In a judgment that has enriched the central government coffers by an estimated Rs 10,000 crore in the last three years, the Bombay high court on Thursday upheld the constitutional validity of service tax on commercial real estate transactions on renting of property.

A 12% service tax was introduced in the amended Finance Act, 2007. Dictating and delivering the judgment in the open court, Justice D Y Chandrachud held that the renting of land and building did comprise a "service" and that the Centre was entitled to levy a tax on it.

The judgment, viewed as landmark in legal circles, has recognized wide powers with the Centre to levy a service tax on transactions which have an element of service. The judgment thus resolved the power of the Centre to bring under the service tax umbrella un-enumerated services too.

The ruling will boost tax revenue for the government and will translate into higher rentals in the already high-priced corporate property markets of bigger metros like Mumbai, Delhi, Bangalore and Chennai.

The Retailers' Association of India along with the Confederation of Real Estate Developers' Association of India and Multiplex Association of India had moved the Bombay high court against the service tax on renting of commercial property. Advocate Ameet Naik, lawyer for the retailers' association, later said, "We will study the judgment once we get a copy and then decide the next course of action."

The service tax provision had resulted in proceedings being filed in the Delhi high court even in 2008, after the first amendment to the law in 2007, which spoke of only "services in relation to renting of immovable property". The Delhi HC in 2009 held that service tax was not payable on renting as it was not a value-added service. The Centre quickly brought out an amendment in 2010 to clarify that the tax was on renting of commercial property. The 2010 amendment was under challenge as it would also have retrospective effect since 2007.

The main argument that the developers made was that tax department was misinterpreting the entry of taxable service "in relation to renting of immovable property" under Section 65 (105) (zzzz) of the Finance Act. They argued that there was "no service involved in renting premises". But the HC held that service was involved and upheld the power of Parliament to levy the service tax.

The HC rejected the retailers' and developers' arguments that only state governments could make laws governing "immovable property". The judges, after tracing laws on land taxes since 1949, said taxes on land and buildings were directly imposed on ownership but significantly delineated the concept of service. It held that what was being taxed was not land but a service invoked in renting of the land and constructed premises.

The HC also upheld arguments by additional solicitor-general Darius Khambata that Parliament could add taxable transactions.

The judgment thus sets at rest the conflict between the power of the Union government and state to levy service tax, particularly on transactions relating to land.