The Division Bench of the Excessive Court docket of Delhi comprised of Mr. Justice Badar Durrez Ahmed and Mr. Justice Rajiv Shakdher, on April 18, 2009, allowed twenty six writ petitions difficult the levy of service tax on business leases. Supplied beneath is the abstract of the dispute, the arguments raised by either side, and the observations of the Delhi Excessive Court docket.

I. Background:

“Renting of immovable property service” was launched by the Finance Act of 2007, amending the Finance Act of 1994 (collectively and successfully “the Act”), whereby the definition of “taxable service” included, with impact from June 1, 2007:

“service offered or to be offered to any particular person by every other particular person in relation to renting of immovable property to be used within the course or furtherance of business or commerce”

Subsequently, the Secretary, Ministry of Finance, Division of Income, Authorities of India issued a Notification No. 24/2007 dated twenty second Might 2007 (“Notification”) and a Round No.98/1/2008-ST dated 4th Might 2008 (“Round”) whereby an interpretation of Part 65(90a) and 65(105)(zzzz) of the Act was positioned to levy service tax “on the renting of immovable property” versus on the service(s) offered “in relation to the renting of immovable property”.

The modification, learn with the Notification and the Round in impact introduced renting, letting, leasing, licensing or different comparable preparations of immovable property, to be used within the course or furtherance of business and commerce, inside the service tax web. This new levy severely impacted business fashions throughout India as a lot of the lease preparations didn’t even stipulate it beforehand.

II. DISPUTE:

A number of tenants/licensees/lessees challenged the legality, validity and vires of the Notification and the Round on interpretation of Part 65(90a) and 65(105)(zzzz) of the Act.

The prime query raised was “Whether or not the Finance Act, 1994 envisages the levy of service tax on letting out/renting out of immovable property per se?”

III. ARGUMENTS OF THE PETITIONERS [TENANTS/LICENSEES/LESSEES]

The petitioners identified that the Notification acknowledged taxable service as a “taxable service of renting of immovable property”. Equally the Round whereas giving clarification in respect of business and industrial development service purportedly clarified that the “proper to make use of immovable property is leviable to service tax underneath the renting of immovable property service”.

The petitioners contended that:

– underneath the provisions of the Act, service tax is levied solely on a service which is offered or to be offered to any particular person by every other particular person “in relation to” renting of immovable property to be used within the course or furtherance of business or commerce;
– within the Act, the reference is to not the “taxable service of renting of immovable property” however to the taxable service “in relation to” the renting of immovable property;
– by advantage of the Notification and Round, an misguided interpretation of related part of the Act is being positioned, and service tax is sought to be levied “on the renting of immovable property” versus service tax on services offered “in relation to renting of immovable property”;
– the statements of the Union of India given within the Notification and the Round travel past the provisions of the Act;
– renting of immovable property as such can’t be considered a service on which service tax could possibly be levied underneath the provisions of the Act รับ ออกแบบ อ พาร์ ท เม้น ท์;
– the Notification and Round underneath problem proceed on an inconsistent assumption that renting out of immovable property is by itself a service;
– service tax is a worth added tax and might solely be levied on the worth addition offered by some service supplier;
– property based mostly services are completely different from efficiency based mostly services. In case of property based mostly services, worth addition when it comes to enchancment/betterment of the property could also be taxed. Nevertheless, in pure lease association, there could be no service tax in absence of any enchancment/betterment.

The petitioners additionally adopted the alternate plea that “whether it is held that such a tax is envisaged then the provisions of Part 65(90a), 65(105)(zzzz) and Part 66 of the Act insofar as they relate to the levy of service tax on renting of the immovable property would quantity to a tax on land and would subsequently fall outdoors the legislative competence of the Parliament in as a lot because the stated topic is roofed underneath Entry 49 Record II of the Structure of India and would fall inside the unique area of the State Legislature. As such, the stated provision must be declared as un-constitutional”.

IV. ARGUMENTS OF THE RESPONDENTS [UNION OF INDIA]

The Authorities maintained that:

– person of the land/constructing itself is a service;
– the switch of the suitable to make use of the property for a business or business goal is itself a service;
– mere renting of immovable property is itself a service;
– merely offering a premises on a short lived foundation for organizing a monetary, social or business operate would additionally embrace different services in relation thereto and subsequently would represent a taxable service; and
– the expression “in relation to renting of immovable property” has a large ambit and likewise covers the act of renting of immovable property.

V. COURT’S DECISION

The Court docket held that:

– any service related with renting of immovable property could be topic to the service tax underneath the Act;
– renting of the immovable property by itself doesn’t represent a service;
– service tax is a worth added tax and subsequently it’s levied on the worth addition offered by some service supplier;
– renting of the immovable property to be used in course or furtherance of business or commerce doesn’t entail any worth addition and subsequently can’t be considered service;
– interpretations positioned by the Notification and Round on the provisions of the Act should not appropriate;
– the Notification and Round, to the extent they authorize the levy of service tax on renting of immovable property per se, are put aside;
– the alternate plea of the petitioners with regard to the legislative competence of the Parliament within the context of Entry 49 Record II of the Structure of India was not examined due to the view taken on the primary plea of the petitioners.

Because of this, no service tax is payable on business lease for immovable property. It’s for the Authorities to method the Supreme Court docket of India inside 90 days of the date of the judgment, if it seeks to reverse the judgment.