1. SPECIAL COMMUNIQUÉ
DECEMBER 2010
Service Tax
Renting of immovable property
The Central Government introduced service tax under the category of ‘renting of immovable property’ with effect from
01.06.2007. Service tax was levied on any service provided or to be provided in relation to renting of immovable
property for use in the course of furtherance of business or commerce. The levy of service tax on renting of immovable
property has been a matter of debate since the date it was proposed to be introduced. In this regard, two High Courts
have pronounced contrary judgments on levy of service tax on renting.
In April 2009, the Delhi High Court ruled in the case of Home Solutions Retail (2009-TIOL-196-HC) that mere renting
of immovable property does not amount to any service and thus no service tax is payable. Further, it was held that only
if any other services in relation to renting are provided, then such other services would attract service tax and further
that the notification and circular issued thereunder were ultra vires, the levy of service tax. The Central Government has
filed a special leave petition (SLP) before the Honourable Supreme Court challenging this decision of the Delhi high
Court. Thereafter, the Central Government amended the definition of renting of immovable property to include the
activity of mere renting within the meaning of taxable services. This amendment was effected on 01.07.2010 with
retrospective effect from 01.06.2007.
In the meanwhile, the High Court of Punjab & Haryana (P&H) has now in the case of Shubh Timb Steels Ltd vs.
Union of India and Another (2010-TIOL-765-HC), upheld that renting of immovable property is a service and levy of
service tax on renting is constitutionally valid. Further, it has also upheld the retrospective amendment made by the
Central Government.
This communiqué takes a look at the key principles held in the judgment delivered by the High Court of P&H.
Analysis of Judgement of High Court of P&H:
In what appears to be one of the landmark judgements in service tax matters, the High Court of P&H has observed that
service tax is a destination based consumption tax and is not a charge on business but on a consumer and is leviable on
services provided. It is thus, a value added tax. Further, even if it is held that transaction of transfer of immovable
property did not involve value addition, the provision cannot be held to be void in absence of encroachment on State
List.
This service tax levy being in addition to income tax and property tax, on the question whether it will be harsh, it has
been held that so long as the levy is within the legislative competence, it is not a matter for High Court to analyse the
same.
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2. SPECIAL COMMUNIQUÉ
DECEMBER 2010
Service element exists | The levy of service tax is on activity relating to land and building (i.e. renting). The
services may be ‘property based’ or ‘performance based’. Renting of immovable property for commercial purposes is
certainly a service and has value for the service receiver. Thus service tax is rightly levied on consideration received for
allowing use of the premises for commercial purposes.
The aspect of service element in renting transaction is certainly an independent aspect covered under Entry 92C read
with Entry 97 of the Union List. Thus, it cannot be held that renting of property did not involve any service as service
could only be in relation to property and not by renting of property.
In this regard, the Hon’ble Supreme Court has in the past has already upheld the levy of service tax in relation to
property in respect of (1) Mandap Keepers (Section 65(105) (m)), (2) Pandal / Shamiana (Section 65 (105) (zzw)), (3)
Convention Service (Section 65 (105) (zc)) and (4) Right to use properties for business purposes under business support
service (Section 65 (105) (zzzq)).
Constitutional Validity | The question before the High Court of P&H was whether levy of service tax on renting
was covered under Entry 49 of List II (State List) exclusively and not covered by Entry 92C or 97 of List I (Union List).
The High Court while analysing the same has relied on various judicial precedents and noted that it is a well-settled law
on interpretation of scope of tax entries and that the constitutional scheme of distribution of legislative powers between
Union and State legislatures is under Article 246 of the Constitution. Every tax is levied on an object or an event of
taxation and that the subject of tax is distinct from incidence of taxation.
It has observed that the tax on land and building is covered under Entry 49 of State List, tax on income accrued from
property is covered under Entry 82 of Union List and the wealth tax on capital value of assets including land and
building is under covered Entry 86. The levy of service tax is on property service is covered under the Entry 92C read
with 97 of Union List.
On the question whether there is an overlap in the powers of the Central and the State Government to levy tax on
immovable property related transactions, it has observed that the subject of tax falling in power of one particular
legislature in one aspect may also fall within the legislative power of another in other aspects. Such overlapping is
unavoidable and the same transaction may involve two or more events in different aspects. In this context, the High
Court has illustrated the two taxes, viz., Central Excise duty and Sales Tax, the former levied on manufacture and the
latter in respect of sales. It has observed that in one sense there is overlap, but in law there is no overlapping - the levy
of service tax is on renting (i.e. on activity connected with Building and Land) and levy of property tax is on Building
and Land per se. Hence, the levy of service tax and property tax is on different aspects and is not overlapping.
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3. SPECIAL COMMUNIQUÉ
DECEMBER 2010
The entries in the Union and the State lists being merely topic and filed of legislation, they must receive a liberal
construction by a broad and generous spirit, widest possible interpretation and not in narrow pedantic sense. The
Constitution contains three lists with large number of entries and hence there is bound to be some overlapping among
them. Even if there is overlapping of entries, the doctrine of pith and substance has to be applied to determine as to
which entry does a given piece of legislation relate to.
The High Court has further observed that under the State list, the levy of tax on property does not exclude levy of tax
on services in relation to property. A tax on one aspect of subject matter did not exclude tax on another aspect of the
same subject matter. In view of this settled legal position, there is no conflict in levy of service tax on renting service by
the Central Government under Entry 49 of the State List and Levy of service tax is covered under 92C read with 97 of
the Union List.
It is held that the levy of service tax is on the service element involved therein and not on land or building per se. Thus,
levy of service tax on renting is outside the scope of Entry 49 of State List and the power of Union Legislature is
undoubted under Entry 92C read with 97 of Unit List. Hence, levy of service tax on renting is constitutionally valid.
Retrospective amendment of the definition | The High Court has observed that it is well settled that
competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary.
Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for
which earlier law was enacted. Hence, levy of service tax on renting retrospectively is valid.
Differentiation with Delhi High Court | The Delhi High Court held that any services provided ‘in relation to
renting of immovable property’ was taxable services and that the activity of renting per se is the primary activity and does
not qualify as a service in relation to renting. The activity of renting does not entail any value addition and consequently,
the Notifications and Circular/s issued thereunder are ultra vires.
Now, in terms of the retrospectively amended definition, the High Court of P&H has held that mere renting of
immovable property is also a service and that the levy of service tax is constitutionally valid. Hence, it is relevant to note
that unlike the High Court of Delhi, the High Court of P&H has considered the constitutional validity. Further, while
the decision may be contradictory, it must be noted that the reasons and principles relied upon are different.
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4. SPECIAL COMMUNIQUÉ
DECEMBER 2010
A Look beyond…
It is envisaged that the observations by the High Court would have a bearing on the disposal of writ petitions filed
before other High Courts on this matter. In the meanwhile, it must be noted that there are several judgements by
various High Courts on the relevance or applicability of a High Court ruling in other States / Union Territories. While
certain judgements support the view that the same would be a binding on all subordinate authorities across the Country
and not only in the relevant State, there are certain other conflicting judgements upholding the view that the judgement
would be applicable only in the relevant State and would only have a persuasive value in other States / Union
Territories. In the light of the conflicting decisions, we believe that the judgement of the High Court of P&H Court be
considered to only have a persuasive value in other States / Union Territories.
A final solution in the light of the conflicting decisions on this vexatious issue of levy of service tax on renting services
can come only from the Supreme Court.
Action taken / proposed If the P&H High Court ruling is If the P&H High Court ruling is
to be taken UPHELD by the Supreme Court REVERSED by the Supreme Court
Lessor Lessee Lessor Lessee
If service tax is No liability CENVAT Credit may be Would not be Will be entitled
collected from the claimed, subject to conditions entitled to claim to claim refund
lessee and remitted to prescribed therein. refund. subject to the
the exchequer by the condition that no
lessor CENVAT credit
is claimed.
If service tax is not Liable to be pay Depending upon the No liability No liability
collected from the service tax contracting terms between the
lessee and not together with lessor and lessee, the lessee
remitted to the interest. Judicial may have to reimburse the
exchequer by the precedents exist service tax to the lessor. In
lessor to support waiver such circumstances, the claim
of penalty. of CENVAT credit may be
disallowed by the tax office
alleging that supplementary
invoice is not prescribed
document for availment of
CENVAT credit.
Accretive Business Consulting Private Limited
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