Brief Facts:- Several writ petitions were filed with the Delhi High Court, questioning the legality, and validity of Notification No. 24 / 2007 –ST dated May 25, 2007 (which exempts from service tax, the taxes paid on property from the gross value charged for renting of immovable property) and Central Board of Excise and Customs (CBEC) Circular No. 98/1/2008 – ST dated January 1, 2008 (which clarified that right to use immovable property is leviable to service tax). The petitions questioned the levy of service tax on renting out of immovable property per se since the taxable services contemplated under Section 65(105)(zzzz) of the Finance Act, 1994 (as amended) were services provided “in relation to renting of immovable property”.
An alternative plea was also taken by the petitioners that the levy of service tax on renting of immovable property would be unconstitutional since it would amount to a tax on land and would therefore fall outside the legislative competence of the Parliament.
Contentions of the Petitioners
The important contentions made by the various petitioners can be summarized as under:
1. Renting of immovable property services as per service tax provisions refers to services in relation to renting of immovable property and not to the activity of renting itself. The taxable service provided must be something which is distinct and different from the transaction of renting.
2. Although Section 65(105)(zzzz) does not mention renting of immovable property as a taxable service, the subject Notification grants the exemption considering the taxable service to be renting of immovable property itself.
3. The subject Circular clarifying that the right to use immovable property is leviable to service tax, travels beyond the provisions of the Act and contemplates levy of service tax on renting itself.
4. Service Tax is a value added tax and therefore only the value addition is liable to be taxed by way of service tax.
5. The use of the expression „in relation to? is with a clear intention of distinguishing the actual renting of the property from the services to be rendered in relation to such renting.
6. The Supreme Court in the case of T N Kalyana Mandapam Association Vs. Union of India & Others2 held that a mandapkeeper provided a bundle of services and it was not a case of mere permission to use a particular property.
Contentions of the Respondents: The contentions of the Respondents were as under:
1. The transfer of right to use a particular property for commercial or business purposes was itself the service contemplated in Section 65 (105) (zzzz).
2. The definition of renting of immovable property is an all inclusive definition.
3. The expression „in relation to renting of immovable property? also covered the act of renting of immovable property.
4. Letting out the property or permitting another person to use the same by itself constitutes an act which could be classified as a service.
5. The expression „in relation to? must be given an expansive meaning of the widest amplitude to cover renting as well.
6. The Supreme Court decision in the case of T N Kalyana Mandapam Association (referred above) stated that merely making a mandap available, with or without other services could in itself be regarded as a service exigible to service tax.
Observations of the Hon’ble Delhi High Court : The Delhi High Court observed the following:
1. The services provided by a mandap keeper are entirely different from the services covered under „renting of immovable property? as the latter contemplates the transfer of possession of immovable property. Accordingly, the decision of the Supreme Court in the case of TN Kalyana Mandapam Association (referred above) cannot be extended to the facts of the present case.
2. Service tax is a tax on the value addition provided by a service provider. If there is no value addition, there is no service.
3. Renting of immovable property, by itself, does not entail any value addition and therefore cannot be regarded as a service. If there is some other service provided along with renting of immovable property, then such other service would be covered by Section 65 (105) (zzzz).
4. The context of the usage of expression „in relation to? determines the ambit of the taxable services. If the expression „in relation to? is used in the context of a service, then such expression covers the service itself and services in connection with the same. If the expression „in relation to? is not used in the context of a service, the usage should be limited to have reference only to some services in connection with the same.
Renting of immovable property would not by itself constitute a taxable service and be exigible to service tax. The interpretation placed by the subject Notification and Circular is incorrect and accordingly they are ultra vires the Act.
The alternative plea taken by the Petitioners with regard to the legislative competence of the Parliament to levy tax on land / building has not been examined by the High court in the present case.
1. Delhi High Court decision in the matter of Home Solution Retail India Ltd & Others Vs. Union of India & Others dated April 18, 2009
2. Supreme Court decision in the case of TN Kalyana Mandapam Association Vs. Union of India & Others (2004) 5 (SCC) 632