Synopsis of Delhi High Court Judgment on Renting of Immovable Property
On 18th April 2009 a Division Bench of Delhi High Court comprising of Justice Badar Durrez Ahmed and Justice Rajiv Shikader gav its decision on levy of service tax on renting of immovable property. As media gave extensive coverage to this judgment, based on media reports a common perception has been formed that the Delhi High Court has struck down the service tax levy on commercial rentals. But actually that is not the case and therefore we are providing an understanding to the judgment pronounced by Delhi High Court.

Background
The Finance Act, 2007 with effect from 01.06.2007 brought in a new category of taxable service namely "Renting of Immovable Property". Section 65(105)(zzzz) which is read as follows was inserted in the statute books "Any service provided or to be provided to any person by any other person in relation to renting of immovable property for use i the course or furtherance of business or commerce' is taxable."

Along with the introduction of this new category of taxable service, Notification No. 24/2007 dated 22.05.2007 was issued by the Central Government. This Notification granted exemption in respect of "renting of immovable property service" to the value of taxable service equivalent to the amount of property tax paid by the service provider (i.e. landlord) on such property. Later on, CBEC vide its circular No. 98/1/2008 Dated 04.01.2008, with reference to a query regarding availability of Cenvat Credit of service tax paid in respect to construction of building carified that right to use immovable property is leviable to service tax under renting of immovable property service.

Hence, an inference was drawn through the aforesaid Notification 24/2007 and Circular No. 98//1/2008 that service tax is payable on the amount of rental income earned by a person from renting of a immovable property which i used for the purpose of business or commerce.

Issues before the Delhi High Court
A number of writ petitions were filed by various parties challenging the validity of the above Notification because as a resultof the incorrect interpretation of the notification, service tax is sought to be levied on renting of immovable property as opposed to service tax on a service provided in relation to the renting of immovable property. Further, the validity of the aforesaid circular was also challenged whereby the landlords/lessors were denied Cenvat credit in respect of service tax paid in relation to the construction of the building.

In addition to the primary plea of the petitioners, as an alternate plea the legislative competence of Parliament was also challenged by the petitioners on the pretext that levy f service tax on renting of immovable property would amount to a tax on land. The same is covered under Entry 49 of List II of the Constitution of India thereby falling within the legislative competence o the States and the Parliament cannot levy any tax thereon.

Order of the Delhi High Court
The Hon'ble Delhi High Court gave its decision in favour of the petitioners on the basis of the primary plea of the petitioners The two pillars of the verdict given by the Hon'ble High Court are:
a) Interpretation of the term "in relation to".
b) Absence of value addition.

Interpretation of the term "in relation to"
While dealing with this issue, the Hon'ble High Court has taken note of various decisions interpreting the term in relation to" and finally came to the conclusion that Finance Act, 1994 does not provide for the levy of service tax on renting of immovable property. It has been observed in the judgment that the 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 taxable. Therefore Notification No. 24/2007 dated 22.05.2007 and Circular No. 98/1/2008 Dated 04.01.2008 are ultra vires being beyond the scope of Finance Act 1994.

In this regard the Hon'ble Delhi High Court placed reliance on the judgment pronounced by the Supreme Court in the case of T.N.Kalyana Mandapam Association Vs. Union of India wherein it was held that a particular property can be made subject to service tax, only when all the apparatus, equipment and infrastructure, which enables property to be utilised for the holding of ceremonial, religious or social functions is provided by the service providers.

Absence of value addition
In addition to the above, the Hon'ble High Court relied heavily on the theory of value addition given by the Hon'ble Supreme Court in the case of All Inia Federation of Tax Practitioners Vs. Union of India. In the said case, the Supreme Court has observed that service tax is a value added tax and can only be levied on the value addition. Therefore, the activity of renting of immovable property does not by itself provide any value addition to any person and therefore, cannot be treated as a service. Based on the value addition theory, the High Court held that when there is no value addition and service tax being a value added tax, there shall be no service tax on renting of immovable property.

The Hon'ble High Court elucidated its findings with an illustrative case in which services are provided to "A" by "B", in relation to "C", "A" is the service recipient, "B" is the service provider and "C" is the subject matter. The Hon'ble High Court observed that if "C" by itself is a service, the expression "in relation to" would cover "C" also and if "C" by itself is not a service, then the expression "in relation to" would not cover "C" as such, but would cover only those services which would add value to the subject matter "C".

The Hon'ble High Court further explained its findings by comparing the definition of taxable service for dry cleaning services nd real estate agent services, two categories of service in which the word "in relation to" has been mentioned in the taxable clause. The Hon'ble High Court after comparing the two definitions came to a conclusion that since dry cleaning by itself is a service the expression "in relation to" would cover dry cleaning per se also whereas the same shall not cover real estate per se, since it is not a service.

Hence, the High Court observed the definition of taxable service in case of renting of immovable property service, actual renting of immovable property is not subject to the levy of service tax, but only those services which are in relation to such renting, like air conditioning, power back up, water supply, etc.

Further, it has been categorically stated in para 37 of the judgment that the alternative plea of the petitioners in respect to CentralGovernment's right to levy tax on land/buildings as the same falls within the State list, has not been examined.

Current Scenario
In the present scenario, nowadays the Lessor provide a lot of services like furniture and fitouts, air conditioning, parking space, common facilities like lift, common power supply, etc. as part of an overall package. According to the findings of the judgment pronounced by Delhi high Court which have been discussed above, all of these services are covered under 'Renting of Immovable Property services.

Thus, now the question which is to be answered is how to ascertain the value of such taxable services, from the amount of rent to be received from the tenant. There is no provision in the law which will enable the lessor to ascertain amount of rent i.e. the amount which is attributable to the activity of 'letting out of the property and not liable to be taxed as per the Delhi High Court.

As per the Service Tax (Determination of Value) Rules 2006 read along with section 67 of Finance Act 1994, service tax is payable on the gross amount charged. Thus, in other words, it can be said tax will be payable on the entire amount realised from renting of immovable property. Therefore, Lessor may continue to collect and pay service tax.

It will not be inappropriate to mention that the Budget 2009 is round the corner and the Government may make retrospective amenments to protect its revenue as done in earlier cases.