Renting of Immovable Property Service – developments and Issues

By CA V S Sudhir & CA Manindar

Renting of Immovable property service is one among the services which has huge implication as to the coverage of number of assessees and the quantum of revenue collection. The levy came in to effect from 01-06-2007. Since renting is not a service in common parlance coupled with power to levy taxes on immovable properties is under state list, this levy created lot of ambiguity and required extensive judicial examination. All these have left behind the landlords and tenants under a puzzled situation as to compliance of the same. Therefore this article aims at giving an insight as to the development of the judicial decisions and the statutory amendments and the possible measures to be taken to obtain relief and to avoid litigation.

The definition of the taxable service as the time when levy was first introduced as defined under section 65(105)(zzzz) of the Finance Act, 1994 which read as “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 or furtherance of business or commerce”.

In the case of Home Solutions Retail India Ltd vs Union of India, 2009 (237) E. L. T 0209 (Del), the Delhi High Court after due examination of the definition, gave a verdict that the definition meant to cover only “the service in relation to renting” and not “mere renting of the immovable property”. Further concluded that service tax is a value added tax and mere renting does not bring any value addition.

With this, the Government of India amended the definition of the taxable service explicitly to cover the ‘mere renting’ in the definition on 01.07.2010 with retrospective effect from 01.06.2007. The amended definition is read as “any service provided or to be provided 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”

The amendment provoked Home Solutions Retail India again to knock the doors of the Delhi High Court. This time the larger bench High Court in M/s Home Solution Retail India Ltd & Others vs UOI and Ors, 2011 (21) S.T.R. 109 (Del.) has upheld the constitutional validity of the same even its retrospective amendment and further concluded that renting involves value addition.

There were other decisional of different High Courts upholding the levy in Shumb Timb Steels Ltd v. UOI 2010(20) S.T.R. 737 (P&H), Utkal Builders Ltd v. UOI, 2011(22) S.T.R. 257 (Ori), Retailers Association of India & Ors vs UOI & Ors, 2011(23) S.T.R. 566(Bom.), Cinemax India Ltd vs. UOI, 2011(24) STR 3 (Guj)

The Delhi High Court in the second Home Solution Case, while upholding the retrospective levy has stated that on the question of levying of penalty it is open to the Government to examine any waiver or exemption can be granted to the tax payers.

Consequently in the recent Union Budget, 2012-13, a new section called Section 80(2) is proposed to be introduced. Accordingly no penalty is imposable on service tax payables as on 6/03/2012 i.e. service tax payable on rents received/receivable till February, 2012, if the service tax along with interest is paid in full with in a period of six months from the date on which Finance Bill receives the assent of the President. The President assent has been received on 28.05.2012. Therefore no penalty would be leviable if the entire service tax amount along with interest has been paid on or before 28.11.2012.

In this backdrop the following questions would arise in order to seek the relief from penalty.

1.    From which date the service providers are required to deposit service tax?

Comments: Since mere renting is also brought under service tax levy with retrospective amendment, service tax is payable from 01.06.2007 i.e. right from the introduction of levy.

2.    Whether Small Service Provider exemption can be available?

Comments: Assessee can avail this exemption in case if the previous year value of taxable services (rental receipts & from other services) does not exceed Rs 10 lakhs. In such case the exemption up to first Rs 10 Lakhs receipts can be claimed in the next year

3.    Whether deduction on payment of municipal taxes can be claimed?

Comment: Notification 24/2007 dated 22-05-2007 provides for deduction of municipal taxes paid from the value of taxable services before arriving at service tax liability. However no deduction is available for any payments by way of interest and penalties paid to local authorities on account of delayed payment or any other reasons. Further the taxes paid proportionate to the period for which service tax is paid shall alone be deducted.

Example: Property tax paid from April’2011 to March’2012   Rs 2 Lakh

Rent received for the period April’2011 to June’2011 Rs 15 Lakh

Service tax payable: 14 Lakhs (15-1) x 10%

4.    How can municipal tax deduction benefit be claimed in case if theses taxes are paid subsequent to the payment of service tax?

Comment: In such cases, the municipal taxes paid can be adjusted while arriving at the service tax liability for the future in accordance with Rule 6(4c) of the Service Tax Rules, 1994. Further the claim can be made within one year from the date of payment of the property tax. The details of such adjustment shall be intimated to the concerned Superintendent of Central Excise in writing within 15 days of such adjustment.

5.    How shall the service tax liability be arrived at?

Comment: For the rents that are due till 30.06.2011, service tax liability can be arrived at on receipt basis. For the rents that are payable for the period beginning from 01.07.2011, the liability shall be arrived at on monthly due basis or the date of payment whichever is earlier.

6.    What are the major capital goods, input and input services on which CENVAT Credit is available?

Comment: 1) Central Excise Duty/Additional duty of Customs (CVD) on lifts.escalators, DG sets and other facilities used in the building.

2) CED/CVD on office equipments and computers.

3) Insurance of premises, Telecommunications and other services.

7.    Whether interest is payable on arrears and if so from which date onwards?

Comment: Interest is levied for not paying service tax within the due dates. In this case when the law was made on 01.07.2010 there could not be default of payment for any month/quarter prior to such date, say June 2007 service tax was required to be remitted on 5^th July 2007 on which date renting was not taxable and hence the same cannot be considered non-payment. However it was clear on 01.07.2010 and hence interest has to be paid only from 01.07.2010 till the actual date of payment. This view is supported by the decision of Supreme Court in the case of Star India Pvt Ltd vs C.C.E., 2006 (1) S.T.R. 73 (SC). However in view of the paper writer, this would be definitely litigated by the Department. Considering that the payment of arrears (service tax and interest) within the time is with a view to sought relief from levy of penalties, litigation in this regard may not serve this objective. It would be worthy to fight only when the stakes involved are high.

  (for feedback and queries mail to manikakarla@gmail.com)