SERVICE TAX - TENANT IS LIABLE- CONTRACT ACT ARBITRATION ETC.

[CA DEV KUMAR KOTHARI]

Commercial renting-

Tenant should pay service tax to the landlord.

Suggestion- reverse charge method will be more revenue friendly

PEAREY LAL BHAWAN ASSOCIATION Versus SATYA DEVELOPERS PVT LTD - 2010 (10) TMI 137 - DELHI HIGH COURT

Owner vis a vis Tenant:

It is true that in case of levy of service tax on rent of commercial properties, the property owners are considered a service provider and he is liable to pay service tax. The tenant is not considered as a ‘service provider’ , and he is not required to get registered as a person liable to pay service tax. However, it is ground reality that service tax on commercial renting is a new levy and it is a substantial levy which was never born by land lord. As per customs, trade practices and usages amongst people concerned with such levy, it is general understanding that service tax shall be payable by the tenant. We find that in new contracts, there are specific clauses that service tax on rent shall be borne by the tenant as may be applicable from time to time.

Thus Service Tax is generally borne by the tenant, therefore, tenant is a party directly affected if the levy of service tax is imposed. Therefore it can be said that tenant is a party affected by levy of service tax. Hence even in case of tenant, cause of action arises if there is a levy of service tax. Whether service tax is collected from the tenant directly or it is collected through the land lord, does not make any difference so far burden on tenant is concerned.  

Disputes about service tax:

In old agreements there is no specific provision about service tax. Therefore, tenants raises disputes and do not want to pay service tax to the landlord taking view that agreement does not provide to pay tax, and under service tax provisions the landlord is liable to pay service tax. The disputes are more intense when the tenant is not eligible to avail CENVAT in respect of service tax on rent.

The action of tenants is not justifiable because service tax is a new levy. It was not levied when tenancy was started. Service tax is not in relation to property.

Court held that service tax is an indirect tax – generally payable by service receiver.

The general rule is that in case of indirect tax any new levy or change in rate of levy will affect the purchaser or the user of service etc. This is also generally provided in contracts relating to goods or services which attract taxes which may vary depending on changes in government policies or tax laws. In case of tenancies, many tenancies are very old, rents were fixed long ago, there is protection of tenant against eviction as well as for increase of rent etc. However, generally tenants have considered that if service tax as a new levy is levied, the tenant shall pay. However, some tenants have disputed this also. Particularly when tenant is not entitled to get CENVAT credit. For example in the following case tenant disputed that service tax is payable by landlord and not by tenant”:

PEAREY LAL BHAWAN ASSOCIATION Versus SATYA DEVELOPERS PVT LTD - 2010 (10) TMI 137 - DELHI HIGH COURT decided on 20 October 2010.

The question involved was about right to recover service tax from the recipient of services(tenant). The court inter alia held   that unless a different intention appears from the terms of the contract, in case of the imposition or increase in the tax after the making of a contract, the party shall be entitled to be paid such tax or such increase. Although there is no explicit provision to that effect, enabling lessors such as the plaintiff, to the service tax component, this Court is of the view that there is sufficient internal indication in the Act, through Section 83 read with Section 12-A and Section 12-B suggesting that the levy is an indirect tax, which can be collected from the user (in this case, the lessee) . Therefore, it was concluded that user / recipient of services is liable to the service tax liability. The plaintiff (service provider) is also entitled to the amounts claimed.

Recent disputes about service tax and arbitration proceedings:

The tenant disputed to pay service tax to the landlord taking view that as per agreement the landlord is liable to pay service tax which is in nature of tax or other outgoings in relation to the property. The Arbitrator decided the issue in favour of landlord. On appeal singe judge of High court also affirmed the arbitration award. On appeal by the landlord before division bench of High Court, the High Court noted facts, made observations and ordered on the following lines:

The dispute amongst the parties (land lord and tenant) is due to the Finance Act, 2007 which introduced an amendment in the Finance Act, 1994 incorporating in Section 65 (105), a sub-Clause (zzzz) imposing service tax on rent received by renting of immovable properties for commercial purposes.

The landlord as a consequence of the new levy, included service tax at applicable rate on all rental bills and cess thereon from June, 2007 onwards.

The tenants , however, refused to pay the service tax component on the basis that under Clause 7.1 of the Lease Deed, such liability had to be borne by the appellant.

As per the Division Bench of the High Court, the most crucial aspect which is material for decision of the present case, is that service tax is neither a “property tax” nor an ‘outgoing‘ in respect of the premises; it is on the commercial activity carried on.

The two expressions “property tax‘ and “outgoings‘ in respect of the premises are in fact of a common species.

Clause 7.1 thus only deals with taxes which are relatable to the property and not the activity carried out in the premises.

That service tax is levied on activity and not on property.

Therefore the Division Bench of the High Court took view that the impugned Awards dated 14.12.2011 and 07.07.2012 as well as the impugned judgments of the learned single Judge dated 04.07.2012 and 06.11.2012 are liable to be set aside. Holding that the respondent (tenant) has to bear the incidence of the service tax and not the appellant(landlord).

Tenant being liable to pays service tax has locus standi to challenge levy:

Tenant is held to be liable to pays service tax to the landlord. Therefore, tenant is affected by the levy and is certainly a party who is affected by levy of service tax and therefore, in view of author tenant can challenge levy of service tax, though some High Courts have held that tenant has no locus standi to challenge levy of service tax.

Reverse charge method will be more revenue friendly:

Tenants can preferably be made liable to pay service tax under reverse charge method:

Earlier also in published and webhosted articles the author has expressed views that for better collection and control on collection as well as CENVAT credit, reverse charge method can be applied and service tax can be recovered from tenants directly. The logic is that major portion of commercial rent is paid by organizations who are large and more organized than landlords. For example in case of rent for small branches of banks and ATM, the landlord may be exempted under threshold limit. However, if bank is made liable to pay service tax under reverse charge method, entire rent will be taxable.

Furthermore, the landlord, by letting out property does not make any value addition. He has invested capital and let out property to tenant at certain agreed rent, which is generally payable from month to month. The rent is in fact consideration which can be considered as in lieu of interest on capital invested with some additions for outgoings. From an empirical study, we find that normal net return, after tax, by way of earning from rent is hardly 3-4% per annum of the market value of property. In many cases the return is abysmally low due to freezing of rents, increase in cost of repair and maintenance, and municipal taxes and appreciation in value of property (on vacant basis). Therefore, validity of service tax on commercial rent is still seriously doubtful in spite of all deeming provisions.

The tenant while using the property for commercial purposes, may makes value additions to his products and / or services. Gujarat High Court has considered levy of service tax on rent and took view that the tenant, while using the property make value addition, hence upheld levy of service tax. However, if that be so, then the tenant should be liable to pay service tax and not the landlord.