Renting Immovable Property : Are We headed for more confusion

Delhi High Court decision on Renting of Immovable Property_ More Developments

By: Nimish Goel

The Delhi High Court in a Writ Petition filed by Home Solutions Retail Ltd has granted a stay from recovery of Service tax under the recently amended entry of Renting of Immovable Property service, where an amendment was made vide the Finance Act 2010 with retrospective effect from June 1, 2007.

Background

The Finance Act, 2007 had introduced Renting of Immovable Property service with effect from June 1, 2007. The taxable service was defined under Section

65(105)(zzzz) as:

(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

Upon introduction of the above service, Writ Petitions were filed in various High Courts challenging the levy on the following main grounds:

(i) Merely allowing use of land/ building does not amount to provision of a service.

(ii) Service tax is on a service provided along with the renting of immovable property and not on renting per se.

(iii) Levy of Service tax on Renting of Immovable Property amounts to levy of tax on land / buildings, which fall within the State List and is not within the purview of the Central Government.

Post the above Writ Petitions, the Supreme Court transferred all the Writs to the Delhi High Court for appropriate disposal. The Delhi High Court in Home Solutions Retail India Ltd. & Ors. v. Union of India [2009 (237) ELT 209 (Del.)], held as under:

35Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz).

36. In view of the foregoing discussion, we hold 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 (sic) commerce would by itself constitute a taxable service and be exigible to service tax under the said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification1 and circular2 on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent they authorise the levy of service tax on renting of immovable property per se, they are set aside.

Post the above decision, Revenue went to appeal before the Supreme Court, where the honble Supreme Court did not grant stay to the Delhi High Courts order.

Recent Amendment in the Finance Bill, 2010

The Finance Bill 2010 (which became the Finance Act, 2010 on May 8, 2010) had proposed to amend the taxing entry of Renting of Immovable Property services with retrospective effect from 01.06.2007, inter alia, as under:

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.;

In this regard, the Circular issued by the TRU dated February 26, 2010 clarified as under:

Amendments are being made in the definition of the taxable service Renting of immovable property [section 65 (105) (zzzz)] to (i) provide explicitly that the activity of renting itself is a taxable service. This change is being given retrospective effect from 01.06.2007;

With the above retrospective amendment, renting of immovable property became taxable with effect from June 1, 2007 and therefore, the Delhi High Court decision was nullified.

Recent Developments

The Delhi High Court while granting the stay has considered the decision of the Division Bench of Delhi High Court in Home Solutions Retail India Ltd. & Ors. v. Union of India [2009 (237) ELT 209 (Del.)], wherein it was held that renting of real estate by itself cannot be by any stretch of imagination be regarded as a service. It was also observed that the renting by itself did not entail any value addition, and therefore, cannot be regarded as a service.

The Delhi High Court has also acknowledged that on the basis of aforesaid decision, which is presently pending adjudication before the Supreme Court, that the present amendment has been introduced to Section 65 (105)(zzzz) by virtue of the Finance Act, 2010 and in particular to Section 76 thereof.

It was argued by the petitioner that the amendment sought to be introduced, puts the petitioner in a worse position than the original provision which has already held not to have any element of service so as to be exigible to Service tax.

The Honble Delhi High Court, while granting the stay under the amended taxing entry of

Renting of Immovable Property service has stated as under:

Prima facie, it appears that renting of immovable property itself has been regarded as a service by virtue of the recent amendment even though this Court by virtue of the said decision on 18.04.2009 had categorically concluded that renting of immovable property by itself cannot be regarded as a service.

The respondents shall file the counter-affidavits within four weeks and the petitioner shall file the rejoinder / affidavits thereto within two weeks thereafter. In the meanwhile, there shall be no recovery of Service tax from the petitioner in respect of renting of immovable property alone. No such service tax would be recovered from respondents 5-10 in the meanwhile.

It is made clear that in the event the writ petition is dismissed, the liability to pay Service tax along with any other liability as a result of demand made will solely be that of the petitioner. We make it clear that there is no challenge in this writ petition to the second part of the aforesaid provision, namely, any other service in relation to such renting and consequently, if there is any other such service, the service provider would be liable to pay service tax on such service and in respect of this portion of the provision there is no stay.

Conclusion

The Delhi High Court in its erstwhile Order dated April 18, 2009 had held that renting of immovable property by itself cannot be regarded as a service. The proposed amendment vide the Finance Bill 2010 in the definition of taxable service was sought to bring within the Service tax net the activity of renting of immovable property per se. The proposed amendment thus, seeks to nullify the position settled by the decision of the Honble High Court of Delhi in Home Solutions Retail India Ltd. The above in fact has also been observed by the Delhi High Court in its Stay Order dated May 18, 2010.

It is important to note that the above stay order shall be applicable only to the petitioner, i.e., Home Solutions Retail India Ltd and not to any other party.

However, what remains unclear is whether something which is not a service per se can be deemed to be a service and whether Service tax can be levied on the same. Further, whether the Central Government is competent under the legislation to tax immovable property, which is the subject area of taxation for the State Governments is a matter left unanswered.