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Service tax on Cost sharing arrangements

08 December 2007

Is service tax applicabe on Debit notes raised for sharing of Rent for use of office space ( on actuals based on area) and other common facilities ( based on specified percentages based on estimated usages)? Is subletting or sharing of rent is taxable under renting of imovable property?

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6 Replies

(Guest)

AS PER MY VIEW SUB LETTING IS NOT COVERED BY THE SERVICE RENTING OF IMMOVABLE PROPERTY THE LOGIC IS THE MAIN TANANT WILL PAY THE RENT FOR THE ENTIRE PREMISES THAT HE TOOK ON LEASE OR RENTAL FROMTHE OWNER AND PAYS THE SERVICE TAX ACCORDINGLY. WHEN HE SUBSEQUENTLY SUBLETS SOME PORTION OF THE PREMISES HE IS SHARING NOT ONLY THE PREMISES BUT ALSO THE RENT PAYABLE ON WHICH ST HAS ALREADY BEEN COVERED IF HE HAS BEEN ASKED TO PAY SERVICE TAX ON THAT SUBLETTING RENT PORTION IT AMOUNTS TO DOUBLE TAXATION. HOWEVER IF THE TOTAL RENT PAYABLE TO THE OWNER IS 100 FOR 100 PERCENT PORTION NOW HE SUBLETS 50% AND COLLECTS RS.75 THEN FOR THAT EXTRA ST MAY HAVE TO BE PAID REGARDS RK

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ANANDH SUNDAR (Bharti Airtel) (1623 Points)
Replied 10 December 2007

For the First Query relating to Debit notes- Yes, Service Tax will be applicable to the transaction under the head "Renting of Immovable Property". This is because the cost sharing arrangement is in essence a service As far as service tax on sub-lease is concerned, ST will apply even on that. But because the sub-leasor can take CENVAT credit on that amount, he won't be affected. For example, A leases a property to B for Rs 15 lakh/month(+ 12.36% ST) and B sub-leases it to C for Rs 20 lakh/month(+12.36% ST), then B pays to Govt net Service tax of Rs 61,800( 12.36%*20 lakhs-12.36%*15 lakhs).

(Guest)

Hi. as a cost sharing, if sublease is given for the part of (i.e, some of the part is recovered by way of debit note, and also cenvat credit availed for the full amount paid in respect of main lease. i feel st is leviable on account of this recovery.

Pritam (CA) (95 Points)
Replied 14 December 2007

If the cost sharing is amongst the group companies - Sharing of expenses among group companies/entities are general practices. Such sharing of expenses is done by issuing debit note on other group company. In this transaction there is no service rendered by one group company to another group company, it is merely an allocation of expenses out of common pool. As the service tax paid on such service is already paid by the corporate office, now again on sharing of such expenses cannot attract service tax again. Kindly note that cost incurred on staff and shared by group companies’ fall under the Business Auxiliary Services. In the case of Glaxo Smithline Pharmaceuticals Ltd V Commissioner of Central Excise (2005–TOIL-688-CESTATE), it was held that cost incurred on staff and shared by staff fall under Business Auxiliary Services.

(Guest)

If a Owner " A" letout the property to a "B" company for a rental consideration of Rs.20lac per month and the "B" Company further sublet the property to "C" company for Rental consideration of Rs.30lac after some renovation .

Wheather the "B" Comany can take the cenvat credit of the ST paid to "A" owner out of ST received from the "C" tenant Company. Please Advice.

If there is any Citation /Judgement or Clerification from Deparment