Liability of lessor or landlord to pay service tax on rent

Liability to pay Service Tax on rent:

The Service Tax Rules, 1994 have been made in exercise of powers under the rule making Section, namely, Section 94 of the Finance Act, 1994 which came into force on 1.4.1994. Rule 2(1)(d) reads as follows:-

“2. Definitions (1) In these rules, unless the context otherwise requires, –

….

(d) “person liable for paying service tax”, –

(i) in respect of the taxable services notified under sub-section (2) of section 68 of the Act, means,- …….

(E) in relation to services provided or agreed to be provided by Government or local authority except,-

(a) renting of immovable property, and

(b) services specified sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory, the recipient of such service; ……

(ii) in a case other than sub-clause (i), means the provider of service.”

In this deed of lease between the lessor and the lessee for a period of three years at a rent of Rs.16,34,967/- per month, it was agreed that:

“6. The lessor/lessors shall pay all rates, taxes, assessment, charges and other outgoings whatsoever of every description which under the statutes are primarily leviable upon the lessor and shall keep the premises free from all encumbrances and interference in this behalf. Rates and taxes primarily leviable upon the occupier shall be paid by the Government.”

Under Rule 4 of the aforesaid Rules, every person liable to pay service tax is to apply for registration under the Act, and under Rule 7, every such assessee shall submit a half yearly return in the relevant form prescribed therein.

A reading of the Act and the Rules, therefore, makes it clear that “assessee”, as defined, means the person liable to pay service tax under the Act. In the present case, we are concerned with the taxable service of renting of immovable property. It is clear that under Section 66B, the levy of service tax at the rate of 12% is on the value of the service of renting of immovable property that is provided or agreed to be provided by one person to another and collected in such manner as may be prescribed. Section 68 whose marginal note reads – “payment of service tax”, makes it clear that it is the person providing the taxable service to another, who is to pay service tax at the rate specified in Section 66B, in such manner and within such period as may be prescribed, unless otherwise specified by the Central Government. Therefore, the person liable for paying service tax is to be determined on a reading of the Rules.

When we come to the Rules, it is clear that under Rule 2(1)(d), the person liable for paying service tax, where the service of renting immovable property is agreed to be provided by the Government, is the provider of such service. Even in a converse situation, which is the situation in the facts of the present case, it is the provider of the service alone, who is liable for paying service tax.

Nature of service tax:

Service tax is an indirect tax, meaning thereby that the said tax can be passed on by the service provider to the recipient of the service. Being a tax on service, it is not a direct tax on the service provider but is a value added tax in the nature of a consumption tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts. Thus, in Babu Ram Jagdish Kumar & Co. v. State of Punjab, (1979) 3 SCC 616, this Court made it clear that, in the case of a purchase tax, the “taxable event” is the purchase of paddy, whereas the “taxable person”, who is the person liable to pay the tax, is the purchaser. In the present case, therefore, the “taxable event” is the provision of the service of renting out immovable property, and the “taxable person”, that is the person liable to pay tax, is the service provider, namely the lessor.

Expression “primarily leviable upon:

In the present case, it is clear that the expression “primarily leviable upon” has reference to the “taxable person”, i.e. the person who is liable to pay the tax. The tax that is levied on “service” may be collected either from the service provider or the recipient of the service. The person assessed to tax, who is primarily liable to pay the tax is, on the facts of this case, the lessor.

“Levy”, in all cases of indirect taxes, is never upon an individual – it is upon a specific aspect of what is sought to be taxed. In the case of a service tax, like the present, the activity of renting out immovable property is sought to be taxed. Therefore, when the expression “primarily leviable” is used in relation to a person and not an activity, it has reference to the assessee upon whom assessment is made under the Act. Thus construed, it is clear that, in the present case, the person liable to pay the tax, who is the assessee under the said Act, in all cases like the present, is only the service provider and not the recipient of the service.

Sanction letter admitting liability:

The sanction letter of 27 th April, 2012 issued by the Government of India conveying sanction for hiring of the lease premises in the present case to the Director General, Indian Coast Guard, specifically states:

“…… The registration charges, stamp duty, service taxes, etc. (if applicable) is the liability of the lessee……”

The letter dated 30th April, 2012, written by the Deputy Inspector General, Chief Staff Officer, to the Respondent, in turn, in paragraph 3(c) reiterated the same position as that of the sanction letter. The learned single Judge in dealing with the letter dated 30th April, 2012 has held:

“12. Turning to the facts of the present case, it appears that clause 6 extracted supra delineated the respective obligations of the lessor and the lessees. The parties agreed that the rates and taxes primarily leviable upon the occupier would be paid by the Government. That the respondents were not oblivious of their obligation to bear service charge is reflected from the letter dated April 30, 2012.

Although the said deed does not specifically refer to service tax, the letter dated April 30, 2012 expressly provides that Government of India had sanctioned the terms and conditions of hiring including, inter alia, the liability of the “lessee in respect of registration charges, stamp duty, service tax etc., (if applicable)”. The words “if applicable” in brackets follows “etc.” and not “service tax”. Therefore, it is not a case that if obligation to make payment of service tax arises, the respondents would have discretion to foist the responsibility on the lessor (the first petitioner). Liability to bear service tax being that of the person receiving service, there can be no escape from the conclusion that the respondents are liable to bear service tax.”

This being the case, though in law and under clause 6 of the lease deed the Appellant is not required to pay service tax, we are loathe to upset the finding of the learned single Judge based upon a letter by the Appellant to the Respondent in which the Appellant has expressly stated that it was liable to pay service charges. Having thus clarified the legal position, given the sanction letter of 27 th April, 2012 and the letter dated 30th April, 2012, in which it was made clear that the Union of India alone will bear the service charges, we refuse to exercise our discretion under Article 136 of the Constitution of India in favour of the Union of India. Thus, the impugned Division Bench judgment is set aside on law, but the appeal fails on the facts of the present case.

[Source: Union Of India vs Bengal Shrachi Housing, decided by SC on 7 November, 2017]

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