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Service tax case will go before SC
April, 23rd 2009

The Union government will move the Supreme Court against the Delhi High Courts order that has ruled against levying service tax on rentals from commercial properties.

We feel that rental income accruing from the lease of commercial property is a service and hence liable to attract service tax. We will appeal against the High Courts order in the apex court, additional solicitor general P P Malhotra told Financial Chronicle.

While Malhotra refused to share the basis of his arguments, independent tax consultants told Financial Chronicle that imposition of service tax is based only on the definition of services provided by the law.

Says Uday Pimprikar, partner, Ernst & Young, Whether leasing of immovable property constitutes a service is conceptually a grey area. Although, renting out involves a transaction of transfer of rights to use the premises, the activity in itself may not constitute a service. It falls in grey areas such as licensing of software or intellectual property rights. Agrees Anita Rastogi, senior manager, PricewaterhouseCoopers, If the law stipulates that a particular activity is deemed to be a service, then it is liable to attract a service tax.

However, senior advocate Jayant Bhushan argues that mere leasing out of the premises does not constitute a service. The fee charged by a broker facilitating the leasing activity may still be considered as a service to attract service tax but not the rental income accruing merely from the lease of a commercial space. Bhushan represents one of the retailers who had petitioned the Delhi High Court against the levy.

The retailers contend that mere lease of property does not constitute a service. N Sundararaman, president, group finance & corporate affairs, Lifestyle International, said, "We had filed a writ petition stating that by taking immovable property on lease, the owner of the property was not extending any service. Also, property is a state subject and the Centre cannot interfere in it. Levy of service tax on commercial property rentals was unconstitutional."

Concurs Sanjeev Mohanty, MD, United Colours of Benetton, It was unreasonable to levy service tax on the rentals of commercial property as it is used only for conducting business. In fact, the property is not being sold." Ajit Kumar Chordia, MD, Khivraj Tech Park, said, Renting out is a not service. Even if it has to be taxed, only the concerned state can do so.

Mayank Saksena, associate director, Jones Lang LaSalle Meghraj, had an interesting take on the debate. He said that renting out commercial properties should not be considered a service, simply because there is no human involvement in it. The only human involvement in the whole process comes with regard to common area maintenance, which in most of the cases is done by facility management service providers, which is already taxed.

V Muhammad Ali, head of operations at Prestige Groups Forum Mall in Bangalore, said that renting is definitely not a service. You make an investment with returns in mind and that cannot be considered a service.

However, Vivek Mishra, tax partner, Ernst & Young, said that the definition of services goes beyond the commonly understood concept of a service. Rather, the law governing service tax clearly stipulates the definition of services, which could come under the ambit of service tax. In fact, the larger issue is not whether renting should come under the service tax net, but the inability of owners of the premises to take credit for any input service tax.

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