Service tax payable on long term lease of Immovable property under Renting of Immovable Property – not in sync with Service tax Act, Accounting Standard, Bombay Stamp Act & Income Tax Act
A) Service is defined under section 65B(44) of the Finance Act, 1994 as introduced w.e.f. 01-07-2012. as under
“service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
(a) an activity which constitutes merely,––
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner
(ii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
Hence based on above definition of Service, a transfer of title in goods or immovable property by way of sale, gift or in any other manner is excluded from the ambit of Service hence the same is also excluded from the net of service tax.
One important think to be kept in mind is transfer by way of sale, gift or in any other manner is excluded. Any other manner is not defined but according to my view long term lease of 30 years or more can also be considered as akin to sale.
B) The said conclusion I have made based on the following;
As per Accounting Standard 19 – Leases issued by the Institute of Chartered Accountants of India there are two types of lease:
1) Finance Lease &
2) Operating Lease
A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset and An operating lease is a lease other than a finance lease.
One of the examples of situations which would normally lead to a lease being classified as a finance lease is mentioned in para 8 ( C ) of the said standard which is as under:
8 (c) the lease terms is for the major part of the economic life of the asset even if title is not transferred.
Here again major part of the economic life of the asset is not defined.
As per stamp duty on immovable property in Maharashtra (governed by the Bombay Stamp Act, 1958),
where the lease purports to be for a term more than 29 years or in perpetuity or does not purports for any definite period, or lease for a term more than 29 years with a renewal clause contingent or otherwise The same duty as is leviable on a Conveyance under clause (a), (b),(c) or (d), as the case may be, of Article 25, on 90 % of the market value of the property
Hence based on above one can conclude that lease of an immovable property equal to or more then 30 years can be considered as akin to sale.
C) As per para 11 of Accounting Standard 19 – Leases:
At the inception of a finance lease, the lessee should recognize the lease as an asset and a liability. A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for a leased asset should be consistent with that for depreciation assets which are owned.
Hence based on above it is clear that if lease is classified as finance lease than in the books of lessee the lease should be recognized as an asset & depreciation can be claimed as if the assets are owned.
D) As per section 50 C (1) of the Income Tax Act 1961, Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed [or assessable] by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority” ) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed [or assessable] shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
As per Section 2(47) of the Income Tax Act 1961, transfer is defined as under,
“transfer”, in relation to a capital asset, includes,—
(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ;] [or]
[(iva) the maturity or redemption of a zero coupon bond; or]
[(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
Hence based on above one can come to know that Section 50C is applicable on transfer of a Capital Assets being land or building or both & as per Section 2(47) transfer in relation to a Capital Assets includes the sale, exchange or relinquishment of the asset.
Therefore there have been conflicting decisions by courts/Tribunal on whether transfer of tenancy/leasehold right is a transfer of a capital asset, and would fall within the ambit of Section 50 C of the Act.
The Lucknow Bench of the Income tax Appellate tribunal (the Tribunal) in the case of Shri Hari Om Gupta (the taxpayer) held that the leasehold right of a land for 99 years is a Capital asset to which the provisions of section 50 C of the Act are applicable. Therefore the capital gain on transfer of such leasehold right is to be computed in accordance with the provisions of section 50 C of the Act.
Hence based on above one can conclude that as per Service tax act, Accounting Standards, as per Stamp duty on Immovable property in Maharashtra (governed by the Bombay Stamps Act, 1958) & also as per the Income tax act, long term lease can be considered as akin to sale.
E) As per section 194I of the Income Tax Act 1961:
Any person, not being an individual or a Hindu undivided family, who is responsible for paying to [a resident] any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, [deduct income-tax thereon at the rate of— [(a) two per cent for the use of any machinery or plant or equipment; and
(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:]]
Explanation.—For the purposes of this section,—
[(i) “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,—
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
whether or not any or all of the above are owned by the payee;
Very often, when land is taken on lease for a long period of time, say for 30 years, 50 years or 99 years, a premium is paid for such grant of lease (such a onetime premium to acquire leasehold rights is called salami payment by several courts in the Income Tax Act), particularly also when the lease is being taken from a Government Authority, such as an Industrial Development Corporation or a Regional Development Authority. In addition to the premium, annual rent may also be charged, which at times may be a nominal amount. The payment of such a premium has been the subject matter of several controversies, under the tax laws, including the liability of the payer to deduct tax at source u/s. 194-I and his eligibility to claim deduction for such payment in computing his total income.
One of the issues is whether such a premium i.e. salami payment is really in the nature of rent for the purposes of section 194-I, and whether tax is deductible at source from such premium, or whether such premium is in the nature of a capital expenditure for the grant of lease of the land and no tax is deductible from such payment.
Chennai Tribunal in the case of Foxconn India Developers Pvt Ltd v/s ITO 53 SOT 213 held that the definition of rent under section 194 I cover the payment made for long term lease arrangements also. Therefore taxes have to be withheld under section 194 I of the Act on long term lease arrangement also.
Similar kind of judgment is also delivered by Mumbai Tribunal in the case of ITO v/s Navi Mumbai SEZ (P) Ltd., 147 ITD 261.
Above said decisions are contradicting i.e. how can salami payment on long term lease be treated as Rent but actually the said expenditure is a capital expenditure hence TDS on rent should not be deducted but on salami payment TDS @ 1% under section 194 – IA, TDS on Transfer of Certain Immovable Property other than Agricultural land can be deducted.
F) In Greater Noida Industrial Development Corporation v/s CCE (2014) 45 GST 185 = 44 taxmann.com 271 (CESTAT) (order dated 08-11-2012) a prima facie view was held (while granting stay) that long term lease is akin to sale of immovable property. It is not renting & not subject to service tax.
However in New Okhla Industrial Development Authority v/s CCE (2014) 45 GST 187 = 44 taxmann.com 287 (CESTAT) (order dated 11-12-2013), it has been held that even a long term lease of 99 years is renting & subject to service tax.
According to my view the said decision of New Okhla is against service tax act, against accounting standard, against stamp duty on Immovable property in Maharashtra (governed by the Bombay Stamps Act, 1958) & also against the Income tax Act 1961.
1) According to my view long term lease should be treated as akin to sale & therefore on salami payment i.e. onetime payment to acquire long term lease rights of land or buildings or both, no service tax should be payable because the same is falling clearly under exclusions given to the definition of service under section 65B(44) of the Finance Act, 1994. Therefore the same should be clearly outside the ambit of service tax net. Hence according to my view the said decision of New Okhla Industrial Development Authority should be reversed by the high court.
2) Similarly on salami payment i.e. onetime payment to acquire long term lease rights of land or building or both TDS on rent u/s 194 I @ 10% should not be deducted but TDS u/s 194 – IA @ 1% , TDS on transfer of Certain Immovable Property other then Agricultural Property can be deducted. Hence decisions of Chennai Tribunal of Income tax namely Foxconn India Developers Pvt Ltd & Mumbai Tribunal of Income Tax, Navi Mumbai SEZ (P) Ltd should be reversed by the high courts.
3) Now with the introduction of Goods & Service tax Act (GST Act) in near future Central taxes like Central Excise duty, Service Tax, Customs duty & also state taxes like VAT, Entertainment tax (unless it is levied by local bodies), luxury tax, taxes on lottery including betting & gambling, entry tax etc will be merged under GST Act. Hence it is the time to integrate all direct, indirect taxes & Accounting Standards in such a fashion that no single law/discipline should contradict other laws/discipline i.e. all laws should be in sync with each other. Then only litigation will reduce significantly.