19 August 2010
Renting premises for business will not invite levy of service tax, the Delhi High Court has ruled.
A division bench comprising Justice B D Ahmed and Justice Rajiv Shakdher passed the order on as many as 26 writ petitions filed by retail majors such as Shopper’s Stop, Lifestyle International and Fun Multiplex, challenging the notification issued by the finance ministry in 2007 vide which rent was made taxable.
“We hold that law does not in terms entail that renting out of immovable property for use in the course of furtherance of business or commerce would by itself constitute a taxable service and be eligible to service tax,” Justice Ahmed said, disposing of the petitions.
The Finance Act of 2007 had introduced Section 65(105)(zzzz) levying service tax on renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of furtherance of business or commerce. The levy, which was made effective from June 1, 2007, also includes part of building and land, common or shared areas and facilities; common areas and facilities of a building located in a complex or industrial estate.
The court concluded that since lease or levy or license or any other similar arrangement in relation to immovable property does not amount to rendering of a “service”, no tax can be levied under the taxable entry of the said Section 65(105)(zzzz).
“The interpretation placed by the impugned notification and circular on the said provision is not correct.”
“Consequently, the same is ultra vires the said Act and to the extent that they authorised the levy of service tax on renting of immovable property per se, they are set aside,” the court said, striking down the notification.
Following the landmark ruling, landlords who have not collected but paid service tax can apply for refund of service tax paid by them in the last one year, subject to such applicant being able to show that he has not collected the tax from the lessee/ licensee. Where the tax has been collected from the lessee/ licensee, such lessee/ licensee can also apply for refund of the service tax paid in the last one year, subject to the lessee/ licensee being able to show that he has not passed on the burden of the tax.
The Centre had appealed against the Delhi high court judgment and this SLP is still pending. Now, what budget 2010 has done is to basically amend the Act and provided explicitly that the activity of ‘renting’ is indeed a taxable service.
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