The Delhi High Court stayed the recovery of service tax on rentals of immovable property, reaffirming its April 2009 decision after the Government had sought to impose the tax by amending the charging section under the Finance Act 2010.

Once again the court has clarified that no service tax is chargeable on rentals of immovable property per se in case no further value added service is provided and will have the effect of resolving doubts raised pursuant to this year’s budget.

“Prima facie, it appears that renting of immovable property itself has been regarded as a service by virtue of the recent amendment even though this Court by virtue of the said decision on 18.04.2009 had categorically concluded that renting of immovable property by itself cannot be regarded as a service,” the court observed. (Download order here, courtesy of Economic Laws Practice (ELP)).

A bench of justices B D Ahmed and V K Jain passed an order dated 18 May in the writ petition (WP 3398/2010) filed by Home Solutions Retail in which Section 65 (105)(zzzz) was challenged as it purported to levy service tax on such rentals retrospectively.

The court while granting the stay occasioned by the same petitioners earlier in Home Solutions Retail India Ltd & Ors Vs Union of India [2009 (237) ELT 209 (Del)] relied on the stance that real estate by itself cannot by any stretch of imagination be regarded as a service.

It was explained that service tax applicability on rental activity alone does not amount to rendering of service when no value added services were attached.

Further, the court also noted that proposed amendment in the definition of taxable service has the objective of overturning the settled position that is pending adjudication before the Apex Court and prevails as long as no stay is granted on the judgement of 2009.

Background
Various writ petitions were filed to challenge the taxing entry of “Renting of Immovable Property service” introduced by the Finance Act 2007 on the following grounds: 

• Merely allowing use of land or building does not tantamount to provision of a service.
• The levy of Service tax under the said taxing entry is on a service provided along with the renting of immovable property and not on renting per se.
• Levy of Service tax on “Renting of Immovable Property” tantamount to levy of tax on land / buildings. The Central Government does not have the right to levy tax on land / buildings as the same falls within the State List (List II 49)

The court had held in 2009:
“In view of the foregoing discussion, we hold that Section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of (sic) commerce would by itself constitute a taxable service and be exigible to service tax under the said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification1 and circular2 on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent they authorise the levy of service tax on renting of immovable property per se, they are set aside.”

However, lawyers from Economic Laws Practice (ELP) argued in a client alert that some issues were yet to be resolved:

The issue that still remains open is that something which is not a service per se can be deemed to be a service and whether Service tax can be levied on the same.

Another issue that still remains open is as regards the legislative competence of the Parliament to charge tax on immovable properties in the context of Entry 49 of List II of the Constitution of India empowering the State Government to tax land and buildings.

The Hon’ble Delhi High Court in its Order dated 18.04.2009 has not decided on the alternative submission with regard to legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. This aspect has also not been considered in the Stay Order dated 18.05.2010.

The Order categorically states that no Service tax would be recovered from respondents 5-10 (Lessors / Licensors).”

The judgment follows the February 2010 Delhi High Court order that widened across India the applicability of the decision that service tax of immovable property was ultra vires the Finance Act.