Service Tax on Renting of Immovable Property

The question whether service tax is leviable on the renting of immovable property to be used for business or commercial purpose has again come up for consideration before the Delhi High Court. The order of the court can be accessed here.


Earlier in 2009 the Delhi high court in Home Solutions retail Ltd. v. UOI had considered a similar question. In the impugned case the legality, validity and vires of notification no. 24/2007 dated 22/05/2007 was challenged. It was contended by the petitioners that the said notification made an erroneous interpretation of s. 65(105)(zzzz) of the finance Act, 1994. The notification which was intended to be clarificatory stated that renting of immovable property was liable to service tax per se. To put it differently in Home solutions the Delhi high court had to consider the question whether the Finance Act, 1994 contemplated levying service tax on renting of immovable property per se. in this regard it is first pertinent to reproduce S. 65(105)(zzzz) of the Finance act, 1994:

(105) "taxable service" means any service provided or to be provided,-


xxxx xxxx xxxx xxxx xxxx


(zzzz) 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.


On plain reading of the aforementioned section it seems evident that only service which is provided “in relation to” renting of immovable property is liable to tax and not renting of immovable property per se. In other words suppose an air conditioner is provided along with the rented house then the same would be chargeable to tax but not renting the house per se. Simply put there has to be a value addition along with just renting of the immovable property. In Home solutions the Delhi high court adopted the same position. The following part of the judgement is apposite:

“The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz).”

In a recent case as pointed out earlier the question of service tax in relation to renting of immovable property has again cropped up. The reason being that the Finance Act, 2010 has made a retrospective amendment to s. 65(105)(zzzz). The amended version reads as under:

(zzzz) by renting of immovable property or any other service in relation to such renting

The amendment makes it abundantly clear that renting of immovable property per se is subject to service tax. However this provision is not immune to a constitutional challenge. The reason being that service tax on renting of immovable property would amount tax on land and would fall outside the legislative competence of parliament since levying of tax on land falls under Entry 49 List II of the constitution of India. In other words levying tax on land is a state subject. This plea was taken by the petitioners as an alternative in Home solutions but the Delhi high court did not consider this question as it was unable to find at the first place that the finance act, 1994 contemplated levying service tax on renting of immovable property per se. For the time being it remains to be seen what the Supreme Court opines on this matter as an appeal in pending before it against the home solutions judgement.