SERVICE TAX ON COMMERCIAL RENT- beginning of new series of litigation.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Section 65 (105) (zzzz) of the Finance Act, with achieves.

HOME SOLUTIONS RETAILS LTD Versus UOI AND ORS 2010 -TMI - 75874.

Home Solutions Retail India Ltd. v Union of India & Others 2009- TMI -33136 (Delhi High Court)

SSIPL Retail Ltd. v. Union of India (Writ Petition (Civil) No. 13861 of 2009 decided on December 18, 2009 reported as 2010 -TMI - 35371 - High Court Of Delhi in relation to stay.

Budget suggestion:

Reverse charge method for tax on rent if the levy persist CA Mrs. Uma Kothari

Pending matter before the Supreme Court:

The issue about validity of service tax on rent of premises used for business or commerce etc. is already pending before the Supreme Court in an appeal filed by department against the judgment of Delhi High Court. Meanwhile, law has been amended with retrospective effect apparently to neutralize effect of ruling of the Delhi High Court. The amendment has caused new series of litigation because the landlords are insisting upon the tenants to pay service tax and the service tax department is trying to collect service tax.

Recent case in brief:

HOME SOLUTIONS RETAILS LTD Versus UOI AND ORS 2010 -TMI - 75874

In the above cited case the Delhi High Court has passed an interim order on 18.05.2010 in Writ Petition No. © 3398/2010. From reading of the order it appears that respondents include the UOI and Service Tax authorities and some of landlords. It seems that, in view of recent amendments (or even earlier), some landlords have asked tenants (who are petitioners) to pay service tax on rent of commercial premises let out. Therefore, landlords were also added as respondents to seek orders that they should not collect service tax on rent.

There is challenge only about renting of commercial premises and not in relation to any other services which may be rendered in relation to renting of premises. The court has granted stay on collection of service tax on rent of commercial premises the order of stay applies to respondents being UOI and its officers as well as landlords who are respondents.

Recent amendment and new Writ Petition:

Vide the recent amendment made by Finance Act, 2010, prima facie renting of immovable property itself has been regarded as a service. This is in spite the fact that the Delhi High Court, after detailed discussions in its decision dated 18-4-2009 had categorically held and concluded that renting of immovable property by itself cannot be regarded as a service. The Judgment of Delhi High Court has not been stayed by the Supreme court where UOI has filed an appeal. Again in the new writ petition No. © 3398 of 2010 there is a challenge to section 65(105)(zzzz) of the Finance Act, 1994, as amended with retrospective effect from 1-6-2007, inasmuch as it purports to levy service tax on the renting of immovable property to be used for commercial / business purposes.

Notices of WP and affidavits:

Notice was accepted by the counsels who appeared on behalf of the respondent Nos. 1- 4. Court ordered that notice shall be issue to respondents no. 5-10.

The Court ordered that the respondents shall file the counter-affidavits within four weeks and the petitioner shall file the rejoinder/ affidavits thereto within two weeks thereafter. Thus, the process should take time of six weeks, if diligence is shown and delaying tactics are not adopted. The period can be counted to latest by 01.08.2010.

The court has orders to renotify on 21.09.2010. Therefore, if the respondents and petitioners comply with requirements of filing affidavits and counter affidavits timely, it is likely that the case may be heard on 21.09.2010.

Stay order:

The court ordered that in the meanwhile, there shall be no recovery of service tax from the petitioner in respect of renting of immovable property alone. No such service tax would also be recovered from respondents 5-10 in the meanwhile. (These respondents seems to be landlords) 

Interim order as to ultimate liability of tenants:

The court made clear that in the event the writ petition is dismissed, the liability to pay service tax along with any other liability as a result of the demand made, will solely be that of the petitioner.

Other services:

Finding that there is no challenge in the writ petition to the second part of the charging provision namely, "any other service in relation to such renting", the Court also held that if there is any other such service rendered in relation to renting of premises, the service provider would be liable to pay service tax on such service and in respect of this portion of the provision there is no stay, since there is no challenge.

Comments of author:

Common trade practices and general understanding in trade circles is that service tax is payable by service receiver, in addition to agreed value of services. In various clauses found in tenancy agreements entered into during last many years, particularly after attempts to levy service tax started in thinking process of government, it has been specifically provided that any such levy will be payable/ reimbursable by the tenant. Thus, the petitioners (Tenants) in this case as well as tenants as service receiver are ultimately liable to pay service tax and also any other liability. Though the landlords are assessed to service tax, however service tax will be payable by tenants, in addition to rent in case the courts ultimately held the levy of service tax on rent as valid.

Services in relation to renting- authors views:

The expression "In relation to renting", is restricted to in relation to renting itself. As expressed in earlier articles on the subject, the author re-iterates his views that "services in relation to renting" will include only services rendered to landlord or tenant by any other person in relation to renting itself for example services of property brokers, property consultants, and some other services which are in relation to renting arrangements.

With due respect, author disagree with the view of the court that such services shall include services like air-conditioning etc. Air-conditioning is not a service in relation to renting of premises. Air-conditioning is service for utilization of premises rented out. Such services are optional and not compulsory to renting. One tenant may require such services, other may not require at all. One tenant may make his own arrangements, whereas other may require the landlord to make arrangements for such facilities or services or make own arrangements or avail services from other service providers. Thus, such services cannot be called services in relation to renting of premises for business purposes. Therefore, such services should not be considered under this specific provision, though they may fall under some other category of taxable services in particular circumstances. 

Reverse charge method:

In an article by Mrs. Uma Kothari it has been suggested that service tax on rent can be collected by reverse charge method, from tenants. If that suggestion be adopted, there will be less litigation and easy and better recovery. This is because major organizations who take premises for commercial use are availing premises from various small landlords located all over India. Many landlords are out of tax net due to threshold exemption. In case the levy is on tenant, rent paid to all such landlords will also be taxable.