Alternatively, it was also argued that if it is held that the above expression “in relation to renting of immovable property” is held to include the activity of “renting” per se also, then the levy of service tax on such renting of property is ultra vires the Constitution, inasmuch as the said subject is falling within the legislative competence of the States under Entry No. 49 of List II of the Seventh Schedule to the Constitution and Parliament cannot levy any tax thereon.

The Delhi High Court has dealt with the first issue and pronounced its verdict in favour of the assessees/petitioners and in view of the said decision, it did not go into the second issue of Constitutional vires of the levy.

The court has resolved the issue, by going into the following two issues:

Interpretation of the term “in relation to”; and

Absence of value addition by the service provider.

The court has interpreted the term “in relation to renting of immovable property” and went on to consider as to whether the term “in relation to” would cover “renting” per se, or would only cover the services which are “in relation to” such “renting”.

While dealing with this issue, the High Court has taken note of various decisions interpreting the term “in relation to” and also observed that services are of two kinds, viz., property-oriented and performance-oriented. It has also observed that the service tax is a value-added tax and when there is no value addition, there is no service tax.

The court has also put it illustratively, whereby it has noted that in case of services provided to “A” by “B”, in relation to “C”, “A” is the service recipient, “B” is the service provider and “C” is the subject matter.

The High Court went on to observe that if “C” by itself is a service, the expression “in relation to” would cover “C” also and if “C” by itself is not a service, then the expression “ in relation to” would not cover “C” as such, but would cover only those peripheral services, which would add value to C.

For this, the High Court has also compared the definition of taxable service for dry cleaning services, which reads as “any service provided or to be provided by any person to any other person, in relation to dry cleaning” and came to a conclusion that in this case, since dry cleaning by itself is a service, the expression “in relation to” would cover dry cleaning per se also.

Also taking cue from the ‘real estate agent’ service, the High Court has come to a conclusion, in the instant case, as the subject matter is an “immovable property” is not a service, the term “in relation to” would not cover the activity of “renting” per se.

In fine, the High Court has ruled that the activity of “renting” per se is not under the scope of the levy of “renting of immovable property” and, hence, not liable to any service tax.