Tea Estate Lease For Plantation Activities Cannot Be Split Into Multiple Taxable Services: CESTAT Chennai

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has held that a tea estate lease arrangement undertaken for plantation activities could not be artificially split and taxed under different service categories.

The tribunal found that the arrangement constituted a composite agricultural transaction.

A Division Bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao allowed two appeals filed by NEPC Agro Foods Limited. The Bench set aside service tax demands raised for the period from November 2009 to June 2017.

"the entire arrangement entered into by the Appellant constitutes a composite and indivisible agricultural transaction for plantation activities. The dominant nature of the activity being agricultural, all ancillary elements such as buildings, labour and machinery are integrally connected with and “in relation to” such agricultural operations and cannot be artificially segregated for the purpose of taxation.", it noted. 

The dispute arose from a lease agreement dated October 30, 2009. Under the agreement, NEPC Agro Foods leased its tea estates at Mount Stuart and Waverly Estates in Valparai to Waterfall Estate Pvt. Ltd. The lease was for carrying out plantation activities.

Following an investigation, the Department alleged that the arrangement attracted service tax under the categories of Renting of Immovable Property Service, Manpower Recruitment or Supply Agency Service and Supply of Tangible Goods Service.

According to the Department, the lease involved agricultural land as well as buildings, labour quarters, offices, machinery and other infrastructure. It also alleged that the appellant had rendered taxable services in relation to manpower and machinery.

NEPC Agro Foods contended that the lease was exclusively for plantation activities such as cultivation, harvesting and processing of tea leaves. It argued that the arrangement was a composite agricultural transaction.

The company further contended that the consideration under the agreement was linked to the quantity of green tea leaves harvested and the auction price. According to it, this showed that the transaction was agricultural in nature.

After examining the lease agreement, the Tribunal observed that the estates had been leased specifically for plantation activities. These activities included cultivation, application of fertilisers, irrigation, harvesting and processing of green tea leaves.

The bench further noted that the consideration was linked to agricultural output. It observed that the amount payable was computed on the basis of the quantity of green leaf harvested and the auction price.

"The lease consideration is directly linked to agricultural output, being computed on the basis of quantity of green leaf harvested and auction price, which clearly establishes that the transaction is in the nature of agricultural revenue sharing rather than commercial renting.", it noted.

The bench observed that agricultural activities had consistently been excluded from service tax under the applicable exemption and negative-list regimes. This position existed under the exemption regime prior to July 1, 2012. It continued under the negative-list regime introduced thereafter.

Referring to the Supreme Court's decision in Doypack Systems Pvt. Ltd. v. Union of India, the Tribunal held that activities having a nexus with agriculture could not be separated from the principal agricultural activity for taxation purposes.

"all elements of the lease arrangement, including provision of land, infrastructure, labour quarters and machinery, are integrally connected with plantation activities and cannot be artificially segregated."

On the demand under Renting of Immovable Property Service, the Tribunal held that the leasing of tea estates formed part of a composite arrangement for plantation activities. It further held that the land and incidental infrastructure were used exclusively for agricultural purposes.

"the leasing of tea estates is not in the nature of commercial renting but forms part of a composite arrangement for plantation activities, and the land, along with incidental infrastructure, is used exclusively for agricultural purposes. Therefore, the activity of leasing, being in relation to agriculture, would fall within the scope of the aforesaid exemption and would not be liable to Service Tax even under the category of “Renting of Immovable Property Service” during the pre-negative list regime.", it noted. 

With regard to the allegation of manpower supply, the Tribunal held that the essential ingredients of the taxable service were not satisfied. It observed that the workers were engaged in agricultural operations. The workers were under the control of the lessee.

The bench found no evidence of any separate consideration for supply of manpower. It also noted that the lease agreement placed responsibility for wages, statutory benefits, and labour welfare obligations on the lessee.

The tribunal also rejected the demand under Supply of Tangible Goods Service. It held that there was no evidence of transfer of possession or effective control of tractors or other machinery to the lessee.

The bench observed that the use of such equipment was incidental to agricultural operations. It formed part of the composite plantation arrangement. The Tribunal further found that there was no separate consideration identifiable for any alleged supply of machinery.

Holding that the demands were based on an impermissible vivisection of a composite agricultural arrangement, the Tribunal set aside the impugned orders. It allowed both appeals with consequent relief.

For Appellant: Advocate Ramesh T.R.,

For Respondent: Sanjay Kakkar and O.M. Reena, Authorized Representative