Service tax on renting / leasing of immovable property has been controversial right from the time of introduction of the taxable category of ‘renting of immovable property services’ in 2007. In 2009, a decision of the Delhi High Court in the case of Home Solution Retail India Ltd. & Others Vs. UOI & Others [2009 (237) ELT-209], held that leasing of immovable property per se was not a service. This was largely due to the wording of the relevant provision as it then stood, which sought to levy service tax only on services “in relation to” renting of immovable property and not on the activity of renting of property itself. The Delhi High Court had consequently held that services in relation to renting of immovable property would not include the activity of renting of property and this would hence not be taxable.
While the Government appealed to the Supreme Court against the decision of the Delhi High Court, it also amended the law to take away the basis of the decision. Accordingly, the Union Budget 2010 amended the charging section on renting of immovable property services to provide that the activity of “renting” was itself a taxable service. This amendment was made with retrospective effect from 1st June 2007 and was intended to override the Home Solution decision as above. This was again challenged by way of a writ petition by the same appellant on several grounds, including on the point of retrospectivity. The matter is currently pending for decision in the Delhi HC. There has however been a recent decision of the Punjab and Haryana High Court in the case of M/s Shubh Timb Steels Ltd vs UOI and another [AIT-2010-539-HC] on the matter. Now, in the aftermath of the Home Solution decision and the retrospective amendment of the relevant provisions covering service tax on immovable property, the following issues were required to be addressed:
After deliberating at length on various aspects of the matter, on the first point as to whether the activity of renting of immovable property was itself a service, the Punjab and Haryana High Court held that renting of property for commercial purposes was certainly a service and it had value for the service receiver, i.e. the person renting the property. Accordingly, the Court held that in view of the amended charging section, the activity of renting of immovable property was certainly a service and it could not be said that it was not so.
With respect to the second issue of the constitutional validity of the service tax, the Court examined in detail the point as to whether the levy of service tax on renting of immovable property for business was exclusively covered by Entry 49 List II and was hence not covered by Entry 92C or 97 of List I, thereby keeping such activities outside the purview of Central law. The High Court analysed various judicial pronouncements which dealt with the issue of interpretation of taxing entries under the Constitution of India and also the aspect theory. In terms of legal precedence and based on the principle of pith and substance, the High Court held that service tax on renting of immovable property was not exclusively covered by Entry 49 List II. The Court elaborated that “Entry 49 of List II relates to tax on land and building and not any activity relating thereto. Income tax on income from property, wealth tax on capital value of assets including land and building and gift tax on gift of land and building have been upheld. 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. Renting of property for commercial purposes is certainly a service and has value for the service receiver. Moreover, the aspect of service element in renting transaction is certainly an independent aspect covered under Entry 92C read with Entry 97 of List I. In any case, subject matter of impugned levy being outside the scope of entry 49 of List II, the power of Union Legislature is undoubted. Question whether levy will be harsh being in addition to income tax and property tax is not a matter for this Court once there is legislative competence for the levy. Even if it is held that transaction of transfer of right in immovable property did not involve value addition, the provision cannot be held to be void in absence of encroachment on List II.”
Accordingly, the Court held that the Central levy was constitutionally valid. Lastly, with respect to the issue of retrospectivity, the Court held that the legislature could always clarify or validate a law retrospectively. The Court explained that the object of validating the law was to rectify any defects in phraseology or other lacunae and effectuate the object for which the earlier law was enacted. Relying on the landmark decisions of the Supreme Court in the cases of Shiv Dutt Rai Fateh Chand Vs. Union of India [(1983) 3 SCC 529] and Tata Iron & Steel Company Limited Vs. The State of Bihar [AIR 1958 SC 452], the High Court held that the retrospective amendment in the definition of renting of immovable property service was constitutionally valid.
In conclusion, the Punjab and Haryana High Court has held that the renting of immovable property was liable to service tax with effect from June 1, 2007. It appears that the various controversies with respect to renting of immovable property have been addressed and settled by this decision of the High Court. It remains to be seen whether this will be taken up to the Supreme Court on appeal.
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The Author is leader indirect tax practice PricewaterhouseCoopers pwctls.nd@in.pwc.com
Supported by Rahul Renavikar and Abhishek A. Rastogi