2009 (4) TMI 14 - HC - Service Tax

Renting immovable property alone not taxable; Section 65(105)(zzzz) applies only with additional services like AC

HC held that renting of immovable property for use in the course or furtherance of business does not by itself constitute a taxable service because it ... Taxable service - renting of immovable property - in relation to - service tax as value-added tax - ultra vires - legislative competenceTaxable service - renting of immovable property - in relation to - service tax as value-added tax - Whether the Finance Act, 1994 (Section 65(105)(zzzz) read with Section 65(90a)) envisages levy of service tax on the letting out/renting of immovable property as such or only on a service provided in relation to such renting - HELD THAT: - The Court examined the language of Section 65(105)(zzzz) and the definition of 'renting of immovable property' in Section 65(90a) against the constitutional and statutory jurisprudence cited. Service tax is a value-added tax and therefore applies to value addition effected by a service provider. The statutory phrasing 'service provided or to be provided to any person, by any other person, in relation to renting of immovable property' contemplates a service provided to A by B with C as the subject-matter. Depending on whether C is itself a service, the phrase 'in relation to' may include C or may denote a distinct service connected with C. Renting of immovable property is a property transaction which, insofar as it entails transfer of possession (as in leases) or permissive use (as in licences), does not in itself effect a value addition by a service provider. The Court could discern no value addition in the bare transaction of letting/renting immovable property for use in business or commerce. Consequently, only services connected with or ancillary to such renting (for example, air-conditioning, sanitation, security etc.) fall within Section 65(105)(zzzz), and the renting per se does not constitute a taxable service under the Act. [Paras 35, 36]Renting of immovable property for use in the course or furtherance of business or commerce is not, by itself, a taxable service under Section 65(105)(zzzz) of the Finance Act, 1994; only services in relation to such renting that effect value addition are taxable.Ultra vires - taxable service - notification - circular - Whether notification no. 24/2007 dated 22/05/2007 and circular no. 98/1/2008 dated 04/01/2008 are valid in so far as they treat renting of immovable property itself as a taxable service and seek to levy service tax on rents received - HELD THAT: - Having held that the Act does not treat the bare renting of immovable property as a taxable service, the Court considered the impugned exemption notification and the clarificatory circular. Both instruments proceeded on the premise that the taxable service was 'renting of immovable property' itself and thus authorised levy/collection of service tax on the rent component. That administrative interpretation conflicts with the statutory scheme and the Court's construction of Section 65(105)(zzzz). A circular or notification cannot amend or rewrite the statute; to the extent the impugned instruments authorise levy of service tax on renting of immovable property per se, they are beyond the Act and therefore ultra vires. The instruments are set aside to that extent. [Paras 36]The notification and circular are ultra vires the Finance Act to the extent they authorise levy of service tax on the renting of immovable property per se; they are set aside insofar as they purport to treat renting itself as a taxable service.Legislative competence - Entry 49, List II - Alternative challenge to validity of the provisions as exceeding Parliament's legislative competence under Entry 49, List II - HELD THAT: - The petitioners advanced an alternative plea that, if renting of immovable property were held to be taxable, the levy would amount to a tax on land within Entry 49 of List II and thus outside Parliament's competence. The Court did not examine this alternative plea because its primary construction rendered such an inquiry unnecessary. [Paras 37]Alternative challenge based on legislative competence under Entry 49, List II was not examined as unnecessary in view of the statutory construction; no adjudication was made on that plea.Final Conclusion: The writ petitions are allowed to the extent that the Court holds that the Finance Act does not make the bare renting of immovable property a taxable service; accordingly the notification dated 22/05/2007 and circular dated 04/01/2008 are set aside insofar as they seek to levy service tax on renting of immovable property per se. The alternative challenge on legislative competence was not decided. Parties to bear their own costs. Issues Involved:1. Legality, validity, and vires of Notification No. 24/2007 and Circular No. 98/1/2008.2. Interpretation of Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994.3. Levy of service tax on renting of immovable property.4. Legislative competence of Parliament in relation to Entry 49 of List II of the Constitution of India.Issue-wise Detailed Analysis:1. Legality, Validity, and Vires of Notification No. 24/2007 and Circular No. 98/1/2008:The petitioners challenged the legality, validity, and vires of Notification No. 24/2007 dated 22/05/2007 and Circular No. 98/1/2008 dated 04/01/2008 issued by the Ministry of Finance. They argued that these documents placed an erroneous interpretation on Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994, leading to the wrongful levy of service tax on the renting of immovable property instead of services related to renting.2. Interpretation of Section 65(90a) and Section 65(105)(zzzz) of the Finance Act, 1994:The core issue was whether the Finance Act, 1994, envisages the levy of service tax on the act of renting out immovable property per se. The petitioners contended that Section 65(105)(zzzz) refers to services provided 'in relation to' renting of immovable property, not the renting itself. They argued that the Act does not treat renting as a taxable service, and the notification and circular misinterpreted the statutory provisions.3. Levy of Service Tax on Renting of Immovable Property:The petitioners argued that the Act does not envisage service tax on the act of renting immovable property. They claimed that the notification and circular wrongly construed renting as a service. The court analyzed the provisions and concluded that renting of immovable property for business or commerce does not constitute a service by itself. Service tax is a value-added tax, and there must be some value addition by the service provider. Renting does not entail value addition and thus cannot be regarded as a service.4. Legislative Competence of Parliament in Relation to Entry 49 of List II of the Constitution of India:The petitioners alternatively argued that if renting is considered a taxable service, it would fall outside Parliament's legislative competence, as it would be a tax on land, covered under Entry 49 of List II of the Constitution, within the state's exclusive domain. However, the court did not find it necessary to examine this plea due to the conclusion reached on the main issue.Conclusion:The court held that Section 65(105)(zzzz) does not entail that renting out immovable property for business or commerce constitutes a taxable service under the Act. The interpretation in the impugned notification and circular was incorrect, making them ultra vires the Act. Consequently, the notification and circular were set aside to the extent they authorized the levy of service tax on renting of immovable property per se. The writ petitions were allowed accordingly, and the parties were left to bear their own costs.