Renting of Immovable Property - Delhi HC – Liable ?
By CA Madhukar N Hiregange
& CA Srikantha Rao T
The category of renting of immovable property service was introduced under service tax for the first time with effect from 01.06.2007. This was introduced following the philosophy that even renting was liable to service tax as evidenced by the Circular 334/1/2007 TRU dated 28.02.2007 which sought to regard renting of immovable property for use in the course or furtherance of business or commerce as the taxable service and the subsequent endeavours of the department in taxing rental income arising from renting of immovable property only proves this thought process. Ever since its introduction there has always been a school of thought that the renting of immovable property was something which could not be taxed under service tax for the simple reason that renting activity is one which cannot be construed as a service. The department though had the opposite view which was evident in Notification 24/2007 ST dated 22.05.2007 as well as Circular 98/1/2008 ST dated 04.01.08. If this view is to be affirmed, the proposition in the Circular as well as the said Notification would go beyond the legislative intent as it appears in Section 65(105)(zzzz). This led to the assessees examining various options including the one relating to payment of service tax under protest.
Another aspect which merited attention was the impact of cenvat credits. Very often assessees who let out property for business or commerce had also incurred service tax or duty of excise during the process of construction of the said property. The credits of the service tax paid and the excise duty incurred was also something which had to be considered before taking a stance on the liability on renting of immovable property service. The matter has now taken an interesting turn as the Delhi High Court in Home Solution Retail India Ltd Vs UOI (2009-TIOL-196-HC-DEL-ST) has allowed a writ petition challenging the levy of service tax on rental income arising from letting out of immovable property. Readers should however note that the High Court has not looked into issues of legislative competence to levy service tax and rather dealt with the matter pertaining to levy of service tax on pure renting of immovable property as distinguished from services in relation to renting of immovable property. In this article we shall address all the issues which we feel are relevant in this matter.
Before we proceed further, it would be important for us to discuss the definitions pertaining to “taxable service” and “Renting of immovable property”.
As per Section 65(105)(zzzz) of Chapter V of Finance Act 1994 as amended from time to time, “taxable service” means 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.
“Immovable property” has been defined to include –
- Building and part of a building and the land appurtenant thereto
- Land incidental to the use of such building or part of a building
- Common or shared areas and facilities relating thereto and
- 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
“Immovable property” would not include –
- Vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes
- Vacant land (whether or not having facilities clearly incidental to the use of such vacant land)
- Land used for education, sports, circus, entertainment and parking purposes and
- Building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Where an immovable property is used partly for residential purposes and partly for use in the course of furtherance of business or commerce, it shall be deemed to be immovable property for use in the course of furtherance of business or commerce.
The phrase “renting of immovable property” has been defined u/s 65(90a) to include 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 –
· Renting of immovable property by a religious body or to a religious body or
· 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
The phrase “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.
Finance Act 2008 had also inserted another explanation in Section 65(90a) to include the act of allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property, within the meaning of the phrase “renting of immovable property”.
While great pains had been taken to define the concept of “immovable property” and the phrase “renting of immovable property” the critical issue was that what could be held liable under Section 65(105)(zzzz) was service provided or to be provided in relation to renting of immovable property and not the very act of renting of immovable property itself. But unfortunately, this aspect seemed to have been ignored totally by the department whose efforts had been to collect service tax on the rental income ignoring totally the absence of “service” element in most of the cases which was also exemplified through the Circular 98/1/2008 ST dated 04.01.2008 which specifically sought to tax right to use immovable property under the category renting of immovable property service. The said Circular at the same time had sought to deny credit of service tax on construction services in relation to construction of the said immovable property by seeking to distinguish the immovable property from the income arising thereon, which was unfair to say the least. What could be regarded as coming within the definition of “service in relation to renting of immovable property” is something which has not been addressed by the lawmakers. A definition which gave illustrations of services liable could probably have avoided confusion as far as interpretation is concerned but this was not to be.
This matter has now been addressed by the Delhi High Court in responding to the writ petition filed by certain assessees who had challenged the levy of service tax on the renting of immovable property. The High Court has in Home Solution Retail India Ltd Vs Union of India (2009-TIOL-196-DEL-HC-ST) correctly analysed the issue as to the levy of service tax on rental income. The High Court has sought to draw a distinction between “service in relation to renting of immovable property” and “renting of immovable property” and held that renting in itself would not amount to provision of taxable service and held both notification 24/2007 ST and circular 98/1/2007 ST to be ultra vires the Act as far as requirement for levy of service tax on renting is concerned. The question of levy of service tax would arise where the renting also involved provision of certain other services which could be brought under the service tax net. This is something which would have to be ascertained by analyzing the facts and circumstances of each case and by going through the relevant agreements entered into by the contracting parties and as such, cannot be presumed.
The concept of the phrase “services in relation to” has also been discussed to mean referring to a wide ambit or variety of services relating to renting of a property, being liable to service tax. This however, did not mean a transaction in the nature of transfer of property could be regarded as one of rendering of service as the same transaction could not be regarded as both, a transfer of property as well as rendering of service. The High Court has clearly held that service tax is a tax on value addition made by the service provider and in case of mere letting out of property, there would be no value addition for the purpose of charging service tax.
The way forward
This decision would now reinforce the stance take by the assessees who have not paid service tax on renting of immovable property so far. As far as other assessees are concerned, a decision would have to be taken as to the future course of action. It maybe noted that the decision of the DHC is not final and it is expected that the same would be appealed. Assuming the DHC decision is good law, the following options may be examined
1. Where the customer is in a position to claim credit, the service provider may examine charging service tax till the matter is finally decided by the Supreme Court as there is every possibility of the department taking the matter up further. This could be worthwhile where the service provider has no other taxable service and he has balance of cenvat credits of service tax/excise duties in respect of construction services received or materials used in relation to the said premises. This decision would also depend on the tenants agreeability which cannot be taken for granted.
2. Where the service receiver is not in a position to claim credit, the service provider would have to examine the option of following the decision of the Delhi High Court and not charge service tax. This, however, would have to be after intimation to the department about the course of action being taken up and seeking their confirmation of the tax payers understanding. In such a scenario, there could be a question as to the treatment to be given to cenvat credits in the books of the service provider or manufacturer who also engages in renting of immovable property. One way out could be adopting the decision of the High Court and that is, there is no service involved in renting of immovable property rather than considering the same as an exempted service.
3. The third scenario can arise where the person renting out the immovable property has collected service tax but now the customer/client desires refund of the amount of service tax collected. This could be a tricky issue as the refund claim if at all to be made, would have to be on the basis of the decision of the High Court which may not be seen favorably by the department. This could lead to the refund being held up. Ideally the tenant being an aggrieved party may make the refund.
This is an article on the first response and many aspects would require to be examined in the light of further legal developments. The paper writers are of the view that this type of legislation trying to tax anything or everything should be avoided in future and fair, certain and simple laws should be the focus of the Government of India. This type of legislation makes the tax compliant assessee look like a fool as against the ignorant / deliberate evader.