Service Tax on Commercial Rent Held Unconstitutional (Delhi High Court)

“The Delhi High Court has on April 18, 2009 struck down the levy of service tax on renting ofimmovable property as “unconstitutional”.”

For_Immediate_Release:

The Delhi High Court has today struck down the levy of service tax on renting of immovableproperty as “unconstitutional”, while deciding 26 writ petitions of different petitioners, by acombined order. The division bench of the Delhi High Court comprised of Mr. Justice BadarDurrez Ahmed and Mr. Justice Rajiv Shakdher observed that service tax shall not be levied onrenting of immovable property.

Alishan Naqvee, Advocate, LexCounsel Law Offices, who represented his clients in two of thepetitions disposed off today, tells that the category of “renting of immovable property service”was introduced by the Finance Act of 2007. This, in effect brought renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course offurtherance of business and commerce, within the service tax net with effect from June 1,2007. This new levy severely impacted business models across India as most of the rentarrangements did not even stipulate it beforehand.

The businesses across India opted to en masse challenge the constitutionality of levy of servicetax on rent, on the primary grounds that renting does not involve any service, and the CentralGovernment is not empowered to tax consideration for transfer of rights in immovable property, being a state subject as per the Constitution of India. Few High Courts, including the High Court of Mumbai, Delhi, Gujarat, Andhra Pradesh, Kolkata and Chennai reportedlygranted interim reliefs to the petitioners from payment of service tax until final disposal of theirmatters. The stays were however granted subject to undertakings by the petitioners, mainlytenants, to deposit the service tax amount with the Government if the tax was ultimately heldconstitutional. The Delhi High Court however is the first High Court to deliver the final orderin the matter that would have persuasive value for the other High Courts.

The detailed order of the Delhi High Court is expected to be available within the next couple ofworking days. One issue that needs to be seen is whether the Delhi High Court has expresslylimited the applicability of its judgment to its territorial jurisdiction. Notably, while grantinginterim orders, the Delhi High Court had expressed that the stays would be operative within theterritorial jurisdiction of the Court.

Consequently, a number of petitioners, having operations in multiple states, were constrainedto knock at the doors of the other High Courts.

To avoid multiplicity of litigation, the Union of India preferred a transfer petition to the Supreme Court of India seeking transfer of all writ petitions pending before different HighCourts of India, to the Delhi High Court for single window adjudication.

It is open for the Government to prefer an appeal before the Supreme Court of India, challenging the decision of the Delhi High Court. The judgment however delivers great relief to the business by helping liquidity in the current times.