Service tax cannot be levied on unpaid compensation for premature lease termination.

Brijrani Hospitality Pvt. Ltd. owned Hotel Ambrosia and leased it to Shotz Hospitality Pvt. Ltd. from April 2013 at monthly rent of ₹4.5 lakh.

After Shotz vacated the premises in August 2014, Brijrani issued a legal notice claiming rent for the unexpired lease term. The parties later compromised, with neither owing compensation to the other.

Brijrani subsequently leased the hotel to Vishwa Mangal Trade Mart Pvt. Ltd.; the record contained agreements stating monthly rent of both ₹2.9 lakh and ₹60,000.

The tax authorities confirmed a service-tax demand of ₹1,06,31,026, with interest and penalties, on the Shotz rent, the termination claim, and the rent attributed to Vishwa Mangal. The Commissioner (Appeals) upheld that order, prompting appeals by Brijrani and its managing director, Aditya Tripathi

1. Whether service tax was payable on the ₹5,83,66,845 claimed from Shotz for premature termination of the lease, although no amount was ultimately received and the parties settled the claim.

2. Whether service tax was payable on rent accrued under the Shotz lease for April 2013 to August 2014, having regard to the rent actually received, the August 2014 vacancy, and the small-service-provider exemption.

3. Whether service tax was payable on rent of ₹2.9 lakh per month under the Vishwa Mangal agreement, rather than on the ₹60,000 stated in the later agreement.

4. Whether the extended limitation period was properly invoked.

The dispute arose under the Finance Act, 1994, including the service-tax demand and penalty provisions in sections 73, 77, 78 and 78A, and the interest provision in section 75.

The Revenue relied on Rule 3(a) of the Point of Taxation Rules, 2011, and section 66E(e) of the Act to argue that the termination claim was taxable when demanded and represented consideration for agreeing to tolerate an act or situation.

The Tribunal held that an unreceived contractual claim for breach, in the circumstances before it, was compensation rather than rent and did not attract service tax; it also recognised that the small-service-provider exemption and tax already paid had to be taken into account when recomputing tax on rent.

The Tribunal set aside tax on the termination claim because the claim was not paid and the parties’ compromise extinguished any obligation to pay; moreover, the sum was compensation for breach, not rent.

For the Shotz rent, it accepted the submission that no rent was received for August 2014 and directed that tax be recalculated for the remaining period after allowing the applicable ₹10 lakh exemption and crediting tax already deposited.

For Vishwa Mangal, it preferred the ₹2.9 lakh monthly rent in the signed agreement, supported by the company representative’s statement, over the later ₹60,000 figure, which the Tribunal considered implausible in the circumstances.

It found sufficient grounds for invoking the extended limitation period.

The service-tax demand of ₹84,63,192 on the unpaid termination claim was set aside.

The demand relating to Shotz rent was partly upheld, subject to excluding August 2014 and recalculating tax after applying the exemption and crediting amounts already paid.

The demand on Vishwa Mangal rent was upheld; the operative order describes the relevant period as December 2014 to June 2015.

Interest and the section 78 penalty were to be reduced proportionally, and the impugned order was modified accordingly.