Constitutional Validity of Service Tax on Renting of immovable property

[C.A. Surender Gupta]

The concept of Service Tax was introduced first time in 1994, since than the entries into service tax law have undergone sea change and subject to judicial scrutiny from time to time.

Here I try to discuss the constitutional validity of service tax on renting of immovable property specifically, the impact after the retrospective changes proposed by the Finance Bill 2010-2011 [Budget 2010-2011]. Without making this article heavy and to be more specific and to focus on the related issue, I tried to limit my discussion on issue of constitutional validity to the cases decided in respect of entries within service tax only.

Let me start with the decision of the Honorable High Court of Delhi in the matter of HOME SOLUTION RETAIL INDIA LTD. Versus UOI & ORS. Reported in [2009 -TMI - 33136 - DELHI HIGH COURT]

This issue is directly related to service tax on renting of immovable property in which the petitioner has challenged the constitutional validity of the service tax on renting of immovable property. It is strange to note that in the writ petition, the petitioner has not challenged the constitutional validity of the entry 65(105)(zzzz) as such but has challenged the notification as well as scope of entry. The question raised by the writ petitioners is as under:

"In this batch of writ petitions the legality, validity and vires of notification no. 24/2007 dated 22/05/2007 and circular no. 98/1/2008-ST dated 04/01/2008 issued by the Secretary, Ministry of Finance, Department of Revenue, Government of India, New Delhi is challenged. It is alleged that by virtue of the said notification and circular a completely erroneous interpretation is placed on section 65 (90a) and section 65 (105) (zzzz) of the Finance Act, 1994 as amended by the Finance Act, 2007. It is further alleged that because of this incorrect interpretation, service tax is sought to be levied on the renting of immovable property as opposed to service tax on a service provided "in relation to the renting of immovable property".

2. In essence, the petitioners have raised the question as to whether the Finance Act, 1994 (hereinafter referred to as the said Act) envisages the levy of service tax on letting out/renting out of immovable property per se? According to the petitioners, who are either landlords or tenants in respect of leased premises, no such tax is envisaged under the said act. Consequently, the said notification dated 22/05/2007 and the said circular dated 04/01/2008 are sought to be set aside as being ultra vires the said act."

Why the framers of the writ petitions have challenged the notification and circulars only and not the basic entry as such:

I have heard from various sources and consultants that Honorable High Court of Delhi has avoided to deliver the judgment on the issue of constitutional validity of the new levy of service tax on renting of immovable property, but it has decided the issue and scope of entry "in relation to" in the writ petition.

I do not agree with those comments, if the opening paragraph of the decision dated 18-4-2009 is read carefully, one can find that the levy of service tax on renting as such was never been challenged. So how can one find fault in the decision of the honourable high court?

Most probably the framers of the writ petition knew that the challenge of levy of service tax on renting in the writ petition on the issue of constitutional validity itself is not proper and it is better to challenge the levy on the scope after reading the term "in relation to".

The net impact of the retrospective change and writ petition as decided by the Delhi High Court can be summarized as under:

The order of Delhi High Court dated 18-4-2009 become redundant and fresh writ petitions on the issue of constitutional validity may be initiated with.

Chance to win the case on the issue of constitutional validity

There are two important decision of the honorable Supreme Court which may be kept in mind with reference to present levy that in these two decisions of the Apex Court the main contention of the petitioner was that the issue is related to state and only stat can levy tax on the subject matter and central government has no power to levy service tax on the subject matter. But, the honorable Apex Court did not find merit in the contention of the petitioner and upheld the constitutional validity of levy of service tax.

In the matter of TAMIL NADU KALYANA MANDAPAM ASSN. versus UNION OF INDIA reported in 2005 -TMI - 135 - SUPREME COURT OF INDIA, honorable Apex Court upheld the levy of service on Madap Keeper service. In this case the honorable Apex Court has discussed the scope of the term "in relation to" in depth. The relevant  paragraphs of the judgment are being reproduced as under:

"46.  The legislative competence of Parliament also does not depend upon whether in fact any services are made available by the Mandap-Keepers within the definition of taxable service contained in the Finance Act. Whether in the given case taxable services are rendered or not is a matter of interpretation of the statute and for adjudication under the provisions of the statute and does not affect the vires of the legislation and/or the legislative competence of Parliament. In fact, a wide range of services are included in the definition of taxable services as far as Mandap-Keepers are concerned. The said definition includes services provided "in relation to use of Mandap in any manner" and includes "the facilities provided to the client in relation to such use" and also the services "rendered as a caterer". The phrase "in relation to" has been construed by this Court to be of the widest amplitude. In M/s. Doypack Systems Pvt. Ltd. v. Union of India and Others - 1988 (36) E.L.T. 201 (S.C.) = (1988) 2 SCC 299 at 302, this Court observed as under :

"The expressions 'pertaining to', 'in relation to' and 'arising out of', used in the deeming provision, are used in the expansive sense. The expression 'arising out of' has been used in the sense that it comprises purchase of shares and lands from income arising out of the Kanpur Undertaking. The words "pertaining to" and "in relation to" have the same wide meaning and have been used interchangeably for among other reasons, which may include avoidance of repetition of the same phrase in the same clause or sentence, a method followed in good drafting. The word 'pertain' is synonymous with the word 'relate'. The term 'relate' is also defined as meaning to bring into association or connection with. The expression 'in relation to' (so also 'pertaining to'), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might have both a direct significance as well as an indirect significance depending on the context."

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58.  The impugned Act was challenged on the ground that it infringed on the State's power to levy tax on luxury vide Entry 62 of the State List.

59.  It would be appropriate to quote Mr. Justice Venkatachelliah who ruled that "the law with respect to a subject might incidentally affect another subject in some way, but that is not the same thing as the law being on the latter subject. There might be overlapping, but the overlapping must be in law. The transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detect from the distinctiveness of the aspects. The consequences and facts of the legislation are not the same thing as legislative subject matter."

60.  For the foregoing reasons, the appellants have not made out any case either on facts or on law and there is no merit in this appeal. We, therefore, have no hesitation in dismissing this appeal by confirming the judgment of the High Court for our own reasons recorded in this judgment. No costs"

In the matter of All India Federation of Tax Practitioners & Ors Versus Union of India & Ors reported in 2007 -TMI - 1556 - Supreme Court, honorable Apex Court upheld the levy of service tax on professional services.  The relevant extract of the case is being reproduced as under:

"…….n the present case, we are concerned with the legislative competence of Parliament to legislate in respect of service tax under Entry 97/92C of List I. In the present case, we are concerned with the period covered by the Finance Acts of 1994 and 1998. However, learned counsel for the appellants has relied upon para 82 of the said judgment in the case of Bharat Sanchar Nigam Ltd. (supra) in which it is observed that the residuary powers of Parliament under Entry 97 of List I cannot swamp away the legislative Entries in the State List. Entry 54, List II read with Article 366(29-A), therefore, cannot be whittle down by referring to the residuary provision. As stated above, we are concerned with the application of the above principles. In the present case, as stated above, we are concerned with the Constitutional status of the levy. As stated above, we have to examine the nature of the levy. We have done so and we have come to the conclusion that the word profession in Entry 60 List II cannot be made synonymous with the word service and, therefore, service tax would fall under the residuary Entry 97 read with Entry 92C after 2003. This position is also made clear by Article 268A, inserted by the Constitution (Eighty-eighth Amendment) Act, 2003."

After analyzing the above decision, it appears that there are thin chances in winning the case against the levy. But, it is also true that, honorable Supreme Court of India has the final power to upheld or setaside the levy and yet to decide the matter. Therefore a ray of hope is there and one can approach the Supreme Court for final decision. But, a question of million is there if the assessee chose to file another writ petition or SLPs on the issue of constitutional validity, whether government of India would accept the decision against the levy in case Apex Court found the levy as unconstitutional?

To find the answer to this complexity, I wish to travel to the decision of Honorable Supreme Court in the matter of  LAGHU UDYOG BHARATI versus UNION OF INDIA reported in 2005 -TMI - 18 - SUPREME COURT OF INDIA, in which the provisions relating to levy and collection of service tax from the recipient of services was decaled as ulta-virus of the act. After the decision of the Apex Court dated 27-7-1999, our legislature has amended the law with retrospective effect and validated the same also as is done in case of renting in the present scenario.

Therefore, there is no doubt in my mind that government of India would not leave any stone unturned to ensure that levy and collection of service tax renting of immovable property with retrospective effect. It may be an academic exercise to fight the issue in the appropriate court but one must understand that nobody can ignore the legislative intention.

Conclusion:

A careful reading and interpretation of the decisions of the Apex Court shows that there is wide difference in the scope of entries in the State List and Union List of the Seventh Schedule of Constitution of India.  Despite the above decisions of the Apex Court, and to remove the ambiguity in the entries, the legislature has made the amendment with retrospective effect. Therefore, it is likely that the entire community who engaged in the business of renting would not find any escape route and would start paying service tax on the renting of immovable property. It is there decision of spend huge money and time in litigation or to start paying service tax obeying the intention of the legislature.