Service Tax on Renting of Immovable Property – Section 66E(A)

Dr. Sanjiv Agarwal

Renting has been defined w.e.f. 1.7.2012 in section 65B(41) as ‘‘allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property’.

Renting covers all types of arrangements in relation to immovable property with or without its transfer of possession or control and whether wholly or partly. It would cover/include –

(i) allowing

(ii) permitting

(iii) granting access/entry/occupation

(iv) use of facility

(v) letting

(vi) leasing

(vii) licensing, or

(viii) other similar arrangements

(such as right to use, sub-lease, space sharing etc.)

Service Tax Rules, 1994 as amended by Notification No. 36/2012-ST, dated 20-6-2012 defines ‘renting of immovable property’ in rules 2(f). It means any service provided or agreed to be provided by renting or immovable property or any other service in relation to such renting.

The term ‘immovable property’ has not been defined. Accordingly, immovable property for this purpose shall include building and part of building, and land appurtenant thereto, land incidental to the use of building or its part, common or shared areas and facilities relating thereto and in respect of buildings in a complex or industrial estate or any other building, all common areas and facilities within such complex or estate.

Under section 2(6) of the Registration Act, immovable property includes any land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit arising out of land, and things attached to earth or permanently fastened to anything which is attached to earth, but does not include standing timber, growing crops or grass.

As per section 3(26) of General Clauses Act, ‘immovable property’ shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to earth.

Any machinery attached or fastened to or embedded to earth becomes part of immovable property [see Official Liquidator v. Srikrishina Dev (1959) 29 comp cases 476 (Allahabad) ; Kulwant Singh v. Makhan Singh (2003) AIR 142 (P & H)]. However, if a machine is fixed by bolts, it does not become a immovable property but remain ‘goods’. Similarly, furniture fixed on ground by bolts, screw etc. are goods i.e., not an immovable property.

Dictionary meanings of renting etc.

Letting out is allowing some one to have the use of a room or property in return for payment; to demise or lease a property. Renting is a consideration paid for use or received for allowing use or occupation of property. It is a compensation for use of any property, land, building, equipment etc; a regular payment to landlord or owner for use of property. Lease is a contract by which one party lets land, property, services etc to another for a specified time, in return for payment. It is an agreement whereby the lessor passes to the lessee the right to use the asset for an agreed period for consideration of rent.

According to Oxford Dictionary, leasing is a legal agreement that allows you to use a building, a piece of equipment or some land for a period of time, usually in return for rent. According to Wikipedia, leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.

According to Advance Law Lexicon, a lease of immovable property is a transfer of right to enjoy such property, made for certain time, express or implied or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfers on such terms. A lease is an instrument in proper form by which the conditions of a contract of letting are finally ascertained, and by which it is intended to vest the right of exclusive possession in the tenant, either at once or at a future date, and which takes effect from the date fixed for the commencement of the term without the necessity of actual entry by the tenant. (See Law Property Act, 1925)

License is a permission to do a particular thing, to exercise a certain privilege or to carry on a particular business or to pursue a certain occupation; to permit from an authority to own, use or do something.

According to Oxford Dictionary, licensing is to authorize the use, performance, or release of (something) or permit (someone) to do something. According to Wikipedia, licensing refers to that permission as well as to the document recording that permission. A license may be granted by a party (licensor) to another party (licensee) as an element of an agreement between those parties. A shorthand definition of a license is an authorization (by the licensor) to use the licensed material (by the licensee).

In particular a license may be issued by authorities, to allow an activity that would otherwise be forbidden. It may require paying a fee and/or proving a capability. The requirement may also serve to keep the authorities informed on a type of activity, and to give them the opportunity to set conditions and limitations.

According to Advanced Law Lexicon, a lease is an instrument in proper form by which the condition of a contract of letting are finally ascertained, and by which it is intended to vest the right of exclusive possession in the tenant, either at once or at a future date, and which takes effect from the date fixed for the commencement of the term without the necessity of actual entry by the tenant.

The immovable property could be –

(i) factories

(ii) office buildings

(iii) warehouses

(iv) theatres

(v) exhibition halls, and

(vi) multiple use buildings.

(vii) commercial markets

(viii) shops/shopping centre

(ix) hotel, guest houses etc

(x) community centre etc

Renting of certain kinds of property is specified in the negative list. These are –

• renting of vacant land, with or without a structure incidental to its use, relating to agriculture.
•  renting of residential dwelling for use as residence
•  renting out of any property by Reserve Bank of India
• renting out of any property by a Government or a local authority to all non-business entity.

Renting of all other immovable properties would be taxable unless covered by an exemption. These are –

• Threshold level exemption up to Rs. 10 lakh.
• Renting of precincts of a religious place meant for general public.
• Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent.
• Renting to an exempt day or equivalent.

It may be noted that as per definition, allowing or permitting the usage of immovable property without transferring possession of such property is also renting of immovable property. For example –

Nature of Activity	Taxability
Renting of property to educational body	Exempted if provided to an educational institutions for the purpose of education which from the levy of Service Tax; to others will be taxable.
Renting of vacant land for animal husbandry or floriculture	Not chargeable to Service Tax as it is covered in the negative list entry relating to agriculture
Permitting use of immovable property for placing vending / dispensing machines	Chargeable to Service Tax as permitting usage of space is covered in the definition of renting
Allowing erection of communication tower on a building for consideration	Chargeable to Service Tax as permitting usage of space is covered in the definition of renting
Renting of land or building for entertainment or sports	Chargeable to Service Tax as there is no specific exemption
Renting of theatres by owners to film distributors (including under a profit-sharing arrangement)	Chargeable to Service Tax as the arrangement amounts to renting of immovable property.

Halls, rooms etc. let out by hotels/restaurants for a consideration for organizing social, official or business or cultural functions are covered within the scope of renting of immovable property and would be taxable if other elements of taxability are present.

The definition is a comprehensive definition applicable to both commercial and non commercial (residential) use, unlike earlier definition in section 65 (90a), prior to Finance Act, 2012. The erstwhile definition of ‘renting of immovable property’ reads as under –

“renting of immovable property” includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include —

(i) renting of immovable property by a religious body or to a religious body; or

(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;

Explanation 1— For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings;

Explanation 2.— For the removal of doubts, it is hereby declared that for the purposes of this clause “renting of immovable property” includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property;

Earlier, immovable properties excluded from the scope of this service were:

• residential properties
•  residential accommodation such as hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities
• vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes
• vacant land, whether or not having facilities clearly incidental to the use of such vacant land
• land used for educational, sports, circus, entertainment and parking purposes

Similarly, renting of immovable property in the following cases was also excluded from the scope of this taxable service, namely:—

(i) renting of immovable property by a religious body,

(ii) renting of immovable property to a religious body,

(iii) renting of immovable property to an educational body, other than commercial training or coaching centre.

Use of immovable property is allowed for placing vending/dispensing machines in malls and other commercial premises and erection of communication towers on buildings. In such cases, there may or may not be transfer of right of possession or control of the immovable property in favour of the person using such property.

Renting of immovable property includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce. Transactions mentioned above get covered under the category of other similar arrangement, if not covered under other categories. Renting of immovable property service includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the immovable property.

In W.M. Van Tiem v. Staatssecretaris Van Financien (2012) 37 STT 31 (ECJ), it was held that granting of building rights in respect of immovable property amounted to its exploration, thereby making assessee a taxable person. The grant of rights in respect of building by authorizing that person to use the immovable property for a specified period in return for a consideration, must be regarded as an economic activity involving the exploration of tangible property for the purpose of obtaining income therefrom.

Place of provision of service for renting of immovable property

In respect of a service relating to immovable property the place of provision of service is the location of immovable property. If the immovable property is located outside taxable territory then it becomes a service provided outside the taxable territory even if the property owners are located in the taxable territory and would hence not be taxable.