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In pursuit of knowledge |
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Whether ‘Renting Property’ is ‘Service’ and thus liable to Service Tax? Indirect Taxes Mukul Gupta |
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Let me tell you a short story signifying the deference between Legal, Illogical & Illegal. One smart student secured lower grades in the exam, after looking at the mark sheet he asks professor. Student : "Can you answer my question?“ Professor: "Surely I must. Otherwise I would not be a professor!" Student: "Great, well then I would like to ask you a question. If you can give me the correct answer, I will accept my mark as is and go. If you however do not know the answer, I want you give me an "A" for the exam." Professor: "Okay, it's a deal. So what is the question?" Student: "What is legal but not logical, logical but not legal, and neither logical nor legal?" Even after some long and hard consideration, the professor cannot give the student an answer, and therefore changes his exam mark into an "A", as agreed. Afterwards, the professor calls on his best student and asks him the same question. He immediately answers: "Sir, you are 63 years old and married to a 36 year old woman, which is legal, but not logical. Your wife has a 22 year old lover, which is logical, but not legal. The fact that you have given your wife's lover an "A" Grade, although he really should have failed, is neither legal nor logical." Similarly, what is happening in the wake of collecting tax by any means and trying to legitimize it. The Service Tax can be levied on the ‘Services’, the element of service is necessary to brought a transaction liable to tax under the Service Tax Law. However, there is no prescribed definition of ‘Service’ under Chapter-V of the Finance Act, 1994 and the subsequent amendments made therein. In the absence of such definition, the interpretation of ‘Service’ have to be made as per the established principles of Law. A transaction which is primarily out of the scope of ‘service’ cannot be brought under the Service Tax Net. By introducing sub-clause (zzzz) by clause (h) of clause (13) in main clause (105) of section 65 of the Finance Act, 1994 the transaction ‘in relation to renting of immovable property for use in the course or furtherance of business or commerce’ has been brought into Service Tax Net (Annexures I & II). The Notification No. 23/2007 – ST dated 22-5-2007 levies Service Tax @ 12.36% on such Taxable Service. Let us not go into the question that what constitutes Immovable Property or the explanations and definitions given in the provisions or the deductions or abatements and the clarifications given by the Service Tax Department. Let us confine this discussion to the fundamental of this Taxable Service, that if any service is involved or not in renting of immovable property. To my mind, there is no element of ‘service’ involved in renting of any immovable property for any use whatsoever. Receiving an amount as valuable consideration for transfer of right to use the property (immovable or otherwise) is covered under the enlarged definition of ‘sale’. No service is provided by the owner of the property to the lessee, there is no involvement of the owner of the property while the rented space in the property is enjoyed by the lease. The relationship between the two does not have any obligation which can be equated to service of any nature. Such valuable consideration under the transaction is purely received by the owner of the property for allowing the use of the property as per the rent agreement. No service is provided by the owner to the lessee. In the D.O.F. No. 333/1/2007-PRU dated 28-2-2007, issued as an Explanatory Note of Finance Bill, 2007, the Service Tax Department have admitted on Page No. 4 in Item No. 6.3 that ‘renting includes letting, leasing, licensing or other similar arrangement. The contract is for right to use an immovable property for a consideration’. In such circumstances the transaction of renting of property could not be brought under the Service Tax Net. Right to use is liable to Sales Tax however when property is let out Sales Tax is not paid. On the other hand, under Feudal Law, tenants had a duty to render service to their Lords in exchange for use of the land. The service required could take many forms: monetary payments, farm products, loyalty, attendance upon the lord as an armed horseman, carrying the king's banner, providing a sword or a lance, or plowing or other farm labour done for the King. The ‘Renting of Immovable Property’, which is specifically covered under the provisions of the Income-tax Act as ‘Income from Property’, does not involve any service, the basis of it being in the nature of financial gain in lieu of interest on the capital invested in the property. The very basis of levy of ‘Service Tax’ under Chapter-V of the Finance Act 1994 is rendering of services and the existence of “Taxable Service”. In the cases of Chartered Accountants Service as well as the Goods Transport Service, the Hon’ble Supreme Court as well as the High Courts has considered the nature of the levy of Service Tax under the Finance Act. Everybody of us is aware that a taxation provision should be harmoniously construed to render it effective and invalidity of the levy cannot be presumed. Viewed in this light, the Entry relating to “renting of immovable property” will have to be interpreted to cover only Service ‘in relation to renting of immovable property for use in the course or furtherance of business or commerce’. This Entry would not hence cover the letting out of the immovable property as such, which does not involve any service, but would cover only such service as are allied to such renting or letting. The use of the expression “in relation to” would also support this interpretation. It has to be remembered that the Entry refers to the ‘service rendered to any person by any other person in relation to renting of immovable property’ and not the ‘service rendered to any person by any other person of renting of immovable property’. In other words, the transaction which is taxable would cover only Ancillary Services relating to renting of immovable property and not the transaction of the renting of immovable property itself. This is the only way in which the above Entry can be harmoniously construed rendering it valid in Law. If, on the other hand, the Revenue takes the view that this Entry would cover pure and simple ‘renting of property’, constituting such renting itself a Taxable Service, the Entry is certainly open to challenge as not valid in Law. In the case of renting of property pure and simple there is no involvement of service at all and hence it cannot be presumed that the Parliament intended to bring within the net of Service Tax a transaction which is pure and simple renting of property not involving any element of service. Service Tax can be levied only if the transaction involves Service. We have to keep in mind that, wherever a transaction is a composite one involving a taxable service along with a transaction of sale or works contract involving transfer of goods, as in the case of construction service or catering service, abatement has been provided, this is to ensure that Service Tax is levied only on the service portion of the transaction. Revenue Department moves Supreme Court on Levy of Service Tax on Rental Income On August 18, 2008 the Centre sought the Hon’ble Supreme Court's Intervention in deciding the Constitutional Validity of the Finance Act, 2007 that empowers the Government to impose Service Tax on ‘rental income from commercial properties’. The Department of Revenue has sought transfer of petitions pending before the High Courts of Mumbai, Chennai, Kolkata, Punjab and Haryana and Kerala on the ground that there was a likelihood of conflicting decisions. According to the petition, retailers, real estate developers and multiplex owners had filed writ petitions before various High Courts challenging levy of Service Tax on leasing, letting, renting or any other similar arrangement in respect of immovable property for use in furtherance of business or commerce. Petitioners challenged the Constitutional Validity of the Finance Act, 2007 on the ground that it was beyond the Legislative Competence of the Union contending that the issue falls within the ambit of List–II of the Seventh Schedule to the Constitution, which is a state subject and thus Parliament cannot levy such a tax and thus sought relief contending that lease or licence (including renting or letting out) is not a service. A three-Judge Bench headed by Justice B N Agrawal, while seeking reply from Retailers Association of India, Confederation of Real Estate Developers' Associations of India and Multiplex Association of India on the transfer petition filed by the Centre also stayed proceedings before various High Courts. The Bombay High Court along with other High Courts have granted interim relief from payment of service tax from the rent of Immovable Property. The service provider; i.e., the owner of the property will not have to pay service tax till the final order of the Supreme Court. Astonishingly, the Revenue Department could have been prompted to levy ‘Service Tax on Renting of Property’ under the influence of the words of the great African-American Social Reformer Marian Wright Edelman, “Service to others is the rent you pay for living on this planet.” Annexure-I As per section 65(105) (zzzz) the “Taxable service” means 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 of furtherance of business or commerce. Explanation 1 – For the purposes of this sub-clause, “immovable property” includes – (i) Building and part of a
building, and the land appurtenant thereto, (a) vacant land solely used for
agriculture, aquaculture, farming forestry, animal husbandry, mining purposes; Explanation 2 – For the purposes of this sub-clause, an immovable property partly for use in the course of furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course of furtherance of business or commerce. Annexure-II As per Section 65(90a) “Renting of Immovable Property” includes renting, letting, leasing, licensing, or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include – (i) Renting of immovable
property by a religious body or to a religious body ; or Explanation 1 – For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibitions halls and multiple-use buildings. Explanation 2 – For the removal of doubts, it is hereby declared that for the purposes of this clause “renting of immovable property” includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property. Note: By illustrative use of words ‘renting’ ‘letting’, ‘licensing’ and then providing the omnibus clause ‘other similar arrangements’, the intention becomes obvious. The nature of arrangement or name of the transaction is not important. It is the activity of providing immovable property for use for a specified period against receipt of certain consideration that has been made taxable. Ownership of property is also not relevant as the statutory provisions do not make any reference in this regard. Annexure-III Whether Income Tax – TDS on ‘Service Tax’ portion is deductible or not from Payment of Rent? This issue got fuel with the issuance of a Circular No. 4 dated 28-4-2008 by the CBDT clarifying that Tax Deduction at Source (TDS) under section 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the Service Tax. After this clarification, some professionals are of the view that the principle enunciated by this Circular is applicable to all the payments made by the assessees and accordingly no TDS is deductible on the part of Service Tax whether it is professional's bill or contractor's bill etc. But, to settle the issue, CBDT has again issued another clarification vide Circular No. 275/73/2007IT(B) dated 30-6-2008 clarifying that the scope of benefit of Circular No. 4 dated 28-4-2008 cannot be extended to the payment made under section 194J (Fees for Professional & Technical Services). Therefore, TDS is to be deducted on the gross amount inclusive of Service Tax where the payment is being made u/s 194J. From the reading of both the clarifications, the reasons for two stands in two situations can be discussed as under: Under Chapter XVII – Part B – Deduction at Source section 194J (1) starts as: (1) Any person, not being an
individual or a Hindu undivided family, who is responsible for paying to a
resident any sum by way of — …………… Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall………… Section 194J speaks about Deduction of Tax at Source (TDS) on any sum which is paid to the recipient, While section 194I speaks about the Deduction of Tax at Source (TDS) on any income paid as rent. Annexure-IV Some interesting issues: The activity of receiving of rent for hoardings and sign boards for display of advertisement could also be seen as a renting of Immovable Property for commercial use. The Service Tax Tribunal have bifurcated the two activities of providing hoardings and sign boards for display of advertisement from the activity of conceptualizing and designing the advertisement along with its display, in the case of High-Tech Publicity vs. CCE Madurai 2008 (11) STR 140(TRI.-Chennai). The second activity has been treated as covered u/s 65 (3) of the Finance Act, 1994, so the Revenue can put its eye on the first activity of providing the hoardings and signboards for display of advertisement on rent. Further, while examining the transaction whether a deemed sale under the VAT Act, Hon’ble Andhra Pradesh High Court in the case of State of A.P. vs. Prakash Arts (2008) 18 VST 39 (A.P) has decided that leasing out of advertisement boards on hire charges is not a transfer of right to use goods. Another interesting issue of attracting Service Tax under the category of renting of immovable property for commercial purposes could be, on providing small office space along with furniture to the Banks/Financial Institutions by the large auto Dealers in their premises for providing fast loan facilities to the prospective car buyers. This issue may arise after the decision of the Bangalore Tribunal in the case of CCE, Belgaum vs. Chadha Auto Agencies 2008 (11) STR 643 (TRI. Bang), wherein it has been decided that such activity cannot be brought within the definition of ‘Business Auxiliary Services’. The question of renting out of storage tank has also cropped up, but a storage tank is not covered under the scope of Immovable Property as per the Statutory Explanation u/s 65(90a) for this service for this taxable service and thus it would not be taxable. Similarly, the question of renting out of cold storage as a facility may be decided on the basis of the explanation which is clarifying the scope of the taxable service of renting of property. Cold storage as such has not been specified in the Explanation of the ‘Immovable Properties’. It is also to be kept in mind that cold storage has been specifically excluded from the purview of taxable service of Storage & Warehousing Services. [Source: Paper presented at Two Day National Tax Conference held on 13th and 14th December, 2008 at Kolkata.] |