Levy of service tax on rentals stayed
Does ‘renting of immovable property’ attract a levy of a service tax? Various court findings seem to have answered this question in the affirmative, subsequent to which the definition of the taxable services of renting of immovable property was amended in the Budget of 2010. But this has been challenged before the Supreme Court, which has granted a stay.
‘NOT SERVICE PER SE’
In the Budget 2010, the definition of the taxable services of renting of immovable property was amended to neutralise the finding of the judgment by various High Courts.
To recap, the issue of levy of service tax on ‘renting of immovable property’ was challenged by First Home Solutions before the Delhi High Court in 2009. The court held that renting of immovable property per se is not a service, whereas any other service in relation to such renting may fall under the taxable service category, under the definition existing at that point in time.
The Budget of 2010 amended the definition of the taxable services of renting of immovable property to neutralise the finding of the judgment. While upholding the constitutional validity of the levy of service tax on ‘renting of immovable property’, the court also ruled in favour of its applicability, retrospectively from June 1, 2007.
Post the amendment, the High Courts of Bombay, Gujarat, Karnataka, Orissa, Punjab and Haryana upheld the levy of service tax and the validity of retrospective amendment.
The general findings of various High Courts, against the writ-petition filed by the petitioners are as follows:
The provisions, namely, Section 65(105)(zzzz) and Section 66 of the Finance Act, 1994, as amended by the Finance Act, 2010, are intra vires the Constitution of India.
The challenge to the amendment, giving it retrospective effect, was unsustainable, and the retrospective amendment was declared as constitutionally valid.
There is value addition when the premises are let out for use in the course of, or furtherance of, business or commerce.
In the meantime, a second writ-petition was filed by Home Solutions Retail India Ltd in the High Court of Delhi.
The Division Bench of Delhi High Court referred this matter to a larger Bench, which overruled the earlier decision rendered by the Division Bench, and concurred with the findings of other High Courts, and held that both the levy and the retrospective amendment is valid.
As regards the penalty due to non-payment of service tax, the Delhi High Court (larger bench) held that it is open to the Government to examine if any waiver or exemption can be granted.
In the meantime, the Retailers Association of India and Multiplex Association of India approached the Supreme Court, challenging a Bombay High Court order.
It was in response to this that the Apex court, on September 28 this year, granted a stay.
According to the KPMG Tax Knowledge Management Team, the larger Bench of the Delhi High Court may have pronounced a landmark decision, upholding the constitutional validity of the levy of service tax on ‘renting of immovable property’, and its applicability, retrospectively.
It is but natural to expect that the service tax department would aggressively pursue the collection of service tax even for the past periods, along with interest.
RAY OF HOPE
The stay order by the Supreme Court, staying the operation of the Bombay High Court order in the case of the retailers association, has given a fresh ray of hope to it, KPMG said.
Meanwhile, the Special Leave Petition (SLP) filed by the Union of India before the Supreme Court in the First Home Solution case is still pending before Supreme Court, and the matter would attain finality only after the Apex court decides in the matter.
While holding that an element of ‘value addition’ is involved in the activity of ‘renting’, the Delhi High Court had stressed upon the fact that the legislature hasn’t imposed tax on mere letting, but associated it with business or commercial use.
It further noted that when premises are taken for commercial purposes, there can be no trace of doubt that an element of value-addition is involved, which entails an element of service.
In view of the aforesaid, KPMG is of the view that assessees who haven’t deposited the service tax shall take a considered decision regarding deposition of service tax for the past, as well as the current, period.