2010 (11) TMI 32 - HC - Service Tax

Court upholds constitutionality of Finance Act sections, validates service tax on property renting.

M/s Shubh Timb Steels Limited Versus Union of India and another

The court dismissed the petition, upholding the constitutionality of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994. It affirmed ... Service Tax on Renting of immovable property - constitutional validity - amendment with retrospective effect - Held that: - Same transaction may involve two or more events in different aspects. There is distinction between general subjects of legislation and taxation. The entries have to receive liberal construction. If there is any overlapping, doctrine of pith and substance is to be applied and the Court has to look at the substance of the matter. List I has priority over List II though predominance of List I does not prevent State Legislature from dealing matters under List II. we are unable to hold that service tax on service of renting of property is exclusively covered by Entry 49 List II. As already observed, Entry 49 of List II relates to tax on land and building and not any activity relating thereto. Income tax on income from property, wealth tax on capital value of assets including land and building and gift tax on gift of land and building have been upheld. It cannot be held that renting of property did not involve any service as service could only be in relation to property and not by renting of property. Renting of property for commercial purposes is certainly a service and has value for the service receiver. It is well settled that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary. Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which earlier law was enacted. - do not find any ground to set aside giving of retrospective effect to the amendment from 1.6.2007 on which date levy was initially provided Issues Involved:1. Constitutionality of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994.2. Legislative competence of the Central Legislature to levy service tax on renting of immovable property.3. Retrospective application of the levy from 1.6.2007.Issue-Wise Detailed Analysis:1. Constitutionality of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994:The petition sought a declaration that the provisions of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994 are ultravires the Constitution. The petitioner argued that the transaction of leasing immovable property is subject to state legislation under the Indian Stamp Act, 1899 and the Transfer of Property Act, 1882, and thus outside the purview of the Central Legislature.2. Legislative Competence of the Central Legislature to Levy Service Tax on Renting of Immovable Property:The Union of India contended that renting of property is different from the sale of goods or transfer of property and is covered by service tax as it involves providing a service. The court examined whether the levy of service tax on renting immovable property for business purposes falls under Entry 49 List II (State List) or Entry 92C or 97 of List I (Union List). The court referred to several judgments, including Union of India v. Shri Harbhajan Singh Dhillon, Tamil Nadu Kalyana Mandapam Assn. v. Union of India, and All India Federation of Tax Practitioners v. Union of India, to conclude that service tax on renting of property is not a tax on land or buildings but on the service element, which falls under the Union List.The court emphasized the 'aspect theory,' which allows different aspects of the same transaction to be taxed by different legislatures. It was held that renting of immovable property for commercial purposes is a service and has value for the service receiver, thus falling under Entry 92C read with Entry 97 of List I. The court concluded that the service tax on renting property does not encroach upon the State's legislative competence under Entry 49 List II.3. Retrospective Application of the Levy from 1.6.2007:The court addressed the issue of the retrospective application of the amendment made by the Finance Act, 2010, which clarified that renting of immovable property itself is a taxable service. The court held that competent legislature can clarify or validate a law retrospectively to rectify defects or lacunae. The court cited several judgments, including Shiv Dutt Rai Fateh Chand v. Union of India and Tata Iron & Steel Company Limited v. The State of Bihar, to support the view that retrospective validation of tax laws is permissible and does not per se render the law unconstitutional.The court observed that the retrospective amendment was intended to overcome the judgment of the Delhi High Court and ensure the collection of service tax from service providers. The court found no ground to set aside the retrospective effect of the amendment from 1.6.2007.Conclusion:The court dismissed the petition, upholding the constitutionality of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994, affirming the legislative competence of the Central Legislature to levy service tax on renting of immovable property, and validating the retrospective application of the levy from 1.6.2007.