RENTING AND SERVICE TAX

Service tax on renting of immovable property

S Madhavan / New Delhi April 27, 2009, 0:23 IST


In a recent landmark judgement, in Home Solution Retail India Ltd. & Others vs. UOI & Others, the Delhi High Court has pronounced its judgement with regard to several writ petitions which had challenged the applicability of the levy of service tax on renting of immovable property.




The High Court has held that the taxable service in respect of renting of immovable property, as defined under the relevant Section 65(105)(zzzz) of the Finance Act 1994 thereof, was with regard to any service in relation to renting of property and was not on the renting of immovable property as such.

Consequently, the High Court has held that the levy of service tax on the renting of immovable property itself, in terms of the relevant notification issued consequent to the introduction of the taxable service, was ultra vires the provisions of the Act.

In arriving at its decision, the court has relied on the wordings of the particular taxable service in order to hold that since the activity of renting of immovable property was itself not a service, the expression ‘service in relation to renting of immovable property’, occurring in the definition of the taxable service, can only extend to services which are provided in relation to the renting of immovable property.

Accordingly, the Court distinguished the particular definition of service in relation to renting of immovable property from several other definitions in service tax law which were similarly worded and held that in those other definitions, the expression ‘in relation to’ itself referred to a service and consequently not only was the core service taxable but also the allied and ancillary services in relation thereto were also taxable.

The court illustrated this distinction by referring to the taxable service of dry cleaning where the expression was a service in relation to dry cleaning and held the activity of dry cleaning was itself also a service which was taxable therein. As opposed to this situation, the taxable service provided by a real estate agent, for instance, was a service in relation to real estate and since real estate was not a service, the definition could only extend to services in relation thereto.

On a similar analogy, the court came to the conclusion that in the present case, the renting of immovable property could not be construed as a service by itself and hence the taxable service in question could only extend to services in relation to renting of immovable property and not to the activity of renting itself.

In arriving at the aforesaid finding, the court has relied on the decision of the Supreme Court in T N Kalyana Mandapam Association Vs. UOI (2004) 5 SCC 632) which, interestingly enough, was relied upon both by the appellants, who had challenged the legality of the levy, as well as by the respondents i.e. Government of India. Based on a detailed consideration of the aforesaid judgement, the Delhi High Court has come to a determination that the decision of the Supreme Court supported the argument of the appellants and not that of the respondents.

With regard to the nature of the service tax itself, the High Court has held that it is a value added tax and the tax is a tax on value addition done by the service provider and it must have a connection with the service. Consequently, since the mere renting of immovable property does not entail any value addition, it could not be regarded as a service for that reason as well.

Here again, the High Court has relied upon another decision of the Supreme Court, in All India Federation of Chartered Accountants Vs. UOI (2007) 7 SCC 527), which had held that just as excise duty was a tax on value addition in regard to goods, the service tax was a tax on value addition by rendition of services.

Accordingly, the Supreme Court, in that case, had distinguished property-based services and performance-based services and had arrived at a conclusion that the expression ‘in relation’, occurring in the various relevant definitions, needed to be construed in accordance with this principle of value addition.

The High Court h as, relying on the above decision, consequently come to the conclusion that the levy of service tax on the activity of renting of immovable property was ultra vires the relevant definition of the taxable service, as contained in the Finance Act, 1994.

While upholding the arguments contained in the writ petitions in regard to the above points, the High Court has held that it has therefore not been required to examine the alternate argument as contained in the petitions that the relevant definition, should it be construed as applicable to the activity of renting of immovable property as well, would be violative of the Constitution of India in that the Central Government could not, in terms thereof, impose a tax on land, as it was a State subject.

Hence, the decision is limited to the point that the taxable service as understood and interpreted through the relevant impugned notification and hence the tax so collected, was not in accordance with the statute and hence without basis in law and the decision is not with regard to whether or not the definition of taxable service itself is unconstitutional.

This judgement is applicable on an all India basis, as it is on a point of legality, and would have far reaching consequences for all and in particular for those who carry on business in rented premises and who do not have an output excise or a service tax liability so as to be able to offset this tax on rentals. The Retail Sector is thus a very major beneficiary, as the service tax on rentals is a very significant unrecovered tax cost for the sector. Further, the judgement has ramifications with regard to other taxable services as well since these are also similarly worded.

The Central Government is almost certain to file an appeal against the aforesaid judgement with the Supreme Court. It remains to be seen whether it will request a stay of the judgment in the interim and whether such a request would be granted. It is also possible that the Government may consider amending the provisions of the Finance Act, 1994, possibly with retrospective effect, in order to overcome the above judgement of the Delhi High Court. The picture will become clear in this regard in the near future.

However, until such time as these eventualities do not occur, taxpayers can take effective steps to avail the benefit of non payment of service tax on renting of immovable property. Several issues such as discontinuance of payment of tax for future period, filing of refund claims for past taxes paid on such rentals, for the period of one year and beyond, availment of CENVAT credits on such taxes, payment of such taxes to the Government, if already collected as such, the person entitled to file such claims will need to be addressed in detail, in order for the benefits to flow to tax payers.

The author is leader, indirect tax practice, PricewaterhouseCoopers
pwctls.nd@in.pwc.com



----------------------------------------------------------------------------------
Renting of immovable property & service tax



JOINTLY OWNED PROPERTY: - ELIGIBILITY FOR EXEMPTION SCHEME

CA SUDHIR HALAKHANDI


The article was written by CA Sudhir Halakhandi in 2007 and it is a published article in journal- CA SUDHIR HALAKHANDI




Renting of immovable property for commercial purpose has been made taxable service w.e.f. 1st. June 2007 but since the threshold limit has been increased from Rs.4 lakhs to Rs. 8 lakhs hence the small property holders are not affected by this levy. The service tax is payable @ 12.36 percent including education cess and Senior and Higher education cess.

Some of the properties are jointly owned by more than one person with their determined share of ownership and if the total rent received from the jointly owned property exceeds Rs. 8 Lakhs than there is confusion about claim of exemption as per Notification 6/2005 – ST dated 1-3-2005 available to the small service providers. Let us try to understand this problem with the help of an example: -


One commercial property is owned by A and B. The total rent for the property for a financial year is Rs. 15 lakhs. Out of this Rs. 7.50 Lakhs is received by A and B respectively . Suppose this is the total rent due and received for the period for which the service is taxable in the Financial Year 2007-08. Now what is the tax liability for the Financial year 2007-08 and what will be the status of the Service provider for the Financial year 2008-09 with respect to Exemption scheme as provided in Notification No. 6/2005- ST dated 1-3-2005.




There are two totally different views on this problem.

One view is very simple that since the rent received is more than Rs.8 Lakhs hence the service in the first year will be taxable over this amount of Rs. 8 lakhs and since the collection is Rs. 15 lakhs hence service tax is payable on Rs.7 Lakhs in the Financial year 2007-08 and since the services rendered during the Financial year 2007-08 is more than Rs. 8 lakhs hence exemption on first collection of Rs. 8 Lakhs will not be available for the Financial year 2008-09. Here the joint ownership has been disregarded while considering the provision of service and calculating the exemption limit.

For the revenue point of view this version is beneficial and will result in more revenue.

But there is one more angle to this problem and according to this since two owners own the property hence both are service providers providing the service individually and can claim exemption individually and in that case the individual exemption up to Rs. 8 lakhs can be claimed. Let us study this angle of the problem for the benefit of joint owners of the property.

The exemption is service provider based exemption

The exemption as mentioned in the Notification No.6/2005 – ST dated 1-3-2005 is a service provider based exemption and this is available on the taxable service or services provided from one or more premises by a service provider. The eligibility to the exemption scheme is also supporting this view and let us see the particular clause in this respect: -


The aggregate value of taxable service rendered by a provider of taxable service from one or more premises, does not exceed Rs. Eight Lakh in the preceding financial year.



Hence it is clear from the exemption scheme as provided in Notification No.6/2005-ST dated 1-3-2005 that the Exemption scheme is based on service provider and not based on the service receiver or individual service. Hence both the joint owners can claim exemption Individually and separately.

Here see the side effects of the Service provider based exemption scheme: -


Mr. Ray, an Individual owning 10 Shops in a complex and the rent of per shop is Rs. 10000.00 per Month received by him from different shop keepers hence the total rent received is 10x12x Rs.10000.00= Rs. 1200000.00. Here the exemption as provided by Notification 6/2005- ST dated 1-3-2005 is not available because the rent received has crossed the basic exemption Limit of Rs.8 Lakhs. Since service tax is an indirect tax and it’s ultimate burden has to be born by the service receiver and here the service receiver is tenant hence a person i.e. small shop keeper paying Rs.10000.00 per Month as rent may have to pay service tax under these circumstances only for the reason that the total receipt of his landlord is higher than the exemption limit.
Mr. Sahay, a another Individual having a big showroom place and receiving rent of Rs. 50000.00 per Month from “Footstep trading company” and does not own any other property given on rent for use in the course or furtherance of Business or commerce. Here the total rent received is Rs. 600000.00 and since it is less than Rs. 8 lakhs hence no service tax is payable.
Here see the effect that a small shop keeper paying small rent as Rs.10000.00 per month has to pay service tax but a big showroom owner paying rent as much as Rs. 50000.00 per month is not required to pay any service tax.



Renting of joint property is a service provided by two joint owners individually

If a jointly owned property is given on rent for commercial purpose then it is the service, which is provided individually by both the joint owners because in case of renting of property nothing has to be done except for renting the property and this is the service as per the fiction of the law then the service is provided by both the joint owners individually. If there are more than two joint owners then it can safely be said all the joint owners are separate service providers and in that case all the joint owners can claim separate exemption.

In the particular case mentioned above the rent received by A is Rs. 7.50 lakhs only hence he can claim the exemption from payment of service and on the same basis the other joint owner B can also claim exemption from the payment of service Tax.

In such a case since the value of service provided is more than Rs. 7 lakhs hence both these joint owners will require their separate registration as per the requirement of the Service Tax (Registration of Special category of persons) Rules 2005.

Since in the true sense “Renting of immovable property” can not be equated with the provision of any service and it is only due to a fiction created by our law makers the renting is equated to provision of a service hence made taxable and in that case the law makers should come forward with a suitable clarification in this respect to end this controversy to avoid confusion about the payment of service tax in this respect.

===================================================================================


1 BACKGROUNDBy the Finance Act 2007, Central Government has extended the levy of service tax on renting of property also with effect from 1.06.2007. Renting of immovable property for use in the course or furtherance of business or commerce is taxable under section 65(105)(zzzz) of the Finance Act 1994. Renting includes letting, leasing, licensing or other similar arrangement. For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings. Some residential and other properties are excluded from the scope of this service. Further Notification No.24/2007-Service Tax, dated 22.05.07 exempts taxable service provided by any person in relation to renting of immovable property from service tax equivalent to service tax payable on the amount of property tax, actually paid by the service provider to the local authority. In other words, service tax is payable on the rental amount received less the actual amount of property tax paid. However, any amount such as interest, penalty paid to the local authority by the service provider on account of delayed payment of property tax or any other reasons can not be treated as property tax for the purpose of this exemption and hence, deduction of such amount from the gross amount charged shall not be allowed.

While the dispute on propriety of the levy of service tax by the central government was yet to be decided by the appropriate courts, the government issued a clarification stating that service tax paid on input services in the nature of construction service or work contract service that are used in construction of an immovable property, which is meant to be rented or leased, will not be eligible for CENVAT credit for those who provide renting of immovable property service.Finance Act, 2008 has inserted an explanation to the definition of immovable property to clarify that renting of immovable property shall include allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of such immovable property. The explanation states that the amendment is for removal of doubts. Ministry of Finance had vide Circular No. DOF 334/1/2008-TRU dated 29.2.2008 clarified as under -"Use of immovable property is allowed for placing vending/dispensing machines in malls and other commercial premises and erection of communication towers on buildings. In such cases, there may or may not be transfer of right of possession or control of the immovable property in favour of the person using such property.”The constitutional validity of the levy of service tax on rentals on such immovable property is doubtful. Mere renting of office space does not involve any service. Many association and individuals have filed writs petitions before different High Courts across India. Now the matter is before Supreme Court, but the some High Courts have stayed the recovery of Service Tax till final decision by the Supreme Court.2 DECISION OF BOMBAY HIGH COURT IN THE CASE OF RETAILERS ASSOCIATION OF INDIA V. UNION OF INDIA[2008] 16 STT 127 (BOM.)Assessee was an association of retailers. In respect of let out premises of members of assessee-association, revenue demanded service tax in category of ‘Renting of immovable property service’. Tribunal confirmed said demand, against which assessee filed writ petition. During pendency of writ petition, revenue moved Supreme Court for transferring these matters to Supreme Court for hearing and, therefore, High Court could not take up matter for final hearing. It was found that few High Courts had granted interim relief to respective assessees in relation to said statutory provision. Such interim relief directed members of assessee to file an undertaking in High Court stating that in event challenge was disallowed, they would make payment of service tax due and payable in accordance with legal provisions and further, that they would not be entitled to transfer their interest in property in relation to which demand of service tax was made, without first giving two weeks prior notice to revenue about their intention to transfer interest and nature of transfer. It was 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. It goes without saying that 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.On the undertaking mentioned above, being filed by the members of the petitioners, The High Court directed that no coercive steps shall be taken by the respondent for recovery of service tax in respect of the premise of such members of the petitioners.

3 DECISION OF DELHI HIGH COURT IN THE CASE OF HOME SOLUTION RETAIL INDIA LTD. V. UNION OF INDIA[2009] 20 STT 129 (DELHI)To avoid multiplicity of litigation, the Union of India preferred a transfer petition to the Supreme Court of India seeking transfer of all writ petitions pending before different High Courts of India. The Supreme Court directed the same to Delhi High Court for single window adjudication. The Delhi High Court has struck down the levy of service tax on renting of immovable property as "unconstitutional", while deciding 26 writ petitions of different petitioners, by a combined order.In the instant batch of writ petitions, the petitioners, who were either landlords, or tenants in respect of leased premises, had challenged the legality, validity and vires of Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008 - ST dated 4-1-2008 issued by the department of revenue. The said notification dated 22-5-2007 is an exemption notification by virtue of which the Central Government exempted the ‘taxable service of renting of immovable property’, referred to in sub-clause (zzzz) of clause (105) of section 65 from so much of the service tax levy as was in excess of service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely, property tax levied or collected by local bodies. It was the petitioners’ contention that while the Act does not treat renting of immovable property as a taxable service, the notification proceeds on the basis that the taxable service is the renting of immovable property itself. Similarly, the impugned circular whilst giving a clarification in respect of commercial and industrial construction service has purported to clarify that the “right to use immovable property is exigible to service tax under the ‘Renting of immovable property service’ ”. Consequently, by the said clarification, the Union of India was seeking to levy service tax on renting of immovable property instead of on services in relation to renting of immovable property. It was further alleged that because of this incorrect interpretation, service tax was sought to be levied on the renting of immovable property as opposed to service tax on a service provided ‘in relation to the renting of immovable property’. Consequently, the said notification and the said circular were sought to be set aside as being ultra vires the said Act.The Delhi High Court held that the Service tax is a value added tax. It is a tax on value addition provided by a service provider. It is obvious that it must have connection with a service and there must be some value addition by that service. If there is no value addition, then there is no service. With this in mind, it would be instructive to anlayse the provisions of section 65(105)(zzzz). It has reference to a service 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’. The wordings of the provision are so structured as to entail a service provided or to be provided to ‘A’ by ‘B’ in relation to ‘C’. Here, ‘A’ is the recipient of the service, ‘B’ is the service provider and ‘C’ is the subject-matter. The expression ‘in relation to’ may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, the expression ‘in relation to’ would include the subject-matter following it and on other occasions, it would not. As in the case of service of dry cleaning, the expression ‘in relation to dry cleaning’ also has reference to the very service of dry cleaning. On the other hand, the service referred to in section 65(105)(v), which refers to a service provided by a real estate agent ‘in relation to real estate’, does not, obviously include the subject-matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service. Going back to the structured sentence, i.e., - service provided or to be provided to ‘A’ by ‘B’ in relation to ‘C’, it is obvious that ‘C’ can either be a service (such as dry cleaning, hair dressing, etc.) or not a service by itself, such as real estate. The expression ‘in relation to’ would, therefore, have different meanings depending on whether ‘C’ is a service or is not a service. If ‘C’ is a service, then the expression ‘in relation to’ means the service ‘C’ as well as any other service having connection with the service ‘C’. Where ‘C’ is not a service, the expression ‘in relation to’ would have reference only to some service which has a connection with ‘C’. But, this would not imply that ‘C’ itself is a service.The High Court further held that there is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. Service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, any value addition could not be discerned. Consequently, the renting of immovable property for use in the course or furtherance of business or commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided along with the renting of immovable property, then it would fall within section 65(105)(zzzz)In view of the foregoing discussion, the court held that section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business or commerce would by itself constitute a taxable service and be exigible to service tax under the Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision was not correct. Consequently, the same were held ultra vires the said Act and to the extent they authorize the levy of service tax on renting of immovable property per se, were set aside.

4 SERVICE TAX DEPARTMENT INSTRUCTION IRK DELHI HIGH COURT [SSIPL RETAIL LTD. V. UOI [2010] 24 STT 571 (DELHI)]Central Government had appealed against the Delhi high court judgment and Supreme Court had admitted the SLP but declined to grant interim stay to the Government (SLP Civil No 13850/2009). During pendency of that SLP, the service tax department official had issued instruction to its officers throughout the country that in view of pendency of SLP, officers should safeguard the revenue by either pursuing the taxpayers to pay the service tax on renting of immovable property or resorting to means under law to protect the revenue. On the basis of such instruction, the officials of the department started sending notices to the petitioners with instructions to start complying with the provisions of the aforesaid notification and circular by paying the requisite service tax. Aggrieved with the orders, again writ petition is filed before the Delhi high court. The Delhi high court held as under:· Even when SLP was pending, the judgment of the High Court held the field and in the absence of any stay, the service tax department was bound to follow the same.· From a perusal of the communications entered by the officials of the department, it was clear that message given was that on account of pendency of the SLP, such persons were under obligation to deposit service tax; so much so that even threat was extended to the extent that failure to comply with the same would leave to initiate the further necessary action against the defaulters.· Even though the judgment of the High Court was challenged by filing the SLP, till the date there was no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the department could not instruct its officers to pursue matter with taxpayers calling upon them to pay service tax or to resort to other means under law to protect the revenue.· The deparetment had assured that corrective steps would be taken by issuing further instructions, in supersession of earlier instructions, to the officers not to write such letters demanding the payment of service tax or threatening coercive steps. On such assurance, no further orders were required to be passed in the instant petition.

5 BUDGET 2010 PROPOSALS

In the case of Home Solution Retail India Ltd. v. Union of India [2009] 20 STT 129 (DELHI), Delhi High Court held that there is no dispute that any service connected with the renting of immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. But the court also held that section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business or commerce would by itself constitute a taxable service and be exigible to service tax under the Act. The obvious consequence of this finding was that the interpretation placed by the CBEC notification and circular on the said provision was held as incorrect but there was no ruling on the constitutionality of provision. Simply, as per high court, the provisions does not entail for service tax on renting of immovable property but services relating to renting etc. and notification providing for levy of service tax on renting was held ultra vires. So, it is provided in the Budget 2010 proposals to amend the relevant provisions itself to override the decision of Delhi high court. Now the renting itself is deemed as taxable services. Further validating provisions has also been proposed under clause 76 to legalise all actions taken under sub-clause (zzzz) of clause (105) of section 65 of the Finance Act, 1994, at any time during the period commencing on and from the 1st day of June, 2007 and ending with the day, the Finance Bill, 2010 receives the assent of the President.ConclusionCentral Government had appealed against the Delhi high court judgment and Supreme Court had admitted the SLP but declined to grant interim stay to the Government (SLP Civil No 13850/2009). The SLP is still pending. In this decision the Delhi High Court had held the circular/notification as ultra vires the said Act (Finance Act, 1994). But it has not been decided whether Central Government has power to levy Service Tax on renting of immovable property. Now the Act is amended. So the question is whether the levy will be constitutional? However, the high court had not decided this issue but the following observations are quite pertinent:“35. From this analysis, it is clear that we have to understand as to whether renting of immovable property for use in the course or furtherance of business or commerce by itself is a service. There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within section 65(105)(zzzz).”So as per these observations, it seems that renting cannot be service per se. But the matter is not free from doubt and second stage of litigation is going to start soon after the proposals become operative.

By CA HARIOM Jindal