News Update

GST - Neither SCN nor the order spell out the reasons for retrospective cancellation of registration, hence cannot be sustained: HCGST - Non-application of mind - If reply was unsatisfactory, details could have been sought - Record does not reflect that such exercise was done - Matter remitted: HCGST - Merely because a taxpayer has not filed returns for some period does not mean that registration is required to be cancelled with retrospective date also covering the period when returns were filed and taxpayer was compliant: HCGST - Petitioner's reply, although terse, is not taken into account while passing assessment orders - Petitioner put on terms, another opportunity provided: HCUnveil One Nation; One Debt Code; One Compliance Rule for Centre & StatesChina moves WTO against US tax subsidies for EVs & renewable energyMore on non-doms - The UK Spring Budget 2024 (See TII Edit)Notorious history-sheeter Mukhtar Ansari succumbs to cardiac arrest in UP jailTraining Program for Cambodian civil servants commences at MussoorieNY imposes USD 15 congestion taxCBIC revises tariff value of edible oils, gold & silver45 killed as bus races into ravine in South AfricaCBIC directs all Customs offices to remain open on Saturday & SundayBankman-Fried jailed for 25 yrs in FTX scamI-T- Once the citizen deposits the tax upon coming to know of his liability, it cannot be said that he has deliberately or willfully evaded the depositing of tax and interest in terms of Section 234A can be waived: HCHouthis attack continues in Red Sea; US military shoots down 4 dronesI-T- Secured creditor has priority charge over secured asset, over claims of I-T Department & other Departments; any excess amount recovered by Secured Creditor from auction of secured asset, over & above the dues payable to it, are to be remitted to the Departments: HCFederal Govt hands out USD 60 mn to rebuild collapsed bridge in BaltimoreI-T - Receipts of sale of scrap being part & parcel of activity and being proximate thereto would also be within ambit of gains derived from industrial undertaking for purpose of computing deduction u/s 80-IB: HCCanadian School Boards sue social media titans for 4 bn Canadian dollar in damagesI-T - Once assssee on year of reversal has paid taxes on excess provision and similar feature appeared in earlier years and assesee had payments for liquidated damages on delay of deliverables, no adverse inference can be drawn: HCFormer IPS officer Sanjiv Bhatt jailed for 20 yrs for planting drugs to frame lawyerST - Software development service & IT-enabled service provided by assessee was exempt from tax during relevant period, by virtue of CBEC's Notification & Circular; demands raised for such period not sustainable: CESTATUN says Households waste across world is now at least one billion meals a dayCus - Order rejecting exporter's request for conversion of Shipping Bills on grounds that the same has been made by exporter beyond period of three months from date of Let Export Order in terms of CBEC Circular No. 36/2010-Cus : CESTATIndia, China hold fresh dialogue for complete disengagement on Western borders: MEACus - No Cess is payable when Basic Customs Duty is found to be Nil: CESTATThakur says India is prepared for 2036 OlympicsCX - As per settled law, a right acquired as result of a statutory provision, cannot be taken away retrospectively unless said statutory provision so provides or by necessary implication has such effect: CESTAT
 
Levy of Service Tax on Salami or Premium

JULY 07, 2015

By Narendra Kumar Singhvi

THE levy of Service Tax on renting of immovable property has witnessed numerous disputes, involving pure constitutional to pure legal questions. In 2007, the Government introduced levy of Service Tax on renting of immovable property service under Section 65(90a) read with Section 65(105)(zzzz) of the Finance Act, 1994 (for short 'the Act '). Since then, petitions were filed before various High Courts challenging the constitutional validity of imposition of Service Tax on this activity. The Hon'ble Delhi High Court in Home Solutions Retails (India) Limited v. Union of India, - 2011-TIOL-610-HC-DEL-ST-LB, upheld the validity of this levy, against which the appeal is pending before the Hon'ble Supreme Court. Meanwhile, various new issues, with huge revenue stakes, have cropped up regarding this category of service.

This article aims at highlighting the issues pertaining to long-term lease where one-time payment in the form of salami/ premium as well as periodical payments in the form of rent are charged by the owner of the property. The issue is whether the value of such services is limited to periodical rents or extends to cover salami/ premium also.

For the period prior to Jul, 2012, Section 65(90a) of the Act defines 'renting of immovable property' in an inclusive manner to include leasing. The term 'lease' or 'leasing' has not been defined in the Act. A lease in ordinary legal sense contemplates demise or a transfer of a right to enjoy land for a term or in perpetuity for a consideration of a price paid or promised or services or other things of value to be rendered periodically or on specified occasions to the transferor. In other words, lease arrangement can be entered into for any duration. The long-term leases are generally entered into for periods such as 90 years, 99 years etc.

At this juncture, it is important to note that there exists apparent difference between lease and ownership. While the former is only a transfer of a right to enjoyment to a property, the latter denotes a complete and total control over the property and not merely a right to enjoyment. The lessee of a property is a tenant. He may be entitled to transfer his interest in the land, but right to transfer ownership vests with the owner of the said land. Tenancy cannot be considered to be a permanent ownership, even when the tenant has made permanent structures at his own cost on the land. Though heritability and transfer may be incidents common to both ownership and lease, however, that by in itself are not sufficient to cloth a person with absolute ownership, as explained by the Hon'ble Supreme Court in Mohd. Noor v. Mohd. Ibrahim , 1994 (5) SCC 562.

The right of ownership over a property in cases of lease is not determined on the basis of the duration for which the lease is granted to the lessee. Thus, a lease even if for 99 years, does not confer ownership rights on the lessee, unless they are specifically transferred to him in which case it stops being a lease . Even in the cases of lease for long duration, the residuary rights of a leased land belong to the owner of the land and not the lessor. It is a settled law that the length of the lease is not indicative of even permanency of lease much less of ownership.

Nonetheless, the grant of long-term lease involves parting of right by the lessor in favour of the lessee, the amount paid against which is popularly called as salami or premium. The periodical payments made for continuous enjoyment of the benefits under the lease are popularly known as rent. Salami is a payment by a tenant to the landlord antecedent to the constitution of the relationship of landlord and tenant. It is really a payment by the tenant to the landlord for being allowed to take possession of the land for cultivation under the lease. Salami is not a recurring or periodical payment or a fee or fine levied at fixed intervals from the tenant. In Member for the Board of Agricultural Income Tax v. Sindhurani Chaudhurani, 1957 (32) ITR 169 (SC), the Hon'ble Supreme Court held that Salami is a non-recurring payment prior to creation of tenancy made by the tenant for being let into possession by the landlord. The characteristics of salami were explained by the Hon'ble Delhi High Court in Bharat Steel Tubes Limited v. CIT , 2001 (252) ITR 622 (Delhi). However, it is not the nomenclature but the substance of the transaction, which will determine the nature of the payment.

The real question is regarding the value of renting of immovable property services. For the period till June 2012, Service Tax was imposed only on taxable services specified in Section 65(105), one of which was renting of immovable property service. The taxable event, thus, under Section 66 of the Act was renting of immovable property service, i.e. continuous enjoyment of the property.

In this regard, the Hon'ble Tribunal, in Greater Noida Industrial Development Authority v. Commissioner of Central Excise, - 2014-TIOL-1741-CESTAT-DEL, held that the salami or premium cannot be considered to have been paid towards continuous enjoyment of the property and thus cannot be brought to charge of Service Tax. It further observed that the levy of Service Tax is on renting of immovable property and not on transfer of interest in property from lessor to lessee.

Thus, as regards the provisions existing for the period till June 2012, the position becomes clear that salami or premium will not be chargeable to Service Tax under the category of renting of immovable property services. However, it would depend on the facts and circumstances of each case so as to see whether it is actually a payment for parting of interest or not.

As regards the legal provisions prevailing on date, Section 66B read with Section 65B(44) of the Act provides for charge of Service Tax on all activities undertaken by one person for another for consideration. The definition of 'service' under Section 65B(44) includes declared services as specified in Section 66E. Renting of immovable property is one of the declared services and thus, constitutes 'service'. The definition of 'service' further excludes a transfer of title in goods or immovable property , by way of sale, gift or in any other manner. The question, thus, arises as to whether the salami or premium is chargeable to Service Tax in terms of the new legal provisions.

As already noted, salami is towards transfer of or parting with the right of the lessor in the immovable property to the lessor. Though transfer of such right does not result in transfer of ownership thereof, but the fact remains that there is a transfer of some right in the immovable property. What is excluded from the definition of 'service' is only a transfer of title in immovable property, whether by way of sale, gift or in any other manner. The transfer of title in immovable property is, thus, necessary and the manner thereof is not important.

The transfer of title conveys the transfer of ownership. Though the term 'title' may have different meanings in different connotations, yet the context, in which it has been used, is material. For example, title may also represent the status of a person qua a subject. A leaseholder has the title of a lessee, however, his title is subservient to the title of the owner, who has absolute right and privilege in respect of the property he owns.

The Budget Circular 334/1/2012-TRU, dated 16.03.2012 also explained that 'transfer of title' means change in ownership. Mere transfer of custody or possession over goods or immovable property, where ownership is not transferred, does not amount to transfer of title.

The exclusion clause in Section 65B(44) of the Act includes the transfer of title in immovable property. In other words, the title in the immovable property itself has to be transferred, i.e. the ownership thereof has to be transferred so as to be covered under the scope of the exclusion clause. By payment of salami, however, the lessee does not get any title of ownership in the immovable property. In such a case, the payment of salami will not be excluded from the definition of 'service'. Though salami is paid towards transfer of right or interest of the lessor in the property to the lessee, such transfer of right does not result into transfer of title in immovable property.

It is clear that under the new legal provisions, even salami may get included within the scope of levy of Service Tax. The taxable event in case of declared services of renting of immovable property continues to be the right to enjoyment of the property, however, the scope of charge of Service Tax under Section 66B extends to all activities undertaken by one person for another for consideration and it is not restricted to renting only. Accordingly, if the activity undertaken against receipt of salami is not excluded from the definition of 'service', the same will become chargeable to Service Tax.

(The author is Senior Associate, Lakshmikumaran & Sridharan & the views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the sites)

 


 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: Salami - Negative list - Non taxable

With respect to taxability of salami under the negative list regime of services, although exclusion is restricted to cases involving transfer of title in immovable property, however what would be imperative to note here would be the valuation part.
Since salami is paid for transfer of interest in the leasehold land and not towards rendition of services (i.e. continuous enjoyment of the leased land), such amount should not be taxable. Refer the decision of Apex Court in the case of CIT vs. Panbari Tea Co. Ltd ((1965) 3 SCR 811) and the Greater Noida case, as relied.

Regards,
Ajay Sanwaria

Posted by jaiprakash rao
 

AR not Afar by SK Rahman

TIOL Tube Latest

Shri Shailendra Kumar, Trustee, TIOL Trust, giving welcome speech at TIOL Awards 2023




Shri M C Joshi, Former Chairman, CBDT




Address by Shri Buggana Rajendranath, Hon'ble Finance Minister of Andhra Pradesh at TIOL Awards 2023