Service Tax on Renting Immovable Property

A recent decision of the Delhi High Court in Home Solution Retails v. Union of India has caused some interesting issues concerning service tax to resurface. Admittedly, the law laid down by the Court is not new. However, the factual backdrop of the decision, and the debate it has given rise to, make the decision potentially significant.

The question before the Court was whether the renting of immovable property is a taxable service under the service tax regime in India. Sec. 65(105) defines ‘taxable service’. Sub-clause (zzzz) includes within the scope of taxable service ‘any service provided or to be provided, to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce’ (emphasis supplied). The issue that arises then is whether the renting immovable property simpliciter is a service, or requires some service to be provided in relation to the process of renting. In this case, the validity of a notification (No. 24/2007, dated 22/05/2007) and a circular (No. 98/1/2008-ST, dated 04/01/2008) issued by the Secretary of the Ministry of Finance, was challenged. The notification was an exemption notification, which exempted the ‘taxable service of renting of immovable property’, from a certain levy of service tax. The circular purported to clarify that the ‘right to use immovable property is leviable to service tax under the renting of immovable property service’. Thus, these two were challenged as impliedly and expressly suggesting that the mere renting of immovable property is a taxable service, and hence, being ultra vires the definition of a taxable service in the Act.

The Court, in this case, held for the petitioners, and declared that the notification and the circular were ultra vires the Act. Interestingly, however, the Court based its decision less on the text of the provision, but more on the concept of ‘service tax’ as mentioned in previous Supreme Court dicta. The Court relied on a 2007 decision in AIFTP v. Union of India [AIR 2007 SC 2990], where the Supreme Court had observed, “[s]ervice tax is a value added tax”. Based on this, the Court concluded that since the process of renting out, in itself, does not add any value, no service tax can be levied on this process, unless some additional services are provided.

It is this conceptual basis of the decision, and the reliance on the decision in AIFTP, which has been questioned in recent analysis of this decision in the Business Standard. It argues that there is nothing in the concept of service tax that necessitates the presence of some value addition. In fact, before 1986 even excise duty was not necessarily value added tax, and the same is the case, to a limited extent, even today. With regard to the reliance on AIFTP, the piece argues that the statement quoted above was an obiter observation, and the primary issue before the Court was whether profession tax is service tax. On this basis, the piece advocates that the decision be appealed by the CBEC before the Supreme Court to clarify the legal position.

Much can be said in favour of this view, and against the Delhi High Court decision. Especially the proposition that conceptually, the levy of service tax does not necessarily need some value addition, is seemingly valid. However, what makes a reconsideration of the Delhi High Court decision by the Supreme Court on appeal unlikely is the fact that both the Act itself (albeit to a limited extent), and prior Supreme Court dicta, seem to favour the interpretation of the Delhi High Court.

First, the provision specifically requires that the service must be ‘in relation to renting of immovable property’. Given this language, deciding that the very process of renting of immovable property is a service requires doing some violence to the provision. While this seems a valid textual argument, an examination of the rest of the Act takes away from its persuasiveness. As rightly pointed out by the ASG, Mr. Malhotra, in Home Solution Retail, sub-clauses (zt) and (zv) also define taxable service as service ‘by a dry cleaner in relation to dry cleaning’ and ‘by a fashion designer in relation to fashion designing’, respectively. Based on this, he argued that if ‘in relation to’ was to be read in the manner suggested by the petitioner, the processes of fashion designing and dry cleaning, by themselves, would not be taxable services, resulting in an absurdity. Thus, the appropriate textual interpretation is dubious, which is why the Court decided the case on the need for value addition.

Coming then to whether this reliance on value addition was appropriate, the Business Standard article is correct is pointing out that value addition is not conceptually essential, and that AIFTP contained only an obiter observation to that effect. However, practically, and in law, even obiter observations of the Supreme Court can be considered binding within certain bounds. A statement made when laying down the legal backdrop for the final decision (which was the case in AIFTP) definitely comes within the fold of these ‘binding obiters’. Although strictly speaking, a similar statement by a lower Court may have been ignored, the same approach cannot be followed when examining the opinion of the Supreme Court. Further, and more importantly, in an earlier decision in 2004 too, the Court seems to have suggested that mere transfer of immovable property cannot be a service. In TN Kalyana Mandapam v. Union of India [(2004) 5 SCC 632], the issue was whether the leasing of mandap premises is a service. In answering the question in the affirmative, the Court also observed, “In fact, making available premises for a period of few hours for the specific purpose of being utilized as a Mandap whether with or without other services would itself be a service and cannot be classified as any other kind of legal concept. It does not certainly involve transfer of moveable property nor does it involve transfer of immoveable property of any kind known to law either under the Transfer of Property Act or otherwise and can only be classified as a service” (emphasis supplied). The highlighted part of the observation clearly shows that the Court believed that if the transaction amounted to a mere transfer of immovable property, it would not be a taxable service.

Thus, in sum, the legal position today is definitely ambiguous, a combined result of legislative inconsistency and the lack of clarity as to the meaning of ‘service’. While a legislative amendment seems the only long term solution to the conundrum, as things stand today, a consideration of the issue by the Apex Court is likely to reaffirm the decision of the Delhi High Court.