NOVEMBER 27, 2012

By Ruchir Bhatia, Advocate

SERVICE Tax on renting of immovable properties was introduced by the Finance Act, 2007 by inserting clause (zzzz) in section 65(105) of the Finance Act, 1994 with effect from 1st June 2007. However, this levy of service tax was challenged in various writ petitions throughout the Country. On 18.04.2009, the Hon'ble High Court of Delhi in the case of Home Solutions v. UOI - 2009-TIOL-196-HC-DEL-ST (now know as Home Solutions - I) held that renting per se does not entail any value addition and therefore, cannot be regarded as a service. In view of this judgment, majority of assessees stopped paying service tax on renting of immovable properties.

In order to over-come the judgment and remove ambiguities, Central Government amended clause (zzzz) by the Finance Act, 2010 with retrospective effect from 1 st June 2007 i.e. the date the levy was first introduced. The amendment made by the Finance Act, 2010 came into force with effect from 1st July 2010.

Again, the amendment was challenged in batch of writ petitions before different High Courts. Six High Courts have already upheld the Constitutional validity of levy of service tax on renting of immovable properties and also upheld the retrospective amendment. However, Home Solutions –I as well as Home Solutions-II (2011-TIOL-610-HC-DEL-ST-LB) are sub-judice before the Hon'ble Supreme Court. But, in order to boost revenue collection from renting of immovable properties, Central Government by the Finance Act, 2012 introduced amnesty scheme. As per this scheme, it has been provided that if service tax along with interest is paid within six months from the date the Finance Act, 2012 receives the assent of the President i.e. 28th May 2012 then no penalty is to be imposed. Accordingly, to get waiver of penalties, the last date for making payment of service tax along with interest is 28th November 2012. This date being public holiday, the last date automatically gets extended to 29th November 2012. It is also hoped that looking into low publicity and total revenue involved, this date may be extended upto 31st December 2012.

However, the principal issue which is a being discussed is about payment of interest i.e. whether interest is payable from 1st June 2007 or from 1st July 2010. There are two views prevalent. One favouring assessee that interest is payable from 1st July 2010 i.e. the date amended provisions came into force. This view is based by placing reliance on the judgment of the Hon'ble Apex Court in Star India Ltd. v. CCE - 2005-TIOL-163-SC-ST-LB. In the said case, the issue related to broadcasting services, which were introduced by the Finance Act, 2001. However, by the Finance Act, 2002, an amendment was made with retrospective effect. In para 8 of the judgment, the Hon'ble Supreme Court has observed:

"The liability to pay interest would only arise on default and is really in the nature of a quasi-punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect."

However, it is also important to note para 10 of the judgment, which is as under:

"Besides, if the liability has been created under the amended section by virtue of sub-section (2) of Section 148 of the Finance Act, 2002, it must be given effect to wholly. The section expressly makes the assessee liable under the amended provision to pay the tax within the period of 30 days from the date of the Presidential Assent to the Finance Bill, 2002. It is admitted that the Finance Bill, 2002 was assented to on 11-5-2002 by the President. In the circumstances, the appellant was entitled to a period of thirty days thereafter to make payment of the tax. Needless to say, if it did not make payment within thirty days from the 11-5-2002, it would be liable to pay interest at the rate specified after that date."

The aforesaid para makes it clear that what led the Hon'ble Court to observe in para 8 was the validation clause in section 148(2) of the Finance Act, 2002 which read as under:

"Any action taken or anything done or omitted to be done or purported to have been under this Chapter at any time during the period commencing on and from the 16th day of July, 2001 and ending with the day, on which the Finance Bill, 2002 receives the assent of the President, shall be deemed to be and to always have been, for all purposes, as validly and effectively taken or done or omitted to be done as if sub-section (1) had been in force at all material times and, accordingly, notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority, recovery shall be made of all such service tax which have not been collected but which would have been collected, if sub-section (1) had been in force at all material times, within a period of thirty days from the date on which the Finance Bill, 2002 receives the assent of the President, and in the event of non-payment of such service tax so recoverable, interest at the rate of fifteen per cent per annum shall be payable, from the date immediately after the expiry of the said period of thirty days, till the date of payment."

In contrast, in the case of renting of immovable properties, validation clause introduced by the Finance Act, 2010 reads under:

"Validation of action taken under sub-clause (zzzz) of clause (105) of Section 65. - Any action taken or anything done or omitted to be done or purported to have been taken or done or omitted to be done under sub-clause (zzzz) of clause (105) of section 65 of the Finance Act, 1994 (32 of 1994), at any time during the period commencing on and from the 1st day of June, 2007 and ending with the day, the Finance Bill, 2010 receives the assent of the President, shall be deemed to be and deemed always to have been, for all purposes, as validly and effectively taken or done or omitted to be done as if the amendment made in sub-clause (zzzz) of clause (105) of section 65, by sub-item (i) of item (h) of sub-clause (6) of clause (A) of section 76 of the Finance Act, 2010 had been in force at all material times and, accordingly, notwithstanding anything contained in any judgment, decree or order of any court, tribunal or other authority,-

(a) any action taken or anything done or omitted to be taken or done in relation to the levy and collection of service tax during the said period on the taxable service of renting of immovable property, shall be deemed to be and deemed always to have been, as validly taken or done or omitted to be done as if the said amendment had been in force at all material times;

(b) no suit or other proceedings shall be maintained or continued in any court, tribunal or other authority for the levy and collection of such service tax and no enforcement shall be made by any court of any decree or order relating to such action taken or anything done or omitted to be done as if the said amendment had been in force at all material times;

(c) recovery shall be made of all such amounts of service tax, interest or penalty or fine or other charges which may not have been collected or, as the case may be, which have been refunded but which would have been collected or, as the case may be, would not have been refunded, as if the said amendment had been in force at all material times.

Explanation. - For the removal of doubts, it is hereby declared that no act or omission on the part of any person shall be punishable as an offence which would not have been so punishable had this amendment not come into force."

The view as per which interest is payable w.e.f 1 st June 2007 is based on the plain reading of the aforesaid validation clause.

Further, in Shiv Dutt Rai Fateh Chand and Ors v. UOI & Ors. (2002-TIOL-417-SC-CT), the Hon'ble Supreme Court upheld retrospective amendment to section 9 of the Central Sales Tax Act which went to the extent of imposing penalty retrospectively, observing thus:

"The Court was more emphatic in Rai Ramkrishan and Ors. v. The State of Bihar [1963] 50 ITR 171 (SC) about the power of the legislature in India to enact retrospective taxation laws. It held that if in its essential features a taxing statute is within the competence of the Legislature, it would not cease to be so if retrospective effect is given to it. A power to make a law, therefore, includes within its scope to make all relevant provisions which are ancillary or incidental to it. The provision for levying of interest and to levy penalties retrospectively and to validate earlier proceedings under laws which have been declared unconstitutional after removing the element of unconstitutionality is included within the scope of legislative power."

In recent times, the view is emerging that even penalty is not quasi-criminal rather compensatory. In the case of State of U.P. and Ors. v. Sukhpal Singh Bal (2005)7 SCC 615, Hon'ble Justice Kapadia upholding penalty upto 10 times of the due tax held:

"Penalty" is a slippery word and it has to be understood in the context in which it is used in a given statute. Apenalty may be the subject-matter of a breach of statutory duty or it may be the subject-matter of a complaint. In ordinary parlance, the proceedings may coverpenalties for avoidance of civil liabilities which do not constitute offences against the State. This distinction is responsible for any enactment intended to protect public revenue. Thus, allpenalties do not flow from an offence as is commonly understood but all offences lead to a penalty. Whereas the former is apenalty which flows from a disregard of statutory provisions, the latter is entailed where there ismens reaand is made the subject-matter of adjudication. In our view, penaltyunder section 10(3) of the Act iscompensatory . It is levied for breach of a statutory duty for non-payment of tax under the Act. Section 10(3) is enacted to protect public revenue. It is enacted as a deterrent for tax evasion. If the statutory dues of the State are paid, there is no question of imposition of heavypenalty . Everything which is incidental to the main purpose of a power is contained within the power itself. The power to imposepenalty is for the purpose of vindicating the main power which is conferred by the statute in question. Deterrence is the main theme of object behind that imposition ofpenalty under section 10(3)."

Before parting, it may be noted that whether interest is calculated and paid from either of the dates, any proceeding to impose penalty appears to be an exercise in futility, as in any case this is one area where the expression "reasonable cause"does not warrant any explanation or a reply running into pages.

It is suggested that the Government may issue suitable clarification on payment of interest also so that levy and payment of service tax on immovable property may "REST IN PEACE!".