Sukumar Mukhopadhyay Member Cbec (Retd.)
1. A very recent judgment of the Delhi High Court holding that renting of immovable property is not a service has created interest among taxpayers, analysts and economists. Both conceptually and legally, there are some issues which need to be settled; as if it is not a service, there will be many in the present list which can also not be treated as a service.
2. Section 65(105)(zzzz) of the Finance Act, 1994 reads:
(zzzz)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”.
The High Court has held the following:
There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that 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 along with the renting of immovable property, then it would fall within section 65(105)(zzzz). (p. 146)
3. The above judgment has six components, which have been examined hereinbelow :
(a)-Any service in relation to renting of immovable property is a service : This part of the decision is unexceptionable but the real controversy lies in interpreting the expression ‘in relation to renting of property’. However, this aspect will be discussed in more detail when one takes up point (f).
(b)-Renting of such immovable property by itself is not a service : One can disagree with this proposition.
Service tax on renting of immovable property is not a tax on the property itself. It is a tax on the rent. It is not a property tax. It is a tax on the service given by the property for the time being when it remains in the possession of the person who has taken it on rent. It is just like the service of pandal, or shamiana or modem or telephone in telecommunication service or similar material objects whose services are taken on payment for the time being. Therefore, renting of immovable property is a service.
(c)-The Supreme Court has called service tax a value added tax : This proposition is also disagreeable. The Delhi High Court judgment has referred to the Supreme Court judgment in the case of All India Federation of Tax Practitioners v. Union of India [2007] 10 STT 166. The High Court referred to para 8 of the Supreme Court judgment wherein it has been observed that service tax is a value added tax. However, one finds that para 8 of the judgment is a part of what the Supreme Court called ‘background facts’. It is no part of the judgment. One can also find that at para 20, the Supreme Court has said that ‘service tax is VAT which, in turn, is both a general tax as well as destination based consumption tax leviable on services provided within the country’. This portion is, however, a part of what the Supreme Court has called ‘findings’. It may be pointed out that a service tax is not always destination based but can as well be origin based as in India. In any case this is not a judgment as such of the Supreme Court. The judgment is only that profession tax is not a service tax. Service tax is a VAT or not or is a destination based tax or not are matters of economic theory. There are different combinations in different countries. Economists have also given different versions. As a concept,
service tax is VAT or not has been discussed below.
It should be also seen that in this Supreme Court judgment, there are some expressions which are judgments. For example, at one place the Court has used the expression ‘service industry’. This does not mean that the Supreme Court has called service as industry. Here the expression industry means sector.
4. It is very important to settle the issues involved here in the interest of conceptual clarity. Therefore, it would be immediately necessary that the CBEC examines the issue taking into consideration the points mentioned herein above for the purpose of filing an appeal in the Supreme Court within the period of limitation. If it is filed later, it will be rejected in limine which has happened before many times. In such an important issue like this, such a chance cannot be taken.
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