Vol. 4 Issue 12.1
December 1, 2010
Constitutional validity of levy of service tax on renting upheld
The Punjab and Haryana High Court has upheld the constitutional validity of levy of
service tax on renting of immovable property in the case of Shubh Timb Steels Limited
[CWP No 11597 of 2010 (O&M)]. The Court held that renting of immovable property for
commercial purposes is certainly a service and has value for the service receiver. The
court also upheld the retrospective levy of service tax on renting of immovable property per
se. Facts of the case The taxpayer leased out commercial immovable property for monthly rent. The lease
was subject to levy of stamp duty under the Indian Stamp Act, 1899 and is governed
by Transfer of Property Act, 1882. The taxpayer filed a writ petition seeking the
declaration of the following provisions of the Finance Act, 1994 (“Act”) as ultravires
the Constitution:
Definition of “renting of immovable property” [Section 65 (90a) of the Act]; and
Definition of “taxable service” by renting of immovable property and any other
service in relation to such renting [Section 65 (105) (zzzz) of the Act].
The above definition of “taxable service” was amended with retrospective effect from
June 1, 2007 to provide for service tax on the service provided “by renting of
immovable property”. Prior to the amendment, only services provided in relation to
renting of immovable property were covered under the definition.
Questions considered by the Court 1. Whether levy of service tax on renting of immovable property for business was
covered by Entry 49 of List II of the Seventh Schedule to the Constitution of India
(“State List”) exclusively and not covered by Entry 92C or 97 of List I of the Seventh
Schedule to the Constitution of India (“Union List") and thus, was outside the
purview of the Central legislature.
2. Whether the retrospective levy of service tax on renting per se from June 1, 2007
was valid.
Key contentions of the taxpayer
Renting of a building was, in pith and substance, a transaction in respect of land
and buildings covered by Entries 18, 45 and 49 of State List. Only the State
legislature has exclusive jurisdiction to legislate on these entries.
Rajeev Dimri, New Delhi
+91 124 339 5050 [email protected] Sujit Ghosh, New Delhi
+91 124 339 5070 [email protected]
Ajay Mehra, Mumbai
+91 22 3021 7030
[email protected]
Malini Mallikarjun, Mumbai
+91 22 3021 7025
[email protected]
Mahesh Jaising, Bangalore
+91 80 4032 0140
[email protected]
K Sivarajan, Chennai
+91 44 4298 7000
[email protected]
Leasing is a transfer of rights (conveyance) attracting stamp duty and not a service
and thus not covered under Entry 92C of Union List.
Transfer of immovable property without any value addition by way of service could
not be covered by the levy of service tax.
The Delhi High Court held in the case of Home Solution Retail India Limited (“Delhi
High Court decision”) that the notification and circular providing for service tax on
renting of immovable property per se were ultra vires the scheme of levy of service
tax.
The retrospective levy was beyond legislative competence.
Key contentions of the Revenue
Renting of immovable property is different from sale of goods or transfer of property
or conveyance.
Providing service with respect to property was taxable in the case of other similar
services like Mandap Keeper service, Convention service, Business support
service (right to use properties for business purposes).
The levy of service tax is only on the service element or an activity in relation to
property. The levy is not a tax on land or building and thus not covered under Entry
18 of the State List. The levy is also not covered under Entry 45 of the State List (not
being land revenue), nor under Entry 49 of the State List (not being a direct tax on
the land or building).
Levy of tax on property did not exclude levy of tax on service in relation to property.
A tax on one aspect of the subject matter did not exclude tax on another aspect of
the same subject matter.
The Delhi High Court decision did not consider the issue of validity of the levy but
only considered the question of validity of notification and circular to recover
service tax from the lessors of the immovable property.
The amendment was clarificatory and the levy was already provided even under
un­amended provisions.
The object of the amendment was to overcome the Delhi High Court decision
against which appeal was pending before the Honourable Supreme Court. The
decision not having become final, the service providers were required to collect
service tax.
Key Observations of the High Court
Service tax is a destination based consumption tax, being not a charge on business
but on consumer and is leviable on service provided. It is a value added tax. The
services may be property based or performance based.
Service tax on service of renting of immovable property is not exclusively covered
by Entry 49 of the State List. This Entry relates to tax on land and building and not
any activity relating thereto. Levy of 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 by the Courts.
Same transaction may involve two or more events in different aspects. Subject of
tax falling in power of a particular legislature in one aspect may fall within
legislative power of another in other aspect. Such overlapping is unavoidable.
If there is any overlapping, doctrine of pith and substance has to be applied and the
Court has to look at the substance of the matter.
Decision of the High Court
Renting of immovable property for commercial purposes is certainly a service and
has value for the service receiver.
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 and within the
power of Union Legislature.
The legislature can always clarify or validate a law retrospectively and the
amendment cannot be held to be invalid, harsh or arbitrary.
BMR Analysis
This is the first decision in the context of renting of immovable property upholding the
constitutional validity of the levy of service tax on renting per se. The Court has applied
the aspect theory and the doctrine of pith and substance to uphold the levy of service tax
on renting. The Court also reiterated that service tax is a value added tax and a
destination based consumption tax.
Binding effect of this High Court judgment Decisions of the High Court are binding on the subordinate courts and authorities or
Tribunal under its superintendence throughout the territory in relation to which it
exercises jurisdiction. There are conflicting views on the binding effect of a High Court
decision on the Tribunals and assessing authorities in other jurisdictions. Recently, the
Mumbai High Court held that the Tribunal is bound by the decision of a High Court, even
of a different State so long as there is no contrary decision of any other High Court on
the question. The Revenue is likely to issue instructions to tax officers to seek recovery of service tax
on renting of immovable properties. Status of other pending cases
Challenge to Constitutional validity
Several writ petitions were originally filed in various High Courts challenging the
constitutional validity of levy of service tax on renting of immovable property and interim
stay was granted by the High Courts. The Union of India sought for transfer of petitions
pending before the various High Courts on the ground that there was a likelihood of
conflicting decisions. We understand that the Supreme Court has directed the Delhi High Court to hear these
petitions. The Revenue would mainly rely on this decision of the Punjab and Haryana
High Court which has considered a lot of judicial principles enunciated by the Indian
Courts. This decision is much awaited and could broadly settle the controversy on the
constitutional validity.
Delhi High Court decision holding renting per se is not taxable
The Delhi High Court decision has been appealed before the Supreme Court and is
pending. However, the Supreme Court has not stayed the operation of the decision.
Writ Petitions challenging the retrospective amendment
The retrospective amendment was also challenged by Home Solutions Retail Limited in
a writ petition before the Delhi High Court. The Court observed that renting of immovable
property per se was regarded as a service by virtue of the amendment even though the
Court had categorically concluded otherwise and stayed the recovery of tax. Similarly, in
the case of Trent Limited, the Andhra Pradesh High Court directed that no coercive steps
for recovery should be initiated basis the amendment.
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