CESTAT New Delhi Sets Aside Rs. 39.64 lakh Service Tax Demand On DLF-Owned Hilton Hotel, Holds Salaries Not Taxable

The New Delhi Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has allowed the appeal filed by DLF Builders and Developers Pvt. Ltd., owner of Hotel Hilton Garden Inn, Saket, and set aside a service tax demand of Rs. 39.64 lakh along with penalties, holding that salaries paid to the general manager and department heads of the hotel cannot be treated as consideration for taxable services.

The dispute arose from an investigation linked to Hilton group entities, wherein the department alleged that the appellant had structured its arrangement in a manner that excluded salary payments to key managerial personnel, such as the general manager and department heads, from the taxable “operator fee” paid to Hilton's overseas entities.

According to the department, these officials were effectively functioning under Hilton's control, and their salaries, though paid directly by the company ought to have been included in the gross value of services for levy of service tax under the reverse charge mechanism.

This led to the issuance of a show cause notice demanding service tax along with interest and penalties, which was confirmed by the adjudicating authority and upheld by the Commissioner (of Appeals).

Before the tribunal, the appellant contended that the salaries paid to its employees had no nexus with the services rendered by Hilton overseas entities and therefore could not form part of the “gross amount charged” for taxable services.

It was argued that the relationship between the appellant and the concerned personnel was that of employer and employee, as evidenced by employment agreements, statutory compliances such as provident fund contributions and issuance of Form-16, and contractual clauses granting the appellant authority over hiring, termination, and supervision.

The bench, comprising Judicial Member Dr. Rachna Gupta and Technical Member Hemambika R. Priya, took note of these submissions and examined the terms of the operating agreement as well as the statutory compliances undertaken by the appellant.

The Tribunal noted that similar disputes involving other hotel owners operating under Hilton arrangements had consistently been decided in favour of assessees.

It was observed that the agreement explicitly provided that the General Manager and other staff were employees of the hotel owner, and that the appellant exercised substantive control over their appointment, transfer, and termination. The Tribunal also emphasized that compliance with statutory employer obligations further reinforced the employer-employee relationship.

The bench opined that "it is clear that in case of similarly placed hotel owners, the Department has held by the officers of other jurisdictions that the GM and other department heads are not employees of Hilton overseas entities and thus, the salaries paid is not liable to tax as a part of the operator fee paid to Hilton overseas entity. Consequently, the same view would have to be taken in the instant case."

Relying on settled legal principles governing the valuation of taxable services, the tribunal held that service tax is leviable only on the gross amount charged by the service provider for such services, and that any amount lacking nexus with the provision of taxable services cannot be included.

The bench stated that "the impugned order has held that the salary paid by the Appellant to the GM and other department heads is liable to be included in the operator fees paid by the Appellant to Hilton overseas entity and hence service tax is payable on the same. However, as per Section 67 of the Finance Act, 1994, the value of taxable service is the gross amount charged by the service provider for such service."

It concluded that salaries paid by the appellant to its employees were not consideration for services rendered by Hilton overseas entities and therefore could not be added to the operator fee for the purpose of service tax.

Accordingly, the Tribunal set aside the impugned order and allowed the appeal.

For Appellant: Advocate Harish Bindumadhvan

For Respondent: Aejaz Ahmad, Authorised Representative