1 WHETHER 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 tell you a short story signifying the deference between Legal, Illogical & Illegal. One smart student secured lower grades in the exaim, 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.
2 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 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 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. By introducing 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. After the recent amendment by Finance Act 2010 effective from 8th May, 2010 the section 64(105)(zzzz) is amended to read as services provided or to be provided to any person by any other person by renting of immovable property or any other services in relation to such renting for use in the course of or for furtherance of business or commerce. (Annexure I & II) The obvious intention of the said amendment is to consider the renting of immovable property per se as taxable service. 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 per se for any use 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,
3 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. Section 105 of Transfer of Property Act, 1888, provides that a lease is alienation of right of a landlord, such alienation cannot be treated as service. 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 even after the amendment in May 2010 could not be brought under the Service Tax Net. Transfer of the right to use any goods or property is liable to Sales Tax however when immovable property is let out Sales Tax is not paid. On the other-hand, under 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. In the cases of Chartered Accountants Service as well as the Goods Transport Service, the Hon ble Supreme Court as well as the
4 High Courts has considered the nature of the levy of Service Tax under the Finance Act. Every body 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 in relation to renting of immovable property for use in the course or 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. In other words, the transaction which is taxable would cover only Ancillary Services relating to renting of immovable property and not the transaction of the renting of immovable property itself. This is the only way in which the above Entry can be harmoniously construed rendering it valid in Law. If, on the other hand, 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 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. Service Tax can be levied only if the transaction involves Service. We have to keep in mind that, wherever a transaction is a composite one involving a taxable service along with a transaction of sale or works contract involving transfer of goods, as in the case of construction service or catering service, abatement has been provided, this is to ensure that Service Tax is leaved only on the service portion of the transaction.
5 Tussle between Tax Payers & Revenue Department in Various High Courts and Supreme Court on Levy of Service Tax on Rental Income prior to as well as after the Recent Amendment in Feb 2010 On August 18, 2008 the Centre 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 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 Bench of the Apex Court headed by Justice B N Agrawal, while seeking reply from Retailers Association of India, Confederation of Real Estate Developers' Associations of India and Multiplex Association of India on the transfer petition filed by the Centre also stayed proceedings before various High Courts. 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 is not expected to pay service tax till the final order of the Supreme Court. The Delhi High Court, in Home Solutions Retail India Ltd. & Ors. vs Union of India 2009 237 ELT 209 Delhi, delivered a judgment, concluding that the act of pure renting does not amount to a taxable service. The court emphasised the fact that service tax is a tax on value-
6 added and any value-added service provided, such as air-conditioning, canteen facilities and designated parking, could amount to taxable service. The decision caused a ripple but due to jurisdictional restrictions of the Delhi High Court, many could not benefit from the ratio of the decision. The Centre had moved the apex court last year after the HC interpreted the Finance Act 2007 provision for levy of service tax on renting of immovable property for use in the course and furtherance of business as not amounting to a tax on renting per se, but services in relation to renting. The court also held that such renting is not a service, and, therefore, cannot be taxed, besides stating that service tax on renting of immovable properties is unconstitutional. Slighted, the frustrated Government used the Brahmastra amending the provisions by the Finance Act, 2010 which received Presidential assent on May 11, to again declare that the activity of pure renting as a taxable service. To rub salt onto the wounds, the amended provision also encompassed renting of vacant land and to bury the hatchet once and for all, the amendment was made with retrospective effect from June 1, 2007, when the tax on renting of property was originally conceived. Wounded, Home Solutions Retail again knocked on the doors of the Delhi High Court stating that they are in a worse position than what they were, thanks to the retrospective effect. Refusing to budge from its earlier stand in spite of the recent amendment in Feb 2010, the Delhi High Court granted a stay to the petitioner reiterating the fact that no tax could be levied on the activity of pure renting while there will be a liability in case of value-added services. The Delhi High Court had granted a stay in April 2010 in favor of Home Solutions Retail India Ltd on recovery of service tax under the newly amended Section 65 (105) (zzzz) under Renting of Immovable Property Service, of which the amendment was made retrospective with effect from 1 June 2007 by the Finance Act, 2010.
7 TRENT Ltd and Future Value Retail Ltd have challenged before the AP High Court, the service tax with retrospective effect on renting of immovable property, brought in by the Finance Act, 2010. The High Court observed that The renting of immovable property per se would not constitute any value addition falling within the lubric of service and that the provisions of Section 65 (105) (zzzz) are inconsistent with the ratio legis of the service tax provisions of the Finance Act, 1994. Alternatively, the Parliament does not have legislative competence to levy service tax by an artificial expansion of the concept of service so as to entrench into the core of the legislative power of the state under entry 49 of List II of VII Schedule to the Constitution of India which reads Taxes on lands and buildings. Sensing a repeat of the earlier decision from Delhi High Court, the Government has again knocked on the doors of the Apex Court whose decision is expected on July 13. Both landlords and tenants would be awaiting this decision as it could have a material impact on their cashflows, whichever way it goes. The service tax impacts retail more than anyone else. Currently retailers pay 10%-12% of the turnover as rentals and the service tax is affecting them by 10.2%. On total turnover, the retailers might pay 1%-1.2% as service tax. Most retailers make a profit between 2%-4%. The government will take away half of the profit, Most retail outlets are on leased spaces, they have to pay service tax. It is difficult for retailers to survive. The Government must exclude non-services such as base rent charged and include only value-added services. The apex court decision could bless such a levy which could be a definitive indicator to the Government. 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.
8 Annexure-I As per Section 65(105) (zzzz) the Taxable service means any 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 of furtherance of business or commerce. Explanation 1 - For the purposes of this sub-clause, immovable property includes Building and part of a building, and the land appurtenant thereto, Land incidental to the use of such building or part of a building. The common or shared areas and facilities relating thereto, and Incase of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate, But does not include (a) Vacant land solely used for agriculture, aquaculture, farming forestry, animal husbandry, mining purposes; (b) Vacant land, whether or not having facilities clearly incidental to he use of such vacant land; (c) Land used for educational, sports, circus, entertainment and parking purposes; and (d) Building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities. Explanation 2 For the purposes of this sub-clause, an immovable property partly for use in the course of furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course of furtherance of business or commerce.
9 Annexure-II As per Section 65(90a) Renting of Immovable Property includes renting, letting, leasing, licensing, or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include Renting of immovable property by a religious body or to a body; or religious Renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre; Explanation 1- For the purposes of this clause, for use in the course or furtherance of business or commerce includes use of immovable property as factories, office buildings, warehouses, theatres, exhibitions halls and multiple-use buildings. Explanation 2- For the removal of doubts, it is hereby declared that for the purposes of this clause renting of immovable property includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property. Note: By illustrative use of words renting letting, licensing and then providing the omnibus clause other similar arrangements, the intention becomes obvious. The nature of arrangement or name of the transaction is not important. It is the activity of providing immovable property for use for a specified period against receipt of certain consideration that has been made taxable. Ownership of property is also not relevant as the statutory provisions do not make any reference in this regard. Recent Amendment in the Finance Act, 2010 The Finance Act, 2010 as became a statute on May 8, 2010 had amended the taxing entry of Renting of Immovable Property Services with retrospective effect from 01.06.2007, inter alia, as under:
10 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; In this regard, the Circular issued by the TRU dated February 26, 2010 clarified as under: Amendments are being made in the definition section 65 (105) (zzzz) of the taxable service Renting of Immovable Property (i) To provide explicitly that the activity of renting itself is a taxable service.(ii)this change is being given retrospective effect from 01.06.2007 and (iii) The definition of immovable property is being expanded to include the vacant land given on lease or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce. The lease rentals for long term lease / sub-lease of land provided by local industrial corporations or any such organization / entity to the lessee for construction of factory or commercial building on such land will now be liable to service tax. Annexure-III Whether Income Tax - TDS on Service Tax portion is deductible or not from Payment of Rent? This issue got fuel with the issuance of a Circular No.4 dated 28-4-2008 by the CBDT clarifying that Tax Deduction at Source (TDS) under Section 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the Service Tax. After this clarification, some professional are of the view that the principle enunciated by this Circular is applicable to all the payments made by the assesse s and accordingly no TDS is deductible on the part of Service Tax whether it is professional's bill or contractor's bill etc. But, to settle the issue, CBDT has again issued another clarification vide Circular NO. 275/73/2007IT(B) dated 30-6-2008 clarifying that the scope of benefit of Circular No. 4 dated 28-4-2008 can not be extended to the payment made Under Section 194J (Fees for Professional &
11 Technical Services). Therefore, TDS is to be deducted on the gross amount inclusive of Service Tax where the payment is being made U/s 194J. From the reading of both the clarifications, the reasons for two stands in two situations can be discussed as under: Under Chapter XVII - Part B - Deduction at Source Section 194J (1) starts as: (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of While, Section 194I provides as: Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall Section 194J speaks about Deduction of Tax at Source (TDS) on any sum which is paid to the recipient, While Section 194I speaks about the Deduction of Tax at Source (TDS) on any income paid as rent. Annexure-IV Some Interesting Issues: The activity of receiving of rent for hoardings and sign boards for display of advertisement could also be seen as a renting of Immovable Property for commercial use. The Service Tax Tribunal have bifurcated the two activities of providing hoardings and sign boards for display of advertisement from the activity of conceptualizing and designing the advertisement alongwith its display, in the case of High-Tech Publicity Vs.CCE Madurai 2008 (11) STR 140(TRI.-Chennai). The second activity has been treated as covered U/s 65 (3) of the Finance Act 1994, so the Revenue can put its eye on the first activity of providing the hoardings and signboards for display of advertisement on rent. Further, while examining the transaction whether a deemed sale under the VAT Act, Hon ble Andhra Pradesh High Court in the case of State of A.P. Vs. Prakash Arts (2008) 18 VST 39 (A.P) has decided that leasing out of
12 advertisement boards on hire charges is not a transfer of right to use goods. Another interesting issue of attracting Service Tax under the category of renting of immovable property for commercial purposes could be, on providing small office space alongwith furniture to the Banks/Financial Institutions by the large Auto Dealers in their premises for providing fast loan facilities to the prospective Car Buyers. This issue may arise after the decision of the Bangalore Tribunal in the case of CCE, Belgaum Vs. Chadha Auto Agencies 2008 (11) STR 643 (TRI. Bang), wherein it has been decided that such activity cannot be brought within the definition of Business Auxiliary Services. The question of renting out of storage tank has also cropped up, but a storage tank is not covered under the scope of Immovable Property as per the Statutory Explanation U/s 65 (90a) for this service for this taxable service and thus it would not be taxable. Similarly, the question of renting out of cold storage as a facility may be decided on the basis of the explanation which is clarifying the scope of the taxable service of renting of property. Cold Storage as such has not been specified in the Explanation of the Immovable Properties. It is also to be kept in mind that Cold Storage has been specifically excluded from the purview of taxable service of Storage & Warehousing Services.