On April 18, 2009, the Divisional Chamber of the Delhi High Court, composed of Mr. Justice Badar Durrez Ahmed and Mr. Justice Rajiv Shakdher, admitted twenty-six written appeals challenging the levying of the service tax on the commercial rentals. The summary of the dispute, the arguments raised by both parties and the observations of the Delhi High Court are provided below.
I. Background:
“Real estate leasing service” was introduced by the Finance Act 2007, which amends the Finance Act 1994 (collectively and effectively “the Act”), whereby the definition of “taxable service” included, as of June 1, 2007:
“service provided or to be provided to any person by any other person in connection with the rental of real property for use in the course or promotion of business or commerce”
Subsequently, the Secretary, Ministry of Finance, Department of Revenue, Government of India issued a Notice No. 24/2007 dated May 22, 2007 (“Notice”) and a Circular No.98/1/2008-ST dated May 4, 2008 (“Circular”) by which an interpretation of Section 65(90a) and 65(105)(zzzz) of the Law was introduced to levy the service tax “on the rental of real estate” rather than on services rendered “in connection with the lease of real estate.”
The amendment, read with the Notice and Circular in force, brought the renting, leasing, leasing, licensing or other similar arrangements of real property, for use in the course or promotion of business and commerce, within the net of the tax. about services. This new levy severely affected business models across India, as most rental agreements did not even stipulate it in advance.
II. DISPUTE:
Several tenants/licensees/tenants questioned the legality, validity and vires of the Notice and the Circular on the interpretation of Section 65(90a) and 65(105)(zzzz) of the Act.
The main question raised was “Does the Finance Act 1994 provide for the imposition of a service tax on the rental/rental of real estate per se?”
third ARGUMENTS OF THE PETITIONERS [TENANTS/LICENSEES/LESSEES]
The petitioners noted that the Notice established the taxed service as a “taxed real estate leasing service.” Similarly, the Circular, while clarifying with respect to commercial and industrial construction service, purportedly clarified that the “right to use real property is subject to service tax by virtue of real property lease service.”
The petitioners argued that:
– under the provisions of the Act, the service tax applies only to a service that is provided or is to be provided to any person by any other person “in connection with” the rental of real property for use in the business or trade course or development;
– in the Law, the reference is not to the “taxable service of lease of real estate” but to the taxable service “in connection with” the lease of real estate;
– under the Notice and the Circular, a misinterpretation of the relevant section of the Law is being given, and it is intended to levy the service tax “on the lease of real estate” instead of the service tax on the services provided “in connection with rental of real estate”;
– the declarations of the Union of India given in the Notice and Circular go beyond the provisions of the Act;
– the rental of real estate as such cannot be considered a service on which a service tax can be charged under the provisions of the Law;
– the challenged Notice and Circular stem from the inconsistent assumption that real estate leasing is itself a service;
– the service tax is a value added tax and can only be levied on value added provided by a service provider;
– property-based services are different from performance-based services. In the case of property-based services, the value added in terms of improvement/improvement of the property may be subject to tax. However, in the pure rental regime, there can be no service tax in the absence of any improvement/improvement.
Petitioners also adopted the alternative claim that “if such a tax is held to be contemplated, the provisions of Section 65(90a), 65(105)(zzzz) and Section 66 of the Act to the extent they relate with the imposition of the service tax on the rental of immovable property would be equivalent to a tax on land and, therefore, would fall outside the legislative competence of Parliament insofar as said subject is covered by Entry 49 List II of the Constitution of India and would fall within the exclusive domain of the State Legislative Assembly, so that provision would have to be declared unconstitutional.
IV. ARGUMENTS OF THE DEFENDANTS [UNION OF INDIA]
The Government maintained that:
– the user of the land/building itself is a service;
– the transfer of the right to use the property for commercial or business purposes is in itself a service;
– the mere rental of real estate is in itself a service;
– the mere fact of providing premises on a temporary basis for the organization of a financial, social or business function would also include other facilities in connection therewith and would therefore constitute a taxed service; Y
– the term “in connection with the leasing of immovable property” has a broad scope and also covers the act of leasing immovable property.
V. DECISION OF THE COURT
The Court held that:
– any service related to the rental of real estate would be subject to service tax under the Act;
– the rental of the real estate by itself does not constitute a service;
– the service tax is a value added tax and therefore taxes the added value provided by some service provider;
– the leasing of real property for use in the course or promotion of business or commerce does not imply any added value and, therefore, cannot be considered a service;
– the interpretations made by the Notice and the Circular on the provisions of the Law are not correct;
– The Notification and the Circular are repealed, to the extent that they authorize the application of the service tax on the leasing of real estate itself;
– the petitioners’ alternative claim regarding the legislative competence of Parliament in the context of Entry 49 Schedule II of the Constitution of India was not examined due to the opinion taken on the petitioners’ main claim.
As a result, no service tax is payable on the commercial rental of real estate. It is up to the Government to go to the Supreme Court of India within 90 days from the date of the judgement, if it wants to reverse the judgement.