Constitutional Validity and retrospective levy of service tax on renting of immovable property upheld -Punjab and Haryana High Court
Court : Punjab & Haryana High Court
Citation :M/s Shubh Timb Steels Limited v. Union of India and ors (A/T–2010¬539-HC]
Brief :Hon’ble Punjab & Haryana High Court in its decision dated 22 November 2010 on the issue of constitutional validity of the levy of service tax on renting of immovable property and the validity of the retrospective amendment to the definition of ‘renting of immovable property’ under Finance Act, 1994 ruled in favor of the Revenue.
Factual background-The levy of service tax on ‘renting of immovable property’ was introduced w.e.f. 1 June 2007. The levy of service tax has been the subject matter of constitutional challenge at various High Courts across India.The Hon’ble Delhi High Court in Home Solution Retail India Limited reported in [2009 (14) STR 433 Del] held that the activity of renting per se is not liable to service tax and only services in relation to renting are liable to service tax. The Constitutional challenge to the levy of service tax was not dealt with in the decision of the Hon’ble Delhi High Court.
The Union Government filed a special leave petition to the Hon’ble Supreme Court against this decision of the Hon’ble Delhi High Court. The Hon’ble Supreme Court recently directed the Hon’ble Delhi High Court to dispose of the matter expeditiously.
In the meanwhile, the Union Government amended the earlier definition of ‘renting of immovable property’ and by introducing a validating provision, made the amendment have a retrospective operation w.e.f 1 June 2007.
The petitioner in the present case is a public limited company owning commercial immovable property in the state of Himachal Pradesh.
This commercial property was let out to various business entities and is receiving rent as per the agreement with the tenants.
In the present case, the constitutional challenge to the levy of service tax on renting of immovable property is on the ground that the levy of service tax under Entry 92C or 97 of the Union List overlaps the power of the State Legislature under Entry 49 of the State List.
Entry 92C of the Union List deals with “tax on service”, while Entry 97 of the Union List deals with the residual power of the Union to legislate on matters not in State List or the Concurrent List. Entry 49 of the State List deals with the power of the State Legislature to levy taxes on land and buildings
Question before the Court
Whether levy of service tax on providing of service to any person by any other person by renting of immovable property was outside the purview of the Central Government? And Whether the levy of service tax with retrospective operation from 1 June 2007 was valid?
Decision of the Punjab and Haryana High Court
As per the scheme of the Constitution of India, subject of tax falling in power of a particular legislature in one aspect may fall within legislative power of another in another aspect, such overlapping in unavoidable. If there is any overlapping, the doctrine of pith and substance would be applied and the Court would look at the substance of the issue.
Entry 49 of the State List covers tax directly on land and buildings and not any activity relating thereto.
The Hon’ble High Court referred to several judicial precedents where constitutional validity 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;
The Hon’ble high Court observed that it cannot be held that renting of immovable property did not involve any service as service could only be in relation to property and not by renting of property. It further states that renting for commercial purposes is a service and has a value for a service receiver.
The aspect of service element in renting is independently covered under Entry 92C read with Entry 97 of the Union List and hence outside the purview of the Entry 49 of the State List
Even if the transaction of transfer of right in the immovable property did not involve value addition, the levy cannot be held as invalid as there is no encroachment on Entry 49 of the State List.
The question whether the levy is harsh on account of levy of income tax and property tax cannot be a subject matter of interference of the High Court once competence of the levy is established.
On the question of retrospective operation, the Hon’ble High Court held that the Legislature was competent to validate the law retrospectively and the objective of a validation is rectify the defect in the phraseology or lacuna and to carry out the effect of the purpose for which the earlier law was enacted.
Thus the Hon’ble High Court upheld the Constitutional validity of the levy of service tax on renting of commercial property with retrospective effect from 1 June 2007.
Comments and analysis
The Hon’ble High Court has laid down a landmark decision upholding the constitutional validity of the levy of service tax on renting of immovable property.
The decision of the Hon’ble Punjab and Haryana High Court has laid to rest some of the important questions pertaining to the vires of the levy of service tax on renting of immovable property.
It is likely that the ratio and observations made in the decision of the Hon’ble Punjab and Haryana High Court may have a bearing on the High Courts while disposing of similar writ petitions in their respective jurisdictions.
It would be interesting to observe the stance of the other High Courts especially the Hon’ble Delhi High Court across India where similar writ petitions challenging the constitutional validity of the levy of service tax on renting of commercial property is pending.