Delhi HC Reserves the Judgement in the case related to applicability of of service tax on renting of immovable Property on 20.05.2011 after hearing the submission of by way of rejoinder from Sr. Counsels Mr. Abhishek Manu Singhvi, Mr. S. Ganesh and Mr. PK Sahu, Advocate (a fromer IRS officer).
The submission were made in the case of British Motor Car Company (1934) Ltd. Vs. Union of India and Others [Batch of Writ Petitions with lead case, Home Solutions Retails Ltd vs. UOI, W.P.(C) 3398/2010].
We are reproducing below the text of rejoinder submitted by Mr. PK Sahu before the Court on 20th May.
BEFORE THE HONORABLE FULL BENCH OF HIGH COURT OF DELHI
Civil Writ Petition No. 5246 of 2010
M.A. NO. 10341-10342 of 2010
IN THE MATTER OF:
British Motor Car Company (1934) Ltd. ……. Petitioner
Union of India and Others ..…… Respondents
[Batch of Writ Petitions with lead case, Home Solutions Retails Ltd vs. UOI, W.P.(C) 3398/2010]
REJOINDER SUBMISSIONS OF P.K. SAHU, ADVOCATE
(This may kindly be read along with the synopsis of submissions submitted on 03.03.2011)
The rejoinder submissions are given in response to the issues raised in the course of reply submissions of Ld. Additional Solicitor General.
A. The introduction of service tax provisions is based on Chelliah Committee Report to cover service sector which now contributes 64% to the GDP. As held by the Supreme Court in All India Federation of Tax Practitioners v. Union of India, 2007 (7) S.T.R. 625 (S.C.), the principle of equivalence is to be applied to production of goods and services.
A-1. The Supreme Court has made several observations regarding the background in which service tax came to be introduced. Much of these observations are valid from economists; point of view. It should be noted that the concept of service adopted for national income accounting by economists is different from the concepts of sale and service in law. GDP accounting is taken by valuing goods and services produced in the country. The value of goods up to the stage of their emergence is taken. Beyond that, any activity taken for transportation and marketing is considered as part of service. But under the law, the value at the point of delivery of the goods as reflected in the transaction between the seller and the buyer is taken into account for sales tax. Therefore, when the Supreme Court talked about application of principle of equivalence between excise duty and service tax, what it meant was that, in principle, both production of goods and services are to be taxed.
A-2. Strictly speaking, it cannot be said that excise duty and service tax are mutually exclusive. A job worker manufacturing goods out of raw materials supplied by the merchant is required to pay excise duty. But at the same time, he is rendering service to the merchant by converting raw materials into finished products. To avoid double taxation, service tax law provides that service tax is not payable on activities which amount to manufacture of goods. Without such specific exclusion in the law, a job worker is required to pay both excise duty and service tax. This only goes to show that the taxable events for excise duty and service tax are such that the same person may end up paying tax twice on different aspects.
B. To ascertain whether renting of immovable property is taxable service or not, the test should not be whether there is value addition or not. The concept of value added tax is different for different tax laws.
B-1. The concept of value added tax essentially pertains to tax collection machinery provided in the law by way of credit mechanism. The purpose is to avoid cascading effect, where a tax rate is levied on the entire transaction value. Under the tax credit mechanism, the tax rate is applied on the transaction value excluding taxes, and from the tax so computed, the underlying taxes are excluded by allowing credit. In this manner, only the incremental tax is paid, which is relatable to the value addition by the manufacturer/seller/service provider. The expression “value addition” would mean that something is added to something else by the taxable activity. But as far as service tax is concerned, there may be services entirely out of human labour, which does not add something to anything. The concept of value addition works differently for central excise duty, service tax and VAT. As a concept “value addition” does not effectively explain the meaning of service. Therefore, there should be some other workable definition for service.
B-2. A service is an activity, performed for the benefit of somebody else. If it is performed for a consideration at the behest of the customer, and such service has been notified as a taxable, tax is to be paid on such taxable service. Service by nature is produced and consumed simultaneously and it cannot be stored. Invariably, there is human involvement in rendering the service. Of course, the help of appliances and equipment can be taken for rendering the service. Most of the commercial transactions can be divided into sale and service. As a transaction, sale involves transfer of ownership of something for a consideration. In a service transaction, there is no transfer of ownership of anything, and the essence of the engagement is for work and labour. Even if something emerges as a tangible product while rendering the service, and it is handed over to the customer, the service provider at no stage has interest in the property of the tangible product. Sale and service are mutually incompatible concepts.
C. Section 105 of Transfer of Property Act covers leasing, which creates interests in the property for the lessee. But the taxable service of “renting of immovable property” also covers licensing, which does not create any interest in the property for the recipient of service.
C-1. The Ld. ASG is right in making a distinction between lease and license. In a leasing transaction, there is transfer of ownership of leasehold interest. Under the law, any interest in immovable property is also immovable property. The Supreme Court in Associated Hotels of India Ltd. vs. R.N. Kapoor, (1960) 1 SCR 368 : AIR 1959 SC 1262, has observed as under:
28. There is a marked distinction between a lease and a licence. Section 105 of the Transfer of Property Act defines a lease of immovable property as a transfer of a right to enjoy such property made for a certain time in consideration for a price paid or promised. Under Section 108 of the said Act, the lessee is entitled to be put in possession of the property. A lease is therefore a transfer of an interest in land. The interest transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor. Whereas Section 52 of the Indian Easements Act defines a licence thus:
“Where one person grants to another, or to a definite number of other persons, a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.”
Under the aforesaid section, if a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favor any estate or interest in the property. There is, therefore, clear distinction between the two concepts. The dividing line is clear though sometimes it becomes very thin or even blurred. At one time it was thought that the test of exclusive possession was infallible and if a person was given exclusive possession of a premises, it would conclusively establish that he was a lessee. But there was a change and the recent trend of judicial opinion is reflected in Errington v. Errington 1, wherein Lord Denning reviewing the case-law on the subject summarizes the result of his discussion thus at p. 155:
“The result of all these cases is that, although a person who is let into exclusive possession is, prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy.”
The court of appeal again in Cobb v. Lane , (1952) I All ER 1199 considered the legal position and laid down that the intention of the parties was the real test for ascertaining the character of a document. At p. 1201, Somervell, L.J. stated:
“… the solution that would seem to have been found is, as one would expect, that it must depend on the intention of the parties.”
Denning, L.J. said much to the same effect at p. 1202:
“The question in all these cases is one of intention: Did the circumstances and the conduct of the parties show that all that was intended was that the occupier should have a personal privilege with no interest in the land?”
The following propositions may, therefore, be taken as well established: (1) To ascertain whether a document creates a license or lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties — whether they intended to create a lease or a license; (3) if the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a license; and (4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negative the intention to create a lease.
C-2. The nature of lease as defined in Section 105 of the Transfer of Property Act has been summed up by the Supreme Court, in Puran Singh Sahni v. Sundari Bhagwandas Kripalani, (1991) 2 SCC 180, as under:
Lease has been defined in S. 105 of the Transfer of Property Act. The essential elements of a lease are : 1. The parties, 2. The subject matter, or immovable property, 3. The demise, or partial transfer, 4. The term, or period, 5. The consideration, or rent. The relationship of lessor and lessee is one of contract. When the agreement vests in the lessee a right of possession for a certain time it operates as a conveyance or transfer and is a lease. The Section defines a lease as a partial transfer, i.e., a transfer of a right of enjoyment for a certain time.
The features distinguishing a lease and license have been explained by the Supreme Court thus:
“There is no simple litmus test to distinguish a lease as defined in S. 105, Transfer of Property Act from a license as defined in S.52, Easements Act, but the character of the transaction turns on the operative intent of the parties. To put it pithily, if an interest in immovable property, entitling the transferors to enjoyment, is created, it is a lease; if permission to use land without right to exclusive possession is alone granted, a license is the legal result. Marginal variations to this broad statement are possible.
In determining whether an agreement creates between the parties the relationship of landlord and tenant or merely that of licensor and licensee the decisive consideration is the intention of the parties. The parties to an agreement cannot, however, turn a lease into a license merely by stating that the document is to be deemed a license or describing it as such; the relationship of the parties is determined by law on a consideration of all relevant provisions of the agreement; nor will the employment of words appropriate to a lease prevent the agreement from conferring a license only if from the whole document it appears that it was intended merely to confer a license. In the absence of any formal document the intention of the parties must be inferred from the circumstances and the conduct of the parties. A grant which confers the right to exclusive possession may operate as a license in the following circumstances which negative the intention to create a lease.
C-3. In case of leasing transaction, there is transfer property for a consideration, which is the meaning of “sale”. Though, normally we associate transfer of 100% ownership with sale transaction, there can be sale of fractional ownership of an asset. This is recognized in Transfer of Property Act. A lease as a transaction of transfer of property is envisaged in this Act. The Supreme Court in A.R. Krishna Murthy vs. CIT, Madras, (1989) 1 SCC 754 : (1989) 176 ITR 417, has held that mining lease of limited duration would be subjected to capital gains tax, as such transaction involves transfer of capital asses. It categorically rejected the contention that the expression “transfer” includes only permanent transfer of capital assets. This view is consistent with the law in a Transfer of Property Act that leasehold interest — right to enjoy the property for a particular period, after which the property would revert to the owner — is transferable property. Therefore, a transaction, wherein there is simple handing over of the property to the lessee for enjoyment during the contract period, would be in the nature of sale transaction, and there is no element of service in it.
C-4. Since, categorizing leasing as a service in section 65(105)(zzzz) is arbitrary and irrational, the provision as regards leasing should be struck down under Article 14 as ultra vires.
D. Service tax is levied on activity undertaken by the service provider. The mere act of letting the recipient of service to enjoy the immovable property is the activity which amounts to rendering of service.
D-1. Service involves “activity” undertaken by the service provider. The activity has to be performed as desired by the customer during the contract period. But in case of sale, the essence of the transaction is transfer of ownership. Once the ownership is handed over, the customer takes the benefit of the property without any active involvement of the seller. Therefore, the act of selling the property cannot be regarded as an activity known as “service”. In case of leasing of immovable property, there is transfer of leasehold interest. Once the transaction of transfer of interest in immovable property takes place, the landlord does not have to undertake any activity. It enjoys the premium or rent as a passive income. The remuneration for service rendered is always an active income. Therefore, the mere act of allowing the tenant to enjoy the immovable property cannot be regarded as service.
E. The Supreme Court in T.N. Kalyana Mandapam Assn vs. UOI, 2004 – 5 SCC – 632, has observed that mere providing the premises on temporary basis for organizing any official, social or business function would be taxable service (Para 51). At para 55, the Court has observed that making available a premises for a period of few hours for the specific purpose of use as a mandap, whether with or without other services, would be taxable. This shows that the act of making available the property for use can be service.
E-1. A reading of this ruling shows that the Supreme Court has understood the activity of a mandap keeper as service in contradistinction with transaction in transfer of property. The Supreme Court has observed as under:
51. Taxable services, therefore, could include the mere providing of premises on a temporary basis for organizing any official, social or business functions, but would also include other facilities supplied in relation thereto. No distinction from restaurants, hotels, etc. which provide limited access to property for speciﬁc purpose.
The Supreme Court has compared activities connected with services rendered in restaurants, hotels, etc. Service by a mandap keeper is not a case of earning passive income by a landlord without undertaking any activity after handing over the property. The fact that the vernacular word “mandap” has been used for describing the taxable service shows that the normal facilities associated with a mandap, where social functions are organized, are ingredients of this service.
E-2. At para 55 and 56, the Supreme Court has observed as under:
55. In fact, making available a premises for a period of a few hours for the speciﬁc purpose of being utilized as a mandap whether with or without other services would itself be a service and cannot be classiﬁed as any other kind of legal concept. It does not certainly involve transfer of movable property nor does it involve transfer of movable* property of any kind known to law either under the Transfer of Property Act or otherwise and can only be classified as a service.
* [Seems to be typographical error, should be “immovable”]
56 In fact, mandap-keepers provide a wide variety of services apart from the service of allowing temporary occupation of mandap. As per Section 65(19) of the Finance Act, 1994, mandap means any immovable property as deﬁned in Section 3 of the Transfer of Property Act, 1882 and includes any furniture, ﬁxture, light fittings and ﬂoor coverings therein let out for consideration for organising any official, social or business function. A mandap-keeper apart from proper maintenance of the mandap, also provides the necessary paraphernalia for holding such functions, apart from providing the conditions and ambience which are required by the customer such as providing the lighting arrangements, furniture and ﬁxtures, floor coverings, etc. The services provided by him cover method and manner of decorating and organizing the mandap. The mandap-keeper provides the customer with advice as to what should be the quantum and quality of the services required keeping in view the requirement of the customer, the nature of the event to be solemnized, etc. In fact the logistics of setting up, selection and maintenance is the responsibility of the mandap-keeper. The services of the mandap-keeper cannot possibly be termed as a hire-purchase agreement of a right to use goods or property. The services provided by a mandap-keeper are professional services which he alone by virtue of his experience has the wherewithal to provide. A customer goes to a mandap-keeper, say a star hotel, not merely for the food that it will provide but for the entire variety of services provided therein which result in providing the function to be solemnized with the required effect and ambience.
The observation in paragraph 55, that making available a premises for a few hours does not involve transfer of property under Transfer of Property Act, shows that it is licensing (and not leasing), which is covered under mandap keeper service. The Court has observed that the mandap keeper is required to ensure proper maintenance of the mandap, apart from providing other facilities for holding of functions. Therefore, even if a bare mandap is handed over for a few hours for organizing a function, the mandap keeper has to keep the mandap in a clean condition, so that after one function is over, it should be ready for use for another function by another party. Hence, at the minimum, the mandap keeper is to be consistently present and make available the premises in a befitting condition for the functions to be organized. Of course, rarely a mandap is given in bare condition. People go to a mandap keeper for the facilities available for organizing the function. Therefore, a mandap keeper’s service ensures active income and not passive income.
E-3. But, in case a person constructs structures of a mandap and gives it on lease for five years to another to run the place for giving mandap keeper’s service, the owner of the premises gets a rent, which is passive income. This would amount to transfer of ownership of the leasehold interest. It is a sale transaction and not a service transaction. However, the lessee has to undertake activities of an ongoing basis to run the place as a mandap and get active income for service rendered. This analysis of the Supreme Court’s observations in T.N. Kalyana Mandapam Assn case (supra) shows that it does not support the Revenue’s case that mere letting of property amounts to service. Rather, it points to the contrary that transactions under Transfer of Property Act would not be regarded as service.
F. Article 239AA shows that Delhi is union territory. The Parliament has power to legislate even on a matter covered by Entry-49 of List-II of the Seventh Schedule. Therefore, levy of service tax on renting of immovable property cannot be challenged as far as Delhi is concerned.
F-1. The Ld. ASG’s assertion is misplaced. In fact, the Parliament has already enacted a law under Entry-49 of List-II for Delhi as The Delhi Municipal Corporation Act, 1957. Section 113 of the Act empowers the Corporation to levy property tax and duty on transfer of property. Section 114 describes component of property tax as a building tax and a vacant land tax. Property tax is levied on the annual value of the building/vacant land. For the purpose of this Act, annual value was earlier determined as the gross rent on which a property may be levied from year to year. [Presently, tax is levied on the basis of unit area located in a particular colony/area.] Section 147 of the Act imposes duty on transfer of immovable property. This covers interalia sale, lease in perpetuity and contract for transfer of immovable property. Therefore, it cannot be said that the very same tax is sought to be levied as service tax for the persons residing in Delhi. In fact, similar enactments are there for all the States under Entry-49 of List-II. This only shows that the tax on renting of immovable property is already being levied under this Entry, and it is not permissible to levy such tax under Entry-97 of List-I.
P.K. Sahu, Advocate