Case Law Details
Court: Punjab & Haryana High Court
Citation: M/s Shubh Timb Steels Limited Vs Union of India and Another
Brief :The Petitioner, owner of commercial immovable property, has let out the said property to business entities on rental basis. The Petitioner has challenged the levy of Service Tax on renting of immovable property covered under Section 65(90a) and Section (65)(105)(zzzz) of the Finance Act, 1994 and its retrospective amendment under the category ‘Renting of immovable property services’ as ultra-vires the legislative competence of the Parliament.
A chartered accountant who is not a member of the Institute of Chartered Accountants of India but impersonating as one can be charged under the Indian Penal Code or under other laws for offences, the Supreme Court stated while allowing the appeal of the institute. The Madhya Pradesh high court had taken a different view. In this case, ICAI vs Vimal Kumar, the institute filed a complaint before the police alleging forgery and impersonation. The trial court ruled that there was no basis for framing charges under IPC. The high court rejected the appeal of the institute stating that though a case was made out under the Chartered Accountants Act, the complaint was not under that Act, but under IPC. The institute appealed to the Supreme Court which set aside the high court judgment and directed prosecution under IPC.
Contentions of the Petitioner
The Petitioner put forth the following contentions:
- The matter of levy of service tax on providing service of renting of immoveable property was covered by Entry 49 of List II and not by Entry 92C or 97 of List I. Further, retrospectivity of the levy was beyond legislative competence.
- Transfer of property without any value addition by way of service could not be covered by the levy of service tax.
- Renting of a building was a transaction of land & building covered by Entries 18, 45 and 49 of List II in respect of which exclusive jurisdiction to legislate under Article 246(3) was vested in the State Legislature. Leasing was a transfer of rights and not a service and was, therefore, not covered under Entry 92C of List I.
- Reliance was placed on the decision of Delhi High Court in the case of Home Solution Retail India Limited vs. Union of India and Others wherein it was held that service was to be provided in relation to the renting of property and the property by itself could not be regarded as service as it did not involve any value addition.
Contentions of the Respondents
The contentions of the respondents were as follows:
– Renting of property is different from sale of goods or transfer of property or conveyance. Providing of service with respect to property was covered by service tax.
– The levy was not covered under Entry 18 not being tax on land or building but the levy was only on service element. The levy is neither land revenue covered under Entry 45 nor contemplated as direct tax under Entry 49.
– Under Article 246(1), Parliament had exclusive power to make laws in respect of matters covered under List I including residue entry.
– The amendment with retrospective effect was only clarificatory in nature, such levy was already provided under un-amended provisions.
– The scope of Entry 49 List II was limited to direct tax on property and not on activity in relation to property. In any case, Entry 49 List II had to be read subject to Entries 92C and 97 of List I.
– The judgment of Delhi High Court did not involve the issue of validity of the levy but involved question of validity of the notification and circular to recover service tax from the lessors of property on the proceeds of renting out of property.
– The retrospective amendment made the renting of immovable property itself a service covered by the definition of taxable service.
Observations of the High Court
The following observations were made by the High Court:
– Service Tax is a destination based consumption tax being not a charge on business but on consumer and is leviable on service provided, hence, is a value added tax. Such services may be property based or performance based.
– There could be unavoidable overlapping in as much as subject of tax falling in power of a particular legislature in one aspect may fall within legislative power of another in other aspect.
– In case of overlapping, doctrine of pith and substance is to be applied and the Court has to look at the substance of the matter. List I has priority over List II though predominance of List I does not prevent State Legislature from dealing matters under List II.
– Various judgments were referred wherein constitutional validity was upheld under List I without affecting the scope of Entry in List II:
– In the case of C. Rajagopalachari vs. Corporation of Madras income tax on pension under Entry 82 List I was upheld without affecting the scope of Entry 62 List II.
– In the case of Western India Theatres Limited vs. Cantonment Board it was upheld that entertainment tax on exhibition of film fell under the residual entry of List I and not Entry 62 of List II.
– In the case of Gujarat Ambuja Cements Limited vs. Union of India service tax on transportation services was upheld under the residual entry of List I which was outside the purview of Entry 56 of List II relating to tax on goods and passengers.
– Considering various judgments it was observed that Entry 49 of List II relates to tax on land and buildings and not any activity relating thereto. It cannot be held that renting of property did not involve any service as service could only be in relation to property and not by renting of property.
– The aspect of service element in renting transaction is an independent aspect covered under Entry 92C read with Entry 97 of List I. The subject matter of impugned levy being outside the scope of Entry 49 of List II, power of Union Legislature is undoubted.
– As regards the retrospective amendment the High Court observed that the object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which the earlier law was enacted.
Conclusion:- Based on the above discussion, the High Court dismissed the petition holding that renting of immovable property for commercial purposes is a service which has a value for the service receiver. Hence, service Tax is leviable on the renting of immovable property as being covered under Entry 92C read with Entry 97 of List I on the value of taxable services referred to in Section 65(105)(zzzz) read with Section 65(90a) of the Finance Act, 1994. Further, the validity of the amendment retrospectively with effect from 1.6.2007 to renting of immovable property services was also upheld.
