Rent For Furniture In Commercial Lease Not Taxable As Deemed Sale: Telangana High Court

The Telangana High Court on 3 July held that rent received from leasing commercial buildings along with furniture, fixtures and other amenities cannot be taxed as a transfer of the right to use goods under the Andhra Pradesh Value Added Tax Act, 2005 (APVAT Act) or the Andhra Pradesh General Sales Tax Act, 1957 (APGST Act), where the transaction is essentially one of renting immovable property and no exclusive right over the goods is transferred to the tenant.

A Division Bench of Justices P. Sam Koshy and Suddala Chalapathi Rao allowed a batch of writ petitions and a tax revision case filed by SDE Engineers Ltd. and other developers, setting aside tax demands raised under Section 4(8) of the APVAT Act and Section 5E of the APGST Act, which levy tax on the transfer of the right to use goods. The Court observed:

“the rent paid by the tenants to the petitioners / landlords towards the furniture, equipment, and other movable items provided in the kitchen and cafeteria, in respect of which the tenants have paid rent, would not be amenable to tax under the APGST Act, as such payments arise out of a contract of service.”

The dispute arose after the developers leased office spaces in technology parks to information technology companies along with facilities such as centralised air conditioning, power infrastructure, lifts, furniture, kitchen and cafeteria facilities. While service tax had been paid on the composite leasing arrangement, the tax department sought to bifurcate the transaction and levy value added tax on the portion of rent attributable to movable assets.

The developers argued that the transaction was a composite contract for renting immovable property and did not involve any transfer of the right to use furniture or other movable items. The Revenue, however, contended that the separately identified rent for furniture and fixtures constituted consideration for the transfer of the right to use goods.

Examining the lease agreements, the High Court held that they must be read as a whole to ascertain the true nature of the transaction. Relying on the Supreme Court's decision in Bharat Sanchar Nigam Limited, it reiterated that the transfer of the right to use goods is the essential requirement for levying sales tax on a deemed sale. Merely permitting tenants to use furniture, fixtures and common amenities as part of a lease does not satisfy that requirement.

The Bench also found that the furniture, equipment and other amenities remained under the lessors' control and formed an integral part of the leasing arrangement rather than being independently transferred for the tenants' exclusive use. 

Accordingly, the High Court allowed the petitions and tax revision case and quashed the impugned tax demands.