Lease of residential premises as hostel is exempt from GST: Karnataka High Court

The Karnataka High Court recently held that the service of leasing of residential property as a hostel for students and working professionals is exempt from payment of Goods and Services Tax [Taghar Vasudeva Ambrish v. Appellate Authority for Advance Ruling, Karnataka and Ors]..The Division bench of Justice Alok Aradhe and Justice MI Arun ruled that the same is covered as a tax exemption under Entry 13 of Notification No.9/2017, of 'services by way of renting of residential dwelling for use as residence' which was issued under the Integrated Goods and Services Tax Act, 2017 (GST Act)."Entry 13 contained in the exemption notification is unambiguous and is clear. It provides for exemption from payment of Integrated Goods and Service Tax in respect of 'services by way of renting of residential dwelling by way of use as residence'. The burden is of course on the petitioner to show that his case comes within the parameters of the exemption notification," the judgment said. .The petitioner in this case was a co-owner of a residential property in Bengaluru consisting of 42 rooms, spread across several floors along with a terrace and common areas. The petitioner leased the premises to one M/s D Twelve Spaces Private Limited, who in turn leased the property as a hostel which provides long term accommodation to students and working professionals. The duration of stay ranged from 3 months to 12 months. .On June 28, 2017 the Central Government issued notification No. 9/2017 - Integrated Tax (Rate) (referred to as 'exemption notification'). The notification granted exemption from payment of GST with respect to services mentioned in the notice, one of which was renting services with respect to a residential dwelling for use as a residence. The Petitioner, seeking clarification on his eligibility to avail of the exemption filed an Advance Ruling application under Section 97 (Application for Advance Ruling) of the GST Act before the Authority for Advance Ruling, Karnataka (AAR)..The AAR held that services of renting the residential premises for use as a hostel do not fall under the exemption notification. Further, the lessee itself is not using the accommodation, so the petitioner must charge GST Tax from the lessee. Thus, the benefit of the exemption notification would not be available to the petitioner, the AAR said..The petitioner proceeded to file an appeal under Section 100 (appeal to Appellate Authority) of the GST Act. The Appellate Authority held that the property rented by the petitioner is a hostel building which is "more akin to sociable accommodation rather than what is commonly understood as residential accommodation." Further, it held that the benefit of exemption is available only if the dwelling is used as a residence by the same person who has leased it. .The petitioner appealed to the High Court which framed the following two questions:(i) What is being rented? (ii) The purpose for which the residence is used forThe petitioner argued that the expression "residential dwelling" has not been defined in the GST Act. Therefore, its normal trade parlance meaning should be taken into account. Any residential accommodation which is used for long term stay has to be construed as "residential dwelling". Further, zoning regulations in Bengaluru clearly provide that hostels are allowed to operate in residential category plots. Since students use the hostel for residential accommodation, the hostels have to be treated as residential accommodation under the law, they contended. .The petitioner also argued that the principle of purposive interpretation must be applied while interpreting an exemption notification. Purposive interpretation, a principle of statutory interpretation means that regard must be had to the purpose and object of a statute while interpreting it. .It was further contended that there is no condition that only the tenant must occupy the premises, and therefore no additional condition can be read into the exemption notification. The activity carried out by the petitioners is not a business activity, and the premises are used for residential purposes; there is a difference between a hotel or lodging house, and a student hostel. .The respondent on the other hand submitted that the lessee runs a business of leasing out the premises. The expression "residential dwelling" means an abode or habitat which has an element of permanency, and does not mean only a "residence". .It was further argued that in the trade license issued by Bruhat Bengaluru Mahanagara Palike, the trade name has been described as "boarding and lodging". The registration certificate of the lessee shows that they are registered as a commercial establishment under the Karnataka Shops and Commercial Establishment Act, 1961.The respondent also contended that the exemption notification should be strictly construed, and any ambiguity in the exemption notification has to be construed in favour of revenue. .The Court noted that the principles of interpretation of exemption notifications have already been determined by a Constitution Bench of the Supreme Court in Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and Ors which had held as follows:"(1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. (2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue. (3) The ratio in Sun Export case (supra) is not correct and all the decisions which took similar view as in Sun Export Case (supra) stands overruled.".The Court also observed that it is a well settled rule of statutory interpretation of fiscal statutes that if the words have not been defined in the statute, they have to be interpreted in their popular sense. Thus, the expression "residential dwelling" has to be understood according to its popular sense, the Court noted. .Under the previous service tax law, "residential dwelling" was defined in an Education Guide issued by the Central Board of Indirect Taxes and Customs which was as follows:"4.13.1 What is a 'residential dwelling'?The phrase 'residential dwelling' has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp - site, lodge, house boat, or like places meant for temporary stay."In the absence of anything to the contrary in the GST Act, it is this definition which would bind the respondent, said the Court. .The Bench also referred to a judgement of the Supreme Court, Kishore Chandra Singh v. Babu Ganesh Prasad Bhagat (AIR 1954 SC 316, which had held that the "expression residence only connotes that a person eats, drinks and sleeps at that place and it is not necessary that he should own it.".Further, the Court observed that it is well settled that when a word is not defined in an Act, dictionaries can be referred to.It, therefore, proceeded to refer to the meaning of the expressions "residence" and "dwelling" in the Concise Oxford English Dictionary 2013 Edition and Black's Law Dictionary 6th edition to understand the definition in common parlance. .From the reference to the dictionaries, the Court noted that the expression 'residence' and 'dwelling' have a similar connotation in common parlance and therefore, no different meaning can be assigned to the expression 'residential dwelling'. .The Court also rejected the contentions of the respondent that the lessee itself must use the premises as residence, as it is not mentioned in the notification. The finding by the Appellate Authority that hostel accommodation is more akin to 'sociable accommodation' was also rejected as being unintelligible and irrelevant for the purposes of determining the eligibility under the exemption notification. .The Court thus answered the two questions in favour of the petitioner holding: i) a residential dwelling is being rented; and ii) it is being used by students and working professionals for the purpose of residence.Hence, it concluded that the service provided by the petitioner is covered under the exemption notification under the GST Act, and allowed the petition. .Senior Advocate Arvind Datar along with advocates Nayana Tara and Rahul Unnikrishnan represented the petitioner.Additional Government Advocate Hema Kumar represented the Appellate Authority for Advance Ruling Karnataka and Assistant Commissioner of Commercial Taxes. Advocate Jeevan J Neeralgi was the Special Counsel for the Commissioner of Central tax. .[Read Order]