Service tax on properties leased - Guj HC dismisses petition by retail companies

Gujarat High Court on Tuesday dismissed a petition, filed by several retail giants in the state, against levying of service tax on properties leased and rented by them. These retail companies had approached the high court challenging the provision in the Finance Act, contending that the same are ultra vires of the Constitution. The petition stated that the Centre did not have the right to impose such tax as it falls under the jurisdiction of the state.

The companies had contended that letting out an immovable property was only a property transaction and could not be considered as a service rendered. However, the court has not upheld the contentions raised by the petitioners.

The petition was filed in 2010 by Cinemax India Ltd, Next Retail India Ltd, Trent Hypermarket Ltd, V Square Project, Villa Developers, Ariane Furnishing Solutions LLP, Infiniti Retail Ltd, Globus Stores Pvt Ltd against the state government, Centre and the landlords of the properties.

The Centre had through an amendment to Finance Act, 2007, had introduced the provision of service tax on renting of immovable property.

The Act was amended in 2008 and most recently in 2010. As per the Act, the government had imposed service tax on every transaction of rent agreements.

In the petition filed by Infinity and Globus through advocate AR Gupta, it was alleged that as a result of the provision in the Finance Act, owners pressurised the tenants to pay the amount of service tax. This, despite the fact that under the provisions, property owners are supposed to pay the tax.

The companies further had argued that this practice had been endorsed by the government in its letter dated February 26, 2010.

Hence, the companies filed a petition whereby they pleaded that such taxes created artificial liabilities for companies who carry their business on rented premises.

In the petition the companies further stated that imposition of service tax on the letting of immovable property goes back to almost three years (2007) and as the amendment is carried out with retrospective effect, the service tax which is required to be paid is 12.5% of the rental amount.