Snatching earth beneath landlord’s feet with retrospective amendment
CA Pradeep Jain
Sukhvinder Kaur, LLB
The renting of immovable property for commercial/business purpose was brought under service tax net in 2007. However, as has been the case with almost all the services the drafting of the provisions was not free from confusion. As per the definition it appeared that the services provided in relation to renting of immovable property was leviable to tax. However, the Government has embraced the interpretation and provided that renting of immovable property per se is leviable to service tax. The matter reached the High Court and thereafter the
However, the Government decided to take the matter in their own hands. Not waiting for the judgment of the
Definition of “Renting of Immovable Service”: -
Service Tax was levied on Renting of Immovable property service from 01.06.2007 by the Finance Act, 2007. The definition of the words ‘renting of immovable property’ has been given in clause (90a) of Section 65 of the Finance Act, 1994. The said definition is reproduced hereunder for ready reference:
(90a) “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;
The taxable service of renting of immovable property on which service tax was levied has been defined in sub-clause (zzzz) of Section 65 (105) of the Act, reproduced hereunder:
(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-
(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;
Thus, from the aforesaid definitions it appears that service in relation to renting of immovable property for the use of business/commercial activity was brought under the service tax net.
Relevant Notification: -
Notification No. 24/2007-ST, dated 22.05.2007 granted exemption to the taxable service of renting of immovable property, from so much of the service tax leviable thereon as in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely, property tax levied and collected by local bodies.
Thus, the amount paid as property tax on the immovable property was not to be included in the assessable value on which service tax was leviable. However, it was provided that the amount of interest charged on the amount of property tax and the penalty paid to the local authority would not be excluded from the assessable value on which service tax was chargeable.
Relevant Circular: -
CBEC issued Circular No. 98/1/2008-ST, dated 04.01.2008 wherein the following issue was raised: -
Commercial or industrial construction service [section 65(105)(zzq)] or works contract service [section 65(105)(zzzza)] is used for construction of an immovable property. Renting of an immovable property is leviable to service tax [section 65(105)(zzzz)].
Whether or not, commercial or industrial construction service or works contract service used for construction of an immovable property, could be treated as input service for the output service namely renting of immovable property service under the CENVAT Credit Rules, 2004?
The following clarification was given in this regard: -
Right to use immovable property is leviable to service tax under renting of immovable property service.
Commercial or industrial construction service or works contract service is an input service for the output namely immovable property. Immovable property is neither subjected to central excise duty nor to service tax.
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.
Thus, the said Circular denied taking of Cenvat credit by the landlords/lessors in respect of service tax paid on input service being Commercial or Industrial Construction service.
Judgment of the High Court of
The Notification No. 24/2007-ST, dated 22.05.07 and the Circular No. 98/1/2008-ST, dated 04.01.08 came to be challenged in the case of Home Solution Retail India Ltd v/s Union of India [2009-TIOL-196-HC-DEL-ST]. The basic issue raised in this case was whether the Finance Act, 1994 envisaged the levy of service tax on letting out/renting out of immovable property per se? Or the service tax was levied on the service provided in relation to the renting of immovable property. It was contended therein that the said Notification and Circular were giving an erroneous interpretation of the Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994 (as amended by the Finance Act, 2007) and therefore they were ultra vires of the Finance Act, 1994.
The verdict of the High Court of Delhi was as under:
Ø High Court observed that service tax is a value added tax. It is a tax on value addition provided by a service provider.
Ø High Court held that 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.
Ø High Court has held that the activity of renting of immovable property without any additional service being rendered would not fall under “Renting of Immovable property service”. If any additional services are provided along with renting of immovable property then such services would fall under “Renting of Immovable property service” like landlord/lessor providing furniture, provision of air conditioning service etc. This means that the landlords/lessors must start to charge service tax on the services provided to tenants in addition to renting of immovable property.
Ø High Court held that Section 65(105) (zzzz) does not in terms entail that 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.
Ø Consequently, the interpretation placed by the impugned notification and circular on the said provision is not correct and the same are ultra vires the said Act and to the extent that they authorize levy of service tax on renting of immovable property per se, they are set aside.
Thus, decision has lead to emergence of new issues regarding the said service. The detailed analysis of the judgment of the High Court was done in our Article titled “Renting of Immovable Property- Delhi High Court Decision”. The implications of the said judgment were also discussed in this article. You can view the aforesaid article on our website in article section.
Appeal against the decision of High Court: -
The Department filed a Special Leave Petition before the Supreme Court against the judgment of the Delhi High Court. The appeal was pending however, no stay was granted against the decision of the High Court. As a consequence, most of the assessee has stopped paying service tax. Even the tenants have stopped service tax to the landlords.
Post Developments: -
After the judgment was passed by the High Court of Delhi in the case of Home Solution Retail India Ltd, it was noticed that some of the clients who had taken the immovable property on rent had stopped paying service tax to the property-owners/landlords. This lead to the Department issuing Circular No. 336/10/2009-TRU, dated 15.07.2009 asking the field formations to go on collecting the service tax on the renting of immovable property. It was said therein that the issue had not reached finality as appeal against the decision of the High Court was pending before the
Thereafter, some assessees have again approached the Delhi High Court challenging the TRU instructions as well as some of the letters issued by some of the filed officers. The Delhi High Court observed that since the operation of the decision given in the Home Solution Retail India Ltd’s case was not stopped by any order of the Apex Court and therefore, the Board could not have instructed their officers to pursue the matter with tax payers calling them to pay service tax not they could resort to other means under law to protect the Revenue. The Delhi High Court did not pass any further orders on the assurance of the ASG appearing for the Government that corrective steps will be taken by issuing further instructions, in suppression of earlier instructions, to the officers not to write such letters demanding the payment of service tax or threatening coercive steps.
Amendments proposed in Budget 2010: -
However, before the Apex Court could take a decision in the SLP filed by the Government against the judgment of the High Court, or even before the ink of the assurance given by ASG has dried, the Government has introduced retrospective amendments regarding the service of ‘renting of immovable property” in the Finance Act, 1994.
In the Budget 2010-11 announced on 26.02.2010 the Government has retrospectively amended the definition given in Section 65(105) (zzzz) of the Finance Act, 1994 to provide that the activity of ‘renting’ itself is a taxable service. The amendment was introduced retrospectively from 01.06.2007.
The Government also proposed to introduce a clause to protect all the action taken by the Department officers for recovering service tax on renting of service from 01.07.2007 onwards.
With the retrospective amendment introduced so, the effect of the judgment of the
All the controversies raised were silenced once and for all. This was being done with retrospective effect. Now, all the landlords, who have not paid the tax, have to pay the tax along with interest. They will ask the tenants to pay the same. Even they will be ready to pay the tax but the interest will be in account of landlord only.
Alternatives available with the Assessee: -
In view of the amendments introduced by the Budget 2010, the assessees have only two options are available with them. Firstly, they can simply pay the service tax levied on the renting of immovable property and put an end to litigation. The second option with the assessee is to once again approach the High Court and contend that the renting falls under the State List and Centre cannot impose tax on the same. As such, he can challenge the constitutional validity of the levy of service tax on renting of immovable property.
The clear cut message given by the Government that one should not fight with the Government. They have the weapon of retrospective amendment available with them. The proverb “IT IS DIFFICULT TO LIVE IN ROME AND FIGHT WITH POP” clearly fits the situation. Nobody is going to penalize the officer who has not properly drafted the wrong provisions. Now, the assessee is also realizing that it is better to pay tax and not to fight with the department. Even if he wins after a long battle then the department will come with a retrospective amendment. In the last, he has to pay the tax.
The second very dangerous outcome is that the Government is amending the law when it is pending before