Renting of Immovable Property Service

[Submitted by Pradeep Kumar S.,
CA student,
Bangalore, Karnataka]

June 29, 2009

Service tax is the tax of the Country. It is a most significant tool of Central Government to revenue generating. It is only an area which is growing faster in comparing to other area of taxes. Central Government levies service tax through chapter V of Finance Act, 1994 vide Entry 97 of schedule VII of Constitution of India.

Today’s Economic has significantly effected due to boom in Real Estate industry business in the recent past and big demand of multiplex, Mall and commercial complexes and growing the business of leasing and renting, these effects have also attracted the attention of the Ministry of Finance, therefore for the extent of scope of service tax the Ministry of Finance in its Budget 2007 has introduced a new service namely “Renting of Immovable Property”. It has effected from 1st June, 2007 and levied under section 65(105) (zzzz) of chapter V of Finance Act, 1994. This service is likely played most significant role among the other taxable services.

This was introduced following the philosophy that even renting was liable to service tax as evidenced by the Circular 334/1/2007 TRU dated 28.02.2007 which sought to regard renting of immovable property for use in the course or furtherance of business or commerce as the taxable service.

APPLICABILITY

As per Section 65(105)(zzzz) of Chapter V of Finance Act 1994 as amended from time to time, 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 or furtherance of business or commerce.

“Immovable property” has been defined to include –

• Building and part of a building and the land appurtenant thereto
• Land incidental to the use of such building or part of a building
• Common or shared areas and facilities relating thereto and
• 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

“Immovable property” would not include –

• Vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes
• Vacant land (whether or not having facilities clearly incidental to the use of such vacant land)
• Land used for education, sports, circus, entertainment and parking purposes and
• Building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

Where an immovable property is used partly for residential purposes and partly for use in the course of furtherance of business or commerce, it shall be deemed to be immovable property for use in the course of furtherance of business or commerce.

The phrase “renting of immovable property” has been defined u/s 65(90a) to include 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 –

• Renting of immovable property by a religious body or to a religious body or
• 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 centre

The phrase “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.

Finance Act 2008 had also inserted another explanation in Section 65(90a) to include the act of allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property, within the meaning of the phrase “renting of immovable property”.

While efforts had been taken to define the concept of “immovable property” and the phrase “renting of immovable property” the critical issue was that what could be held liable under Section 65(105)(zzzz) was service provided or to be provided in relation to renting of immovable property and not the very act of renting of immovable property itself. But unfortunately, this aspect seemed to have been ignored totally by the department whose efforts had been to collect service tax on the rental income ignoring totally the absence of “service” element in most of the cases which was also exemplified through the Circular 98/1/2008 ST dated 04.01.2008 which specifically sought to tax right to use immovable property under the category renting of immovable property service.

Now we know what the coverage of this service is, but there was very interesting decision, in Delhi Home Solution Retail India Ltd. V UOI. 2009 (14) S.T.R. 433 where it was held that, the service rendered should be “in relation to” renting of immovable property with some value addition are covered under this category section 65(105)(zzzz) , else only renting of immovable property is not a service at all and not liable under this category .

The High Court has clearly held that service tax is a tax on value addition made by the service provider and in case of mere letting out of property, there would be no value addition for the purpose of charging service tax.

Detail discussion of applicability on the basis of legal provisions: -

• Every person is covered under this category of service in the role of service provider, but a religious body shall not be liable to collect/pay service tax either in role of a service provider or in role of a service recipient.
   
• Immovable property must be used for business or commerce (i.e. Factories, office buildings, warehouses, theaters, exhibition halls, building used for multiplexes, ect.) in other words if it is used for personal purpose, it shall be out of purview of service tax.
   

• If a building partly used for residential purpose and partly used for business or commercial purposes, it shall be deemed property used for business or commercial purposes, therefore it is covered in definition of immovable property.
   

• Renting of common or shared area and facilities related thereto (i.e. Lift, hall, and other facilities which are used by tenants commonly or shared base) are also covered in this definition.
   
• In the case of commercial complexes, there may be space for parking purposes in or around the complex and if the owner of this complex is leased out such parking space to other person (tenant), service tax shall not be levied on space around the complex but service tax shall be levied on space in the complex because only “land for parking purposes” has excluded in the definition of immovable property not building.
   
• If land owner is leased out his land to tenant and tenant used this land for construction of factory or building, which is/to be used for business or commerce, in this situation land deemed to be an immovable property for the purposes of renting of immovable property.
   
• If leased out vacant land is used solely as vacant land for any purposes, it shall not be covered in definition of immovable property.
   

CIRCULAR NO. 98/1/2008 ST

As per circular immovable property which is not subject to excise duty or service tax and neither service nor goods , hence service tax paid on construction of immovable property can’t be setoff against service tax payable on renting of immovable property service.

Firstly, space of immovable property are completely used for renting purposes and renting of immovable property is an output service, it is clear that immovable property is not subject to service tax but service provided by immovable property is subject to service tax and in view of author this immovable property is clearly the premises of output service provider therefore we can take credit of service tax/excise duty paid on setting up such premises.

Secondly, a manufacture of excisable goods pays service tax and excise duty on those input services and capital goods, which are used for construction of factory and an office relating to such factory and a output service provider (other than provider of renting of immovable property) also pays service tax and excise duty on those input service and capital goods which are used for construction of premises of output service provider and an office relating to such premises. Revenue allows credit in this situation both to manufactures and service providers thus provider of renting of immovable property service is also entitled for credit of discussed input services and capital goods

This circular is being challenged before the high court and presently the matter is before Supreme Court

Based on above discussion we had and the latest decision in case of Delhi Home Solution Retail India Ltd, what would be the service providers view in this regard. Whether he going to take a shelter under this case, or not. Whether in case if there is any amendment under this category in future, since the above decision has been challenged before the Supreme Court. What would be the position of the assessee lets wait & see?

Go to "Articles" Listings

Read our disclaimer and privacy policy
In case of problems viewing CAalley, please inform us