Author Name:   satyasivadarshan

Hierarchy of Case laws deciding whether renting of immovable property alone is exigible for service tax...

Renting of Immovable Property – Service Tax

By the Finance Act 2007, Central Government has extended the levy of service tax on renting of property also with effect from 1.06.2007. Renting of immovable property for use in the course or furtherance of business or commerce is taxable under section 65(105) (zzzz) of the Finance Act 1994. Renting includes letting, leasing, licensing or other similar arrangement. For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings. Some residential and other properties are excluded from the scope of this service. Further Notification No.24/2007-Service Tax, dated 22.05.07 exempts taxable service provided by any person in relation to renting of immovable property from service tax equivalent to service tax payable on the amount of property tax, actually paid by the service provider to the local authority. In other words, service tax is payable on the rental amount received less the actual amount of property tax paid. However, any amount such as interest, penalty paid to the local authority by the service provider on account of delayed payment of property tax or any other reasons can not be treated as property tax for the purpose of this exemption and hence, deduction of such amount from the gross amount charged shall not be allowed.

While the dispute on propriety of the levy of service tax by the central government was yet to be decided by the appropriate courts, the government issued a clarification stating that service tax paid on input services in the nature of construction service or work contract service that are used in construction of an immovable property, which is meant to be rented or leased, will not be eligible for CENVAT credit for those who provide renting of immovable property service.

Finance Act, 2008 has inserted an explanation to the definition of immovable property to clarify that renting of immovable property shall include allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of such immovable property. The explanation states that the amendment is for removal of doubts. Ministry of Finance had vide Circular No. DOF 334/1/2008-TRU dated 29.2.2008 clarified as under -

"Use of immovable property is allowed for placing vending/dispensing machines in malls and other commercial premises and erection of communication towers on buildings. In such cases, there may or may not be transfer of right of possession or control of the immovable property in favour of the person using such property.”

The constitutional validity of the levy of service tax on rentals on such immovable property is doubtful. Mere renting of office space does not involve any service. Many association and individuals have filed writs petitions before different High Courts across India. Now the matter is before Supreme Court, but the some High Courts have stayed the recovery of Service Tax till final decision by the Supreme Court.

2. Retailers’ Association v. Union of India[1] [2008] [BOMBAY]
Assessee was an association of retailers. In respect of let out premises of members of assessee-association, Department of Revenue demanded service tax in category of ‘Renting of immovable property service’. Tribunal confirmed the said demand, against which assessee filed writ petition. During pendency of writ petition, Revenue moved Supreme Court for transferring these matters to Supreme Court for hearing and, therefore, High Court could not take up matter for final hearing. It was found that few High Courts had granted interim relief to respective assessees in relation to said statutory provision. Such interim relief directed members of assessee to file an undertaking in High Court stating that in event challenge was disallowed, they would make payment of service tax due and payable in accordance with legal provisions and further, that they would not be entitled to transfer their interest in property in relation to which demand of service tax was made, without first giving two weeks prior notice to revenue about their intention to transfer interest and nature of transfer. It was further directed that in case such undertaking is given, the person who is submitting the undertaking shall not be entitled to transfer his interest in the property in relation to which the demand of service tax is made without first giving two weeks prior notice of his intention to transfer his interest and the nature of the transfer to the respondents. In case within the period of two weeks, objection is raised on behalf of the respondents to the proposed creation or transfer of interest, then no interest will be created or transferred without seeking leave of the Court. It goes without saying that if the objection is not raised within the period of two weeks, the person shall be free to create or transfer proposed interest in the property.

On the undertaking mentioned above, being filed by the members of the petitioners, The High Court directed that no coercive steps shall be taken by the respondent for recovery of service tax in respect of the premise of such members of the petitioners.

3. Home Solution Retail India v. Union of India[2] [2009] [DELHI]
To avoid multiplicity of litigation, the Union of India preferred a transfer petition to the Supreme Court of India seeking transfer of all writ petitions pending before different High Courts of India. The Supreme Court directed the same to Delhi High Court for single window adjudication. The Delhi High Court has struck down the levy of service tax on renting of immovable property as "ultra vires” the finance act, while deciding 26 writ petitions of different petitioners, by a combined order.

In the instant batch of writ petitions, the petitioners, who were either landlords, or tenants in respect of leased premises, had challenged the legality, validity and vires of Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008 - ST dated 4-1-2008 issued by the department of revenue. The said notification dated 22-5-2007 is an exemption notification by virtue of which the Central Government exempted the ‘taxable service of renting of immovable property’, referred to in sub-clause (zzzz) of clause (105) of section 65 from so much of the service tax levy as was in excess of 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. It was the petitioners’ contention that while the Act does not treat renting of immovable property as a taxable service, the notification proceeds on the basis that the taxable service is the renting of immovable property itself. Similarly, the impugned circular whilst giving a clarification in respect of commercial and industrial construction service has purported to clarify that the “right to use immovable property is exigible to service tax under the ‘Renting of immovable property service’ ”. Consequently, by the said clarification, the Union of India was seeking to levy service tax on renting of immovable property instead of on services in relation to renting of immovable property. It was further alleged that because of this incorrect interpretation, service tax was sought to be levied on the renting of immovable property as opposed to service tax on a service provided ‘in relation to the renting of immovable property’. Consequently, the said notification and the said circular were sought to be set aside as being ultra virus the said Act.

The Delhi High Court held that the Service tax is a value added tax. It is a tax on value addition provided by a service provider. It is obvious that it must have connection with a service and there must be some value addition by that service. If there is no value addition, then there is no service. With this in mind, it would be instructive to anlayse the provisions of section 65(105)(zzzz). It has reference to a 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 wordings of the provision are so structured as to entail a service provided or to be provided to ‘A’ by ‘B’ in relation to ‘C’. Here, ‘A’ is the recipient of the service, ‘B’ is the service provider and ‘C’ is the subject-matter. The expression ‘in relation to’ may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, the expression ‘in relation to’ would include the subject-matter following it and on other occasions, it would not. As in the case of service of dry cleaning, the expression ‘in relation to dry cleaning’ also has reference to the very service of dry cleaning. On the other hand, the service referred to in section 65(105)(v), which refers to a service provided by a real estate agent ‘in relation to real estate’, does not, obviously include the subject-matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service. Going back to the structured sentence, i.e., - service provided or to be provided to ‘A’ by ‘B’ in relation to ‘C’, it is obvious that ‘C’ can either be a service (such as dry cleaning, hair dressing, etc.) or not a service by itself, such as real estate. The expression ‘in relation to’ would, therefore, have different meanings depending on whether ‘C’ is a service or is not a service. If ‘C’ is a service, then the expression ‘in relation to’ means the service ‘C’ as well as any other service having connection with the service ‘C’. Where ‘C’ is not a service, the expression ‘in relation to’ would have reference only to some service which has a connection with ‘C’. But, this would not imply that ‘C’ itself is a service.

The High Court further held that there is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be eligible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. 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, any value addition could not be discerned. Consequently, the renting of immovable property for use in the course or furtherance of business or commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided along with the renting of immovable property, then it would fall within section 65(105)(zzzz)

In view of the foregoing discussion, the court held that section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business or commerce would by itself constitute a taxable service and be exigible to service tax under the Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision was not correct. Consequently, the same were held ultra vires the said Act and to the extent they authorize the levy of service tax on renting of immovable property per se, were set aside.

4. Union of India v. Home Solutions Retailers of India[3]. (pending). [SUPREME COURT]
Central Government had preferred a Special leave petition against the decision of High Court in HSRI v. UOI[4]. Though the SLP has been admitted by the Supreme Court, they declined to issue a stay order on the operation of Delhi High Court’s judgment in the aforementioned case.

Case is still pending before the Supreme Court for final hearing and yet to be disposed off.

5. SSIPL Retail Limited and Ors v. Union of India[5] [2010] [DELHI]
Central Government had appealed against the Delhi high court judgment and Supreme Court had admitted the SLP but declined to grant interim stay to the Government (SLP Civil No 13850/2009). During pendency of that SLP, the service tax department official had issued instruction to its officers throughout the country that in view of pendency of SLP, officers should safeguard the revenue by either pursuing the taxpayers to pay the service tax on renting of immovable property or resorting to means under law to protect the revenue. On the basis of such instruction, the officials of the department started sending notices to the petitioners with instructions to start complying with the provisions of the aforesaid notification and circular by paying the requisite service tax. Aggrieved with the orders, again writ petition is filed before the Delhi high court. The Delhi high court held as under:

Even though the judgment of the High Court was challenged by filing the SLP, till the date there was no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the department could 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 corrective steps would be taken by issuing further instructions, in super session of earlier instructions, to the officers not to write such letters demanding the payment of service tax or threatening coercive steps. On such assurance, no further orders were required to be passed in the instant petition.

6. Finance Act, 2010:
The Finance act, 2010 has made the following important amendments relating to Renting of Immovable Property Service: (section 65 (105) (zzzz))

‘Renting’ activity itself regarded as taxable service (Retrospectively amended from 1 June, 2007)
Renting of vacant land for construction of building /temporary structure at later stage for furtherance of business or commerce regarded as taxable service.

7. Home Solutions Retailer of India and ors v. Union of India and Ors[6]. (pending) [DELHI]
The petitioners again challenged the validity of Section 65(105) (zzzz) of the Finance Act, 1994 which purports to levy service tax on mere renting of immovable property for building or construction usage. This particular amendment has been inserted by Finance Act, 2010 and gave retrospective effect from June 1st 2007. It received the President Assent on May 11th 2010.

The High Court upheld its earlier judgment regarding the same and provided an interim relief holding that there shall be no recovery of service tax from the petitioner for renting of immovable property alone.

The case is still pending before this Honourable High Court for final hearing. Meanwhile, it gave appropriate time for both Respondents and Petitioners to file counter affidavits and rejoinders respectively. The next date listed for hearing is September 9th 2010.

8. Conclusion:
From the foregoing discussion, it is quite evident that the issue whether renting of immovable property alone is taxable or not is sub-judice. However the Delhi High Court reiterated its earlier view in the interim order recently issued by them on May 18th 2010 that there shall be no levying of service tax on renting of immovable property alone.

Since there are conflicting views of the High Courts on the binding effect of a decision of High Court on other jurisdictions, it is advisable to take a position that the decision of the Delhi High Court is binding only on the assessing authorities and Tribunals in Delhi. However, the decision would have only a persuasive value outside Delhi.
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[1] [2008] 16 STT 127 (BOM).
[2] [2009] 20 STT 129 (DELHI).
[3] (SLP Civil 13850 / 2009).
[4] Supra note.2
[5] [2010] 24 STT 571 (DELHI).
[6] (WP. CivilNo. 3398/2010)

The  author can be reached at: satyasivadarshan@legalserviceindia.com

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