Background :
W.e.f 1-6-2007 the Central Government included within the
definition of taxable service 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. Renting included
letting, leasing, licensing or other similar arrangement. The phrase ‘for use in
the course or furtherance of business or commerce’ was said to include use of
immovable property as factories, office buildings, warehouses, theatres,
exhibition halls and multiple-use building. Some residential and other
properties were excluded from the scope of this service.
The levy of service tax on renting of immovable property was
challenged through writ petitions before High Courts in different parts of the
country. Many property owners began paying self-assessed tax on the rent amount
and passed on the said liability to the tenants. At the same time, many property
owners did not charge service tax pending disposal of writ petitions.
Implications of the levy on renting of immovable property and
issues arising therefrom have been discussed in detail in the August 2007 and
September 2007 issues of BCAJ.
The Delhi High Court in Home Solution Retail India Ltd. v.
Union of India & Others, (2009) 14 STR 433 (Del.) held that service tax 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. Applying the
same to renting of immovable property service, the High Court observed as
under :
“There is no dispute that any service connected with the
renting of such immovable property would fall within the ambit of S.
65(105)(zzzz) and would be exigible 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 providers. 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.“
In arriving at the aforesaid finding, the Delhi High Court
relied on the decision of the Supreme Court in Tamil Nadu (T.N.) Kalyana
Mandapam Association v. UOI, (2006) 3 STR 260 (SC) which, interestingly was
relied upon both by the appellants who had challenged the legality of the levy,
as well as by the respondents i.e., the Government of India. Based on a
detailed consideration of the aforesaid judgment, the Delhi High Court held that
the decision of the Supreme Court supported the argument of the appellants
before it and not the Government of India. With regard to the nature of the
service tax itself, the High Court held that it is a value added tax on value
addition done by the service provider and it must have a connection with the
service. Consequently, since mere renting of immovable property does not entail
any value addition, it could not be regarded as a service for that reason as
well.
The Delhi High Court observed in para 37 as :
. . . . We have not examined the alternative plea taken
by the petitioners with regard to legislative competence of the Parliament in
the context of Entry 49 of List II of the Constitution of India.
The Govt. filed an SLP against the said ruling which has been
admitted, but no stay has been granted against the Delhi HC Ruling. The same is
pending disposal.
Implications arising from the Delhi High Court Ruling have
been discussed in detail in the July 2009 issue of BCAJ.
Amendment by Finance Act, 2010 (‘Act’) :
Prior to the amendment, S. 65(105)(zzzz) of the Act defined
‘taxable service’ in the context of ‘renting of immovable property’ as under :
“(105) ‘taxable service’ means any service provided or to
be provided :
(a) to (zzzy) . . . . . .
(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.
Explanation 1. . . . . . .
The Finance Act, 2010 has nullified the Delhi High Court
Ruling by redefining ‘taxable service’ with retrospective effect from 1-6-2007
as under :
“(105) ‘taxable service’ means any service provided or to
be provided :
(a) to (zzzy)
(zzzz) to any person, by any other person, by renting of
immovable property or any other service in relation to such renting for use in
the course or furtherance of business or commerce.“
Thus, henceforth a service provided by renting of immovable
property or a service ‘in relation to’ such renting of immovable property, is
now covered in the definition of taxable service. TRU Circular No. 334/1/2010 —
TRU (Annexure B), dated 26-2-2-10 clarifies as under :
Para 9.2
“In order to clarify the legislative intent and also bring
in certainty in tax liability the relevant definition of taxable service is
being amended to clarify that the activity of renting of immovable property
per se would also constitute a taxable service under the relevant clause.
This amendment is being given retrospective effect from 1-6-2007.“
Thus, renting of immovable property by itself is now
considered to be a taxable service. In the Finance Act 2010, it has been
declared as under :
“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.
Implications of the amendment :
The amendment in the definition of taxable services seeks to bring within the service tax net the activity or renting of immovable property per se nullifying the position held in the Home Solutions case. It further seeks to overturn the said position w.e.f. 1-6-2007. Therefore any levy, demand, recovery or action in relation thereto taken by the authorities will be validated and no action against the same will be maintainable in a Court of law. Further, all refunds made consequent to the Delhi High Court Ruling in Home Solutions case, are liable to be overturned by virtue of this amendment.
Legality and constitutional validity of the amendment:
An important issue that arises for consideration is whether the amendment will withstand the test of constitutionality. Though the answer can only come by way of a final decision by the Courts of law, it becomes important to prima facie examine the same.
In the light of the Delhi High Court ruling in Home Solutions case, the amended provisions will be subject to judicial scrutiny. Questions which arose before the Delhi High Court would once again arise. Is the bare renting of immovable property a taxable service? Is there a continuous flow of service between the property owner and the tenant in such a scenario? Is there any value addition involved?
In addition, constitutional validity was not examined by the Delhi High Court in Home Solutions case. Hence, there would be fresh round of litigations on this ground too.
According to one school of thought, the amended provisions can be challenged for transgression of the constitutional line of control which divides the powers of the Union and the State Governments. In terms of Article 246(3) of the Constitution, the Legislature of any State has the exclusive power to make laws with respect to matters listed in List II to the Seventh Schedule. Taxation on transactions relating to immovable property is not within the legislative competency of the Central Government inasmuch as these matters fall under Entry 49 of List II of the Seventh Schedule to the Constitution of India.
S. 66 of the Act, which is the charging section for the purpose of levy of service tax, provides, for the levy of tax on the taxable services covered by S. 65(105) thereof. From a reading of the charging section, it is clear that service tax is a charge of tax on taxable services. The Supreme Court in Laghu Udyog Bharati v. Union of India, (1999) 112 ELT 365 (SC) has also held that service tax is a tax on services and is leviable on the service provider. The levy of service tax on the leasing or letting or rent-ing of immovable property may be illegal and ultra vires Article 246 of the Constitution of India.
According to another school of thought, in terms of the Supreme Court Ruling in TN Kalyana Manda-pam (supra), levy of service tax on renting of immovable property is constitutionally valid.
In the light of the foregoing, a fresh round of litigations is likely as regards legality and Constitutional validity as well of the retrospective amendment made in regard to renting of immovable property.
Some issues:
Implications on property owners:
The retrospective amendment in renting of im-movable property has been challenged through writ petitions in various courts of the country and interim stay has been granted in some cases. The benefit of the same would be available to a property owner who is a petitioner/member of the petitioner association. However, it would be advisable for the petitioners, to make appropriate disclosures before service tax authorities by filing letters/through notes in service tax returns. In cases where, property owners charge service tax but the tenants refuse to pay, the detailed analysis and discussions in July, 2009 of BCAJ can be referred as to the various options that can be exercised by property owners and implications in regard to each option.
Interest implications:
In Pratibha Processors v. UOI, (1996) 88 ELT 12 (SC), it was observed by the Supreme Court as under:
“in fiscal statutes, the import of the words, — ‘tax’, ‘interest’, ‘penalty’, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purpose, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of delay in paying the tax on due date. Essentially, it is compensatory and different from penalty — which is penal in character.” (p. 20).
Thus, interest is not a penalty, but is essentially compensatory in nature.
In the context of stay matters, it is a reasonably settled position to the effect that if a petitioner loses he would have to pay tax along with interest inasmuch as interest is compensatory as discussed above. However, in the context of retrospective amendment, whether this principle would apply is an issue.
In this connection, attention is invited to the Supreme Court Ruling in Star India Pvt. Ltd. v. CCE, (2006) 1 STR 73 (SC), wherein the following was observed in regard to liability to interest in cases of retrospective validation of levy on broadcasting services.
Para 7
“In any event, it is clear from the language of the validation clause, as quoted by us earlier, that the liability was extended not by way of clarification but by way of amendment to the Finance Act with retrospective effect. It is well established that while it is permissible for the Legislature to retrospectively legislate, such retrospective legislation is normally not per-missible to create an offence retrospectively.
There were clearly judgments, decrees or orders of Courts and Tribunals or other authorities, which were required to be neutralized by the validation clause. We can only assume that the judgments, decree or orders, etc. had, in fact, held that persons like the appellants were not liable as service providers. This is also clear from the Explanation to the validation Section, which says that no act or acts on the part of any person shall be punishable as an offence which would have been so punishable if the Section had not come into force.”
On the basis of Star India ruling, a view can be taken to the effect that there may be no interest liability for the past period. However, this view is likely to be disputed by the tax authorities, resulting in litigations.
Penalty implications:
It is a very well-settled position that in cases where matters involved are of controversial nature, no penalty can be imposed. Based on the same, it would appear that there may be no liability to penalties, provided appropriate disclosures are made before service tax authorities.
Vacant land leased for construction of building?: Under the unamended provisions, ‘vacant land’, whether or not having facilities clearly incidental to the use of such vacant land was excluded from the definition of ‘immovable property’. Thus, renting of such vacant land was not liable for service tax.
The Finance Act, 2010 has curtailed the above exclusion by bringing within the ambit of the immovable property ‘vacant land, given on lease or licence for construction of building or temporary structure at a later stage to be used for further-ance of business or commerce’. Thus, renting of vacant land on long-term lease for construction of commercial building or structure thereon in future would be liable for service tax.
Leases executed prior to the amendment:
An important issue that arises for consideration in case of leases executed prior to the amendment (in some cases such leases would have been ex-ecuted before the introduction of service tax).
It is pertinent to note that advances received in respect of all newly inserted taxable services (as well on those services the scope of which has been expanded) in the Finance Act, 2010, have been exempted by virtue of Notification No. 36/2010-ST, dated 28-6-2010. However, services falling under sub-clause (zzc) (Commercial Training or Coaching Service) and (zzzz) (Renting of Im-movable Property Service) of S. 65(105), [which have been given retrospective effect] have been kept out of this Notification.
No such retrospective effect has been given to renting of vacant land (on which some construction is to be made subsequently). Therefore, it would appear that advances received in respect of this renting of vacant land ought to be exempted on the same ground on which exemption to advances in respect of other newly inserted services and amended services has been given. The scope of Notification No. 36/2010-ST, dated 28-6-2010 needs to be clarified accordingly.
The issue involved has ramifications for a large number of assessees most of which are PSUs and local industrial corporations which are renting vacant land on a long-term lease with a explicit condition that the lessee would construct a factory or commercial building on such land.
This can also be seen from a perspective that the moment advance is received and lease agreement is signed, the taxable event of provision of service is completed. Thus, as per settled position, if the taxable event happened at the time when service tax was not leviable on that service, then service tax cannot be demanded later, on a pro rata basis or otherwise even if the service becomes taxable during the tenure of the lease. The Draft Point of Taxation Rules seems to support this position.
From the Service Tax Department’s perspective, they could argue that service is in the nature of continuous service. Hence, service tax needs to be discharged on a pro rata basis for the period post amendment.
In case of long -term leases, whether the same can be covered within the ambit of ‘renting’ at all, may have to be examined vis-à-vis provisions under principal laws governing transfer of property and related regulations.
Editor’s Note:
Recently, Hon. Punjab and Harayana High Court in the case of Shubh Timb Steels Ltd has upheld the consitutional validity of levy of service tax on renting of immovable property as also its retrospective application.
