Service tax on commercial rent of immovable properties- better way for revenue to tax tenants under reverse charge method.

Dev Kumar Kothari, CA

 

Better way for revenue to collect tax from tenants:

The revenue can take a better and smooth way to make reverse charge of service tax on rent. The assesses who are eligible for CENVAT credit will have no problem and will willingly pay service tax and avail CENVAT credit. This may cover about 70-80% of rent payments. Major amount of rent is paid by manufacturers of excisable goods, banks and financial institutions, insurance companies, and other taxable service providers will hopefully willingly pay service tax. In fact even when the liability is on landlords, the tenants who are eligible for CENVAT credit are willingly paying rent together with service tax. However, tenants who do not fall in eligible category for CENVAT were reluctant to pay service tax and now  after the judgment of the Delhi High Court rightfully denying liability to pay service tax on rent, when demanded by landlords.

Land lords dilemma:

Land lords are in dilemma. Cases are noticed when the same landlord is getting payment of service tax from some of tenants (who can avail CENVAT credit) and not from other tenants ( who are not eligible to fully avail CENVAT credit). Now the difficult question is that paying service tax in relation to some tenants may be considered as if land lord has accepted the levy.

Delhi high Courts directions and undertaking of ASG

SSIPL Retail Ltd. v. Union of India  (Writ Petition (Civil) No. 13861 of 2009 decided on December 18, 2009 reported as [2010] 1 taxmann.com 51 (DELHI):

In this case the Delhi High Court has held that in view of judgment of Delhi High Court and the fact that the judgment has not been stayed by the  Supreme Court, the revenue should not take action against landlords to collect service tax on rent. The Court  observed and held as follows:

 

             “As pointed out above, even when the judgment of this Court is challenged  by filing the SLP, till date there is no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the respondent could not instruct their officers to peruse the matter with tax payers calling upon them to pay service tax or to resort to other means under the law to protect the Revenue.  The manner in which the letters are written clearly indicate that the payment of tax is demanded and the threat is also extended that if there is no compliance, Department would initiate further necessary action against them.

 

Mr. Chandhiok, learned ASG appearing for the respondent, assures that corrective steps shall  be taken by issuing further instructions, in (supersession) of earlier instructions, to the officers not to write such letters demanding the payment of service tax or threatening corrective steps. On this assurance no further orders are required to be passed in this Writ Petition.

Assurance of ASG Mr. Chandhiok before Delhi High Court  is also not working:

It appears that the assurance given by learned ASG is not being complied with by the revenue.this is clear from the following report about cracking of revenue in Maharastra:

“Service tax: Excise dept gets cracking on landlords

Rajshri Mehta

Monday, February 22, 2010 0:52 IST

Mumbai: There is resentment brewing among landlords against the Central Board of Excise and Customs. The reason? The board is yet to retract a circular issued in July last year directing service tax units to take action against those who do not pay tax on rentals earned from immovable propert.

With the circular still in force, the department is issuing show-cause notices asking landlords to pay tax running into lakhs. Considering the tax burden is usually passed on to the end user, the landlord/lessor is pressurising lessees to pay the service tax, giving rise to differences between the two parties.

What has irked developers is that the tax has not been rescinded despite the Delhi high court ruling last year that renting immovable property does not constitute a taxable service. The court had passed the order while hearing a petition filed by a subsidiary of Pantaloon Retail (India) Limited, along with other retailers, challenging the government’s decision.

Further, when the circular was challenged, the board had assured the court that it will take corrective steps, yet continued issuing notices demanding the tax, forcing many landlords to pay it under protest.

The board defends itself by saying since an appeal is pending before the apex court, it is free to demand taxes.”

The wrong thinking in mind of revenue officers:

The revenue officers are having wrong notion that the judgment of Delhi High Court is applicable only in area of jurisdiction of Delhi High Court. This is wrong, because the relevant notification is issued for all India. The authority to collect  tax is derived under the notification and not the Finance Act,1994 (as is case in respect of income-tax Act, 1961). Therefore the judgment of Delhi high Court is binding all over India. The notification which prescribes date of commencement of levy and authorizes the government to collect tax and oblige tax payers to pay tax is held not valid, therefore, the decision is applicable all over India.

 

 

[2010] 1 taxmann.com 51 (DELHI)

 

Propriety of revenue’s instruction to its officers demanding service tax on renting of immovable property against High Court’s ruling during pendency of SLP before Supreme Court

 

In absence of Supreme Court’s order staying operations of High Court’s judgment relating to levy of service on renting of immovable property, Revenue Department could not instruct its officers to pursue the matter with tax payers calling upon them to pay service tax on same or to resort to other means under the law to protect the Revenue.

 

HIGH COURT OF DELHI

SSIPL Retail Ltd.

v.

Union of India

Writ Petition (Civil) No. 13861 of 2009

December 18, 2009

RELEVANT EXTRACTS:

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By the Finance Act, 2007, service “in relating to renting of immovable property for use in the course or furtherance of business or commerce” was introduced within the definition of taxable service as sub-section (zzz) to section 65 (105) along with corresponding insertions to section 66 and 65 (90a) thereto. Notification dated 22-5-2007 was thereafter issued making the aforesaid amendment effecting from 1-6-2007. The said Notifications/amendments as well as  circular was challenged by various tenants and landlords by filing various Writ Petitions. These writ petitions were decided by this Court on 18 -4-2009 in Home Solution Retail India Ltd. v. UOI and others (2009) 20 STT 129 by the said judgment this Court hold that aforesaid notification and circular were ultra vires the provisions of the Finance Act. 

 

Respondent  no. 1 has filed Special  Leave Petition No. 1385O/ 2009   in   the   Supreme   Court   challenging   the   aforesaid judgment dated 18,h April. 2009 rendered by this Court, though in the Special Leave Petition till date Supreme Court has not granted any stay on the operation of that judgment. Therefore even when Special Leave Petition is pending, the judgment of this Court as of today holds and  in  the absence of any stay  the respondents are hound to follow the same.

 

Grievances  made  in   this  petition   is   that   in   spite  of the aforesaid position, the respondent No. l is issuing instructions to its officers throughout the' country slating that in view of the filing and pendency  of  the  said  Special   Leave  Petition,  the officers  should safeguard the revenue by either pursuing the tax-pavers to pay the service tax on renting of immovable property for use in the course of furtherance of business or commerce or resorting to means under law to protect the Revenue It is further stated on the basis of these instructions received by the officials of the Department, they are sending notices to various persons with instructions to start complying with   the provisions of the aforesaid  notification and circular by paying the requisite -'Service tax.  One specimen  of such notice is enclosed along with this writ petition which is notice dated 24\07£009 issued by the Office of the Commissioner of Service Tax, Service Tax Commissionerate, to Karnataka State Industrial Investment and Development Corporation Ltd:-

"Sub. Issue of leviability of ST on renting of immovable property - Clarification sought for - Reg.

Please refer to your letter dated IS.07.2009 on the above mentioned subject.

 

As pointed out above, even when the judgment of this Court is challenged  by filing the SLO, till date there is no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the respondent could not instruct their officers to peruse the mater with tax payers calling upon them to pay service tax or to resort to other means under the law to protect the Revenue.  The manner in which the letters are written clearly indicate that the payment of tax is demanded and the threat is also extended that if there is no compliance, Department would initiate further necessary action against them.

 

Mr. Chandhiok, learned ASG appearing for the respondent, assures that corrective steps shall  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 corrective steps. On this assurance no further orders are required to be passed in this Writ Petition.

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Service tax on renting of commercial premises review from the  budget 2007 to recent  Delhi High Courts judgment.

 

Budget 2007-

The proposal for levy of service tax was mooted in the Budget 2007 and then service tax on renting of commercial premises came into force with effect from 1st June 2007. The nature of levy, doubts about validity of levy, scope of levy etc. were discussed in several articles published in tax journals and newspapers. The author was also contributor to some of articles as follows:

A. Panel Discussion about Service Tax on Rentals of Immovable Property – view of panelists including the author  (2007) 9 STJ 56 (P.36) April I.

 

 B. Proposed service tax on renting of commercial premises- analysis, request to reconsider levy and some suggestions- make tenant, as service receiver liable to register and pay service tax.

   -  Published in Service Tax Today in MARCH 22,2007   PAGE 55 (Mag.)

 

C. Service tax on renting of commercial premises some commercial and business aspects. (was sent on 29.05.07 please check and mention citation)

 

In the panel discussion (9 STJ 56 (P.36) the author had inter alia wrote as follows:

Validity of service tax on renting of commercial properties:

For a valid levy of service tax, by the Central government important preconditions are examined in the following table:

a.      the levy should be constitutionally valid,

 

The levy of tax on land and building is subject matter of ‘state’ and is out of scope of the ‘Central list’. Therefore, the Central government is not authorised to impose tax on land and building, even if element of some service is found.

 Levy is not valid as it would be ultravirse the Constitution.

b.      the tax should be on value of a service,

 

The service is to be valued for the service rendered. In case of letting out of property, there is no element of service in the context of tax on service. Providing a space cannot be called providing a service by any stretch of language and imagination.

In absence of service the rentals cannot be considered as value of service. Imposition of any service tax on rentals would amount to taxing property in guise of service tax, and that should not be allowed.

c.      there should be a service provider and service receiver.   

 

 

In case of letting out of property a space is provided to tenant and not a service. Provision of service is based on basic concept of   services of personal nature though in advanced times personal services may be further strengthened with help of other assets.

The owner is provider of space and not any service by letting out of property.

Owning and letting out of property is an investment activity and not a personal service. Even in the Income Tax Act we find that rental income is assessed under the head ‘income from house property’ and not as a business or professional income.

Only services of personal nature, if any rendered to the tenant by the landlord can be subject to levy of service tax. Such services like cleaning, maintenance, security etc. are already taxable under other categories of taxable services.

 

In view of the above discussion it can be said that the proposed levy of service tax on rentals of commercial premises is not valid levy in view of our Constitution and it is also not valid for complete absence of service, service provider and service receiver. Thus, the basic preconditions for a valid levy of service tax are not met.

 

The issue, whether service tax can be imposed by GOI on rent within the powers granted to impose tax under the Indian Constitution is still open as the same has not been decided by any court so far.

 

In the article published  in Service Tax Today (STT) in MARCH 22,2007   PAGE 55 (Mag.) the author had discussed various aspects of proposed levy and pointed out that the language used in proposed charging section is not proper. Particularly in connection with levy on rent, the author had suggested change in language as follows:

“ e.To avoid confusion  words “by renting “ can be used in meaning of taxable service as follows:

“taxable service” means any service provided or to be provided --

  to any person, by any other person by renting of immovable   property for use in the course or furtherance of business or commerce”.

 This is because the words ‘in relation to renting’ can be construed as service rendered to land lord or tenant in relation to renting of property and not the rent itself”.

 

Recently the Delhi High Court has taken the same view and held that as per charging section rent itself cannot be taxed as a value for taxable service. Only services in relation to renting can be taxed under the charging section. Therefore, it appears that the suggestions were not taken note by. Had they considered and applied the suggestions, they would not have to lose the case before the Delhi High Court.

 

Brief analysis of recent judgment of Delhi High Court:

In Home Solutions Retail India Ltd. v Union of India & Others 2009- TMI -33136 (Delhi High Court)  has after consideration of various contentions raised by petitioners   held that renting of immovable property for furtherance of business or commerce, per se, is not a taxable service falling within the scope of  relevant charging section that is S. 65(105) (zzzz) of Finance Act, 1994. The court held that services ‘in relation to renting’ are different from ‘renting’ itself. Furthermore, court also considered that in case of renting of premises, there is no value addition, whereas conceptually service tax is tax on value addition. The ruling of the court is to the effect that the notifications/ circulars issued by concerned authorities of GOI imposing tax on rent itself are beyond the scope of charging section 65(105)(zzzz) of the Finance Act, 1994 as inserted by the Finance Act, 2007. We have statutory definition of taxable service and if the statute stipulates a particular activity as a taxable service or even deemed to be a taxable service, it shall attract service tax. However, since ‘renting’ is not included in charging section, service tax on rent cannot be imposed.

Wider definition of service is of no avail unless service is chargeable to tax:

It can be said that the very wide and clarificatory definition of the expression “renting of immovable property” as given in S. 65(90)  is of no avail to impose tax on rent itself. It only expanded the scope of service in relation to renting of commercial premises of different type and in different situations. Such definition  cannot govern the charging section. Even the amended definition , w.e.f. 16.5.2008, section 65(90 a) of Finance Act, 1994  to clarify the meaning of service was of no avail in absence of coverage in the charging section.This is because in the charging section still the words used are “in relation to renting of ….” and  the words’ renting of property’ is not yet incorporated in the charging section, as was suggested by the author in an article published on budget proposals in this regard as discussed earlier.

Notification is beyond charging section:

Charging section that is  section 65(105) (zzzz) states that taxable service shall be any service in relation to renting of immovable property, the notification states 'taxable service of renting of immovable property'. Therefore, the notification is ultra virse the charging section.

In Circular No 98  it is  stated that right to use immovable property is leviable to service tax under the renting of immovable property service. This is also contrary to charging section. 

The expression ‘In relation to’:

The court noted that the expression is wider however its meaning depend on the context . It has been noted that in some other services (eg, dry cleaning), the expression - 'in relation to' itself refers to a service and as such core service plus service in relation to, both are taxable. Contrary to this, in case of renting of property, 'in relation to' would mean service in relation to renting of property as renting by itself can not be considered as a service and only the services which are in relation to renting would be taxable services leaving the actual renting out of service tax ambit.

In view of author the services in relation to renting would include only services provided in connection with renting and not for any enjoyment of property. Therefore, only services provided to landlord or tenant till conclusion of renting arrangement that is showing property, settling terms and conditions, execution of agreement and possession from land lord to tenant etc. will be covered and any service subsequent to renting of property would not be covered under this charging section. Though they may be taxable under other clauses.

Service Tax is a tax on value added:

High court held that  service tax is a tax on value added by way  of services. Mere renting does not provide any value addition and as such service tax can not be levied. The same view was expressed by the author in the panal discussion (supra.) that there is no service provided by merely letting out a property in consideration of rent.

Land lord is not a service provider:

The High Court has also observed that there should be a service  that means that there should be a service provider and a service receiver. In case of tenancy of property there is a landlord who gives possession of property and the tenant takes possession of property. The landlord does not provide any service in consideration of rent for letting out property. Therefore, view expressed by the author in this regard also finds support from Delhi High Court.

High Courts ruling:

Conclusions and judgment of the High Court are found in para 34-37which are reproduced below with high lights provided by the author:

34. From the above discussion, it is apparent that service tax is a value added tax. It is a tax on value addition provided by a service provider. It is obvious that it must have connection with a service and, there must be some value addition by that service. If there is no value addition, then there is no service. With this in mind, it would be instructive to analyse the provisions of Section 65(105)(zzzz). It has reference to a 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". The wordings of the provision are so structured as to entail a service provided or to be provided to 'A' by 'B' in relation to 'C'. Here, 'A' is the recipient of the service, 'B' is the service provider and 'C' is the subject matter. As pointed out above by Mr Ganesh, the expression "in relation to" may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, "in relation to" would include the subject matter following it and on other occasions it would not. As in the case of the service of dry cleaning, the expression "in relation to dry cleaning" also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65(105)(v), which refers to a service provided by a real estate agent "in relation to real estate", does not, obviously, include the subject matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service. Going back to the structured sentence, i.e.- service provided or to be provided to 'A' by 'B' in relation to 'C', it is obvious that 'C' can either be a service (such as dry cleaning, hair dressing, etc.) or not a service by itself, such as real estate. The expression "in relation to" would, therefore, have different meanings depending on whether 'C' is a service or is not a service. If 'C' is a service, then the expression "in relation to" means the service 'C' as well as any other service having connection with the service 'C'. Where 'C' is not a service, the expression "in relation to' would have reference only to some service which has a connection with 'C'. But, this would not imply that 'C' itself is a service.

35. From this analysis, 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)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz).

36. In view of the foregoing discussion, we hold that Section 65(105)(zzzz) does not in terms entail that the 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 said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent that they authorize the levy of service tax on renting of immovable property per se, they are set aside.

37. Before parting with this batch of cases, we would like to observe that we have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above.

38. The writ petitions are allowed to the extent indicated above. The parties are left to bear their own costs.

Fit case for allowing costs in favor of petitioners:

The author feel that these cases were fit for allowing cost of petitions and litigation in favor of petitioners because it can be said that on bare reading of provisions it is clear that no tax can be imposed on rent, as was rightly pointed by the author in his article at the time of budget. The revenue must suffer, if there is a mistake in drafting of law and such mistake was pointed out before enactment but the bureaucracy did not care to remedy the situation by proper alterations in the proposed draft of law. For this reason, it is also hoped that any amendment should not be allowed to have retrospective effect.

Fit case for review of law but not for appeal:

As discussed above it appears that there will be no purpose in filing an appeal by the revenue. Because the answer is obvious on a plain reading of the charging section, as was pointed out by the author in article on budget proposals. Before any such actions it is advisable that the revenue must consider the following  suggestions :”

“Request and suggestions to the would be Finance Minister:

After the general elections a new government will be formed and may be a new finance minister will take charge of the matters connected with finances of our country. It  is requested and suggested to the honorable Finance Minister to:

a.      Reconsider the provisions  in view of constitutional validity and the scope of service for taxation. The author feels that there cannot be levy of service tax on rent.  On reconsideration  if it is considered  found inconsistent with constitutional provisions and also inconsistent with the concept of service tax please drop the same by omitting relevant provisions from the FA.

b.      If found correct and desirable, to impose tax only on portions of buildings which are used for commercial purposes and not to treat all portions as commercial building merely because a part of it is used for commercial purposes..

c.      To make the service receiver liable to pay service tax on service used. This will avoid revenue leakage. For example, suppose a building is owned by four persons who let out the same to a company each receiving rent of Rs.60000/- per month amounting to Rs.7,20,000/- per year. In this case all owners may be exempt from service tax. Whereas the tenant, if made liable to pay service tax , will have to pay tax on entire amount of Rs.28,80,000/- paid to four owners.

d.      In case of business organizations several properties are taken on rent from several owners. It would be difficult to monitor owners, instead of that tenants who are organized persons can manage tax affairs easily and it would be easy to monitor them.

e.      To amend the charging section to include renting of property as such in taxable service as discussed earlier.

 

The author again reiterate  that before making any amendment in charging section first of all it should be examined that the levy is constitutional or not. In case levy of service tax on rent is considered not within powers of Central Government, the charging section should be omitted. If GOI still feel that they can impose a tax on rent, then charging section can  be amended properly (may be on lines suggested by author) with prospective effect only.

 

 

 

[2010] 1 taxmann.com 51 (DELHI)

 

Propriety of revenue’s instruction to its officers demanding service tax on renting of immovable property against High Court’s ruling during pendency of SLP before Supreme Court

 

In absence of Supreme Court’s order staying operations of High Court’s judgment relating to levy of service on renting of immovable property, Revenue Department could not instruct its officers to pursue the matter with tax payers calling upon them to pay service tax on same or to resort to other means under the law to protect the Revenue.

 

HIGH COURT OF DELHI

SSIPL Retail Ltd.

v.

Union of India

Writ Petition (Civil) No. 13861 of 2009

December 18, 2009

RELEVANT EXTRACTS:

**         **         **         **         **         **         **         **         **         **         **         **

By the Finance Act, 2007, service “in relating to renting of immovable property for use in the course or furtherance of business or commerce” was introduced within the definition of taxable service as sub-section (zzz) to section 65 (105) along with corresponding insertions to section 66 and 65 (90a) thereto. Notification dated 22-5-2007 was thereafter issued making the aforesaid amendment effecting from 1-6-2007. The said Notifications/amendments as well as  circular was challenged by various tenants and landlords by filing various Writ Petitions. These writ petitions were decided by this Court on 18 -4-2009 in Home Solution Retail India Ltd. v. UOI and others (2009) 20 STT 129 by the said judgment this Court hold that aforesaid notification and circular were ultra vires the provisions of the Finance Act. 

 

Respondent  no. 1 has filed Special  Leave Petition No. 1385O/ 2009   in   the   Supreme   Court   challenging   the   aforesaid judgment dated 18,h April. 2009 rendered by this Court, though in the Special Leave Petition till date Supreme Court has not granted any stay on the operation of that judgment. Therefore even when Special Leave Petition is pending, the judgment of this Court as of today holds and  in  the absence of any stay  the respondents are hound to follow the same.

 

Grievances  made  in   this  petition   is   that   in   spite  of the aforesaid position, the respondent No. l is issuing instructions to its officers throughout the' country slating that in view of the filing and pendency  of  the  said  Special   Leave  Petition,  the officers  should safeguard the revenue by either pursuing the tax-pavers to pay the service tax on renting of immovable property for use in the course of furtherance of business or commerce or resorting to means under law to protect the Revenue It is further stated on the basis of these instructions received by the officials of the Department, they are sending notices to various persons with instructions to start complying with   the provisions of the aforesaid  notification and circular by paying the requisite -'Service tax.  One specimen  of such notice is enclosed along with this writ petition which is notice dated 24\07£009 issued by the Office of the Commissioner of Service Tax, Service Tax Commissionerate, to Karnataka State Industrial Investment and Development Corporation Ltd:-

"Sub. Issue of leviability of ST on renting of immovable property - Clarification sought for - Reg.

Please refer to your letter dated IS.07.2009 on the above mentioned subject.

 

As pointed out above, even when the judgment of this Court is challenged  by filing the SLO, till date there is no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the respondent could not instruct their officers to peruse the mater with tax payers calling upon them to pay service tax or to resort to other means under the law to protect the Revenue.  The manner in which the letters are written clearly indicate that the payment of tax is demanded and the threat is also extended that if there is no compliance, Department would initiate further necessary action against them.

 

Mr. Chandhiok, learned ASG appearing for the respondent, assures that corrective steps shall  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 corrective steps. On this assurance no further orders are required to be passed in this Writ Petition.

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