The levy of service tax on the renting of immovable property for commercial use has been an issue of incessant controversy and litigation in India. It has been a subject matter of scores of writ petitions filed in various high courts and has caused a great deal of uncertainty for lessors and lesees of commercial properties.
The levy of service tax on the renting of immovable property for commercial use was first introduced by the Finance Act, 2007, where services provided “in relation to” the renting of immovable property for use in the course or advancement of business or commerce were made liable to tax.
In this regard, Delhi High Court in Home Solutions Retail India Limited v Union of India had held that as service tax was a value added tax and since there is no value addition in renting a property, the renting of immovable property for business or commercial use was neither a service nor a taxable service. The high court had relied on the decision of the Supreme Court in All India Federation of Tax Practitioners v Union of India, and held that if some other service, such as air conditioning service, is provided along with the renting of immovable property, then it alone would be a taxable service and not the activity of renting per se.
Following the decision in Home Solutions, the Finance Act, 2010, modified the definition of taxable service to include the renting of immovable property per se as a taxable service, in addition to services in relation to the renting. This amendment was made with retrospective effect from 1 June 2007, which was the date when this taxing entry was introduced.
The amended taxing entry has also been challenged through various writ petitions filed by lessors and lesees in high courts across the country and some high courts have granted interim relief to the petitioners by staying the recovery of service tax.
The Shubh Timb Steels case
In this context the recent decision of Punjab and Haryana High Court in M/s Shubh Timb Steels Limited v Union of India and another, which upheld the constitutional validity of the levy of service tax, assumes great significance.
The various issues considered by the high court in this writ petition were as follows:
• Whether service tax on renting of immovable property for business was covered by entry 49 of list II of the Indian constitution exclusively and so outside the purview of the central legislature or was covered by entry 92C or 97 of list I of the constitution;
• Whether the renting of immovable property per se can be considered as a service entailing value addition so as to be liable to service tax;
• Whether the levy could validly be made retrospectively operative from 1 July 2007?
On the issue of legislative competence, the high court held that the levy of service tax on renting of immovable property is outside the scope of entry 49 of list II since that entry relates to tax on land and building only and not any activity relating to it. The court also held that the service element in a renting transaction is an independent aspect covered under entry 92C (which has not been notified as yet) read with entry 97 of list I and that the power of the central legislature to levy service tax on immovable property cannot be doubted. It should be noted that the issue of legislative competence was not dealt with in Home Solutions.
Relying upon the Supreme Court judgment in All India Federation of Tax Practitioners, the high court further held that renting of immovable property for commercial purposes is a service and has value for the service receiver. The high court also held that the legislature can clarify or validate a law retrospectively and that the retrospective amendment made in the Finance Act, 2010, was valid.
In this context it is to be noted that the Supreme Court judgment in All India Federation of Tax Practitioners was also relied upon in the case of Home Solutions, but in that case a divergent view was pronounced on the issue of value addition.
This is the first definitive judgment by a high court on the levy of service tax on renting of immovable property after the retrospective amendment. It will be relied upon by the tax authorities to justify the collection and recovery of service tax on the renting of immovable property for commercial use.
The tax authorities may move the high court in various jurisdictions for vacation of stays granted on the basis of the earlier decisions and some momentum can now be expected with respect to such pending matters.
However, it is almost certain that the matter will be appealed in the Supreme Court and until that happens uncertainty regarding the levy will continue.
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