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Rentals Still Rattles
18 November, 2009 Ahmedabad :
Rentals Still Rattles

We have learnt that there is no Service tax on renting after the recent Delhi high court judgement. As landlords of a fully furnished commercial property, do we still have to collect and deposit Service tax on rent? 

In a landmark judgement dated 18.04.2009 delivered on Service tax, in the case of Home Solution Retail India Ltd.v UOI and others, the Delhi high court held that 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.

However, the court categorically stated that 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 subject to Service tax. In this regard, the CBEC issued instructions vide 336/10/2009 TRU dated 15.7.2009 to all service tax formations that the department has filed an appeal against the said order of the Delhi high court, and the dispute has not reached finality.

The moot issue before the Delhi high court was whether the provisions of the Finance Act provide for levy of Service tax on the renting of immovable property as such or otherwise. It was contended that the said act does not treat renting out of immovable property as a "service". In terms of Section 65(105)(zzzz), Service tax is levied only on a service which is provided or sought 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.

On a plain reading of this provision, the service provided must be something that is distinct and different from the transaction of renting of immovable property as such, though the service would have to be "in relation to such renting". If the legislature wanted to treat renting of immovable property as a service, then nothing would have been easier or simpler for the legislature than to use the words "service by way of renting of immovable property" or "the service of renting of immovable property" or "service consisting of renting of removal property". 

It was further contended that the said provision indicated that the service will be provided "by any other person" and not only by the owner or lessor or person in possession of the immovable property. Furthermore, the service could be rendered to any person provided it was in relation to the renting of the property and not merely to the person who takes the property on rent. If the renting of property as such constituted a service which could be taxed, then such a service could only be rendered to the person taking the property on rent and not "to any person".

From this it was sought to be contended that there is a clear indication that the expression "service in relation to the renting of immovable property" means a service which is distinct and different from the renting of property itself although it may be connected with or related to such renting. 

The expression "in relation to" separates objects from each other as the phrase by itself conceives of two separate things. Service tax is a value-added tax and, therefore, only the value addition is liable to be taxed by way of this tax. It is only the value addition which is taxable. In the case of a stockbroker, real estate broker, auctioneer, travel agent etc, it is only the commission received by the service provider which is subjected to service tax and not the main transaction of sale or purchase.

This, by itself, clearly indicates that it is only the service rendered by a person to another which is the intangible value addition to the main transaction which is subjected to Service tax. Consequently, in respect of renting of immovable property also, the main transaction of renting of immovable property and the rents paid thereof cannot be subjected to service tax. It is only the value addition by a service relating to renting of immovable property that can be the subject matter of service tax.

The Hon’ble High Court held 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.

However the Hon’ Court has categorically stayed that 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. Other service, such as air conditioning service provided along with the renting of immovable property, then it would fall within Section 65(105)(zzzz).

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 Hon'ble High Court further held that "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." 

Consequent to the said judgment of the Honourable High Court of Delhi many of the Landlords stopped paying service tax on the renting of immovable property for business or commerce. Given the situation, service tax formations throughout the country, are instructed to take necessary action to safeguard revenue by either pursuing the taxpayer to pay up the service tax due or resort to means under law to protect the revenue.

Taxable Services: Renting of Immovable Property Services

Courtesy: From the Desk of MONISH BHALLA , Founder, www.servicetaxonline.com
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