In this Budget a retrospective amendment has been introduced in respect of the service of renting out of property for commercial purposes. Amendment has been made in the definition of “Renting of immovable property service” to provide explicitly that the activity of renting itself is a renting service. The change has given retrospective effect from June 1, 2007. This treatise seeks to explain the rationale and the background for the retrospective amendment for a proper appreciation of this action in the Budget.
This amendment has been made to settle an issue which became quite controversial when in a very recent judgement of the Delhi High Court in the case of Home
Solution Retail India vs UOI 2009 (237) ELT 209 (Del) held that renting of immovable property is not service. Section 65(105)(zzzz) of Finance Act 1994 reads “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”. The High Court has held that service tax is value added tax and since there is no value added in renting of property it is not service. And it is not service independently also the terms of Section 65(105)(zzzz)”. The CBEC was reportedly contemplating filing appeal in the Supreme Court. In the meantime in the Budget 2010 the amendment has been made so that the case in the Supreme Court, even if filed,does not have to be waited for.
There are two reasons why the amendment is justified.
(a) Renting of immovable property is a service. And service tax is a tax on rent. It is not a property tax. It is a tax on the service given by the property for the time being when it remains in the possession of the person who has taken it on rent. It is just like the service of pandal, or shamiana or modem or telephone in telecommunication service or similar material objects whose services are taken on payment for the time being. The distinction that has been made with the judgment in the Kalyan Mandapam case is really not valid.
(b) Service tax is not a value added tax by itself. Only if there is the system of input credit of the tax already paid that it becomes a value added tax. That is how it has been designed in India but basically it is not a value added tax. It can be also a turnover tax as it was when it was introduced in 1994 in India. Since it is not a value added tax, the question of value addition does not does not determine the issue whether the tax is legally valid or not. There is no need of value addition at all since all that is necessary is that there is a turnover from the service. Now after the amendment, the question of value addition has become irrelevant.
There is good reason to think that the amendment has been a much better step than approaching the Supreme Court and waiting for its decision which in any case will take time (during which period uncertainty would continue). It had been contended by the Delhi High Court that the expression ‘service in relation to renting of property’ does not in terms include ‘service in renting of property’. Now by making an explicit provision for providing that renting of property is a service, the probable lacunae has been made good.
Retrospective amendment has been made to cover the past cases which is also permissible in law. Judicial decisions can be nullified by retrospective amendment of law. This has been upheld in the case of Easland Combines vs CCE Mumbai reported in 2003 (152) ELT 39 SC.
The general power of retrospective amendment has also been upheld by the Supreme Court in many cases though the power is not unlimited. Here however no challenge can come on that count since the retrospectivity is limited to three years and not extended over an unreasonably long period. And during these years the tax has been paid already. So there is no hardship also.