Service Tax on renting of immovable properties was introduced from June 01, 2007 by insertion of section 65(105) (zzzz) in the Finance Act, 1994. The scope of this levy was examined by the Delhi high court in its judgment dated 18.04.2009 delivered in the case of Home Solution Retail India Ltd.v UOI and others (STO 2009 Del 825).
While delivering this judgment, the court held that renting of immovable property for use in the course or furtherance of business of commerce by itself doesn't entail any value addition and, therefore, cannot be regarded as a service. However, the court categorically stated that there is no dispute that any service connected with the renting of such immovable property would fall within the ambit of Section 65(105) (zzzz) and would be subject to service tax. Subsequent to this judgment, the CBEC issued instructions vide 336/10/2009 TRU dated 15.7.2009 to all service tax formations that the department has filed an appeal against the said order of the Delhi high court, and the dispute has not reached finality.
The Government of India, without awaiting the outcome of the appeal filed in the Supreme Court against the above judgment dated 18.04.2009, inserted an amendment with retrospective effect from 01.06.2007, in the Finance Act, 2010, to the Section 65(105)(zzzz) of the Finance Act, 1994. The amendment that has been introduced by virtue of the Finance Act, 2010 substituted the words "in relation to renting of immovable property" with words "by renting of immovable property or any other service in relation to such renting" in Section 65(105) (zzzz). The tenor of this retrospective amendment strikes at the very root of the observation of the Delhi high court that renting of immovable property can't be regarded as a service and is introduced with the multiple objective of nullifying the effect of the judgment of Delhi high court and also to deny opportunity to the apex court to finally settle this issue once for all.
This amendment was again challenged by filing writ petitions before the Delhi high court. While admitting the writ petition, the Delhi high court in (STO 2010 Del 296) directed the respondents to file the counter-affidavits within four weeks and the petitioner to file the rejoinder/ affidavits thereto within two weeks thereafter. The high court also directed that there shall be no recovery of service tax from the petitioner in respect of renting of immovable property alone. It was further observed by the court that in the event the writ petition is dismissed, the liability to pay service tax along with any other liability as a result of the demand made will solely be that of the petitioner.
Regarding "any other service in relation to such renting" as appearing in the amended Section 65(105) (zzzz), the high court observed that there is no challenge in the 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.
The net effect of the retrospective amendment to Section 65(105)(zzzz) of Finance Act, 1994 by the Finance Act, 2010 and the observations of Delhi high court in its order dated 18.05.2010, is that the issue of service tax on rentals have now entered its last lap of the race, with both the participants evenly poised. This development has put the landlords in a precarious situation since there are every chances that the Delhi high court may finally decided the issue in the favour of the department and in which event they will be required to shell out service tax on the rentals received from 01.06.2007 onwards. Many landlords who have stopped collecting and paying service tax after the first judgment dated 18.04.2009 of the Delhi high court are now faced with a dilemma as to whether to collect service tax from their clients during the interim period without waiting for the outcome of the Delhi high court case or refrain from doing so, and bear the burden thereof on their own in the eventuality of Delhi high court ruling against the landlords.
The situation further became confusing for assessee, as courts were staying recovery whereas 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 will 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 retrospective amendment has also brought out the devious intentions of the government of not allowing the judiciary to gain upper hand in the matters of levy and collection of taxes and to declare the supremacy of the legislature in these matters of extreme importance in the government of the state. This amendment designed to counter the effects of an undesirable ruling from the perspective of the government will have a singular effect on the role played by the judiciary in review of actions of the legislature for maintaining check and balance in its pursuit to uphold the democratic principles.
At the same time, the prompt action of judiciary also needs to commended, which as hindered the government initiative in levy and collection of taxes by way of introduction of retrospective amendments.