1 WHEATHER RENTING OF PROPERTY IS SERVICE AND THUS LIABLE TO SERVICE TAX? By: MUKUL GUPTA, Tax Advocate R-13/24, Raj Nagar, Ghaziabad Tel :+91120-2820380, 2821407 Mobile: +919811023739 e-mail: mukuladv@hotmail.com Let me first of all tell you a short story signifying the deference between Legal, Illogical & Illegal. One smart student secured lower grades in the exam, after looking at the mark sheet he asks professor. Student: "Can you answer my question? Professor: "Surely I must. Otherwise I would not be a professor!" Student: "Great, well then I would like to ask you a question. If you can give me the correct answer, I will accept my mark as is and go. If you however do not know the answer, I want you give me an "A" for the exam." Professor: "Okay, it's a deal. So what is the question?" Student: "What is legal but not logical, logical but not legal, and neither logical nor legal?" Even after some long and hard consideration, the professor cannot give the student an answer, and therefore changes his exam mark into an "A", as agreed. Afterwards, the professor calls on his best student and asks him the same question. He immediately answers: "Sir, you are 63 years old and married to a 36 year old woman, which is legal, but not logical. Your wife has a 22 year old lover, which is
2 logical, but not legal. The fact that you have given your wife's lover an "A" Grade, although he really should have failed, is neither legal nor logical." Similarly, what is happening in the wake of collecting tax by any means and above all trying to legitimize it. The Service Tax can be levied on the Services, the element of service is necessary to brought a transaction liable to tax under the Service Tax Law. However, there is no prescribed definition of Service under Chapter-V of the Finance Act 1994 and the subsequent amendments made therein. In the absence of such definition, the interpretation of Service have to be made as per the established principles of Law. A transaction which is primarily out of the scope of service cannot be brought under the Service Tax Net. Service Tax @ 10.3% is presently leviable on all Taxable Services including the Renting of Immovable Property. By introducing in Finance Act 2007 w.e.f. 1.6.2007 sub-clause (zzzz) by clause (h) of clause (13) in main clause (105) of Section 65 of the Finance Act 1994 the transaction in relation to renting of immovable property for use in the course or furtherance of business or commerce has been brought into Service Tax Net. In the Finance Bill 2010 as presented before the Parliament on 26 th February 2010 by the Finance Minister has introduced minor amendment to legitimize it with retrospective effect from 1.6.2007, sub-clause (zzzz) is now read as to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or, for furtherance of, business or commerce. After this basic definition certain explanations with regard to what is immovable property and some specific exclusions therefrom for the purpose of the Service Tax has been provided. Let us not go into the question that what constitutes Immovable Property or the explanations and definitions given in the provisions or the deductions or abatements and the clarifications given by the Service Tax Department. Let us confine this discussion to the fundamental of this Taxable Service, that if any service is involved or not in renting of immovable property. To my mind, there is no element of service involved in renting of any immovable property for any use for whatsoever. Receiving an amount as valuable consideration for transfer of right to use the property (immovable or otherwise) is covered under the enlarged definition of sale. No service is provided by the owner of the property to the lessee, there is no involvement of the owner of the property while the rented space in the property is enjoyed by the lease. The relationship between the two does not have any obligation which can be equated to service of any nature. Such valuable consideration under the transaction is purely received by the owner of the property for allowing the use of the property as per the rent agreement. No service is provided by the owner to the lessee.
3 In the D.O.F. No. 333/1/2007-PRU dated 28.2.2007, issued as an Explanatory Note of Finance Bill 2007, the Service Tax Department have admitted on Page No. 4 in Item No. 6.3 that renting includes letting, leasing, licensing or other similar arrangement. The contract is for right to use an immovable property for a consideration. In such circumstances the transaction of renting of property could not be brought under the Service Tax Net. Transfer of Right to Use is liable to Sales Tax however when immovable property is let out Sales Tax is not paid. On the other-hand, under the Feudal Law, tenants had a duty to render service to their Lords in exchange for use of the land. The service required could take many forms: monetary payments, farm products, loyalty, attendance upon the lord as an armed horseman, carrying the king's banner, providing a sword or a lance, or plowing or other farm labor done for the King. The Renting of Immovable Property, which is specifically covered under the provisions of the Income Tax Act as Income from Property, does not involve any service, the basis of it being in the nature of financial gain in lieu of interest on the capital invested in the property. The very basis of levy of Service Tax under Chapter-V of the Finance Act 1994 is rendering of services and the existence of Taxable Service. This has been allowed by the Parliament to tax Service Sector of the Indian economy. In the cases of Chartered Accountants Service as well as the Goods Transport Service, the Hon ble Supreme Court as well as the High Courts has considered the nature of the levy of Service Tax under the Finance Act. Every one of us is aware that a taxation provision should be harmoniously construed to render it effective and invalidity of the levy cannot be presumed. Viewed in this light, the Entry relating to renting of immovable property will have to be interpreted to cover only Service by renting of immovable property or any other service in relation to renting of immovable property for use in the course of or, for furtherance of, business or commerce. This Entry would not hence cover the letting out of the immovable property as such, which does not involve any service, but would cover only such service as are allied to such renting or letting. The latest explicit inclusion in the Finance Act 2010 of the words by renting of immovable property cannot legally empowered the Central Government to levy service tax on the valuable consideration as rent received for letting out of the immovable property. In the second limb of the definition, the use of the expression in relation to would also support this interpretation. If, the Revenue takes the view that this Entry would cover pure and simple renting of property, constituting such renting itself a Taxable Service, the Entry is
4 certainly open to challenge as not valid in Law. In the case of renting of property pure and simple there is no involvement of service at all and hence it cannot be presumed that the Parliament intended to bring within the net of Service Tax a transaction which is pure and simple renting of property not involving any element of service. Revenue has also an argument in favour of levying service tax on renting of property that internationally renting of immovable property is perceived as a service. This argument cannot go with the Indian Philosophy and understanding that rent is a financial charge for the capital invested in the immovable property. In India no owner provides any service of any kind to the tenant. No personal effort or involvement of the owner of immovable property is desired by the tenant for enjoyment of access to the property and its legitimate use. The Officials of the Government of India must go by the common understanding of the Indians in framing the laws for charging the tax rather than blindly following the international understanding. After the presentation of Finance Bill 2010 the Tax Research Unit of the Department of Revenue have issued a Clarification letter No. DOF334/1/2010- TRU dated 26 th February 2010 wherein in Para 9.1 it has been admittedly mentioned that Hon ble High Court of Delhi in its order dated 18.4.2009 in the case of Home Solutions Retail India Limited & Other Vs. UOI has strucked down the levy of service tax on Renting of Immovable Property by observing that the renting of immovable property does not involve any value addition and therefore, cannot be regarded as service. Even inspite of the High Court Judgment strucking down the levy, the Service Tax Department under the umbrella of Central Board of Excise & Customs continued its illegal effort to collect service tax by issuing demand notices to the landlords, this continued illegal action cannot justify the levy of strucked down provisions of service tax. It is wrong on the part of the Tax Research Unit, Department of Revenue, Government of India to mention in Para 9.1 of their Letter dated 26 th February 2010 that the judgment of the Hon ble Delhi High Court has placed the Landlords in a very precarious situation. The Department of Revenue should have stopped its Commissionerate to issue demand notices to the landlords after the judgment of Hon ble Delhi High Court. Continued dis-regard by the Service Tax Department of the High Court Judgment cannot be a good ground for levy of illegal service tax and its collection on renting of property. On August 18, 2008 the Government of India sought the Hon ble Supreme Court's Intervention in deciding the Constitutional Validity of the Finance Act 2007 that empowers the Government to impose Service Tax on rental income from commercial properties. The Department of Revenue has sought transfer of petitions pending before the High Courts of Bombay, Madras, Kolkata, Punjab and
5 Haryana and Kerala on the ground that there was a likelihood of conflicting decisions. According to the petition, retailers, real estate developers and multiplex owners had filed writ petitions before various high courts challenging levy of Service Tax on leasing, letting, renting or any other similar arrangement in respect of immovable property for use in furtherance of business or commerce. Petitioners challenged the Constitutional Validity of the Finance Act 2007 on the ground that it was beyond the Legislative Competence of the Union contending that the issue falls within the ambit of List II of the Seventh Schedule to the Constitution, which is a state subject and thus Parliament cannot levy such a tax and thus sought relief contending that lease or license (including renting or letting out) is not a service. The Bombay High Court alongwith other High Court has granted interim relief from payment of service tax from the rent of Immovable Property. The service provider i.e. the owner of the property will not have to pay service tax till the final order of the Supreme Court. Astonishingly, the Revenue Department could have been prompted to levy Service Tax on Renting of Property under the influence of the words of the great African-American Social Reformer Marian Wright Edelman, Service to others is the rent you pay for living on this planet.