Renting of Immovable Property – Service Tax – The Elusive Delhi High Court order – English wins!
NORMALLY we would not like to comment/analyse a judgement unless we have an authentic copy of it. Since the Delhi High Court delivered its classic judgement on service tax on renting of immovable property, on Saturday 18 April 2009, our mail boxes are bombarded and our phones are constantly ringing – when are you carrying the judgement?, what are the implications?, Is it applicable to the whole country or only Delhi?
A hapless assessee told me, “all this hype is meaningless; the government will appeal to the Supreme Court or amend the law retrospectively; can I continue to pay the tax, in spite of the Delhi High Court judgement, or am I bound by it?”
Coming back to the judgement, till this morning, we could not get a copy and there are so many frustrated sites out there waiting for us to carry it so that they can also pick it from us and flash it. We are really very sorry, we have disappointed them.
But we give below a brief on the case gathered from sources and we may hasten to add this may not be authentic. Later in the day we will try to get the judgement and our analysis. Till then this is what we have gathered.
The petitioners have not won by challenging the legislative competence of Parliament to levy tax on renting of immovable property.
They challenged an exemption notification – Notification No. 24/2007 dated 22/05/2007 which exempts the taxable service of renting of immovable property , referred to in sub-clause (zzzz) of clause (105) of section 65 of the Finance Act, from so much of the service tax leviable thereon as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies:
And they have challenged Board Circular No. 98/1/2008-ST dated 04/01/2008 which casually mentioned that Right to use immovable property is leviable to service tax under renting of immovable property service.
The Delhi High Court has quashed both the notification and the Circular. So what happens? The service is still taxable under the Act and the exemption of Municipal taxes would not be available?
No. The High Court has categorically held that Section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the Act. Of course, if there is some other service, such as air conditioning service provided along with the renting of immovable property, then it would fall within Section 65(105)(zzzz).
And the Delhi High Court has 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 11 of the Constitution of India. Such an examination has become unnecessary because of the view it has taken on the main plea taken by the petitioners – that even as per the Act, renting is not taxable.
Tax is in relation to renting not renting itself: The High Court's reasoning was that the tax is not on renting per se but on services in relation to renting. So it was this ‘in relation to' which caved in the case or the government.
Everybody knows that what the government wanted to tax and what it made parliament to legislate was a tax on renting of immovable property. But what the government got the parliament to legislate was a tax ‘in relation' to renting and not renting itself. This English is what came handy to the legal brains to wriggle out of the tax on renting. The draftsmen's casual use of the phrase ‘in relation to' has cost them dear. In fact this phrase ‘in relation to' has been the subject matter of over 7000 reported cases.
Lord Denning, in his classic style had remarked, “A Judge must not alter the material of which the Act is woven, but he can and should iron out the creases."
Now whether the issue at hand involves altering the material of the fabric or ironing out the crease is an altogether different topic.
Back to the future? Now what happens? These are the possible situations.
1. Government appeals to the Supreme Court – Uncertainty for the assessee; client will not pay Service tax in view of the High Court order, but the assessee is liable in case the Supreme Court overrules the High Court order.
2. The Supreme Court upholds the High Court order, but government amends the law retrospectively (they had done it several times and Supreme Court has upheld their right to do so) – the assessee is burdened again.
3. Government keeps quiet – the Delhi High Court order may not be applicable outside Delhi – another High Court may take a different view. The power of the High Court under Article 226 is throughout the territories in relation to which it exercises jurisdiction . So the Delhi order may not be applicable in Tamil Nadu. – More confusion and uncertainty for the assessee.
4. If another High Court, say Madras High Court holds a contrary view and if there is an assessee who has branches in Chennai and Delhi, he would have to pay tax in Chennai and need not pay in Delhi. What happens if he has a centralised billing centre either in Chennai or Delhi?
It doesn't always pay to win judicial battles; the best option is what my assessee friend asked me – continue to pay the tax – you are safe.
We reiterate that our comments on the judgement are based on information furnished by our sources and we still do not have an authentic copy of the Delhi High Court order.