service tax on renting

Is service tax on renting of immoveable property constitutionally valid?

by T.N.PANDEY

While the Punjab and Haryana High Court has upheld the validity of such a tax, the Delhi High Court has ruled otherwise.


Service tax is leviable on ‘taxable service', which is defined in Section 65(105) of the Finance Act, 1994 as ‘any service provided or to be provided'. Clause 65 (90)(a) of the Act relates to taxable service of ‘renting of immoveable property' and includes renting, letting, leasing, licensing or other similar arrangement of immoveable property.

Taxable service in the context of renting of immovable property has been defined in sub-clause (zzzz) to mean rendering of taxable service to any person by any other person, by renting of immoveable property or any other service in relation to such renting for use in the course of, or for furtherance of, business or commerce (subject to two exemptions provided).

Prior to amendment by the Finance Act, 2010, the taxable service w.e.f. June 1, 2007, meant service in relation to renting of immoveable property for use in the course or furtherance of business or commerce.

The amendment became necessary to clarify the impact of Delhi High Court decision in the Home Solution Retail India Ltd vs UOI (2009 20 STT 129) case.

Constitutional validity

The Constitutional validity of taxing such service was challenged before the Punjab and Haryana High Court in Shubh Timb Steels Ltd vs UOI (2010 29 STT 479). It was claimed that service tax on ‘renting of property' relates to tax on land and building covered by Entry 49 of the List-II in the Constitution and not Entry 92C read with Entry 97 of List-I and, therefore, the the State Government, and not the Central Government, is more competent to levy such a tax and, hence, service tax on such a service is contrary to the Constitution and should be struck down. The High Court has not agreed with this view.

According to the court, List-II relates to tax on land and building and not to any activity relating thereto. Income-tax on income from property, wealth tax on capital value of assets, including land and building, and gift tax on land and building have been upheld, and it cannot be said that renting of property does not involve any service.

According to the court, renting for commercial purpose is certainly a service and has value for the service receiver. The service element in a renting transaction is certainly an independent aspect covered by Entry 92C read with Entry 97 of List-I and, hence, the Centre is competent to impose tax on such a service. The validity of the tax was upheld by the court.

It may, however, be mentioned that Delhi High Court, in Home Solution Retail India Ltd (supra), held that service tax was a tax on value addition as the words ‘in relation to service' was to be provided in relation to renting of property and the property by itself could not be regarded as service.

Renting of property did not involve any value addition. It was, accordingly, held that notification dated May 22, 2007, and Circular of January 4, 2008, issued by the CBEC, providing for service tax on renting of property, per se, was ultra vires the scheme of levy of service tax.

The Punjab and Haryana High Court had decided that even if a transaction of transfer of right in immoveable property does not involve value addition, the provision cannot be held to be void in the absence of encroachment on List-II. Accordingly, no merit was found in the writ petition and the same was dismissed.


There is apparent contradiction in the two decisions. The Punjab and Haryana High Court may be technically right in upholding the constitutional validity of the service tax on renting of immoveable property, but it will be of no avail if the Delhi High Court's view, which seems to be more convincing, prevails — that is, within the framework of the Act no tax can be imposed on such a service.


(The author is a former chairman of CBDT.)