Service tax on rent of commercial premises -now the matter is before the Supreme therefore, here is an attempt to strengthen the case of landlords and to consider certain issues based on decision of the Supreme Court.

[C.A. DEV KUMAR KOTHARI]

Service tax on commercial rent:

This levy came into force w.e.f. 01.06.2007. There has been some clarifications as well as amendments in the provisions since initially introduced provisions. Even after such clarifications, the legal position is not clear because the levy of service tax goes against the basic concept of service tax. The validity of the levy being ultravirse the Indian Constitution is also in doubt and now the matter is before the Supreme Court.

In case of letting out of property there is no service, there is no service provider and there is also not a service receiver, therefore, even if the levy of tax be considered  as intravirse the Indian  Constitution, it goes against very basic concept of service and taxable service.

The landlord provides land and /or building and gives possession and the tenant use the same as per agreement. Thus, there is no service provided by the landlord to the tenant while he hands over the building and /or land to the tenant to possess, use and enjoy the property.

The tenant receives in his control and possession land and/ or building and he use it without any services from the landlord.

Rent is payable even if tenant keep the building unused and do not use the same in any manner. We find several tenements around us which are let out by landlord and are kept under lock and key by the tenant without being using in any manner for considerable period. Still the tenant has to pay the agreed rent. This clearly satisfy the preposition that rent is not for any service or use but for the period during which the property is under control and possession of the landlord. 

The rent received is also not a service charge for service rendered- it is for providing land and/or building and not for any service.

The incidental services like water supply, cleaning, repairs and maintenance are also not generally carried out by landlord. These are carried out by owners associations. In case the entire building is let out , usually the tenant arranges for such facilities. In case of small buildings the landlord may arrange for such services. In case such services are provided by landlord or association, there is usually a separate charge collected, and that may be taxable under other categories of taxable services but not as rent of commercial premises. Such charges may be fixed or semi-variable depending on nature of facilities provided and availed by tenant. For example, water charges and electricity charges can be based on actual use calculated on the basis of meter reading. But the rent of premises  is fixed per month.     

Difference between Mandap and let out property:

In case of mandap and let out property there are vast differences in the modes operandi, and basic nature as pointed out below:

Mandap	Let out property
Overall possession and control is not given, partial possession of some areas like safe rooms, lockers are allowed on very temporary basis. The owner keeps lack and key of the space provided to the customer.	Possession and control of premises is given to the tenant. The ownerdo not continue to hold lock and key of the space letout.
Duration- duration of use is very short- may be few hours or few days.	Duration is longer. Even in case of eleven months licence the period of eleven months is quite lengthy in comparison to case of mandap.
Services- the mandap owner/ operator provides various services like providing utensils, furniture, decoration items, lighting, water supply for drinking and washing, cleaning and disinfection, catering, serving meals, manpower for  organization of functions etc. Some services may be provided by  mandap owner directly or through  associates or approved parties, who  under guidance and control of mandap  owner and carryout work as per policies framed by the mandap owner.	In case of letout property there is no such services provided. Incidental services like water supply, lighting in common areas, cleaning of common areas, stand by electricity generation and distribution are part and parcel of building they are not independent services from concept of building. Furthermore in case of large commercial buildings such services are arranged by owners/ occupiers association and not by owners. For such services separate charges are payable whether these be provided by owner or some body else.
Other services are main function and matter of consideration of services of Mandap. Mandap has enlarged utility fro these services and not for simply building. Quality of a mandap is considered by its location, type of building and facilities and services available. The nature and quality of services is a factor that weigh very high in selection of mandap and charges which can be levied.	There are no such services. Location, type of building and maintenance of common facilities are relevant factors in selection of building and rate of rent.   Other services may be separately taxable and not as part of rent.
Relationship- there is relationship of service or facility provider and service / facility receiver- between the owner/ operator of mandap and the customer/ guest. The relationship cannot be called as that of a landlord and tenant.	There is relationship of landlord and tenant.
Charges- charges are usually per day or per hours. Again they depend on the extent of services availed.	The rent is usually on per month basis. The working hours of commercial spaces are fixed differently in agreement based on negotiation and customs in particular trade. Besides usual working hours some time extended working hours are  adopted but for that usually any extra rent is not payable.
Check-in and check out times are agreed.	There is no such check-in and check out timing in case of let out properties.

Interim order of the Bombay High Court:

In RETAILERS ASSOCIATION OF INDIA & OTHERS Versus UNION OF INDIA & OTHERS 2008 -TMI - 30461 Appeal No. - Writ Petition No 1263 of 2008 the Bombay High Court has passed order on  Date - 30 July 2008 in view of the matter having Supreme Court on the following lines as  interim order which  would, as per the high Court  meet the ends of justice.

1.  Undertaking for Payment:

 In the event, demand of service tax being made under the provisions of Section 65(90a), Section 65(105) (zzzz) and section 66 of the Finance Act, 1994 as amended by Finance Act, 2007 in respect of the Petitioner's member's premises, such members of the Petitioners shall file undertaking in this Court stating that in the event the challenge is disallowed, they shall make payment of service tax due and payable in accordance with the aforesaid provisions as may be directed by this Court.

2.  Transfer of property:

 It is 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.

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.

About coercive measures by revenue:

 On the undertaking mentioned above being filed by the members of the Petitioners, no coercive steps shall be taken by the Respondent for recovery of service tax in respect of the premises of such members of the Petitioners.

Other cases:

The order of the Bombay High Court is applicable only to the members of the petitioner Association. In view of the order of the Bombay high court, it can be taken as strategy by other owners of commercial premises to wait and watch. They can and to apply for registration and pay tax if the Supreme Court upheld the levy and the case of landlord falls under taxable category of services. The landlords can then also raise debit notes on tenants and collect service tax. The landlords who have not applied for registration should apply for registration immediately if the levy is upheld by the Supreme Court.

In case levy is not upheld:

In case a landlord has got registered and collected service tax, the same should be under protest and subject to outcome of case before the Supreme Court. The collection from tenants as well as remittance to the service tax department can be on provisional basis and under protest. If the levy is not upheld, then claim for refund can be made because an illegally collected tax cannot be retained by the Government.  

However, in cases where the service receiver has availed CENVAT credit for service tax paid  on commercial rent then it would not be justified for the tenant to ask the landlord to refund the service tax and accordingly the landlord should not claim refund. Therefore, in the event levy is not upheld, the landlord should take a declaration from the tenant, whether he has availed CENVAT credit, if yes, then in respect of such tenant, service tax collected and paid should not be claimed as refund and the service tax in respect of other tenants can be claimed as refund for onward payment to tenants.

Where service tax is collected and paid without any protest then in the event levy is not upheld, the tenant who actually paid the service tax and did not claim CENVAT can directly claim refund from the Central Government as per provisions of S73A (6) which reads  as follows:

 (6) Where any surplus amount is left after the adjustment under sub-section (5), such amount shall either be credited to the Consumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 or, as the case may be, refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 11B of the said  Act and such person may make an application under that section in such cases within six months from the date of the public notice to be issued by the Central Excise Officer for the refund of such surplus amount.