Albert Einstein - “Nothing is more destructive of respect for the government and the law of the land than passing laws, which cannot be enforced.”
Concept of Service:
The term “service” has not been defined under the service tax law. It is a fact that when words are not defined in statute, then recourse would have to be taken to the meaning of the term as understood commercially. This view has been followed in Bajaj Auto Ltd Vs CCE Pune [1997 (94) ELT 545 (Tri)]. In Sunbeam Electronics Vs Collector of Customs [1992 (62) ELT 97 (Tri)], the meaning of the term as understood commercially found favour with the tribunal even where the words had scientific or technical meaning and had not been defined by statute.
If we refer to the Webster’s Dictionary, the term “service” has been defined in various context. But if we are to narrow down on a specific meaning, it means the performance of any duties or work for another. As per Black’s Law Dictionary, “service” could be construed as the act of doing something useful for a person or company for a fee. It can also be an intangible commodity in the form of human effort, such as labour, skill or advice.
If we consider this specific meaning, then the levy of service tax would probably fail in cases where there is absolutely no service involved or rather, no work is done for another.
Introduction to Rental Service:
In 2005 under business support services the “infrastructural services” were introduced. However this service was understood to exclude pure rental. This includes provision of office space with office utilities, lounge, and reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security. This category didn’t include the activity of mere renting.
This expert view seems to have spurred the government to press for the introduction of a separate category of service nomenclated as “Renting of Immovable Property Service”. This category was introduced with a view to tax the commercial use of immovable property.
The introduction of this category led professionals as well as the industry to wonder whether such a levy was valid for the simple reason that what was being sought to be taxed was not understood as a service but in fact rental income from letting out of immovable property. It could be said to be a return on investment. Normally service is associated with advice, use of skill or labour none of which exist in letting out of property. The moot question would be whether in “pure renting” is there any rendition of service?
Taxable Service Definition:
The taxable service in this regard is defined under sec 65(105)(zzzz) as any service provided or to be provided to any person, 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.
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,
[(v) vacant land, given on lease or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce;]
but does not include —
(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, an 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;
“Renting of immovable property” includes 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;
Background of the Service and status as on date:
The category of renting of immovable property service was introduced under service tax in the year 2007. The reasons and philosophy behind introducing this category was explained by the Circular 334/1/2007 TRU which sought to regard renting of immovable property for use in the course or furtherance of business or commerce as the taxable service, but the taxable service provided to tax only services provided in relation to renting of immovable property and not the very act of renting of immovable property. This was confirmed by the Honorable High Court in the case of Home Solution Retail India Ltd Vs UOI 2009-TIOL-196, where the high court held that the activity of mere renting would not amount to provision of taxable service.
The government in order to nullify the order passed by the Delhi High Court made an amendment to include the activity of mere renting of immovable property within the tax net. This amendment has been made effective retrospectively from 01.06.07 as the government sees it to be clarificatory which may not be the understanding of the tax payer. This retrospective amendment would nullify the impact arising out of the decision of the Delhi High Court in the Home Solutions case and the appeal which is pending before the Supreme Court.
The Delhi High Court in the case of Home Solution Retail India Ltd. v. Union of India 2009-TIOL-196-HC-DEL-ST had struck down Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008 - ST, dated 4-1-2008. The decision which was favoring the public was appealed and is presently pending before the Apex Court.
In the mean time, the board responsible for administering the service tax law issued a Circular dated July 15, 2009, wherein the departmental officials could collect service tax from the landlords as the issue had not attained finality. The Delhi High Court, on a petition filed, had asked the Government to withdraw the Circular dated July 15, 2009 and has asked the officers not to take any action.
The amendment which was made retrospective protected all actions taken by the officers in recovering the service tax on renting activity. This amendment was again challenged by filing writ petitions before the Delhi High court. The following are the views of the various high courts in response to the writs challenging the constitutional validity and the retrospective amendment.
Delhi High Court in Home Solutions Retail India Ltd- II:
Mere renting of Immovable Property is not liable to Service tax but only the services in relation to Renting of Immovable Property is taxable, as value addition is absent in the activity of mere renting of immovable property for use in the course or furtherance of business or commerce. Further renting of immovable property by itself cannot be regarded as a service i.e. Renting out of immovable property by itself for business or commercial use not constitutes a taxable service as per Section 65(105)(zzzz) of Finance Act, 1994. Any service connected with renting of immovable property are covered and eligible for Service tax i.e. Other services such as air conditioning service provided along with renting of immovable property is covered. Further it was held that notification 24/2007 and circular 98/1/2008 are ultra vires the act in so far as levy of Service tax on renting of immovable property per se is not taxable.
Andhra Pradesh High Court in Trent Ltd
The situation further became confusing for assessee, as courts were staying recovery where department came up with show cause Notices for collection of service tax. Recently, in Trent Limited Vs Union of India (STO 2010 AP 137) high court observed that pending further order in this application or in the writ petition, department would not initiate any coercive steps for recovery of the service tax on the renting of immovable property by the petitioners, on the basis of the provisions of Section 65 (105) (zzzz) as amended by the Finance Act, 2010, for the period 01/06/2007 to 01/04/2010.
The arguments were that (i) renting did not add any value, (ii) it encroached on legislative power of State under Entry 49 of List II of Constitution of India, covering “taxes on lands and buildings” and hence Parliament was not competent to levy it, and (iii) its levy with retrospective effect was arbitrary. The court after hearing the parties held that contentions eminently arguable and plea about retrospective effect was prima facie on more substantial ground. Pending the writ petition, Department was directed not to initiate coercive steps for recovery of Service tax for retrospective period. The retrospective amendment however clearly shows the intentions of the government.
Punjab & Haryana High Court in Shubh Steels
It cannot be held that renting of property did not involve any service as service could only be in relation to property and not by renting of property. Renting of property for commercial purposes is certainly a service and has value for the service receiver. Moreover, the aspect of service element in renting transaction is certainly an independent aspect covered under Entry 92C read with Entry 97 of List I. In any case, subject matter of levy being outside the scope of entry 49 of List II, power of Union Legislature is undoubted. Question whether levy would be harsh being in addition to income tax and property tax is not a matter for this Court once there is legislative competence for the levy. Even if it is held that transaction of transfer of right in immovable property did not involve value addition, the provision cannot be held to be void in absence of encroachment on List II.
On retrospectivity: It is well settled that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary. Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which earlier law
Delhi High Court in Home Solutions Retail India Ltd (latest decision post Shubh Steels):
It was argued that Section 65(105)(zzzz) of the Act cannot really cover mere renting of immovable property in the net of service tax. It is averred that in the earlier definition of the said provision words used in relation of renting of immovable property were ‘for use in the course or furtherance of business or commerce’ and the present provision has only made a different kind of contour but by such an amendment, it cannot be held that mere renting of immovable property without any kind of rider would tantamount to service and thereby would be covered in the ambit and sweep of service tax.
Relying upon the observations made by the High Court, it was submitted by the advocate that in the said decision it has been clearly held by the Division Bench that the renting of the immovable property for use in course or furtherance of business or commerce by itself does not entail any value addition and, therefore, cannot be regarded as service. The advocate submits that when such a conclusion has been arrived at while interpreting the concept of service tax in respect of letting simplicitor, by amending the Act with regard to renting of immovable property by Finance Act, 2010 the situation cannot improve.
With the following observations, the High Court has ordered to continue the stay and the court to wait for disposal of SLP against Home Solutions case by Supreme Court. In the course of hearing, counsel for the parties fairly stated that they would bring it to the notice of their Lordships of the Apex Court and shall seek expeditious disposal of the SLP filed against the judgment rendered in Home Solution. In view of the submissions raised at the bar, the High Court adjourned these matters to be called on 25th January, 2011 for direction.
Impact and issues:
Whether government has legislative competence to levy service tax on rental income?
The matter is presently before the Supreme Court to decide on the legislative competency of the Central Government to levy service tax on rental income. However, in the view of the paper writer, the levy of service tax on renting of immovable property could 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 I1 of the Constitution of India and would fall within the exclusive domain of the state legislature (state government).
Further deeming “rent” as a service may not be appropriate as the tax is a value added tax. However the final judicial decision would have to be followed.
Who are the assessees likely to be affected?
The assessees who are likely to be affected are those who provide/let out commercial buildings on rent and would also impact manufacturers or service providers taking the premises on rent as the recipients would be obligated to pay service tax in addition to the rents.
Whether the amendment can have retrospective effect?
There is no doubt that Parliament has plenary powers to amend any law with retrospective effect. There is no restriction on Legislature passing law with retrospective effect. However this would be decided judicially in due course probably in favour of the tax payer.
Whether the benefit of service tax paid under rental of immovable property service is available as cenvat credit?
Yes, the benefit of cenvat credit of service tax paid on rental charges is available for set off under rule 3 of Cenvat Credit Rules 2004 provided the same is an eligible input service used for manufacture/ clearance of goods or used for providing a taxable service.
Whether the manufacturer (service receiver) is legally bound to pay service tax in addition to the rental charges to the land lord?
The liability to pay service tax is on the service provider, but since service tax is an indirect tax, the same can be collected from the service receiver. It is also expected to be collected from the customers/ consumer of the service. Supreme Court in the case of All India Federation of Tax Practitioners Vs UOI 2007 (7) STR 625 has observed that service tax is destination based consumption tax and service tax is not a charge on business but on consumer. Therefore the recipient of service is bound to pay service tax to the receiver of service.
Ø Where the manufacturer/ service provider [ tenants] is in a position to claim credit, the landlord may examine charging service tax [ after availing the eligible credits like construction services, architects, etc] under protest till the matter is finally decided by the Supreme Court. The receiver would avail the credit.
Ø Where the tenant is not in a position to claim credit and / or not willing to pay service tax, the landlord may take an undertaking to the effect that the service tax with interest would become payable, if the Supreme Court upholds the levy. Here litigation + interest could be an additional cost which could be avoided if the same is paid under protest.
The Latest news:
The High Court was not impressed and granted stay to the petitioners in respect of renting of immovable property. Revenue naturally took the matter to the Supreme Court and the Supreme Court has stayed the operation of the Delhi High Court judgment, till the next date. The next hearing is on 20.01.2011 and there would be many more……. Hopefully the confusion would get resolved in this year!!
Have an Empowered and Fulfilling 2011.
Madhukar N Hiregange FCA