reimbursements could be included in the taxable value of services for the period prior to May 14, 2015.
The appellant argued that Section 67 of the Finance Act, 1994, as it stood during the disputed period, did not include reimbursable expenditure or cost within the definition of “consideration”. According to the appellant, Rule 5(1) of the Service Tax Valuation Rules could not enlarge the scope of the substantive provision and bring additional amounts into the taxable value.
The Tribunal accepted this legal position.
It noted that the Supreme Court had held that Rule 5 travelled beyond the mandate of Section 67 insofar as it sought to include expenditure or costs that were not consideration for the taxable service.
The Supreme Court’s ruling had held that the valuation of taxable services had to relate to the consideration paid for rendering the particular taxable service.
CESTAT observed that the reimbursements received by Belle Vue Clinic related to the period from October 2010 to March 2015.
During that period, Rule 5(1) provided that expenditure or costs incurred by a service provider in the course of providing taxable services would be treated as consideration and included in the value for charging Service Tax.
However, the Tribunal noted that the Supreme Court in Intercontinental Consultants had held Rule 5 to be ultra vires Section 67 as it stood during the relevant period.
Consequently, CESTAT held that the Supreme Court judgment squarely applied to the dispute.
The Tribunal stated that since the disputed period was from 2010 to March 31, 2015, the impugned demand could not survive on the basis of Rule 5(1). It therefore set aside the order and allowed the appeal on merits.
The Tribunal also considered the subsequent amendment to Section 67 introduced by the Finance Act, 2015 with effect from May 14, 2015.
The amended provision expressly expanded the meaning of “consideration” to include reimbursable expenditure or cost incurred by a service provider and charged in the course of providing or agreeing to provide a taxable service.
The Tribunal referred to the Supreme Court’s finding that this amendment constituted a substantive change in the law.
The Supreme Court had specifically held that reimbursable expenditure or cost became includible in the valuation of taxable services only from May 14, 2015. The amendment was prospective and not retrospective in operation.
Accordingly, CESTAT held that the lower authorities had erred in relying upon the amended Section 67 to treat the shared expenditure reimbursements as consideration even for the earlier period.
The Tribunal also examined the factual aspect of the expense-sharing arrangement.
It found that Belle Vue Clinic had clearly demarcated the sharing of expenses between the parties and that the Revenue had not produced evidence showing that the clinic had recovered any amount beyond those disclosed in the expense-sharing table.
The Tribunal observed that the accommodation had been provided free of charge and that the common expenditure was merely being defrayed by MPBN.
The Revenue’s contention that the reimbursements were effectively consideration for renting was therefore not accepted in light of the contractual terms and the absence of evidence of any separate rent or additional recovery.
The Tribunal further considered the invocation of the extended period of limitation.
Belle Vue Clinic had argued that it had acted under a bona fide understanding that reimbursement of proportionate common expenses did not constitute taxable consideration. The appellant also pointed out that the issue concerning inclusion of reimbursable expenditure had been the subject of prolonged litigation and was ultimately settled by the Supreme Court.
CESTAT found that there was nothing to indicate that Belle Vue Clinic had collected Service Tax from MPBN and retained it without paying the same to the department.
The Tribunal also took note of the fact that the appellant was a registered Service Tax assessee and had been filing its statutory returns. On these facts, it held that the Revenue had failed to establish suppression with an intent to evade Service Tax. The demand relating to the extended period was consequently set aside on the ground of limitation as well.
The Bench set aside the confirmed Service Tax demand on merits. It also set aside the demand to the extent it related to the extended period on account of limitation.
The Tribunal consequently allowed the appeal and held that the appellant would be entitled to consequential relief, if any, in accordance with law.
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