Service tax on renting is under litigation

Written by Saloni Roy | Jayanta Kalita | Vivek Sharma | Vivek Sharma | Samsuddha Majumder | Samsuddha Majumder | Updated: Mar 31 2011, 08:06am hrs
Here are some queries on taxation and service tax liabilities, addressed by Ernst & Young, and published in The Financial Express on alternate Fridays. Readers may mail their queries to fesmes@gmail.com

We are in the business of trading within an airport premises. The airport authority has recently leased the shop to us. We have been asked by the airport authority to pay service tax on the consideration amount paid by us. Kindly suggest whether we are liable to pay service tax and, if yes, under what service category

The activity of renting of immovable properties for commercial use was brought under the purview of service tax vides Finance Act, 2007. However the High Court of Delhi in the case of Home Solutions Ltd v. Union of India held that the activity of renting per se is not subject to service tax as the same is outside the scope of service tax legislation. The Government, vide Finance Act, 2010, has retrospectively amended the definition of 'renting of immovable property service' to include within the service tax net, the activity of renting of the property as well as any service in relation to such renting. However, post the amendment, various high courts have granted stay on recovery of service tax on activity of renting alone. It is to be noted, however, that w.e.f. 1 July 2010 any services rendered entirely within the airports is taxable under the category of 'airport services'. In the instant case, the activity of renting is provided within an airport premises and hence would be covered within the amended service category of airport services. Accordingly, even though the levy of service tax on renting per se is currently under litigation the same would be taxable under the service category of airport services.

We are an EPC contractor and have recently been awarded a contract for the construction of an SEZ unit. We understand that supply of goods and services to an SEZ unit is exempt from taxes and duties. Will such exemption be available if we procure the goods from third parties and use them for construction of the unit

Rule 27 of the SEZ Rules, 2006 provides that exemptions, drawbacks and concessions and other benefits on goods and services allowed to an SEZ unit for the setting up and maintenance of a factory building is also allowed to the contractors appointed by such a unit. To enjoy these benefits, procurements should be made jointly by the contractor and the unit. All documents should bear the name of the unit and the contractor and should be filed jointly in their name. Hence, the benefits on goods and services allowed to an SEZ unit shall also be available to you if they are procured jointly. However, the transaction should be structured properly so that you can avail of these benefits.

We are manufacturers of televisions. To aid in the manufacture of our products we had executed a Technical assistance and transfer of technology agreement with a foreign company under which we receive specific information and product-based technology. We are also allowed to design, manufacture and service the televisions using the technology provided to us. The consideration to the foreign company was paid as royalty during 2006-07. Are we liable to discharge service tax on such payments

Temporary transfer or permitting the use or enjoyment of an intellectual property right is taxable under the category of intellectual property services. During the relevant period, the law defined intellectual property as any right to an intangible property, namely, trademarks, designs, patents or other similar property under any law for the time in force (excluding copyright). Thus, if there are any intellectual property which is not recognised under law in force, it may not fall under the ambit of the said taxable category. Thus, in the instant case, if the technology obtained by you is recognized under law for the time being in force, the same would qualify as an intellectual property and service tax would be applicable.

We are a software development firm. We have heard that both VAT and service tax is to be charged on software developed by us for our clients. What would you suggest

Whether software development leads to the sale of goods or provision of service has been a contentious issue for a long time now. The Supreme Court, in the case of Tata Consultancy Services, laid down the principle that the intangible property would qualify as goods, provided it has utility, its capable of being bought and sold and capable of being transmitted, delivered, stored and possessed. Accordingly, software was held to be goods in the case of BSNL by the Supreme Court. Further, it would be relevant to note that the definition of the taxable service of information technology software service specifically defines the development of software as a taxable service. Hence, as there is no clarification or notification issued by the government in this regard, it would be prudent to deposit both VAT and service tax on the same for the time being.

The replies do not constitute professional advice. Neither Ernst & Young nor SME World is liable for any action taken on the basis of these replies