V.S. Datey
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Recent decision of Delhi High Court that service tax cannot be imposed on renting of immovable property has raised hornet’s nest. The judgment has raised many issues and created numerous problems to landlords (service providers) and tenants (service receiver). In this article, attempt has been made to discuss various questions arising out of the judgment and possible plans of action.
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1. Background
As per section 65(105)(zzzz) of Finance Act, 1994; 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 is a ‘taxable service’.
Many writ petitions were filed and all these were transferred to Supreme Court. It seems these were transferred by Supreme Court to Delhi High Court to consider the matter. Delhi High Court has passed order on 18-4-2009. However, the judghment nowhere mentions that all writ petitions were transferred to Delhi High Court. In any case, that decision cannot be taken as decision of Supreme Court on the issue.
In Home Solution Retail India Ltd. v. UOI (WP(C) 1659/2008 and others decided on 18-4-2009), Hon. Delhi High Court has observed, ‘Service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz)’.
In short, service in relation to renting of immovable property’ is taxable (e.g. air conditioning of immovable property given on rent), but ‘renting of immovable property’ is a taxable service.
No decision about constitutional validity of the tax - It may be noted that Hon. High Court has not expressed any view regarding constitutional validity of the service tax on renting of immovable property. It was observed, ‘We have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above’.
1.1 Various definitions using the term ‘in relation to’
In the judgment, Hon Delhi High Court observed, ‘Sometimes, 'in relation to' would include the subject matter following it and on other occasions it would not. As in the case of the service of dry cleaning, the expression 'in relation to dry cleaning' also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65(105)(v), which refers to a service provided by a real estate agent 'in relation to real estate', does not, obviously, include the subject matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service.
There are many definitions of service where the term ‘in relation to’ has been used where the subject matter itself is a taxable service.
For example, any service provided or to be provided to a client, by any person in relation to business auxiliary service is a ‘taxable service’ [section 65(105)(zzb)]. This cannot be interpreted to mean that business auxiliary service itself would not be a taxable service.
As per the section 65(105)(zzq) of the Act, any service provided or to be provided to any person, by any other person in relation to commercial or industrial construction service is a taxable service. As per section 65(105)(zzzh), any service provided or to be provided to any person, by any other person, in relation to construction of complex; will be taxable service. Thus, construction itself is a taxable service.
As per section 65(105)(zzzza), any service provided or to be provided; to any person, by any other person in relation to the execution of a works contract is a taxable service. Does it mean that ‘works contract service’ itself is not taxable?
Any service in relation to information technology software is a taxable service [section 65(105)(zzzze)]. Thus, it can be argued that IT software itself is not taxable.
As per section 65(105)(zzzx), any service in relation to telecommunication service is ‘taxable service’.
As per section 65(105)(o), any service provided or to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab is ‘taxable service’.
As per section 65(105)(zzp), , any service, in relation to transport of goods by road in a goods carriage is a ‘taxable service’.
As per section 65(105)(zzg), any service provided or to be provided in relation to management, maintenance or repair, is a ‘taxable service’.
There are over .60 definitions of services where the phrase ‘in relation to’ is used to cover the subject matter itself for levy of service tax.
These services are - Air transport of passenger embarking in India for international journey, Automated teller machine operations, maintenance or management service, Asset management including portfolio management, Beauty parlour , Auction of property, movable or immovable, tangible or intangible, Service, repair, reconditioning or restoration of motor cars, light motor vehicles or two wheeled motor vehicles, Banking and other financial services , Business exhi bition, Support services of business or commerce, Cable services, Cargo handling agency, Cleaning activity, Clearing and forwarding operations,Advice, consultancy or technical assistance by consulting engineer, Credit card, debit card, charge card or other payment card service, Credit rating of any financial obligation, instrument or security., Design services., Development and supply of content , Dredging, will be taxable service., Dry cleaning., Erection, commissioning or installation., Event management., Fashion designing., Forward contract, Health and fitness services, Intellectual property service., Planning, design or beautification of spaces by interior decorator, Access of internet., Mailing list compilation and mailing., Use of a mandap in any manner., Manpower recruitment or supply , Market research of any product., Mining of mineral, oil or gas., On-line information and database access or retrieval , Opinion poll , Packaging activity., Pandal or shamiana, Photography, Port services., Programme service, Managing the public relations, Booking of passage for travel by rail, Sale of space or time for advertisement, Scientific or technical consultancy., Security of any property or person, Site formation and clearance, excavation and earthmoving and demolition, Any kind of sound recording, Sponsorship, Survey and exploration of mineral, Survey and map-making., Technical inspection and certification., Technical testing and analysis agency, Tour, Transport of goods by aircraft, Booking of passage for travel by travel agent., Underwriting., Video-tape production.
In all these cases, it will have to be examined whether there is any value addition!.
2. Meaning of ‘in relation to’
It is well settled that the term ‘in relation to’ is expansive [That is the reason why it has been liberally used in service tax provisions].
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v.Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9 = 136 Taxman 596 = 135 STC 480 (SC) CCE v. Solaris Chemtech (2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC).
3. Rule of purposive construction
The rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 - 1999) has evolved this rule of construction.
Lord Denning had observed – ‘It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with approval in K P Varghese v. ITO - (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1) SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) * DLF Universal Ltd. v. Appropriate Authority 243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) – same view in Amrendra Pratap Singh v. Tej Bahadur Prajapati 2004 AIR SCW 4103.
In Pepper v. Hart (1993) 1 All ER 42 (HL), it was observed, ‘The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted. – quoted with approval in – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999(9) SCC 334.
If there exists some ambiguity in the language or the same is capable of two interpretations, it is trite that the interpretation which serves the object and purpose of the Act must be given effect to. In such a case, the doctrine of purposive construction should be adopted – Nathi Devi v. Radha Devi Gupta AIR 2005 SC 648 = (2005) 2 SCC 271 (SC 5 member bench).
When an expression is cable of more than one meaning, the Court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the consequences of alternative constructions - Prakash Kumar v. State of Gujarat AIR 2005 SC 1075 (SC 5 member bench) – same view in South Eastern Coalfields v. CCE 2006 (200) ELT 357 (SC).
Applying this rule, it is difficult to say that the purpose of legislation was not to tax renting of immovable property.
See the relevant definitions reproduced below-
As per section 65(105)(zzzz), 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 is a ‘taxable service’.
Explanation 1.- For the purposes of this sub-clause, “immovable property” includes -
(i) building and part of a building, and the land appurtenant thereto;
(ii) land incidental to the use of such building or part of a building;
(iii) the common or shared areas and facilities relating thereto; and
(iv) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,
but does not include-
(a) vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;
(b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land;
(c) land used for educational, sports, circus, entertainment and parking purposes; and
(d) building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Explanation 2. - For the purposes of this sub-clause, an immovable property partly for use in the course or 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 or furtherance of business or commerce.
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
(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching center;
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, exhibition 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 [explanation 2 inserted vide Finance Act, 2008 w.e.f. 16-5-2008].
The intention to levy service tax on renting of immovable property itself seems quite evident from aforesaid definitions.
4. Meaning of ‘value addition’
The term ‘value addition’ is nowhere defined and in fact, nowhere used in the Finance Act, 1994 relating to service tax.
‘Value addition’ is a slippery and vague undefined term. The fact that someone is paying an amount for something means he is getting benefit out of that and hence it is ‘value addition’ for him. Otherwise, why he should agree to pay something?
Further, when legislature itself defines an activity as a taxable service and when there is no constitutional bar, there should be no impediment in imposing a tax.
5. Binding nature of Delhi HC judgment
It is well settled that decision of High Court is binding on all tribunals and quasi-judicial authorities within jurisdiction of that High Court but is not binding on other High Courts.
One question is whether the decision of one High Court is binding on tribunals and other quasi-judicial bodies in other States, in cases where there is no binding decision of High Court of the State where the tribunal or quasi-judicial body is situated. In such cases, in CIT v. Thana Electric Supply Ltd. (1994) 206 ITR 727 (Bom HC) - followed in Consolidated Pneumatic Tool Co. (I) Ltd. v. CIT - (1995) 79 Taxman 458 = (1994) 209 ITR 277 (Bom HC DB) * CIT v. Highway Construction 1999(105) ELT 14 (Gau HC DB) * Geoffrey Manners & Co. Ltd. v. CIT (1996) 89 Taxman 287 = 221 ITR 695 (Bom HC DB), where it has been held that decision of High Court is not binding precedent on Courts or Tribunals outside the jurisdiction of that High Court. It has only persuasive effect on courts and tribunals situated outside the jurisdiction of that High Court - same view in Taylor Instrument Co. v. CIT (1998) 99 Taxman 155 = 232 ITR 771 (Del HC DB) * CIT v. Ved Prakash (1989) 178 ITR 332 = 44 Taxman 365 (P&H HC).
However, Tribunals have expressed different views.
In Madura Coats v. CCE - (1996) 82 ELT 512 = 13 RLT 186 (CEGAT 3 member bench), it has been held that (a) decision of High Court having jurisdiction over the adjudication authority and assessee will have to be followed by Tribunals (b) When jurisdictional High Court has not taken a view and there are conflicting views of different High Courts, the Tribunal can formulate its own views (c) When there is decision of only one High Court (which is not connected with constitutional validity of a provision), the Tribunal is bound to follow that decision all over India. (d) However, when decision of one High Court is in respect of vires of any provision i.e. its constitutional validity, the decision of High Court is binding only in jurisdiction of that High Court - decision confirmed and followed in CCE v. Kashmir Conductors 1997 (96) ELT 257 = 22 RLT 343 (CEGAT 5 member bench).
In Khanbhai Esoofbhai v. CCE 1999(107) ELT 557 (CEGAT 5 member bench), it was held that in absence of any decision of a High Court holding a contrary view, decision given by a High Court is binding on Tribunal. (All over India - though these words were not used).
6. What assessee should do?
As discussed above, the decision of Delhi High Court is not on the basis of constitutional invalidly. It is only on the ground that in renting, there is no ‘value addition’.
It is reported in some articles that Central Government has 90 days time to file appeal or SLP before Supreme Court. Really, Delhi High Court has not specified any such limit and in fact, for fling SLP, there is no time limit.
The (so called) defect in legislation is no minor that it can be easily corrected by making retrospective amendment. Government can also approach Supreme Court for stay of the decision.
In any case, decision of Delhi High Court is not the last word and in my view, the decision will be unsettled either by Supreme Court or by retrospective amendment.
Action by landlord – It should be noted that statutory liability is on landlord. Liability of tenant is only contractual. In my view, it is safe to collect and pay service tax, particularly if he is outside the jurisdiction of Delhi High Court, binding nature of decision outside jurisdiction of Deli High Court is weak. He should note that if tax is found to be payable later, it will have to be paid with interest @ 13%.
If possible, collect ‘Deposit against possible service tax liability’ from tenant assuring that if final decision is in your favour, you will refund the amount or it can be adjusted against future rent.
In any case, the landlord must safeguard his interest at least by getting undertaking from tenant that he will pay service tax amount if finally decision goes against the landlord. [Of course, such undertaking can be enforced only through civil court and not through any statutory provision].
Renting within group companies – If renting is within the group companies itself, payment of service tax can be avoided (at least deferred) by informing department.
Action by tenant, if he is able to avail Cenvat credit – If tenant is in position to avail Cenvat credit, better option is to ask landlord to continue charging service tax. It is well settled that once tax is paid, Cenvat credit can be availed whether tax was actually payable or not. In CCE v. CEGAT 2006 (202) ELT 753 (Mad HC DB), it was held that the words used in rule 3(1) of Cenvat Credit Rules are ‘excise duty and service tax paid’ and not ‘payable’. Thus, once duty is ‘paid’, Cenvat credit is available, whether duty was payable or not - same view in CCE v. Ranbaxy Labs Ltd. 2006 (203) ELT 213 (P&H HC DB) * Manaksia Ltd. v. CCE (2008) 232 ELT 497 (CESTAT 2 v. 1 order) * Savera Pharmaceuticals v. CCE (2008) 222 ELT 457 (CESTAT).
If tenant is in dictating position and not in position to avail Cenvat credit - If the tenant is not in position to avail Cenvat credit (and if he is in position to dictate terms to landlord), he can refuse to pay service tax (and let landlord suffer), since the tenant has no statutory liability to pay service tax or even interest.
6.1 Disclosure to department
Whatever you decide, it is highly advisable to write to department, so that charge of suppression of facts is avoided and your liability is restricted to service tax plus interest.
6.2. Can assessee or service receiver claim refund?
Assessee or service receiver claim refund, but chances of actually getting refund are negligible, in view of doctrine of unjust enrichment. Landlord cannot get refund if he has collected service tax from the tenant. The tenant can refund only if he can establish that he has not passed on the burden of tax to another person.
Refund claim beyond one year is anyway time barred even if it is found that the levy was illegal!
7. Conclusion
In my view, decision of Delhi High Court is not the last word on this issue, particularly because it is not on the basis of constitutional validity of a decision. It can be easily overturned by judgment of Supreme Court.
Central Government need not take even that trouble and can overturn the decision simply by making a minor retrospective amendment, particularly because the phrase ‘in relation to’ has been used in at least 60 definitions of services.
In any case, landlord should take steps to protect his liability and should make full disclosure to department.
