SERVICE TAX ON RENTING OF IMMOVABLE PROPERTY- KEEP YOUR FINGERS CROSSED

[RB SINGH]

The Finance Act, 2007, introduced Service tax on the services 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 vide Section Section 65 (105) (zzzz) of Finance Act, 1994. The levy was effective from 01/06/2007.

Initially, the wording of the service was such that, it gave the impression that the Government attempts to tax "the services in relation to the renting of immovable property" and not the rental income itself. But after issuance of  notification No. 24/2007 dated 22.05.2007, it became clear that the rental income earned on letting out of immovable property shall be subjected to service Tax under the  category of service as " renting of immovable property ". Thereafter came the circular No. 98/1/2008 ST dated 04.01.08, which clarified that right to use immovable property is liable to service tax under 'renting of immovable property service'. The Notification and the circular referred above had enough ground for the industry to agitate and in result number of petitions were filed before the different High Courts, challenging the constitutional validity of the levy of service tax on "renting of immovable property".

The Hon'ble High Court of Delhi decided the bunch of petitions filed on the issue including the writ petition (civil) no. 1659/2008 in case of Home Solutions Retail India Ltd. v. Union of India vide its order dated 18.04.2009 reported in 2009 (14) S.T.R. 433 (Del.). The main challenge before the court was the legality, validity and vires of Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008-S.T., dated 4-1-2008 and the question as to whether the Finance Act, 1994  envisages the levy of service tax on letting out/renting out of immovable property per se. Alternately, the petitioners also took a plea that in case it is held that such a tax is envisaged then the provisions of section 65(90a), section 65(105)(zzzz) and section 66 insofar as they relate to the levy of service tax on renting of immovable property would amount to a tax on land and would therefore fall outside the legislative competence of Parliament inasmuch as the said subject is covered under Entry 49 of List II of the Constitution of India and would fall within the exclusive domain of the state legislature.

In its landmark judgment, the court held that mere renting of immovable property for furtherance of business or commerce by itself cannot be regarded as a taxable service in terms of the Section 65 (105) (zzzz) of Finance Act, 1994. It further held that both notification 24/2007 ST and circular 98/1/2007 ST to be ultra vires the Act as far as requirement for levy of service tax on renting is concerned. As regard the alternative plea, the court held that it has not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India.

Realizing the repercussion of the judgement of the high Court of Delhi, the government went into full throttle to legalize the levy. So, firstly the government approached to the apex court and pleaded for staying the operation of the high court order, But, the Hon. Supreme Court refused to stay the operation of the order.  Not getting any reprieve from the apex court the Government took out its last arrow and amended the provision with retrospective effect  (w.e.f. 01.06.2007)  by amending the definition given in Section 65(105) (zzzz) of the Finance Act, 1994 to provide explicitly that  the activity of 'renting' itself is a taxable service. The amendment also provide that renting of vacant land, where the agreement or contract between the lessor and lessee provides for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subjected to service tax.

In view of the amendments introduced by the Budget 2010, the assessees had the option either to pay the service tax levied on the renting of immovable property or to challenge once again the validity of the amendment of levy of service tax on renting of immovable property introduced with retrospective effect.  Many preferred the first option but quite a good numbers followed the second option by filing writ petitions before various High Courts.  This has resulted into second round of litigation on the issue. The various High Courts like Mumbai High Court in the case of INFINITI RETAIL LTD, The AP High Court in the case of TRENT LTD Vs UNION OF INDIA, The Allahabad High Court in the case of  M/S Orient Craft Limited, the Karnatak high court, The Delhi High court in the case of Home Solutions Retail India Ltd  have stayed the operation of the amendment either in full or in part.  However the High court of Punjab & Haryana has decided the issue finally vide its order dated  22 November, 2010  in the case of the Shubh Timb Steels Ltd ( 2010-TMI-78578) and upheld the legality of retrospective amendment. The gist of the order of the Hon. Court is that:.

"Service Tax on Renting of immovable property - constitutional validity - amendment with retrospective effect - Held that: - Same transaction may involve two or more events in different aspects. There is distinction between general subjects of legislation and taxation. The entries have to receive liberal construction. If there is any overlapping, doctrine of pith and substance is to be applied and the Court has to look at the substance of the matter. List I has priority over List II though predominance of List I does not prevent State Legislature from dealing matters under List II.

we are unable to hold that service tax on service of renting of property is exclusively covered by Entry 49 List II. As already observed, Entry 49 of List II relates to tax on land and building and not any activity relating thereto. Income tax on income from property, wealth tax on capital value of assets including land and building and gift tax on gift of land and building have been upheld. It cannot be held that renting of property did not involve any service as service could only be in relation to property and not by renting of property. Renting of property for commercial purposes is certainly a service and has value for the service receiver.

It is well settled that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary. Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which earlier law was enacted. - do not find any ground to set aside giving of retrospective effect to the amendment from 1.6.2007 on which date levy was initially provided "

All the high Courts, where the writ petitions are pending, are going to decide the issue in near future and there are going to be brain storming arguments and counter arguments by the best Tax/legal practitioners in the country. There are also possibilities of conflicting judgments arising at the High Court's level which will result into more confusion and further rise to litigation. However, one thing is sure, what may come at High Court's level, the conclusive decision has to come from the Apex court. Sooner it comes, better for the industry. Reason being, the assesses  who have not paid/stopped paying after the decision of the Delhi High Court  have to pay the Tax with interest, if the Punjab & Haryana High Court decision is upheld. Therefore, till the time, the Apex court's decision remains pending, the confusion will not die down and the assessees have to keep their fingers crossed.