2011 (8) TMI 58 - HC - Service Tax

Service Tax on Renting of Property Constitutionally Valid; Retrospective Application Upheld

Retailers Association of India (RAI). & Others Versus Union of India & Ors.

The Court upheld the constitutional validity of the service tax on renting of immovable property, affirming Parliament's legislative competence under ... Service tax on Renting of immovable property - Constitutional validity – Legislative changes – retrospective effect – Held that: - The assumption by a legislative body that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the Court as being so manifestly absurd or perverse as to lead to an inference that Parliament had treated as a service, an item which in no rational sense could be regarded as involving service. - There is no violation set up of any provision in Part III of the Constitution – Levy of service tax is constitutionally valid on Renting of immovable property.With Regard to Retrospective amendment – violation of Article 14 of constitution – Held that: - The provision was given retrospective effect so as to cure the deficiency which was found upon interpretation by the Delhi High Court. The notes on clauses accompanying the introduction of the Finance Bill of 2010 would indicate that the amendment has been brought about to validate the provision.Whether the case was involving substantial question of law – Held that: - the scope and ambit of Entry 49 of List II of the Seventh Schedule and of the residuary power of legislation of Parliament have been considered by several judgments of the Constitution Bench of the Supreme Court and this Court has followed the law as expounded therein. - the case does not involve a substantial question of law as to the interpretation of the Constitution. – Decided in favour of revenue. Issues Involved:1. Imposition of service tax on renting of immovable property.2. Legislative competence of Parliament to impose such tax.3. Retrospective application of the service tax.Detailed Analysis:1. Imposition of Service Tax on Renting of Immovable Property:The Finance Act of 1994 introduced a service tax, defining taxable services under Section 65 and charging them under Section 66. Subclause (zzzz) of Section 65(105) initially defined taxable service as any service provided 'in relation to renting of immovable property for use in the course or furtherance of business or commerce.' The Delhi High Court in Home Solution Retail India Ltd. vs. Union of India held that service tax could not be levied on renting of immovable property as it did not constitute a service. Following this, the Finance Act, 2010 amended subclause (zzzz) to include 'by renting of immovable property or any other service in relation to such renting' to clarify that renting itself is a taxable service.2. Legislative Competence of Parliament:The Petitioners challenged the constitutional validity of the service tax on renting of immovable property, arguing it fell under Entry 49 of List II (State List) as a tax on lands and buildings. The Court, however, upheld the legislative competence of Parliament under Entry 97 of List I (residuary powers). The Court referred to several Supreme Court decisions, including Tamil Nadu Kalyana Mandapam Association vs. Union of India, Gujarat Ambuja Cement Ltd. vs. Union of India, and All India Federation of Tax Practitioners vs. Union of India, which affirmed that service tax falls within Parliament's residuary powers. The Court emphasized that a tax on land and buildings must be directly imposed on the land or buildings, whereas service tax on renting is a tax on the service of renting, not on the property itself.3. Retrospective Application of the Service Tax:The Petitioners also contested the retrospective application of the amended provision from 1 June 2007. The Court upheld the retrospective amendment, noting that Parliament has plenary power to legislate retrospectively. The amendment aimed to clarify the original intent of Parliament and validate the collection of service tax on renting of immovable property, which had already resulted in substantial revenue collections. The Court cited the Supreme Court's decisions in Bakhtawar Trust v. M.D. Narayan and other cases, affirming that retrospective amendments are permissible to cure deficiencies identified by judicial interpretation.Conclusion:The Court dismissed the petitions, upholding the constitutional validity of the service tax on renting of immovable property. It ruled that the tax is within Parliament's legislative competence under its residuary powers and that the retrospective amendment was valid. The Court also declined to certify the case as involving a substantial question of law under Article 132 of the Constitution, as the issues had been settled by previous Supreme Court rulings. The interim orders were extended for four weeks to allow the Petitioners to seek appellate remedies.