Friday, June 5, 2009

Implication of High Court Order on Renting of Immovable Property Services !!!

Introduction:
Service Tax as everyone knows is by far the most evolving taxation law in India today. This evolution sometimes is good as changes required by trade can be included at the right stages without creating much problem for the end user. But an unnecessary by - product of this evolution process is that it gives a lot of chance to the judiciary to interpret the law in terms that the executive may not have imagined.
One such instance of this constant evolution has arisen due to the order of the Honourable Delhi High Court in case of Home Solution Retail India Ltd. vs. Union of India [2009] 20 STT 129 (DELHI) dated 18.04.2009 wherein Justice Shri Baddar Durrez Ahmed has passed an order thereby nullifying the whole tariff entry of section 65 (105) (zzzz) and 65 (90a) of the Finance Act, 1994 as far as Renting of Immovable Property Services are concerned.
This article makes a humble attempt to de-mystify the above order and explain its practical and legal aspect for the members at large.

Legislative Background:
Finance Act, 2007 introduced a new tariff head wide section 65 (105) (zzzz) which was given assent by the President on 1.06.2007. This section introduced a new service category popularly known as the Renting of Immovable Property Services.
This section authorised levy of service tax on Services in relation to Renting of Immovable Property for use in the course of furtherance of business or commerce.
Consequently notification no. 24/2007 dated 22.05.2007 was issued saying that,
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of renting of immovable property, referred to in sub-clause (zzzz) of clause (105) of section 65 of the Finance Act, from so much of the service tax leviable thereon as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies
There was a vast difference between the language of section 65 (105) (zzzz) where services in relation to renting were made taxable whereas in this notification the service OF renting were perceived to be made taxable. This issue of difference in language was also raised in the appeal filed by Home Solutions in the Delhi High Court.
Many sections were hit hard by this new tax and they protested by filing Special Civil Applications in various High Courts around India saying that the section itself was un-constitutional and therefore needs to be quashed as void-ab-initio. Many High Courts responded by giving interim stay orders restraining the Service Tax authorities from collecting service tax from the appellants. Gujarat High Court has also given stay orders in the following cases:
Iskrupa Mall Management Company Pvt. Ltd. Vs Union of India - SCA No. 5269 of 2008
where the honourable court has said;
“Notice as to interim relief returnable on 22nd April 2008. Notice to the learned Attorney General returnable on the same day, viz. 22nd April 2008. Till the returnable date, the respondents shall not make any coercive recovery of the Service Tax in respect of the amount of licence fees for the use of the immovable property in question”
Same interim relief is also granted by the Gujarat High Court in case of
1. Fun Multiplex Pvt. Ltd. vs Union of India - SCA No. 9935 of 2008
2. Saffron Traders vs Union of India - SCA No. 8176 to 8179 of 2008

Certain other High Courts like the Bombay High Court, Andhra-Pradesh High Court and Madras High Courts to my knowledge have also given interim reliefs to the petitioners.

Legal Importance of Delhi High Court Order:
I believe that most of the above cases if not all are pending with the Apex court and it has not passed any order till now on the impugned subject.
Meanwhile the on 18.04.2009 the Honourable Delhi Court has now passed a Final order on the issue in the case of Home Solution Retail India Ltd. v. Union of India [2009] 20 STT 129 (DELHI).
The petitioner had challenged the levy of service tax on renting services on 2 counts:
1. The section authorised taxing ONLY services IN RELATION TO renting of immovable properties and not the service of renting itself.
Alternate Plea
2. The levy was unconstitutional and hence void-ab-initio
The High Court has discussed the issue at length and come to a conclusion that the bare section which goes like this,
65 (105) “(zzzz) 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.
seeks to tax only services which are provided or performed in relation to renting of immovable property like providing air-conditioning or infrastructural support, security etc but the Renting itself would not be a service.
Para 35 and 36 of the Order says as follows,
“35. From this analysis, it is clear that we have to understand as to whether renting of immovable property for use in the course or furtherance of business or commerce by itself is a service. There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within section 65(105)(zzzz).
36. In view of the foregoing discussion, we hold that section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent that they authorize the levy of service tax on renting of immovable property per se, they are set aside.”
On the alternate plea the Honourable court has said,
“37. Before parting with this batch of cases, we would like to observe that we have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above.”

Following points come out from the order of the Delhi High court:
a. Renting of immovable property per se is not a taxable service in terms of section 65 (105) (zzzz).
b. Services in relation to renting of immovable property are only taxable.
c. Notification 24/2007 dated 22.05.2007 is null and void.
d. Section 65 (105) (zzzz) is not unconstitutional.

Practical difficulties in implementing the High Court Order:
The Delhi High Court has come out with an order saying that Renting of immovable property is not a taxable service at all, however it would be pertinent to note that the High Court has in-effect rejected the alternate plea of the petitioners that the levy is unconstitutional.
There is a lot of excitement in the minds of the tenants and they are taking decisions solely on the basis of the Delhi High Court whereby they have stopped payment of Service Tax to their respective landlords. The landlords are in a catch 22 situation and are unable to decide which course to take as no one knows what future beholds for them in terms of the Supreme Court Order. Otherwise also the Delhi High Court order raises many practical questions for the landlord:
a. Should the landlord stop paying service tax to the exchequer.
b. Should he stop collecting tax from his tenants
c. If he keeps collecting and paying the tax will he be able to get refund of it if the Apex Court rules in favour of the assesses.
There are no easy answers to the above questions, hence the controversy.
The Central Government has already filed an appeal in the Supreme Court wide Special Leave Petition (Civil) 13850 of 2009. Thus the ball has been set rolling. It may take 2 or 3 years for the Supreme Court to give its final order – until that comes the above questions will keep haunting.
Meanwhile the Government also has chance to amend the sections retrospectively as was done in case of GTA Services. For example, in the case of GTA, the Supreme Court in the case of Laghu Udyog Bharati v. Union of India [2006] 4 STT 322 has held that recovery of service tax from the service recipient is ultra vires of the law. Thereafter, the Central Government brought retrospective amendment to validate the levy and deny refund claim by the Finance Act, 2000 and the Finance Act, 2003. The Finance Minister if provoked will not miss the chance once again. What does this leave the landlord with.

Conclusion:
Following practical solutions can be proposed:
1. Collect the tax from the tenant and pay the same to the exchequer “under protest” with a written undertaking to the tenant that in case the supreme court passes an order in favour of the assessee than the landlord shall apply for refund under section 11B of the Central Excise Act r.w.s. 83 of the Finance Act, 1994 and once the refund is granted the same will be refunded back to the tenant. I propose to pay the tax under protest because refunds of taxes paid under protest do not get time barred. In my view doctrine of unjust enrichment will not apply in this case because the tax is collected expressly under an undertaking to refund the same if refund is granted.
2. Stop collection of tax from tenant and payment thereof to the government and take a written undertaking from the tenant that in case the Supreme court passes an order in favour of the Central Government or if the government changes the law retrospectively the tenant will indemnify the amount of tax as well as interest to the landlord.
The first option will save the interest cost as well as the hassle of collection of taxes later from the tenant which in my view is a bigger problem.
Above solutions if accepted will give rise to newer problems for tenants who are taking credit of the service tax so paid on rent. If the tax itself is indemnified for refund – how can one take credit of the same, and if the tax itself is not paid as per solution 2 than there would be no question of credit. Secondly if the tax becomes payable at a later date – question will again arise as to how to take credit of tax at a future date when the related expense was paid earlier. It would also raise the issue of tenants existence when the final order is passed. In todays fast world tenants keep changing addresses and once the tenant leaves the place – it would be hard to collect tax from him on the basis of the written undertaking alone.
Another solutions that comes to mind is that an Escrow account can be created with an express standing instruction to the bank that unless and until all stake holders say, the money will not be released to any single or multiple entity except to the Central Government. The landlord will amend the lease deed and specify that service tax will henceforth be deposited in this escrow account and the same will not be paid to the Central Government till the Supreme Court order comes or a retrospective amendment is made.
I leave the readers to decide how practical this idea is and whether the same can be implemented successfully.
Nitesh Jain
N.J. Jain & Associates
Chartered Accountants
www.niteshjain.co.in
Email ID - nitesh@niteshjain.co.in