Service Tax on Vacant Land Lease for Industrial Use: Key Takeaways from Bhilai Steel Plant vs Commissioner of Central Excise

Introduction

This decision of the CESTAT Delhi in Bhilai Steel Plant Vs Commissioner of Central Excise deals with an important controversy under the erstwhile service tax regime: whether lease rentals received for vacant land, given on long-term lease for setting up an industrial unit, were taxable under Section 65(105)(zzzz) as “Renting of Immovable Property Service” before 01.07.2010.

The Tribunal also examined whether penalties under Section 76, Section 77 and Section 78 could be sustained for the period after 01.07.2010, when the definition of taxable service was amended to specifically cover certain leases of vacant land.

Factual Matrix

Joint Venture and Lease Structure

  • The appellant, Bhilai Steel Plant, a unit under Steel Authority of India Limited, manufactures iron and steel products and is registered for various taxable services.
  • Its manufacturing activity generates blast furnace slag, a by-product suitable for cement manufacturing.
  • To utilise this slag, it entered into a joint venture with M/s Jai Prakash Associates, resulting in the formation of M/s Bhilai JVC Cement Limited (BJCL).

Under this arrangement:

  1. Long-term land lease

    • The appellant executed a long-term lease deed dated 05.06.2007 in favour of BJCL.
    • Approximately 34.59 acres of open/vacant land was leased for 30 years.
    • Consideration comprised a one-time non-refundable premium and annual rent.

  2. Supplementary lease deed

    • A supplementary lease deed dated 23.11.2007 altered the specific parcels (khasra numbers) while retaining the total area of 34.59 acres.
    • The realignment was to enable construction of a railway siding required by BJCL.

  3. Separate licence agreement for buildings

    • By a distinct licence agreement dated 23.11.2007, certain buildings were given on a temporary licence to BJCL for office use.
    • On the licence fee for these office buildings, the appellant regularly discharged service tax under “Renting of Immovable Property Service” and filed corresponding returns.

The dispute in the appeal was restricted solely to the service tax demand on consideration received for the lease of 34.59 acres of vacant land, not on the licensed office buildings.

Period of Dispute and Demand

  • The adjudicating authority passed an Order-in-Original dated 30.08.2013, confirming a service tax demand of Rs. 84,16,343/- for the period 2007-08 to 2011-12, treating the lease receipts from BJCL as taxable under “Renting of Immovable Property Service”.
  • An amount of Rs. 3,26,080/- earlier paid by the appellant was appropriated.
  • Interest and penalties under Section 76, Section 77 and Section 78 were also imposed.

The relevant period considered by the Tribunal was 01.06.2007 to 31.03.2012, falling into two distinct phases:

  1. Pre-amendment period – From 01.06.2007 to 30.06.2010.
  2. Post-amendment period – From 01.07.2010 to 31.03.2012.

The assessee:

  • Accepted liability to pay service tax on the lease of vacant land for the post-01.07.2010 period, and had already paid such tax.
  • Disputed the levy of service tax for the pre-01.07.2010 period on the ground that vacant land leases were outside the ambit of the then definition of taxable service.
  • For the post-01.07.2010 period, challenged only the penalties, not the tax.

Statutory Framework: Section 65(105)(zzzz) Before and After 01.07.2010

Position Prior to 01.07.2010

Before the 2010 amendment, Section 65(105)(zzzz) (Chapter V of the Finance Act, 1994) covered:

“to any person, by any other person in relation of immovable property for use in the course of furtherance of business or commerce.”

Explanation 1 defined “immovable property” to include:

  • (i) Building and part of a building and the land appurtenant thereto;
  • (ii) Land incidental to the use of such building or part of a building;
  • (iii) Common/shared areas and facilities;
  • (iv) Common areas and facilities in a complex/industrial estate.

But it expressly excluded:

  • (a) Vacant land used solely for agriculture, aquaculture, farming, forestry, animal husbandry, mining;
  • (b) Vacant land, whether or not having facilities incidental to its use;
  • (c) Land used for education, sports, circus, entertainment, parking;
  • (d) Buildings used solely for residential purpose or for specified accommodation like hotels, hostels, etc.

Thus, vacant land as such, including with incidental facilities, stood outside the scope of “immovable property” for the purpose of service tax under this clause.

Position From 01.07.2010 Onwards

With effect from 01.07.2010, the definition was significantly widened. Section 65(105)(zzzz) was amended to read: