Service Tax – Renting of Immovable Property – A fresh stir of litigations

By TIOL News Service

NEW DELHI, MAR 02, 2010: FINANCE Act 2007 sought to tax services in relation to renting of immovable property by introducing section 65(105)(zzzz) w.e.f 01.06.2007. The said section read as under:

“(zzzz) to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce.”

Plain reading of the abovementioned section gave an impression that only services rendered in relation to renting of immovable property were chargeable to tax under service tax. Renting per se is not chargeable to service tax.

Central Government had issued notification No. 24/2007 dtd. 22 nd May 2007 exempting the “taxable service of renting of immovable property” referred to above from so much of the service tax levy as was in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied or collected by local bodies. Though this notification dealt with exemption, it also referred to the taxable service as “ taxable service of renting immovable property ”, thereby giving an indication that renting itself is a taxable service, even though such a thing was not explicitly mentioned in section 65(105)(zzzz).

CBEC circular no. 98/1/2008 – ST dtd. 04 th January 2008while giving a clarification in respect of commercial and industrial construction service once again tried to convey that “right to use immovable property is leviable to service tax under the renting of immovable property service.”

Consequently by above notification and circular, the Government of India was seeking to levy service tax on renting of immovable property instead of services in relation to renting of immovable property. These clarifications therefore were clearly traveling beyond the provisions/scope of the original section.

Writ petitions were filed in various high courts challenging the validity of these notification and circular and also challenging the right of the Central Government to charge tax in respect of immovable properties. The major points of contentions were as follows:

++ Section 65(105) (zzzz) refers to the service provided or to be provided to any person, by any other person, in relation to renting of immovable property for use in the course or furtherance of business or commerce. The reference in the said provision is not to the taxable service of renting of immovable property but to the taxable service " in relation to " the renting of immovable property. While the Act does not treat renting of immovable property as a taxable service, the notification and circular proceed on the basis that taxable service is renting of immovable property itself. Based on the above mentioned notification and circular, Government is trying to levy service tax on immovable property. The notification and circular travel beyond the provisions of the scope of the main section and hence are ultravires to the act and hence bad in law.

++ Hon'ble Supreme Court in the case of All India Federation of Tax Practitioners vs. Union of India (2007) 7 SCC 527 held that service tax is a tax on value addition and hence can be levied only on value added services. Since renting of immovable property by itself does not provide any value addition, it cannot be treated as a service.

++ Alternatively, in case it is held that such a tax is envisaged under the provisions of section 65(105) (zzzz) in so far as it relates to levy of service tax on renting of immovable property, it would tantamount to a tax on land and would therefore fall outside the legislative competence of the Parliament as the said subject would be covered under Entry 49 (Taxes on Lands and Buildings) of the List II of the Constitution of India. It would fall within the exclusive domain of the State Legislature. Based on this, the said provisions would have to be declared as unconstitutional.

Hon'ble Delhi High Court in case of Home Solutions Retail India Ltd and Others Vs. Union of India [2009] 20 STT 129 (Delhi) had delivered a landmark judgment on 18 th April 2009 on the above issue. The major highlights of the judgment were as follows:

++ Service tax is a value added tax. It is a tax on the value addition provided by some service provider. In so far as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. (Hon'ble Supreme Court judgement in case of All India Federation of Tax Practitioners vs. Union of India (2007) 7 SCC 527 relied).

++ The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent that they authorize the levy of service tax on renting of immovable property per se, they are set aside.

++ The High Court further observed that it has not examined the alternative plea with regard to the legislative competence of the Parliament in the context of Entry 49 of List 11 of the Constitution of India. Such an examination has become unnecessary because of the view it has taken on the main plea taken by the petitioners.

The above mentioned judgement quashed the rights of the Government to recover service tax on renting of immovable property. Central Government appealed against the Delhi High Court order to the Supreme Court and Supreme Court had admitted the SLP. However Supreme Court declined to grant any interim stay to the Government.

During pendency of the SLP, CBEC issued an instruction no. F. No 336/10/2009 – TRU dtd. 15th July 2009 stating that consequent to the above mentioned judgement, many assessees have stopped paying service tax on the renting of immovable property for business or commerce. All the service tax formations were informed that the Department had filed an appeal against the said order of the Delhi High Court, and the dispute has not reached finality. Given the situation, service tax formations throughout the country, were instructed to take necessary action to safeguard revenue by either pursuing the tax payer to pay up the service tax due or resort to means under law to protect the revenue.

This clearly showed up that Government is not going to leave its claim on this and only Hon'ble Supreme Court will decide this issue. Further the more astonishing fact was that inspite of losing out in the Delhi High Court, the Government asked its field formations to take steps to recover the tax (held illegal by the Delhi High Court!!).

Against these instructions, fresh writ petitions were filed before Delhi High Court and Delhi High Court in the case of SSIPL Retail Ltd. v. UOI [2010] 24 STT 571 had passed strictures against the department stating that during the pendency of the SLP, the judgment of the High Court was applicable and in the absence of any stay from the Supreme Court, the service tax department was bound to follow the same. In these circumstances, the department cannot not instruct its officers to pursue matter with taxpayers calling upon them to pay service tax or to resort to other means under law to protect the revenue. The department had assured that further instructions would be issued in supersession of earlier instructions, to the officers not to write letters to the assessees demanding payment of service tax or take coercive steps.

However in the Finance Bill 2010, Hon'ble Finance Minister chose to reverse the judgement of Hon'ble Delhi High Court by amending the section 65(105) (zzzz) retrospectively w.e.f. 01 st June 2007 thereby specifically levying service tax on renting on immovable property.

Further clause 76 of the Finance bill proposes to validate all actions taken under section 65(105) (zzzz), at any time during the period from 01 st June 2007 and ending with the day, the Finance Bill 2010 receives the assent of the President as if the amendment as proposed above had been in force at all material times, irrespective of anything contained in any judgement, decree or order of any court, tribunal or other authority.

This kind of retrospective amendments reversing the judicial pronouncements affects confidence of the tax payers/assessees on the entire taxation framework in the country. Further an assessee even after winning a case in High Court clearly feels dejected on account of such acts/deeds of the Government. Ideally the Government could have allowed this issue to be decided by the Supreme Court based on its merits.

To me it appears that this amendment of levying service tax on renting of immovable property is also not legally valid on account of following observation made by Hon'ble Delhi High Court in case of Home Solutions Retail India Ltd and Others Vs. Union of India [2009] 20 STT 129 (Delhi):

“The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service .”

These observations also have strong legal support from Hon'ble Supreme Court in the case of All India Federation of Tax Practitioners vs. Union of India (2007) 7 SCC 527.

Further the constitutional validity of this amendment can surely be challenged on the grounds that it is a tax on land and would therefore fall outside the legislative competence of the parliament. This subject would be covered under Entry 49 (Taxes on Lands and Buildings) of the List II of the Constitution of India and hence would fall within the exclusive domain of the State Legislature.

This would surely stir up a fresh round of litigations. We really fail to understand as to why Hon'ble Finance Minister would have to chosen to make this amendment and further increase litigations especially when he is proposing to have Goods and Service Tax from the next financial year and this probably is the last year of Central Excise and Service Tax.