HC: No sales tax on common tenant amenities

A two-judge panel of the Telangana High Court held that rental income received by landlords from tenants towards furniture, equipment and other movable facilities provided as part of lease arrangements cannot be subjected to sales tax in the absence of a transfer of the right to use such goods.

The panel comprising Justice P. Sam Koshy and Justice Suddala Chalapathi Rao observed that merely permitting tenants to use common facilities and amenities does not constitute a deemed sale under the taxation laws.. The panel was dealing with a batch of writ petitions filed by SDE Engineers Limited and other companies engaged in developing and leasing commercial properties, particularly IT parks, challenging tax demands raised by the commercial tax authorities on rental income attributable to furniture, fixtures, equipment and facilities provided to tenants.

The petitioners contended that the entire consideration received from tenants was towards leasing immovable properties and providing incidental amenities. They argued that the landlords retained possession and effective control over the furniture, fixtures and equipment, and that tenants were merely permitted to use such facilities as part of the overall leasing arrangement. Consequently, the transactions could not be treated as transfers of the right to use goods attracting tax under the APGST Act and APVAT Act.

The Government Pleader for State Tax, on the other hand, contended that the lease agreements separately identified rental amounts attributable to movable facilities and equipment, thereby making such receipts liable to taxation as transfers of the right to use goods.

Upon examining the lease agreements, the panel observed that the essential requirement for attracting tax under the deemed-sale provisions was the transfer of effective possession and control over the goods to the transferee.

The panel further observed that the lease agreements did not identify specific goods for delivery or confer an exclusive legal right upon individual tenants to use them. The landlords continued to retain effective control over the facilities and were entitled to regulate, suspend or discontinue their provision. Further, common amenities such as lifts, cafeterias and sewage systems were shared by several tenants and could not be exclusively delivered to any particular tenant.

The panel also observed that the authorities could not, merely on the basis of presumption, bifurcate composite lease rentals into components attributable to movable and immovable properties and impose tax without establishing the essential ingredients of a deemed sale.

Holding that the transactions arose out of contracts for providing services and did not involve a transfer of the right to use goods, the Court set aside the orders passed by the Sales Tax Appellate Tribunal and the subordinate tax authorities.