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LexCounsel gets service tax notice on commercial rentals banned across India

Alishan Naqvee LexCounsel
Alishan Naqvee LexCounsel

A divison bench of the Delhi High Court has widened across India its April 2009 judgment that service tax on commercial rentals is ultra vires the Finance Act, in a victory for law firm LexCounsel.

The ruling was delivered in the case of SSIPL Retail Ltd & Ors vs Union of India & Ors by Justices A K Sikri and Siddharth Mridul. It directs the Government to take corrective actions by overriding its demands made through notices issued to taxpayers in Karnataka and Delhi.

LexCounsel partner Alishan Naqvee (pictured) and associate Rupal Bhatia had represented the petitioner companies SSIPL Retail and Genesis Fashion in this case and in court.

Additional Solicitor General of India, A S Chandhiok, Mukesh Anand, R C S Bhadoria, Shailesh Tiwari and Sumit Batra were counsels for the respondents.

Naqvee commented: "This judgement has clarified two aspects; firstly, the earlier Delhi High Court judgment which said that service tax on commercial rentals will not be paid because it is ultra vires is applicable throughout India and not just in Delhi on account of the Finance Act being a central legislation. We relied on Sarla Mudgal's judgement which decided on central legislations and their applicability.

"Secondly, the Government cannot instruct their officers to pursue the taxpayers for payment or resort to other means to collect the revenue as long as the Supreme Court does not stay the operation of the earlier judgment in the Special Leave Petition that the Government has filed in appeal."

Naqvee also explained the rationale of not charging service tax on rentals. "As the name suggests there has to be a service. If you are giving your premises to somebody you’re not providing any service to him, but letting out an immovable property for whatever use."

"If some management services are given like in malls or offices then service tax could be levied on the management services portion."

Whatever is pure rental without the landlord providing any services cannot be charged as service tax.

Commenting on the service tax for lawyers, which is currently being fought separately in a writ by the Society of Indian Law Firms (SILF), he said: "The way I look at it, there has to be justification for excluding litigation and including corporate work. Now it is not clear or justified."

"The money Government is going to get is miniscule, in legal services almost three quarters of turnover is in litigation considering major corporate legal work catered in at the most four big cities versus overburdened courts throughout India with litigations. Even if the rest comes from law firms, most are not partnership structures having deeds but sole proprietors, where recipient or provider is an individual. Even some of the big law firms would not come under the service tax net and actual recovery would be less."

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