The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that renting a residential building to an educational institution for use as a student hostel qualifies as “renting of residential dwelling for use as residence” and is therefore exempt from service tax.

The bench of R. Bhagya Devi (Technical Member) allowed the appeal filed by a property owner who had rented a five-storey building comprising 129 rooms to an educational foundation for accommodation of students and staff. The appellant had initially paid service tax under the category of “Renting of Immovable Property Service” but later sought a refund after realizing that the transaction was covered by the exemption available under Section 66D(m) of the Finance Act, 1994.

The appellant had leased the premises to an educational institution between June 2014 and May 2015. Believing the rental receipts to be taxable, service tax amounting to ₹6.47 lakh, along with applicable interest, was paid. Subsequently, a refund claim was filed contending that the rental activity fell within the negative list of services exempt from service tax.

The Department rejected the refund claim on the ground that the premises had been rented for operating a hostel rather than for residential purposes. The authorities also observed that the building contained common facilities such as dining and kitchen areas and therefore could not be regarded as a residential dwelling eligible for exemption.

The Commissioner (Appeals) upheld the rejection, concluding that the service provided was not covered by Section 66D(m) of the Finance Act, 1994.

The department argued that the taxpayer had voluntarily assessed and paid service tax and had not challenged the assessment. Relying on several Supreme Court decisions, including Flock India, Priya Blue Industries, ITC Ltd., and Mafatlal Industries, the Department contended that a refund claim could not be entertained without first challenging the assessment order.

The department further submitted that the taxpayer was attempting to claim refund on the basis of a judicial decision rendered in another person’s case and that such an approach was legally impermissible.

CESTAT rejected the Department’s contention regarding the absence of a challenge to the assessment. The Tribunal noted that neither the show cause notice nor the orders passed by the lower authorities had rejected the refund claim on that ground. Instead, the authorities had examined the claim on merits and denied it solely on the basis that the service was considered taxable.

The Tribunal observed that the Revenue could not introduce new grounds at the appellate stage that were not part of the original proceedings. Referring to Supreme Court precedents, it reiterated that authorities cannot travel beyond the scope of the show cause notice and that the notice forms the foundation of the Department’s case.

The central issue before the Tribunal was whether renting a building to an educational institution for operating a student hostel could be regarded as “renting of residential dwelling for use as residence” under Section 66D(m) of the Finance Act, 1994.

The Tribunal noted that there was no dispute regarding the actual use of the premises. The building was admittedly used by students for residential accommodation and not for any commercial activity.

While deciding the issue, the Tribunal placed substantial reliance on the Supreme Court’s judgment in State of Karnataka v. Taghar Vasudeva Ambrish, where the apex court had held that leasing residential premises for use as hostels by students or working professionals continues to qualify as residential use. The Supreme Court had emphasized that the exemption is activity-based and not dependent on the identity of the tenant or whether the property is sub-let to residents.

Applying the same reasoning, the Tribunal held that the ultimate use of the premises remained residential in nature, irrespective of whether the educational institution itself occupied the property or provided accommodation to students.

The Tribunal also referred to the Tax Research Unit (TRU) clarification issued by the Central Board of Excise and Customs in 2012, which explained that a “residential dwelling” includes residential accommodation but excludes hotels, motels, inns, guest houses and other premises intended for temporary stay.

Considering the nature of the accommodation and its long-term residential use by students, the Tribunal concluded that the premises satisfied the requirements of a residential dwelling under the negative list provision.

Allowing the appeal, CESTAT held that the rental income received from leasing the building to the educational institution for use as student hostels was not liable to service tax under Section 66D(m) of the Finance Act, 1994. Consequently, the Tribunal directed that the appellant be granted consequential relief, including the refund claimed.

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