Joint Venture MoU For Sugar Mill Modernisation Not Taxable: CESTAT Chandigarh

The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that amounts received by a sugar mill under a co-generation and modernisation Memorandum of Understanding (MoU) cannot be treated as consideration for renting of immovable property and are therefore not liable to service tax.

Setting aside a service tax demand of over Rs. 21 lakh, the Bench comprising S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) observed that in the case at hand, the arrangement between the parties was in the nature of a joint venture and did not involve any service provider–service recipient relationship.

The appellant, M/s Nawanshahr Cooperative Sugar Mills, is engaged in the manufacture of sugar and is registered under the Central Excise regime. It is also registered for payment of service tax under the reverse charge mechanism in respect of transportation of goods by road.

The appellant entered into a Memorandum of Understanding with M/s Saraya Industries Ltd. (SIL) for the purpose of modernisation and improvement of energy efficiency at the sugar mill. Under the MoU, SIL deposited an amount of Rs. 2 crore with the appellant, which was expressly stated to be an advance for modernisation and not consideration for any service.

The Department took the view that the amount received under the MoU was liable to service tax under the category of “renting of immovable property” under Section 65(105)(zzzz) of the Finance Act, 1994, on the ground that land had been made available to SIL. Therefore, it issued a show cause notice demanding service tax of Rs. 21 lakh along with interest and penalty. The demand was confirmed by the adjudicating authority and upheld by the Commissioner (Appeals).

The appellant contended that the amount received from SIL was not linked to any renting of land but was paid exclusively towards modernisation and upgradation of machinery to improve energy efficiency, which did not amount to a taxable service.

The Tribunal found that the amount of Rs. 2 crore paid by SIL was not consideration for renting of immovable property but an advance specifically meant for the upgradation and modernisation of the sugar mill machinery. It further noted that the contemplated project never materialised and that disputes between the parties had already led to arbitration proceedings.

In this context, the Tribunal observed:

“No service can be said to have been provided as the project never took off, and the appellant has initiated arbitration proceedings against M/s SIL for violation of the MOU; at the most, the arrangement between the appellants and SIL was in the nature of a joint venture, and therefore, there is no component of service between the two parties.”

Accordingly, the Tribunal concluded that the demand of service tax under the category of “renting of immovable property” on the amount received under the MoU was not sustainable in law and allowed the appeal.

Case Title: M/s Nawanshahr Cooperative Sugar Mills v. Commissioner of Central Excise, Goods and Service Tax

Case Number: Service Tax Appeal No. 60878 of 2018

Counsel for Appellant/ Assessee: Sudeep Singh Bhangoo

Counsel for Respondent/ Department: Narinder Singh