2011 (9) TMI 767 - HC - Service Tax

Service tax on property renting upheld as valid retrospective amendment, dismissing challenges on new tax liabilities.

The court upheld the imposition of service tax on renting of immovable property, citing the constitutional authority of Parliament to legislate ... Service tax on renting of immovable property - constitutional validity of Finance Act, 2010 amendment to definition of taxable service - retrospective taxation - parliamentary power to legislate retrospectively - scope of 'service' for taxation - distinction between clarificatory and substantive amendments - validity of the 88th Constitutional Amendment inserting Entry 92-CService tax on renting of immovable property - scope of 'service' for taxation - constitutional validity of Finance Act, 2010 amendment to definition of taxable service - Validity of the amendment to the definition of 'taxable service' in the Finance Act, 2010 so as to include renting of immovable property and the consequent imposition of service tax. - HELD THAT: - Parliament enacted the Finance Act, 2010 amending the definition of 'taxable service' to include services by renting of immovable property, exercising legislative power under Entry 92-C (Taxes on Service) introduced by the 88th Constitutional Amendment. The Court noted that earlier decisions (including the Delhi High Court in Home Solution Retail India Limited) held mere renting not to be a service, and that an SLP was pending before the Supreme Court. Nevertheless, the legislative amendment is within Parliament's competence under the said entry. The Court relied on precedent holding that levy of service tax on a particular kind of service cannot be struck down merely because it departs from a common understanding of 'service' so long as no specific constitutional restriction is transgressed, and that making premises available for use can amount to a service. Applying these principles, the Court found no merit in the challenge to the constitutional validity of the amendment and sustained imposition of service tax on renting of immovable property.The amendment to include renting of immovable property within 'taxable service' is constitutionally valid and the imposition of service tax on such renting is upheld.Retrospective taxation - parliamentary power to legislate retrospectively - distinction between clarificatory and substantive amendments - Validity of the retrospective effect given by section 77 of the Finance Act, 2010 to the amendment defining 'taxable service' and whether retrospective operation creating past tax liabilities (including interest and penalty) is impermissible. - HELD THAT: - It was contended that the amendment was substantive (not merely clarificatory) and that retrospective effect thereby impermissibly saddled service providers with past liabilities, including interest and penalty. The Court observed that Parliament's competence to enact retrospective legislation creating liabilities is not, in general, restricted by the Constitution except where specific provisions (for example Article 20(1) in criminal matters) prohibit retrospective creation or enhancement of offences or punishments. No constitutional provision was shown to curtail Parliament's power to legislate retrospectively in the present fiscal context. Prior High Court decisions rejecting similar challenges were noted. Even if the amendment were treated as substantive, retrospective taxation falls within legislative competence and cannot be struck down merely on that ground in absence of a constitutional prohibition.The retrospective operation accorded to the amendment is constitutionally permissible and does not invalidate the imposition of past tax liabilities, interest or penalties arising therefrom.Final Conclusion: Writ petitions challenging the imposition of service tax on renting of immovable property and the retrospective effect of the Finance Act, 2010 amendment are dismissed; the amendment and its retrospective operation are upheld. Issues:Challenge to imposition of service tax on renting of immovable property.Validity of retrospective amendment to the definition of 'taxable service.'Analysis:The judgment dealt with the challenge against the imposition of service tax on renting of immovable property. The Constitution was amended to introduce a new entry regarding 'Taxes on Service,' empowering the Parliament to levy Service Tax. The Delhi High Court previously held that mere renting out of immovable property did not amount to a service and was not amenable to service tax. However, the Finance Act 2010 amended the definition of 'taxable service' to include renting of immovable property. This amendment was made retrospective, leading to a challenge on the grounds that it imposed a substantive liability retrospectively.The petitioners argued that the retrospective amendment was impermissible as it created a new tax liability and subjected service providers to interest and penalties for past periods. Similar challenges were rejected by various High Courts, including Punjab and Haryana, Bombay, Gujarat, and Orissa. The judgment highlighted that unless restricted by the Constitution, Parliament has the authority to legislate retrospectively to create tax liabilities. The absence of any constitutional provision limiting Parliament's power to legislate retrospectively for tax liability was noted.Referring to a previous Supreme Court judgment, the court emphasized that the levy of service tax on a particular service could not be invalidated as long as it did not violate any specific constitutional restriction. The court held that providing premises for a specific purpose, such as a mandap, constituted a service and was not a transfer of movable property, thus falling under the ambit of taxable service. Consequently, the arguments against the imposition of service tax on renting of immovable property were dismissed, and all the writ petitions challenging the tax imposition were rejected.