Delhi HC stays service tax on immovable property rental, ping-pongs question back to apex court

Wednesday, 15 December 2010

Exclusive: The Delhi High Court has again stayed the imposition of service tax imposition on immovable property rentals in one of the Home Solutions cases, reaffirming its earlier stance. The order contradicted a Punjab & Haryana High Court order and put the ball back into the Supreme Court, which had asked for the Delhi High Court to adjudicate.

The Delhi High Court division bench comprising of Delhi High Court Chief Justice Dipak Mishra and justice Manmohan pressed for early adjudication of the matter by the apex court while observing the recent conflicting Punjab & Haryana High Court’s order to be merely persuasive and not binding.

Naik Paranjpe & Co partner Ameet Naik assisted by advocate Rishi Agarwal had instructed senior counsel Harish Salve for clients Home Solutions in the final hearing of the Delhi High Court petition filed against the imposition and retrospective applicability of service tax on property rentals. A fresh petition had been filed in 2010 to challenge the post-budget amendment of the Finance Act 2010 which facilitated such a levy.

Additional Solicitor General AS Chandiok has been representing the governement in the matters.

Naik said that the court referred to its April 2009 judgement (see background below) to conclude prima facie that a Finance Act amendment had not removed the earlier judgement’s substratum, which was directly conclusive of the fact that "mere renting of immovable property was not service since there was no value addition".

“The Hon'ble High Court of Delhi was of the view that if the earlier view of the Hon'ble Delhi High Court was to be accepted then the writ petitions may have to be allowed but in case it was not to be accepted then the matter may have to be referred to a larger bench. During the course of arguments it was also informed to the Hon'ble Delhi High Court that the earlier judgment of Home Solutions was in appeal before the Hon'ble Supreme Court,” said a Naik.

He explained: “After hearing the parties, the Hon'ble Delhi High Court thought it proper to record the joint statement of the counsels for the petitioners and the respondents that they would be mentioning the SLP in Home Solutions Judgment before the Hon'ble Supreme Court for early disposal since it would directly impact the decision in the Hon'ble Delhi High Court.”

The Delhi HC allowed the interim stay to remain operative while concluding that the Supreme Court would be the final authority to decide on the substantive questions

Background

At the heart of the case is the validity or effectiveness of a statutory amendment to justify value added services tax liability on immovable property rentals.

Home Solutions had filed two petitions filed in the Delhi High Court. In April 2009 the company tried to set aside service tax sought to be charged on commercial property rentals, which resulted in Home Solution winning a favourable order under which a stay was granted.

Thereafter, through a post-budget Finance Act amendment of 2010, the legislature tried to broaden the scope of the charging section by extending the definition of Section 65 (105) (zzz). The amendment substituted the applicability of the tax “in relation to … by renting of immovable property or any other service in relation to such renting”.

The earlier definition had stated: “in relation to the renting of immovable property”. The purported intention was to extend the scope so as to ensure levy even on the mere act of renting out immovable property without offering any rationale for so doing.

The amendment was introduced after the government had failed in a Supreme Court special leave petition (SLP) to stay the April 2009 Delhi High Court order won by Home Solutions.

In principle, this constituted the grounds of the second petition, which Home Solutions also filed in the Delhi High Court before a different bench in May 2010.

In the May 2010 the Delhi High Court order on the recovery of service tax was stayed yet again in respect of immovable property alone and it was clarified that second part of the charging provision relating to recovery of tax on “any other service in relation to such renting” would remain operational.