2011 (9) TMI 46 - HC - Service Tax

Service tax on commercial letting of immovable property upheld as activity-based levy under Entry 97; Entry 49 not attracted

HOME SOLUTIONS RETAILS (INDIA) LTD. Versus UNION OF INDIA & ORS

HC upheld constitutional validity of the service tax provisions taxing letting/leasing of immovable property, ruling the levy targets an activity ... Constitutional validity of Section 65(105)(zzzz) of the Finance Act, 1995, and Section 66 as amended by the Finance Act, 2010 - Service Tax on renting of immovable property with retrospective effect from 1st June 2007 – Held that: - The imposition of service tax under Section 65(105)(zzzz) read with Section 66 is not a tax on land and building which is under Entry 49 of List II. What is being taxed is an activity, and the activity denotes the letting or leasing with a purpose, and the purpose is fundamentally for commercial or business purpose and its furtherance. - Once there is a value addition and the element of service is involved, in conceptual essentiality, service tax gets attracted and the impost gets out of the purview of Entry 49 of List II of the Seventh Schedule of the Constitution and falls under the residuary entry, that is, Entry 97 of List I. - the decision in the first Home Solution case [2009 (4) TMI 14 - DELHI HIGH COURT] does not lay down the law correctly and therefore overruled. Amendment with retrospective effect – held that: - It is worth noting that the Parliament, keeping in view the first Home Solution case, substituted sub-clause (zzzz) in the present incarnation and gave retrospective effect to cure the deficiency. It is well settled in law that it is open to the legislature to pass a legislation retrospectively and remove the base on which a judgment is delivered. Issues Involved:1. Constitutional validity of Section 65(105)(zzzz) of the Finance Act, 1995, and Section 66 as amended by the Finance Act, 2010.2. Legislative competence of the Parliament to impose service tax on renting of immovable property.3. Retrospective applicability of the amended provisions.4. Whether renting of immovable property constitutes a service.Issue-wise Analysis:1. Constitutional Validity of Section 65(105)(zzzz) and Section 66:The petitioners challenged the constitutional validity of Section 65(105)(zzzz) of the Finance Act, 1995, and Section 66 as amended by the Finance Act, 2010, arguing that these provisions imposed service tax on renting of immovable property, which they contended was a tax on land and buildings under Entry 49 of List II of the Seventh Schedule of the Constitution. The court, however, held that the provisions were intra vires the Constitution. The court emphasized that the service tax was on the activity of renting for commercial purposes, which involved value addition and thus constituted a service.2. Legislative Competence of the Parliament:The petitioners argued that the Parliament lacked the authority to impose service tax on renting of immovable property, as it fell under Entry 49 of List II, which pertains to taxes on lands and buildings. The court rejected this argument, stating that the tax was on the activity of renting for business or commercial purposes, which involved value addition and thus fell under the residuary power of the Parliament under Entry 97 of List I. The court cited various precedents to support its conclusion that the Parliament had the legislative competence to impose such a tax.3. Retrospective Applicability of the Amended Provisions:The petitioners contended that the retrospective application of the amended provisions was unconstitutional. The court held that the Parliament had the power to amend the law retrospectively to cure deficiencies identified by judicial decisions. The court noted that the retrospective amendment was intended to clarify the legislative intent and validate actions taken under the previous provisions. The court cited several precedents to support its conclusion that retrospective amendments were constitutionally permissible.4. Whether Renting of Immovable Property Constitutes a Service:The petitioners argued that renting of immovable property did not constitute a service, as there was no value addition involved. The court disagreed, stating that renting for commercial purposes involved value addition due to factors such as location, accessibility, and other advantages. The court noted that the economic concept of rent included elements of service, and thus, renting of immovable property for business purposes constituted a taxable service. The court overruled the earlier decision in the first Home Solution case, which had held that renting did not involve value addition.Conclusion:The court concluded that the provisions of Section 65(105)(zzzz) and Section 66 of the Finance Act, 1995, as amended by the Finance Act, 2010, were constitutionally valid. The court held that the Parliament had the legislative competence to impose service tax on renting of immovable property for commercial purposes. The court also upheld the retrospective applicability of the amended provisions and overruled the earlier decision in the first Home Solution case. Consequently, the writ petitions were dismissed.