VAT Payment Doesn't Exempt Fit-Out Charges From Service Tax, CENVAT Credit Allowed: Madras High Court

The Madras High Court on 12 October held that payment of Value Added Tax (VAT) on fit-out charges does not automatically exempt the same transaction from service tax. Further, a portion of the consideration for leased office premises must be attributed to fit-outs provided under the lease agreements.

A Division Bench comprising Justices Anita Sumanth and C. Kumarappan upheld CENVAT credit claimed by Ascendas IT Park (Chennai) Ltd. on specified input services, while deciding an appeal filed by the Commissioner of GST and Central Excise, Chennai South, against an order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). It held:

“The argument put forth by the assessee was that VAT had been paid and hence such payment would obviate the necessity for service tax. This argument has been negated by the authority on the ground that the provision of the fit-outs form part of the value of the immovable property rented out and hence the liability should encompass the same as well.”

Ascendas IT Park develops and maintains an Information Technology Park and provides management, maintenance and repair (MMR) services and renting of immovable property (RIP) services.

The dispute arose from two show-cause notices covering the periods from 16 June 2005 to 1 June 2007 and from April 2009 to March 2010. The Department sought to recover CENVAT credit claimed by Ascendas IT Park, along with interest and penalties.

The adjudicating authority disallowed the credit, but the CESTAT allowed Ascendas IT Park's appeal. The Department challenged that decision before the High Court, arguing that the company had claimed credit on input services relating to renting of immovable property, which was exempt during the relevant period.

Ascendas IT Park relied on Rule 6(5) of the CENVAT Credit Rules, 2004, to claim full credit on specified input services. The company had not maintained separate accounts to distinguish credit attributable to taxable and exempt services.

The Court observed that Rule 6 generally requires service providers that render both taxable and exempt services to maintain separate accounts or follow prescribed alternatives. However, Rule 6(5) permits full credit on specified input services unless the provider uses those services exclusively to manufacture exempted goods or provide exempted services.

It noted that Ascendas IT Park provided both MMR and RIP services. Even if some input services supported exempt RIP services during the relevant period, the company had not used those services exclusively to provide exempt services. Therefore, the judges upheld the CESTAT's decision allowing the credit.

For the period after 1 June 2007, the Department also relied on Central Board of Excise and Customs Circular No. 98/1/2008-ST dated 4 January 2008 to challenge the credit. The Bench agreed with the CESTAT that the circular did not apply because it addressed whether immovable property itself attracted service tax or excise duty, rather than whether input services used to provide renting services qualified for credit.

It answered the first two substantial questions of law in favour of Ascendas IT Park and against the Department. It left the third question, concerning the applicability of the Supreme Court's decision in Safety Retreading Co. (P) Ltd. v. Commissioner of Central Excise, Salem, unanswered because neither side made submissions on the issue.

Separately, the judges examined the service tax demand on fit-out charges. The CESTAT had set aside the demand because it considered the fit-outs to comprise movable items, such as chairs and tables, handed over to tenants, and noted that Ascendas IT Park had paid VAT on the consideration.

The Bench found that the fit-outs also included workstations, cabins and meeting rooms provided with the leased office space. Since the lease agreements expressly provided for these facilities, it held that the Department had to attribute a portion of the consideration to the fit-outs.

Relying on the Supreme Court's decision in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes & Others, it rejected the argument that payment of VAT automatically ruled out service tax liability. It stated that “..mere payment of VAT would not lead to the conclusion that no services tax is payable..”

Further, the judges also noted that Ascendas IT Park had not produced evidence to establish that it had actually paid VAT on the fit-outs. It therefore answered the fourth substantial question of law in favour of the Department and against the company.

Accordingly, the High Court upheld CENVAT credit on specified input services but ruled in favour of the Department on service tax liability for fit-out charges. It awarded no costs and closed the connected miscellaneous petition.

For Appellant: Mr Rajendran Raghavan, Senior Panel Counsel for Mr.Su.Srinivasan, Senior Panel Counsel

For Respondent: Ms. Mathangi.G. for Mr.S.MuthuVenkataraman