2001 (4) TMI 9 - HC - Service Tax

Service Tax Air travel agents (1) Air travel agent received commission from air lines (2) Alternative mode of taxation (3) Constitutionality (4) Independent measure

Summary

Issues Involved:
1. Constitutionality of Section 65(3) and Section 67(k) of the Finance Act, 1994.
2. Consistency of Section 67(k) with Section 65(3), Section 65(48)(i), and Section 66(3).
3. Validity of Rule 6(7) of the Service Tax Rules under the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 65(3) and Section 67(k) of the Finance Act, 1994:
The petitioners initially challenged the provisions on the grounds that they violate Article 19(1)(g) and Article 14 of the Constitution and questioned the legislative competence. However, during arguments, the petitioners abandoned the constitutional challenge and focused on other propositions.

2. Consistency of Section 67(k) with Section 65(3), Section 65(48)(i), and Section 66(3):
The petitioners argued that Section 67(k), which provides for the valuation of taxable services for charging service tax, is inconsistent with the definitions of "Air Travel Agents" and "Taxable Service" under Section 65(3) and Section 65(48)(i), as well as the charging provision under Section 66(3). They contended that the value of the service should be based on the service provided to the customer, not the commission received from airlines. The court held that the commission received by air travel agents from airlines is integrally connected with the service provided to customers. The commission is not independent of the services offered to customers, and thus, Section 67(k) is not inconsistent with the other provisions. The court rejected the argument that the measure of the tax under Section 67(k) lacks a rational nexus with the service provided.

3. Validity of Rule 6(7) of the Service Tax Rules under the Finance Act, 1994:
The petitioners contended that Rule 6(7), which allows air travel agents to pay tax based on a percentage of the basic fare instead of the commission, is ultra vires the rule-making power and amounts to a different levy. The court noted that Rule 6(7) is optional and provides a beneficial alternative method of tax calculation. The court referred to the Supreme Court's decision in the Builders' Association of India case, which upheld the validity of an optional alternative method of taxation. The court held that Rule 6(7) is within the rule-making power under Section 94(2)(a) and does not constitute an independent levy. The rule serves the purpose of collection and recovery of service tax and is consistent with the general scheme of the Act.

Conclusion:
The court dismissed the writ petitions, holding that Section 67(k) is consistent with the other provisions of the Finance Act, 1994, and that Rule 6(7) is valid and within the rule-making power. The court found no merit in the petitioners' arguments and upheld the provisions and rules under challenge.