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Bombay HC rules service tax chargable on immovable property rentals; Naik, retailers now wait for Delhi HC

Naik Naik & Co-led Retailers Association of India (RAI) has lost the immovable property rentals’ service tax matter in the Bombay High Court, which upheld the union government’s power to enact laws to impose service tax on such rentals as constitutionally valid.

The association comprising of retailers such as DB Realty, Fabindia and Cinemax had challenged the levy of service tax on property rentals provided under section 65(105)(zzzz) of the Finance Act 2010 which was brought in to take effect retrospectively since 2007.

Naik Naik & Co managing partner Ameet Naik had instructed senior counsel Apsi Chenoy to represent RAI while Additional Solicitor General D J Khambata argued for the respondent central government.

Naik told Legally India: “The court has rejected our contention and upheld the constitutional validity of service tax on rent. Therefore on rent of commercial premises you have to pay service tax.

“The stay which we had earlier [on the levy of service tax on immovable property] continues for only four weeks.

“While it is a well written judgement, I feel service tax net should not become wide enough to tax anything and everything and by this logic everything will become service, which is what the impact of this judgement is going to be.”

Naik added that the court rejected their argument that service tax on rent is nothing but a tax on land and it was within the legislative competence of the state and not the union government. “The judge said that it is not a tax on rent and covered under entry 97 of the residuary list and therefore the parliament is competent to enact it.”

The issues contended before the Bombay High Court on behalf of the RAI included:

a) The letting of immovable property is a mere property transaction and there is no value added service element in the same which alone can be subjected to service tax.

b) The impugned levy of tax is nothing but a tax on the letting of immovable property and the same is squarely covered by Entry 49 of List II. Consequently, Parliament has no legislative competence to levy the said tax under the residuary Entry 97 of List I of Schedule VII.

c) In our Constitutional Scheme, the very same transaction or taxable event cannot be taxed by both Parliament and also by the State Legislature.

d) In any event, there can be no retrospective imposition of any penal levies on the Assessees, such as penalties, interest and prosecution.

Naik said that the full bench decision of the Delhi High Court on the issue is awaited now and only after reading the Bombay High Court judgement they will decide on the question of approaching the Supreme Court.

In open court yesterday the judgement was delivered by division bench of justices DY Chandrachud and Anoop Mohta.

As reported by Legally India, the Delhi High Court earlier ruled twice in favour of Naik’s client Home Soultions and stayed the imposition of service tax on immovable property while the Punjab & Haryana High Court had adopted a contrary view.

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