Issues on renting of immovable property

Service in relation to ‘Renting of immovable property’ has been explained in detail in our earlier articles for the month of March 2007 & June 2007. Some queries in relation to the said service have been answered in this article. Further, the recent and important High Court decision in case of Assotech Realty Pvt. Ltd. have been analyzed and explained.

1. Issues in relation to ‘renting of immovable property’

• Two co-owners Mr. X and Mr. Y jointly own a property. The rent paid to each owner individually does not exceed Rs. 8 lakhs exemption limit. Does the exemption limit apply to each co-owner?
  
  Notification No. 6/2005 dated 1-3-2005 exempts taxable services of aggregate value not exceeding four lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66 of the said Finance Act.
  
  Explanation B in Notification No.6/2005 defines "aggregate value not exceeding four lakh rupees" means the sum total of first consecutive payments received during a financial year towards the gross amount, as prescribed under section 67 of the said Finance Act, charged by the service provider towards taxable services till the aggregate amount of such payments is equal to four lakh rupees but does not include payments received towards such gross amount which are exempt from whole of service tax leviable thereon under section 66 of the said Finance Act under any other notification.
  
  Please note that the words Rs. "four lakhs" have been substituted by Rs. "eight lakhs" vide Notification No. 4/2007 dated 1-3-2007.
  
  Mr. X and Mr. Y both here are service providers as both are providing the service in relation to renting of Immovable property for commercial purpose. However as the amount charged by Mr. X and Mr. Y individually does not exceed Rs. 8 lakhs, service tax will not be applicable.
   

• ABC Ltd. has its registered office in Mumbai. The company has leased its premises in Kolkata and Goa. Does ABC Ltd requires to mention the address of Kolkata and Goa in ST-I as the "additional place of business"?
  
  ABC Limited is not providing/conduction business from such leased premises business. The lessee is utilizing the said premises for conducting his business operations.
  
  Thus, in our opinion the leased premises should not be added in the additional place of business. However, it is suggested to intimate the department the list of premises given on rent. This will enable the service provider (landlord/lesser) to avail cenvat credit on input services such as interior decorator services, architect services, construction services etc. in relation to the said premises.
  
  It is further suggested that The ST-1 should be suitably amended to cover such scenario in relation to this service.
   

• Mr. Rustam, landlord for commercial property located in Nariman Point receives monthly rent of Rs. 3 Lakhs w.e.f June, 07. However, Mr. Rustam pays the property tax of Rs. 1 lakh on the same premise in March 2008 for the period June 2007- March 2008. How will Mr Rustam discharge his service tax liability?
  
  In situations when property tax is paid after the payment of service tax on the rental, deduction of property tax paid from rental could not be availed of at the time of payment of service tax. In such cases, Rule 4C of the Service Tax Rules, 1994 provides self-adjustment of excess service tax paid against the service tax liability without any limit within 1 year from the date of payment of such property tax. [Notification No.24/2007-Service Tax, dated 22-5-2007].
  
  Please note that the details of such adjustment should be intimated to the Superintendent of Central Excise within a period of fifteen days from the date of such adjustment.
  
  However it is important to note here that the doctrine of "unjust enrichment" will be applicable in this situation too. Thus, the landlord will be entitled such self-adjustment of excess service tax paid provided the landlord refunds the excess amount collected by him to the tenant.
  
  Thus, Mr. Rustam will discharge his service tax liability as following:
  
  Service tax payable per month for the period June, 2007 - Feb., 2008 = 12.36% on Rs.3 lakhs.
  
  Service tax payable for the month of March, 2008= 12.36% of Rs. 2 lakhs (Rental for the month less property tax paid)
  
  Now, the landlord needs to refund excess service tax collected to the tenant or alternatively raise an Invoice in the month of March 08 for Rs. 3 lakhs, but charge service tax on Rs 2 lakhs only.

2. High Court decision in case of Assotech Realty Pvt. Ltd. vs. State of Up and Another (Service tax on sale of immovable property)

The order passed by the Assistant Commissioner, Trade Tax, Section – I, Noida held that as the construction of flats have been made for and on behalf of prospective purchasers; M/s Assotech Realty Pvt. Ltd. was liable to pay trade tax on the value of the materials used in the construction of the said flats. The order mainly relied on the decision of the Apex Court in the case of K. Raheja Development Corporation vs. State of Karnataka (2005) 5 SCC 162.

Against the said order the petitioner in Allahabad High Court filed two writ petitions.

The High Court while examining the merits of the case, examined clauses in the allotment letter and made the following observations:-

• The specification, plan, price payment, schedule and layout plan as has been proposed by the petitioner is to be agreed by the parties. Further, the petitioner has been empowered to mortgage the land and apartments of the said complex to raise construction of the complex.

• The only stipulation is that the sale deed would be executed and registered free from all encumbrances

• The allottees are to strictly adhere to payment schedule, failing which liability for payment of interest accrues

• The allottees do not get any right in the apartment until a sale deed is executed and registered and the petitioner continues to remain the owner of the apartment as also the construction thereon. The allotment letters do not give any right, title and interest to the allottees, even thought full payment has been received by the petitioner.

• The petitioner is empowered to make variations/modifications in the plan, design and specification, and possession is to be handed only upon payment of the entire amount.

The High Court distinguishing the case of K. Raheja stated that the agreement in that case provided as a developer on its own behalf and as a developer of such person would construct flats as a unit ultimately to belong to such persons. In the case, K. Raheja Developer Corporation was constructing the unit for and on behalf of the person who had agreed to purchase the flats.

The High Court further stated that the principle of equitable assignment of a decree would not be attracted in the present case as the terms and conditions of the letter of allotment specifically provides that the right, title and interest in the apartment shall vest with the purchaser only on execution of the sale deed and its registration.

Taking into consideration the terms and conditions of the letter of allotment, the allotment, the High Court held that the petitioner is constructing the flats/apartments not for and on behalf of the prospective allottees but otherwise. The payment schedule would not alter the transaction. The right, title and interest in the construction continue to remain with the petitioner. It cannot be said that the constructions were undertaken for and on behalf of the prospective allottees and, therefore, the constructions in question undertaken by the petitioner would not fall under clause (m) of section 2 read with section 3F of the Act and are outside the purview of the provisions of the Act. In other words, they cannot be subjected to tax under the Act and the action in imposing tax on such constructions treating them to be works contract, is wholly without jurisdiction.