Retailers Assoc. v. Union: Bombay High Court on Service Tax

In a previous post, I had briefly mentioned the judgment of a Division Bench (D.Y. Chandrachud and  A.V.Mohta, JJ.) the Bombay High Court, where the constitutional validity of service tax on renting of immovable property was upheld. The judgment (Retailers Association v. Union of India) is available on the Bombay High Court website (linked here). A perusal of the judgment shows that three separate challenges were urged before the Court:

(i) The essence of a “service tax” is the rendering of a service or of a value addition, and in the case of renting of immovable property, no service element is involved; consequently, the charge must fail

(ii) The impugned levy fell under Entry 49, List II, and was outside the legislative competence of Parliament

(iii)  In any case, levying the tax retrospectively from 1^st June 2007 was unconstitutional

After discussing the relevant Supreme Court decisions on the point, the High Court noted “the settled principle of law is that a tax on lands and buildings is a tax on the general ownership of lands and buildings. In order that a tax must fall under Entry 49 of List II, the tax must be one directly on lands and buildings. A tax which is levied on the income which is received from lands or buildings is not a tax on lands or buildings. A tax levied on an activity or service rendered on or in connection with lands and buildings does not fall within the description of a tax on lands and buildings.” The Court next examined the charging section, Section 66 of the Finance Act, 1994. It noted that the charge was on “taxable services”. Looking at the character of the impugned levy, it was held “The charge of tax is on a taxable service. The measure of tax is the gross amount charged by the service provider. The charge of tax is not on lands or buildings as a unit nor is the tax on lands or buildings. To be a tax on lands and buildings under Entry 49 of List II, the tax must be directly a tax on lands and buildings. That is not the true character of an impost on taxable services.” The measure of the tax may be the rental income; that does not mean that the nature of the tax is itself a tax on land.

Next, turning to the argument that there is no “service” involved in mere renting, the Court held that when Parliament legislates on a matter, it is open to Parliament to make assessments of fact on the basis of which a legislation can be drafted. Importantly – and perhaps, in a comment of wider constitutional significance – the Court held, “An underlying assessment of fact by Parliament on the basis of which a law has been enacted cannot be amenable to judicial review absent a case of manifest arbitrariness.” Apart from this, the Court noted that it is open to Parliament to enact deeming fictions as well. The only limitation on the exercise of the power is that the Legislature cannot by deeming fiction “transgress upon a constitutional restriction or a field of legislation that is reserved to another legislature.” Considering in this case that there was no transgression into List II, there was no question of there being any limitation on the power of Parliament to treat renting as a service. The Court explained, “Once the Court comes to the conclusion that the law is not a law with respect to the legislative entry of taxes on land and buildings, the field of the legislation would necessarily fall within List I and more particularly, the residuary entry of List I. The levy of tax on a taxable service provided or to be provided to any person, by any other person, by the renting of immovable property is based on a considered determination by Parliament that such transactions do in fact involve an element of service. The fact that the service which is provided may not, to the Petitioners, accord with what is commonly regarded as a service would not militate against the validity of the legislation.”

Insofar as the challenge on the basis of retrospectivity is concerned, the Court noted the legislative history, by which it could fairly be said that the retrospective amendment was curative / validating, and intended to bring out the true intent of Parliament in enacting the Finance Act 2007. The amendment was intended to remove the basis of Delhi high Court’s the ruling in Home Retail, and was a permissible exercise of legislative power. (The test for judging the validity of such laws has been laid down by the Supreme Court in several cases – see this post, for a brief discussion. When compared to some other exercises of retrospective taxation, the impugned amendment in this case is quite benign!)