S ERVICE T AX O N R ENTING O F I MMOVABLE P ROPERTY – P RIOR T O T HE

F INANCE ACT , 2 010

1. STATUTORY BACKGROUND

The Finance Act, 2007 amended the Finance Act, 19941 to insert two new section, viz.,

Section 65(90a) and 65(105)(zzzz). The afore – mentioned sections were in relation to service

tax payable on renting of immovable property. Before moving further, it is pertinent to

reproduce the sections as under:

Section 65. Definitions.--in this chapter, unless the context otherwise requires,-

xxxx xxxx xxxx xxxx xxxx

(105) "taxable service" means any service provided or to be provided,-

xxxx xxxx xxxx xxxx xxxx

(zzzz) 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.

Explanation 1. – For the purposes of this sub-clause, "immovable property" includes—

(i) building and part of a building, and the land appurtenant thereto;

(ii) land incidental to the use of such building or part of a building;

(iii) the common or shared areas and facilities relating thereto; and

(iv) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,

but does not include--

1 Service tax is a tax levied on services rendered by a person and the responsibility of payment of the tax is cast on the service provider. It is an indirect tax as it can be recovered from the service receiver by the service provider in course of his business transactions. Service tax was introduced in India in 1994 by chapter v of the finance act, 1994. It was imposed on a initial set of three services in 1994 and the scope of the service tax has since been expanded continuously by subsequent finance acts. The finance act, 1994 extends the levy of service tax to the whole of India, except the state of Jammu & Kashmir.

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(a) vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;

(b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land;

(c) land used for educational, sports, circus, entertainment and parking purposes; and

(d) building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

Explanation 2. – For the purposes of this sub-clause, any immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce;"

The expression "renting of immovable property" has been defined in section 65(90a) as under:-

"renting of immovable property" includes the renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include -

(i) renting of immovable property by a religious body or to a religious body; or

(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre.

Explanation 1. – 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;

Explanation 2. – For the removal of doubts, it is hereby declared that for the purposes of this clause "renting of immovable property" includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property;"

The department issued certain notifications and circulars clarifying the scope and content of

this service. The departmental instructions in question were, viz., Notification No. 24/2007 -

ST dated 22/05/2007 and Circular No. 98/01/2008 - ST dated 04/01/2008. The various

impugned provisions in these circulars are highlighted as below:

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Notification No. 24/2007 – ST : While this notification was an exemption

notification, it also refers to the "taxable service as a taxable service of renting of

immovable property".2 This, in theory, is not so provided for under the Finance

Act, 1994.3 Therefore, the notification proceeds on the basis that the taxable

service is the renting of immovable property itself and hence created doubts on the

levy. 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 cannot 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.

Circular No. 98/01/2008 – ST : This was a clarificatory circular, which, as shall

be seen, was not in conformity with the scheme of the Finance Act, 1994. 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 leviable to service tax under the renting of immovable

property service".4

Immediately, after these circulars were issued, there was a hue and cry among various

segments of the industry5 and experts alike, as these amended provisions and clarifications

tried to bring within the service tax net, the activity of renting itself. Logically, the question

brooming the taxpayer circles & experts were, viz., “Is there any element of service in an

action of renting immovable property for it to be subject to levy of service tax?” These

concerns were finally answered in the profound judgment of the Delhi High Court in Home

Solution Retail India Ltd. & Ors. v. Union of India6 in April 2009.

2 The example given in the notification treats renting of any immovable property as leviable to service tax. 3 Infra at note 64 Column 3, at Reference code 096.01 of the circular reads as: right to use immovable property is leviable to service tax under renting of immovable property service.5 For more information, kindly Refer to http://www.business-standard.com/india/news/service-taxrentingimmovable-property/356332/, last visited on 02/09/2010. Reference can also be made to Home Solution Retail India Ltd. v. Union of India 2009-TIOL-196-HC-DEL-ST, wherein 20 of India’s biggest concerns in the retail sector, including Shopper’s Stop Ltd., Wardhaman Lifestyle Retail Ltd., Barista Coffee Company Ltd. had filed separate writ petitions challenging the legality and vires of section 65(105)(zzzz) r/w section 65(90a) of the finance act, 1994.6 Home Solution Retail India Ltd. & Ors. v. Union of India 2009 (237) ELT 209 (Del.)

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2. JUDICIAL TREATMENT OF SERVICE TAX LIABILITY ON RENTING OF IMMOVABLE

PROPERTY

Though the Special Leave Petition from the judgment of the Delhi High Court in Home

Solution Retail (2009)7 is still pending, a discussion of this judgment is pertinent to the

subject matter. Furthermore, the Bombay High Court got the opportunity in 20088 to test the

constitutionality of Service Tax on Renting of Immovable property. The judicial treatment is

brought out as below:

A. DECISION OF THE BOMBAY HIGH COURT IN RETAILERS ASSOCIATION OF INDIA

V. UNION OF INDIA 9

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

7 Supra note 6

8 Retailers Association of   India   v. Union of   India [2008] 16 STT 127 (Bom.)

9 [2008] 16 STT 127 (BOM.)

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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.

B. DECISION OF THE DELHI HIGH COURT IN HOME SOLUTION RETAIL INDIA LTD.

V. UNION OF INDIA 10

The petitioners, in this batch of writ petitions had questioned the legality, validity and vires of

Service Tax Notification No. 24/2007 dated 22/05/2007 and circular no. 98/1/2008-ST dated

04/01/2008. It was alleged that by virtue of the said notification and circular a completely

erroneous interpretation is placed on section 65(90a) and section 65(105)(zzzz) of the

Finance Act, 1994 as amended by the Finance Act, 2007. It was further alleged that because

of this incorrect interpretation, service tax is 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.

As has been explained earlier, the Petitioner’s had shown that a bare reading treats mere

renting / leasing as a taxable service on perusal of the said notification dated 22/05/2007 and

Circular dated 04/01/2008.11

In essence, the substance of the petitioners have raised the question as to whether the Finance

Act, 1994 envisages the levy of service tax on letting out / renting out of immovable property

per se?

The Petitioners, who are landlords or tenants in respect of leased premises, contended that no

such tax is envisaged under the said act. Therefore, the notification dated 22/05/2007 and the

circular dated 04/01/2008 are sought to be set aside as being ultra vires the said act.

Alternatively, the Petitioners buttressed their arguments that if such a tax was envisaged

under the Finance Act, 1994; it would still be struck down on the basis of Legislative

Competence insofar as they relate to the levy of service tax on renting of immovable property

would amount to a tax on land and would therefore fall outside the legislative competence of

Parliament inasmuch as the said subject is covered under Entry 49 of List II of the 10 2009 (237) ELT 209 (Del.)11 Supra at Page 2

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Constitution of India and would fall within the exclusive domain of the State Legislature.

Henceforth, such a tax would be unconstitutional.12

Interestingly, counsels appearing on both sides sought to place reliance on Tamil Nadu

Kalyan Mandapam Association v. Union of India13 and All India Federation of Tax

Practitioners v. Union of India14 and Doypack Systems (Pvt.) Ltd. v. Union of India.15

In T.N. Kalyan Mandapam,16 the Supreme Court had considered the issue of the taxable

service provided by a mandap keeper.

The Supreme Court held that the taxable service provided as a caterer by a mandap keeper

was within the legislative competence of the Parliament and could not be construed as a tax

on the sale and purchase of goods. In this context, the Supreme Court observed that it was

well-settled that the measure of taxation cannot affect the nature of taxation and, therefore,

the fact that service tax is levied as a percentage of the gross charges for catering did not alter

or affect the legislative competence of the Parliament in the matter.

The counsel appearing for the revenue seemed to stress on Para 55 of the judgment in Kalyan

Mandapam, wherein the court had noted that mere letting of premises for even a few hours

was leviable to service tax.17 The Delhi High Court, however, digressed with the view taken

by the revenue and instead, referred itself to Para 56 of the judgment, and noted that the

phrase used was “other services”, thereby referring to other services than those already

provided by the mandap keeper, for e.g., catering services.18

The phrase "in relation to" has been construed by the Supreme Court to be of the widest

amplitude. In Doypack19 the Court observed as under:

“The expressions 'pertaining to', 'in relation to' and ‘arising out of', used in the deeming provision, are used in the expansive sense. The expression 'arising

12 Ibid at Para 313 2004-TIOL-36-SC-ST14 2007-TIOL-149-SC-ST15 2002-TIOL-389-SC-MISC16 Supra Note 1317 Ibid at Para 55, wherein the court notes: “In fact, making available a premises for a period of few hours for the specific purpose of being utilized as a Mandap whether with or a without other services would itself be a service and cannot be classified as any other kinds of legal concept. It does not certainly involve transfer of moveable property nor does not it involve transfer of moveable property of any kind known to law either under the Transfer of Property Act or otherwise and can only be classified as a service.”18 Supra Note 12, at Para 2619 Supra Note 15

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out of' has been used in the sense that it comprises purchase of shares and lands from income arising out of the Kanpur Undertaking.”20

Another contention that was dismissed by the Delhi Court, was when it emphasized that a tax

cannot be struck down on the ground of lack of legislative competence by enquiring whether

the definition accords with what the layman's view of service is. It noted the well-settled

principle that in matters of taxation, the courts permit greater latitude to the statute to pick

and choose objects and rates for taxation and has a wide discretion with regard thereto.21

At this juncture, the High Court noted that the main challenge in the present petitions is not

on the ground of lack of legislative competence, but on the ground that the impugned

notification and circular are ultra vires the Act itself. Therefore, the areas of discussion in the

T.N. Kalyana Kandapam and the present case are somewhat different.

The Supreme Court had also observed that a levy of service tax on a particular kind of service

could not be struck down on the ground that it does not conform to the common

understanding of the word "service" so long as it does not transgress any specific restriction

contained in the Constitution.

But, the scope of discussion in the present case is entirely different. It is the petitioners'

contention that the intention of the legislature in enacting Section 65(105)(zzzz) was not to

tax the activity of renting of immovable property, but only to levy a tax on a service which is

provided in relation to renting of immovable property.

The Supreme Court observed that a tax on services rendered by mandap keepers and outdoor

caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire-

purchase activities.

The High Court felt that this conclusion of the Supreme Court makes the distinction clear

between the case of a mandap keeper and that of a person who rents out an immovable

property for use in the course or furtherance of business or commerce. Consequently, the

Supreme Court decision in the case of Kalyana Mandapam does not advance the case of the

respondents. On the other hand, it does go towards clarifying the stand taken by the

petitioners.

20 Ibid at Para 4621 Supra Note 10, Para 30

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The High Court observed that it is apparent that 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, the Court proceeded to analyse the provisions of Section 65(105)(zzzz)

and held the following.

1. 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".

2. 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.

3. The expression "in relation to" may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, "in relation to" would include the subject matter following it and on other occasions it would not. As in the case of the 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.22

4. 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.23

5. 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)(zm) 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, 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

22 Ibid at Para 3423 Ibid at Para 34

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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).24

So the High 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 of 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 is not correct. Consequently, the same are ultra vires the said

Act and to the extent that they authorize the levy of service tax on renting of immovable

property per se, they are set aside.

Before parting with this batch of cases, the High Court observed that it has not examined the

alternative plea taken by the petitioners with regard to the legislative competence of the

Parliament in the context of Entry 49 of List 11 of the Constitution of India. Such an

examination has become unnecessary because of the view it has taken on the main plea taken

by the petitioner’s as taken above.

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.

C. DECISION OF THE DELHI HIGH COURT IN S SIPL RETAIL LTD. & ORS. V.

UNION OF INDIA AND ORS. 25

The 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)26. 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

24 Ibid at Para 3525 2010 [18] S.T.R. 26226 Please Refer to http://www.indiancaonline.com/section/service_tax, last visited on 02/09/2010

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on renting of immovable property or resorting to means under law to protect the revenue.27

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:

1. 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.

2. 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.

3. 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.

4. The department 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.

27 Circular No. DOF 334/1/2008-TRU

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S ERVICE T AX O N R ENTING O F I MMOVABLE P ROPERTY – W.R.T. T HE F INANCE

ACT , 2 010

1. AMENDMENTS AND IMMEDIATE RESPONSE OF COURTS

As was seen in the earlier, the Hon’ble Supreme Court was to be the final arbiter on the

taxability of renting of immovable property. However, the Central Government had different

plans in mind. With the staunch belief of Sh. P. Chidambaram to tax such transactions,28 it

(the revenue) has left no stone unturned to tax the same.

The Finance Act, 2010 amends the erstwhile Section 65(105)(zzzz), as it stood after The

Finance Act, 2007; and the effect is that renting is itself a taxable service. The Government,

has used a concept better known as ‘legislative over – ruling’29 to achieve this and has

nullified the judgment delivered in Home Solutions Retail Ltd.30 This concept of legislative

overruling has been widely used in taxing statutes and can be best summed up in the words of

the Hon’ble Supreme Court in the Empire Industries Case31, wherein it was noted:

“Such legislative expedience of validation of laws is of particular significance and utility and is quite often applied, in taxing statutes. It is necessary that the legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and seek a windfall from the legislature's mistakes. Validity of legislations retroactively curing defects in taxing statutes is well recognised and courts, except under extraordinary circumstances, would be reluctant to override the legislative judgment as to the need for and wisdom of the retrospective legislation.”32

Therefore, Section 65(105)(zzzz) is now worded as follows:

Section 65. Definitions.--in this chapter, unless the context otherwise

requires,-

xxxx xxxx xxxx xxxx xxxx

28 Refer to para 153 of the Budget Speech of the Finance Minister, available at http://www.hindu.com/nic/budget2007.htm, last visited on 02/09/10.29 Refer to Ujagar Prints Etc. v. Union of India & Ors. AIR 1989 SC 516, wherein the doctrine of legislative over ruling was succinctly explained at Para 25: “A Competent legislature can always validate a law which has been declared by courts to be invalid, provided the infirmities and vitiating factors noticed in the declaratory-judgment are removed or cured. Such a validating law can also be made retrospective. If in the light of such validating and curative exercise made by the Legislature-granting legislative competence--the earlier judgment becomes irrelevant and unenforceable, that cannot be called an impermissible legislative overruling of the judicial decision. All that the legislature does is to usher in a valid law with retrospective effect in the light of which earlier judgment becomes irrelevant. Such legislative expedience of validation of laws is of particular significance and utility and is quite often applied, in taxing statutes….” 30 Supra Note 1031 Empire Industries Limited & Ors. Etc. v. Union of India & Ors. Etc. AIR 1986 SC 66232 Ibid

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(105) "taxable service" means any service provided or to be

provided,-

xxxx xxxx xxxx xxxx xxxx

(zzzz) to any person, by any other person in relation to renting of

immovable property for use in the course or furtherance of by any

other person, by renting of immovable property or any other service in

relation to such renting, for use in the course of or, for furtherance of,

business or commerce.

xxxx xxxx xxxx xxxx xxxx

One may also refer to Para 9.2 of the circular issued by the department.33 It reads:

9.2 In order to clarify the legislative intent and also bring in certainty in tax liability the relevant definition of taxable service is being amended to clarify that the activity of renting of immovable property per se would also constitute a taxable service under the relevant clause. This amendment is being given retrospective effect from 01.06.2007.

Therefore, it is apparent that renting has now been defined as a service explicitly in the

Finance Act, 1994. Furthermore, it has been retrospective operation from 01/06/2007.

Amendments made vide the Finance Act, 2010 try to achieve the position as it was before the

case of Home Solutions Retail India Ltd.34, viz., as Section 65(105)(zzzz) stood amended vide

the Finance Act, 2007 read with the relevant notification and circular.35

The Central Government's attempts to legalize the levy of and collection of service tax on

commercial rentals, on a retrospective basis, from June 1, 2007, would seem to have met with

some judicial resistance, at least, in so far as the retrospectivity of the levy is concerned.

While the Delhi High Court has given a stay in the Home Solution Retail Ltd v. Union of

India and others,36 the AP High Court, in Trent Limited v. Union of India and Others,37 has

stayed the recovery of service tax for the period June 1, 2007 to March 31, 2010. The issue

before the Delhi High Court was, whether, the amendment brought about by the Government,

by the introduction, through the Finance Act, 2010, in the place of the words “in relation to

33 D .O .F. No .334 /1/20 10- TRU dated 26/02/201034 Supra Note 1035 Supra Page 336 2010-TIOL-341-HC-DEL-ST37 2010-TIOL-402-HC-AP-ST

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renting of immovable property” appearing in Section 65(105)(zzzz), the words “ by renting of

immovable property or any other service in relation to such renting”, was valid in law.

Though its attention was drawn to the decision of the Delhi High Court in the Home Solution

case38 delivered in 2009, the AP High Court has taken a different stand by only staying the

recovery of tax in respect of the period June 1, 2007 to March 31, 2010, without toeing the

line of the Delhi High Court which had held that, if additional services are provided along

with renting, service tax was attracted.

Therefore, a combined reading of these decisions would possibly lead to the following

conclusions:

1. The constitutionality of the levy has not been touched. It is now up to the Supreme Court to decide on whether renting, as an activity, would constitute a service. Of course, as aforesaid, the Delhi High Court had held that, when additional services are provided along with renting, service tax was very much attracted.

2. The AP High Court, it seems, has no problems about service tax being levied on renting even without any additional service being provided, post April 1, 2010. In a way, it seems to justify the levy of service tax on renting, as an independent service, post April 1, 2010.39

3. The Supreme Court is already hearing the SLP filed by the Government against the decision of the Delhi High Court, in the Home Solution case delivered in 2009.40 It has been reported that the Government is in the process of filing a fresh appeal/SLP before the Supreme Court against the latest decision of the Delhi High Court in the Home Solutions case.41

However, before discussing the constitutional validity of the so – called ‘service’, it is

imperative to settle some of the other issues that might by affecting the taxpayer. The

fundamental issue here is the impact of these decisions42 outside of A.P. and Delhi. Can these

decisions constitute a binding decision outside these states? In this regard, the Hon’ble

Supreme Court has, at occasions, dealt with the jurisdiction of a High Court.

In Kusum Ingots & Alloys Ltd. v. Union of India43, a three member Bench had held that “an

order passed a High Court on a writ petition questioning the constitutionality of a

parliamentary Act whether interim or final keeping in view the provisions contained in clause

38 Supra Note 1039 Supra Note 37 at Para 540 Refer to http://www.taxguru.in/service-tax/update-on-the-delhi-high-court-decision-regarding-applicability-of-service-tax-on-rent.html, last visited on 03/09/10.41 Home Solution Retail Ltd v. Union of India and others 2010-TIOL-341-HC-DEL-ST 42 Supra Notes 36 & 37. Refer also SSIPL Retail Limited and Ors. v. Union of India (UOI) and Ors. 2010 [18] S.T.R. 26243 AIR 2004 SC 2321

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(2) of Article 226, will have effect throughout the territory of India subject of course to the

applicability of the Act.”44 In the Home Solutions case decided in 2009, the Delhi High Court

had not had not struck down the constitutionality of the levy of service tax on renting and

consequently, its decision cannot be made applicable to cases falling beyond its jurisdiction.

Similarly, in Ambica Industries v. Commissioner, Central Excise,45 the Supreme Court had

held that “the decision of the high court shall be binding only on the authorities which are

within its jurisdiction.”46 In another case,47 the Supreme Court has made the same

observations. At Para 74, the court noted:

“…So far as a High Court is concerned, its jurisdiction is limited to territory within which it exercises jurisdiction and not beyond it. On that analogy also, a High Court cannot pass an order transferring a case pending in a Court subordinate to it to a Court subordinate to another High Court. It would be inconsistent with the limitation as to territorial jurisdiction of the Court.

75. This can be compared with exercise of extraordinary jurisdiction by a writ Court under Article 32 or 226 of the Constitution. It is well settled that this Court can exercise power by issuing writs, directions or orders to every authority within the territory of India (as also those functioning outside the country provided such authorities are under the control of Government of India). But the jurisdiction of a High Court has territorial limitations. It can exercise the power "throughout the territories in relation to which it exercises the jurisdiction", that is to say, the writs issued by a High Court cannot run beyond the territory subject to its jurisdiction and the person or authority to whom the High Court is empowered to issue such writs must be within those territories which clearly implies that they must be amenable to its jurisdiction in accordance with law.”48

It is then very clear that, the impact of the decisions of the Delhi High Court and the A.P.

High Court would be restricted to cases falling within their respective territories and cannot

be made applicable to cases falling beyond their jurisdiction.

2. SUBSTANTIVE ISSUES TO BE DECIDED BY THE SUPREME COURT

44 Ibid at Para 2245 2007 (213) ELT 323 (SC)46 Ibid at Para 1347 Durgesh Sharma v. Jayshree (2008) 9 SCC 648 48 Ibid

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Apart from the preliminary issues highlighted earlier, the Supreme Court shall also have to

delve into certain predicate issues. These go into the very question of the taxability of the

‘service’ of renting immovable property. Two major grounds that will be presented before the

court are that of (1) Retrospectivity and (2) Constitutionality. This section of the paper shall

analyse the other arguments that the Supreme Court shall hear, in addition to the arguments

already put up before the Hon’ble Delhi High Court.

A. RETROSPECTIVE APPLICATION

The Finance Act, 2010 makes the amendment to Section 65(105)(zzzz) retrospective from

1/06/2007.49 It raises peculiar questions. Firstly, does the legislature have the power to enact

such amendments with retrospective effect? This question was answered in the affirmative in

National Agricultural Cooperative Marketing Federation vs. Union of India.50

Sometimes, a provision is declared invalid by court (as has happened in Home Solutions

Retail Case of 2009). In such case, Parliament can amend the Act with retrospective effect

making its intention clear. If an interpretation made by Court of Law is not what Parliament

had in mind, Legislature can always amend the law - even with retrospective effect. The

reason is simple - Legislature in effect says that ‘the interpretation placed by Court is not

what we wanted to legislate while passing the law. Hence, let us clarify what we have in

mind’. This is true in respect of Parliament as well as State legislature.51

In Virendra Singh Hooda v. State of Haryana52 it was held as follows – (a) If legislature has

the power over subject matter and competence to make a valid law, it can at any time make

such a valid law and make it retrospectively so as to bind even past transactions. Validity of

validating law depends upon whether the Legislature possesses the competence which it

claims over the subject matter and whether in making the validation it removes the defect

which the Courts had found in the existing law.53 (b) Legislature cannot directly overrule,

49 There is another retrospective amendment being made vide Finance Act, 2010 to “Commercial Training and Coaching Service” under Section 65(105)(zzc) of The Finance Act, 1994. This amendment seeks to operate from 1/07/2003, i.e., when the service was actually introduced into the tax net, and also ‘clarifies’ that the word ‘commercial’ means consideration and not actual profit motive. This is to nullify the decisions rendered in Ahmedabad Management Association v. CST (2009) 19 STT 1 (CESTAT), Great Lakes Institute of Management v. CST (2008) 12 STT 306 (CESTAT) and Administrative Staff College of India v. CCE (2009) 18 STT 78 (CESTAT)50 260 ITR 54851 Shri Prithvi Cotton Mills v. Broach Borough Municipality AIR 1970 SC 192 , Hotel Balaji v. State of A.P. 88 STC 98 and A. Manjula Bhashani v. M.D., A.P. Women’s Cooperative Finance Corporation Ltd. (2009) 8 SCC 431.52 AIR 2005 SC 13753 Ibid at Para 45

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reverse or override a judicial decision by a bare declaration. It cannot set aside an individual

decision. (c) There is distinction between encroachment on the judicial power and

nullification of effect of a judicial decision.54 (d) Vested rights can be taken away by

Legislature by retrospective amendment.

In Empire Industries Ltd. v. UOI55, it was observed that retrospective effect to a taxing

legislation can be given. Such legislation is not per se unreasonable. Giving retrospective

effect to a provision by removing the drafting mistake of legislation is not an unreasonable

restriction on the right to carry on business.56 One can also look at numerous examples in The

Income Tax Act, 1961.57

The assessees might rely upon Union of India v. Martin Lottery Agencies58, wherein it was

unequivocally held that only a clarificatory amendment can have retrospective operation,

while one that widens the tax base or imposes a new tax, can only have prospective

operation.59 However, this case should have no bearing on the ultra vires of the present

taxable service in question, as in Martin Lottery Agencies, the court did not have any basis,

including the then Finance Minister’s Speech.60 According to the court, the intention to tax

54 Ibid at Para 4755 (1987) 64 STC 42 (SC)56 RC Tobacco P Ltd. v. UOI (2005) 7 SCC 725 57 Refer to CIT v. Mahendra Mills 243 ITR 56 wherein it was held that it is the sweet will of the assessee to claim or not to claim depreciation and depreciation cannot be thrusted upon an assessee by the Assessing Officer. Explanation 5 was inserted by the Finance Act, 2001 declaring that the provisions of depreciation shall apply whether or not the assessee claims the depreciation in computing his total income. Explanations 3C and 3D were inserted in sec. 43B by the Finance Act, 2006 with retrospective effect from July 1, 1989 to clarify that interest if converted but not actually paid shall not be deemed as actual payment for purposes of sec.43B. Refer also to Smt. Amiya Bala Paul v. CIT 262 ITR 407 which held that valuation by the Valuation Officer u/s. 55A cannot be for computing cost of construction. However, sec. 142A was inserted by the Finance Act, 2004 with effect from 15-11-1972 to nullify the said decision, empowering the Assessing Officer to obtain valuation report for purpose of any investment referred to in secs. 69, 69A, 69B etc. Refer also to The Orissa High Court judgment of CIT v. Aloo Supply (1980) 121 ITR 680 held that there is no restriction for payment of Rs. 20 ,000 at a time more than once in a day. The Madhya Pradesh High Court in CIT v Triveniprasad Pannalal 228 ITR 680 held that Sec. 40A(3) of the Act only says that the amount exceeding Rs. 2500 as then, should not be paid except by way of cheque drawn on a bank or by a cross bank draft and if it exceeds that amount, then such expenditure shall not be allowed as deduction. It does not say that the aggregate of the amount should not exceed Rs.2,500. The words used are ‘in a sum’; i.e., single sum has been used. Therefore, irrespective of any number of transactions, where the amount does not exceed Rs. 2,500 as above, the rigours of sec.40A(3) will not apply. Now, the amount should not exceed Rs. 20,000. that apart, practicability of the payment has also to be judged from the point of view of a businessman. To nullify the said judicial decisions, sec. 40A(3) has been substituted to provide that where a payment or aggregate of payments made to a single person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A, as the case may be.58 (2009) 223 CTR (SC) 32159 Ibid at Para 2560 Ibid: 27. The speech of the Hon'ble the Finance Minister would have been relevant for the purpose of opining as to whether the court independently would have arrived at a conclusion that organizing lottery would amount

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such transactions was intended in 2008 itself, and not before it. In the present matter, the

intention was already there61, and therefore, reliance on Martin Lottery would be erroneous.

I. RETROSPECTIVE OPERATION STILL INEFFECTIVE DUE TO LIMITATION

As seen earlier, courts have always inclined towards the validity of a retrospective

amendment, and for the same, amendments carried vide The Finance Act, 2010 shall, in most

probability, be upheld as valid. However, any tax collections vide the Act would still be time

– barred.

Section 73 of The Finance Act, 1994 provides for recovery of service tax in certain cases. Per

sub – clause (1), the claim for service tax is to be made within a period of one year from the

relevant date. In certain cases, extended period of limitation shall apply, i.e., 5 years.62 As per

the dicta of the Supreme Court in J.K. Cotton Spinning Mills v. Union of India63, the time

limit of Section 11A of The Central Excise Act, 1944 [pari material with Section 28 of The

Customs Act, 1962 and Section 73 of The Finance Act, 1994] shall apply also in cases where

act is amended with retrospective effect. Furthermore, question of applying penalty also does

not arise as it is covered by judgment delivered in CCE v. Rama Vision Ltd.64, wherein it was

held penalty cannot be imposed for past period if act is amended with retrospective effect.

The Department may take a stand that this period of limitation shall not apply because of

validation Clause 76 in the Finance Act, 2010. Such reliance, however, is faulty and should

not stand water in the Supreme Court. It was categorically held in National Agricultural

Cooperative Marketing Federation vs. Union of India65, “…that the authorities cannot

reopen assessments when they have become time barred; more so, in the absence of any such

express provision or clear implication…”66

to rendition of service but not otherwise. As it is not possible for us to arrive at the said conclusion, we have no other option but to hold that by inserting the explanation appended to Clause (19) of Section 65 of the Act, a new concept of imposition of tax has been brought in. The Parliament may be entitled to do so. It would be entitled to raise a legal fiction, but when a new type of tax is introduced or a new concept of tax is introduced so as to widen the net, it, in our opinion, should not be construed to have a retrospective operation on the premise that it is clarificatory or declaratory in nature.61 Supra Note 2862 Proviso to Section 73(1) of The Finance Act, 199463 (1988) 68 STC 421 (SC)64 (2006) 3 STT 53 (SC)65 Supra Note 5066 Ibid at Para 28. Refer also to Kerala State Cooperative Marketing Federation vs. Union of India AIR 1998 SC 2303

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Hence, it is sufficiently clear that in most cases, viz., wherein the assessee has not been

served with a Show Cause Notice, the demands for recovery of service tax are time barred.

Clause 76 of The Finance Act, 2010 does not mention about differential periods of limitation.

It rather gives protection to any proceedings started prior to 1/6/2010. Therefore, in case the

assessee, has not been served a show cause notice, there cannot be any demand by the

department, provided assessee establishes bonafide belief.67 The Government has earlier,

altered the period of limitation vide the Finance Acts.68

B. LEGISLATIVE COMPETENCE QUESTIONED

The Delhi High Court in Home Solutions Retail69 had not considered the argument of

legislative competence.70 The petitioners assailed Section 65(105)(zzzz) of The Finance Act,

2007 being unconstitutional due to lack of legislative competence. The tax so imposed could

only have been levied by a State because of Entry 49, List II of Schedule 7 of the

Constitution of India, which reads as ‘Taxes on Lands and Buildings.’

The question that arises is, does the scope of Entry 49, List II also include taxes on renting of

land and buildings?

It is possible to argue that on the face of it, Entry 49 refers to taxes on land and buildings per

se; when a tax is levied on the renting of land and buildings it would not be covered under 67 Refer to V.S. Datey, Retrospective Amendments to Service Tax, available at http://www.dateyvs.com/ca_nov03.htm, last visited on 03/09/200968 Sections 153A and 153B were inserted by Finance Act, 2003 after omitting Chapter XIV-B. Subsequently, proviso 1 was inserted by Finance Act, 2005 with retrospective effect from 1-6-2003. Second proviso was again inserted by Finance Act, 2006 with effect from 1-6-2006. The Finance Act, 2007 inserted two new provisos in sub-sec.(1) of sec.153B with effect from June 1, 2007. By the Finance Act, 2008 w.e.f. 1-6-2003, Sec.153 has been amended to provide (i) if any proceeding initiated under section 153A or any order of assessment or reassessment made under sub-section (1) of this section has been annulled in any appeal or other legal proceeding, the abated assessment or re-assessment relating to any assessment year shall stand revived and if such order of annulment is set aside, such revival shall cease to have effect; (ii) that time limit for completion of such reassessment or assessment shall be one year from the end of the month in which the abated assessment revived or within the period already specified in section 153 or in sub-section (1) of section 153B, whichever is later; (iii) the period commencing from the date of annulment of a proceeding or order of assessment or reassessment referred to in sub-section (2) of section 153A till the date of the receipt of the order setting aside the order of such annulments by the Commissioner, shall be excluded in computing the period of limitation for the purposes of this section. New sec. 292BB has been inserted to provide that where an assessee has appeared in any proceeding or co-operated in any inquiry related to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act has been duly served upon him in time in accordance with the relevant provision of the Act. Further, such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was – (a) not served upon him; or (b) not served upon him in time; or (c) served upon him in any improper manner. One who abstains from attending would be at premium than who co-operates in the proceedings. Clause (ii) of sub-section (2) of section 143 has been amended to provide that the notice under sub-section (2) of section 143 shall be served on the assessee within a period of six months from the end of the financial year in which the return is furnished.69 Supra Note 1070 Ibid Para 37

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this Entry. Entry 49 is attracted only when the tax is on the land and building – the taxable

event for a charge of tax covered by this entry would be the existence of land and buildings

alone. The renting of such land and buildings is different from the existence thereof –

consequently, a tax on renting of immovable property is different from a tax on immovable

property itself. Arguably, there is some indirect support for this proposition in State of West

Bengal v. Kesoram Industries.71

In Kesoram Industries, a Constitution Bench of the Supreme Court was called upon to

adjudicate whether a cess on land levied by the State Legislature based on the value of the

coal production from that land was within the scope of Entry 49. The Court upheld the

legislative competence of the State government and observed,

“Once it is held that the land or building is available to be taxed, it does not matter to what use the land is being subjected though the nature of the user may enable land of one particular user being classified separately from the land being subjected to another kind of user. The tax would remain a tax on land. It cannot be urged that what is being taxed is not the land but the nature of its user…”

So too, can it be urged that in the instant case, because reference is made to immovable

property, what is being taxed is not the renting/nature of use of the property but the property

itself? It would appear that such an argument would not be possible.

In Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co.,72, it was held

that to fall under Entry 49, List II, two tests must be satisfied. First, the tax must be directly

imposed on land/buildings; and secondly, the tax must bear a definite relation to the land and

buildings. In the case of tax on renting of immovable property, is the tax really imposed

directly on land and buildings? In Kesoram Industries, the Court also clarified the earlier

decision in India Cements v. State of Tamil Nadu73, and in this context observed, “There is a

clear distinction between 'tax directly on land' and 'tax on income arising from land' .” If that

is so, it can be argued that there must be an equally clear distinction between a tax directly on

land and a tax on the renting of that land for use by another.71 (2004) 10 SCC 201 72 75 ITR 603 (SC)73 (1990) 1 SCC 12, refer also Bhagwan Dass Jain v. Union of India (1981) 2 SCC 135, "The word 'income' in Entry 82 should be interpreted in its widest amplitude. Even in its ordinary economic sense, the expression 'income' includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. The tax levied under the Act is on the income (though computed in an artificial way) from house property in the above sense and not on house property. Entry 49 of List II of the Seventh Schedule to the Constitution is not, therefore, attracted. The levy in question squarely falls under Entry 82 of List I of the Seventh Schedule to the Constitution."

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The Revenue can also argue from a logical footprint. Service Tax is levied vide The Finance

Act, 1994. As per the dicta of the Hon’ble Supreme Court in All India Federation of Tax

Practitioners v. Union of India74, service tax is VAT. Hence, there must be value addition to

the service receiver. In the scope of the present service, what is being levied to service tax is

this ‘transfer of right to use’ of a certain immovable property. According to the revenue, this

‘transfer of right’ leads to certain economic value addition to the service receiver. Hence, it is

made taxable. Therefore, there is a distinction between Taxes levied vide Entry 49, List II and

the one contemplated in Section 65(105)(zzzz) of The Finance Act, 1994. While the taxable

event in case of Entry 49, List II is the existence of land/building, the taxable event in case of

Section 65(105)(zzzz) is the ‘transfer of right of use.’

One can find support in the concept of ‘deemed manufacture’ in Central Excise. Although, an

activity is not manufacture in the true sense of the word75, is yet somehow bought within the

ambit of manufacture is leviable to Central Excise Duty. For e.g., in Section 4(3)(d)76 of The

Central Excise Act, 1944, any expenditure towards re-labelling or labelling is included within

the ambit of value for Central Excise purposes. Interesting, Central Excise is a duty on

manufacture77, and yet, an activity which has explicitly not been held to be manufacture is to

be included in valuation.78 The only reasons being is, that transaction value is ‘ad valorem’,

and hence, any activity that generates economic value, even if not amounting to manufacture,

but has a reasonable nexus to the manufacture, shall be included in the Central Excise

Valuation.

One can also buttress, albeit discursive, in Section 65(105)(zzzzj) as amending the Finance

Act, 1994 vide the Finance Act, 2008. The said section imposes service tax on Supply of

Tangible Goods for use, without any transfer of effective control or possession. An

immediate controversy arose with the industry opining that the Revenue Department was

stepping into legitimate tax collections of states, as these were ‘deemed sales’ under their

respective VAT enactments r/w Article 366(29A) of The Constitution of India. The board has

come out with internal circular/letter79, issued to its rank and file wherein it has tried to define

74 Supra Note 1475 Union of India v. Delhi Cloth Mills AIR 1963 SC 791, Refer also C.C.E. v. S.R. Tissues (2005) 6 SCC 310, wherein it was held that ‘mere value addition’ does not amount to manufacture.76 It defines transaction value77 Section 3 of The Central Excise Act, 194478 Union of India v. J.G. Glass Industries AIR 1988 SC 839. Refer also S. Mukhopadhay, Expansive Definition of Manufacture: Intrusion of Excise into VAT, Economic and Political WeeklyVol. 38, No. 41 (Oct. 11-17, 2003), pp. 4298-430179 F.No. 341/1/2008 dated 29.02.2008

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the differential nexus between supply of goods in the case of VAT (Sales Tax) and service

tax. The essential test wherein VAT was leviable was given in Para 4.4.3 of the said letter,

which stated:

4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of proposed service.

This clarification was inserted to ensure compliance with the judgment delivered in State of

A.P. v. Rashtriya Ispat Nigam.80 Examples of such a service include the Delhi Metro, or using

an airplane etc. Using the same syllogism, the assessees can take a stand that service tax can

be levied only when there is no loss of effective control or possession. Renting of immovable

property leaves no effective control to the service provider and hence, such a tax cannot be

provided for.81

This argument, stands on a very weak footing though. It can be defeated because of simply

two reasons.

i. The service in Section 65(105)(zzzzj) relates to goods, i.e., movable property. The cardinal principles/jurisprudence should not be applied to immovable property, as they are two different streams of thought and are handled accordingly.

ii. The second reason is on the occurrence of taxable event. Once proved that Clause (zzzzj) cannot be a tool to interpret Clause (zzzz); one has to note the different taxable events. In renting, as noted earlier, it is the ‘transfer of right of use’ of immovable property. The competence of the parliament to levy a tax on such transfers comes vide Entry 97 of List I of Schedule 7 of the Constitution of India.82

C. OTHER MISCELLANEOUS ARGUMENTS

The international scenario is heavily in favour of the department. The World Trade

Organisation recognises renting as a service.83 In the 19th meeting of the IMF Committee held

at Frankfurt from October 23 – 26, 2006, the committee recognised the aspect of ‘transfer of

80 AIR 2002 SC 1305. Refer also Commissioner of Trade Tax Vs. U.P.S.R.T.C. [2008] 16 VST 226 and Commissioner of Trade Tax Vs. Nand Transport Co. [2008] 16 VST 381.81 Sadashiv Shyama Sawant [D] through L.Rs. and Ors. v. Anita Anant Sawant (2010) 3 SCC 385 82 Empire Industries v. Union of India (1985) 3 SCC 31483 Classification Code 831, Services Sectoral Classification List, MTN.GNS/W/120, 10 July 1991

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right’ as amounting to an economic asset.84 Similarly, Canada considers renting / leasing as a

supply of service.85 Therefore, any act of renting amounts to value addition and so does

renting of immovable property under the Finance Act, 2010.

The assessees, however, will rely upon the controversial Circular No 98/1/2008-ST on

January 4, 2008. This circular meant to clarify issues related to renting of immovable

property services and works contractor’s services, has instead, managed to open up a

pandora’s box. In a blatant attempt to deny Cenvat Credit benefits to a service provider under

“Renting of Immovable Property” service, the clarificatory Circular would seem to have

raised a big question mark on the leviability of service tax on “Renting of Immovable

Property”.

Consider the following:

1) The Circular makes a sweeping ‘clarification’ that ‘Right to use immovable property is leviable to service tax under renting of immovable property service.’ The words “right to use immovable property” has not been used anywhere in the Finance Act. As per Section 65 (90a) of the Finance Act, “Renting of Immovable Property” includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of or furtherance of business or commerce”. From a purely legal point of view, there need not necessarily be a transfer of right to use immovable property, either actual or deemed, for rent to be received out of an immovable property. A typical example could involve certain sub-lease or sharing agreements when a first lessee could let out the leased premises to another sub lessee. It would be too simplistic to take a view that “Renting of Immovable Property” service can arise only on the “Right to use Immovable Property”.  What the Circular perhaps tries is to mean that “transfer of right to use immovable property” is taxable under “Renting of Immovable Property”.

2) A rather poor usage of words such as these, is bound to create a lot of contentious issues. If the Government feels that it is the transfer of right of use immovable property that is taxable under “Renting of Immovable Property”, what would happen to a case wherein a commercial property has been let out for a period of three years through’ a lease agreement prior to June 1, 2007? Since the right to use immovable property has already been transferred, does it mean that no service tax can be levied on the rentals arising out of such a lease agreement signed before June 1, 2007? After all, can’t one take a view that ‘right to use immovable property’ cannot happen every month for the rentals to be brought into the service tax net?

3) We have all been under the impression that the Government has sought to levy service tax “renting of immovable property” as a service related to immovable

84 Report BOPCOM-06/33, available at http://www.imf.org/external/pubs/ft/bop/2006/06-33.pdf, last visited on 06/09/2010.85 Alarie, Benjamin and Gendron, Pierre-Pascal, The VAT Treatment of Real and Immovable Property in Canada (April 28, 2010). Available at SSRN: http://ssrn.com/abstract=1597421, last visited on 08/09/2010

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property. As such, a number of petitions have already been admitted by the High Courts, challenging the constitutional validity of the levy of service tax on “renting of immovable property”. The main line of argument that has been taken is that, no “service” gets rendered when a landlord or lessor lets out an immovable property for business or commerce and further that levy of service tax on “renting of immovable property” is nothing but a tax on immovable property by the Union Government, which is unconstitutional.

The Government would seem to have made the life of the Courts easier by seemingly

admitting that “renting of immovable property” is not a service. Look at the words that the

Circular has used, which are reproduced below:

“Input credit of service tax can be taken only if the output is a ‘service’ liable to service tax or a ‘goods’ liable to excise duty. Since immovable property is neither ‘service’ or ‘goods’ as referred to above, input credit cannot be taken”. 86

It seems very clear that, in its attempt to deny Cenvat Credit benefits to service providers

providing services under “Renting of Immovable Property”, the Government could well run

the risk of the very levy of service tax on “Renting of Immovable Property” being struck

down by the Courts. Let’s remember that the Government’s views are binding on the

Revenue87 and it is open for an assessee to say that when the Government itself feels that

“Renting of Immovable Property” is a tax on immovable property, he is entitled to depend on

that view.

CONCLUSION

86 Clarification to Reference Code 096.0187 Ranadey Micronutients v Collector of Central Excise 1996 (87) ELT 19 (SC)

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Clearly, the so – called ‘service’ of renting has been hotly debated both inside and outside the

courts. There are arguments to justify either side. In my opinion, however, the tax shall be

held valid and constitutional because of reasons of legislative competence and taxable event,

which has also been supplied above. The industry perceives the tax as a liability, while the

Government is only interested in filling up it’s coffers. The onus is now on the Supreme

Court to decide the constitutionality of Section 65(105)(zzzz) of The Finance Act, 1994 as

amended in 2010.

However, there has been a dangerous trend in the Government to nullify every judicial and

reasoned decision with a singular objective, to maximize the revenue. However, while doing

so, it does trample upon some well laid industry principles, which it should not. This is also

one of the reasons why we desperately need an entire overhaul of our tax regime, to

transform it into a singular GST regime. The quicker it happens, happier will the revenue, and

the tax payer be.

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