The Division Bench of the High Court of Delhi comprised of Mr. Justice Badar Durrez Ahmed and Mr. Justice Rajiv Shakdher, on April 18, 2009, allowed twenty six writ petitions challenging the levy of service tax on commercial rentals. Provided below is the summary of the dispute, the arguments raised by both sides, and the observations of the Delhi High Court.
I. Background:
“Renting of immovable property service” was introduced by the Finance Act of 2007, amending the Finance Act of 1994 (collectively and effectively “the Act”), whereby the definition of “taxable service” included, with effect from June 1, 2007:
“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”
Subsequently, the Secretary, Ministry of Finance, Department of Revenue, Government of India issued a Notification No. 24/2007 dated 22nd May 2007 (“Notification”) and a Circular No.98/1/2008-ST dated 4th May 2008 (“Circular”) whereby an interpretation of Section 65(90a) and 65(105)(zzzz) of the Act was placed to levy service tax “on the renting of immovable property” as opposed to on the service(s) provided “in relation to the renting of immovable property”.
The amendment, read with the Notification and the Circular in effect brought renting, letting, leasing, licensing or other similar arrangements of immovable property, for use in the course or furtherance of business and commerce, within the service tax net. This new levy severely impacted business models across India as most of the rent arrangements did not even stipulate it beforehand.
II. DISPUTE:
A number of tenants/licensees/lessees challenged the legality, validity and vires of the Notification and the Circular on interpretation of Section 65(90a) and 65(105)(zzzz) of the Act.
The prime question raised was “Whether the Finance Act, 1994 envisages the levy of service tax on letting out/renting out of immovable property per se?”
III. ARGUMENTS OF THE PETITIONERS [TENANTS/LICENSEES/LESSEES]
The petitioners pointed out that the Notification stated taxable service as a “taxable service of renting of immovable property”. Similarly the Circular while giving clarification in respect of commercial and industrial construction service purportedly clarified that the “right to use immovable property is leviable to service tax under the renting of immovable property service”.
The petitioners contended that:
– under the provisions of the Act, service tax is levied only on a service which is 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;
– in the Act, the reference is not to the “taxable service of renting of immovable property” but to the taxable service “in relation to” the renting of immovable property;
– by virtue of the Notification and Circular, an erroneous interpretation of relevant section of the Act is being placed, and service tax is sought to be levied “on the renting of immovable property” as opposed to service tax on services provided “in relation to renting of immovable property”;
– the statements of the Union of India given in the Notification and the Circular travel beyond the provisions of the Act;
– renting of immovable property as such cannot be regarded as a service on which service tax could be levied under the provisions of the Act;
– the Notification and Circular under challenge proceed on an inconsistent assumption that renting out of immovable property is by itself a service;
– service tax is a value added tax and can only be levied on the value addition provided by some service provider;
– property based services are different from performance based services. In case of property based services, value addition in terms of improvement/betterment of the property may be taxed. However, in pure rent arrangement, there can be no service tax in absence of any improvement/betterment.
The petitioners also adopted the alternate plea that “if it is held that such a tax is envisaged then the provisions of Section 65(90a), 65(105)(zzzz) and Section 66 of the Act insofar as they relate to the levy of service tax on renting of the immovable property would amount to a tax on land and would therefore fall outside the legislative competence of the Parliament in as much as the said subject is covered under Entry 49 List II of the Constitution of India and would fall within the exclusive domain of the State Legislature. As such, the said provision would have to be declared as un-constitutional”.
IV. ARGUMENTS OF THE RESPONDENTS [UNION OF INDIA]
The Government maintained that:
– user of the land/building itself is a service;
– the transfer of the right to use the property for a commercial or business purpose is itself a service;
– mere renting of immovable property is itself a service;
– merely providing a premises on a temporary basis for organizing a financial, social or business function would also include other facilities in relation thereto and therefore would constitute a taxable service; and
– the expression “in relation to renting of immovable property” has a wide ambit and also covers the act of renting of immovable property.
V. COURT’S DECISION
The Court held that:
– any service connected with renting of immovable property would be subject to the service tax under the Act;
– renting of the immovable property by itself does not constitute a service;
– service tax is a value added tax and therefore it is levied on the value addition provided by some service provider;
– renting of the immovable property for use in course or furtherance of business or commerce does not entail any value addition and therefore cannot be regarded as service;
– interpretations placed by the Notification and Circular on the provisions of the Act are not correct;
– the Notification and Circular, to the extent they authorize the levy of service tax on renting of immovable property per se, are set aside;
– the alternate plea of the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 List II of the Constitution of India was not examined because of the view taken on the main plea of the petitioners.
As a result, no service tax is payable on commercial rent for immovable property. It is for the Government to approach the Supreme Court of India within 90 days of the date of the judgment, if it seeks to reverse the judgment.