2006 (9) TMI 8 - HC - Service Tax

Service Tax Petitioners filed writ petitions to challenged the levy of service tax on the taxable service provided by Tour operators and Contract carriage operators (2) Legislative competence to impose service tax (3) Fundamental rights (4) Interpretation of statute

Issues Involved:
1. Levy of Service Tax on tour operators.
2. Competency of Parliament to enact the Service Tax Law.
3. Whether the levy of Service Tax amounts to a tax on passengers.
4. Whether the Service Tax legislation is discriminatory and violative of Article 14 of the Constitution.
5. Identification and measurement of the service element for taxation purposes.

Detailed Analysis:

1. Levy of Service Tax on Tour Operators:
The petitioners, who are owners of contract carriages and taxies with tourist permits, challenged the levy of Service Tax on tour operators under the Finance Act, 1997. The court noted that the vehicles involved are contract carriages as defined under Section 2(7) of the Motor Vehicles Act (M.V. Act). The petitioners' services fall under the definition of "tour operators" as per Section 65(78) of the Finance Act, 1994, which includes any person engaged in the business of operating tours in a tourist vehicle covered by a permit granted under the M.V. Act. Thus, the petitioners are liable to pay Service Tax.

2. Competency of Parliament to Enact the Service Tax Law:
The petitioners argued that the Parliament lacked the competency to enact the Service Tax Law, citing entries 54, 56, and 60 of List II of the VII Schedule of the Constitution. However, the court held that Service Tax is within the legislative competence of the Parliament under residuary entry 97 of List I of VII Schedule to the Constitution. The Parliament has exclusive powers under Article 248 of the Constitution to make laws imposing taxes not mentioned in the State or Concurrent Lists.

3. Whether the Levy of Service Tax Amounts to a Tax on Passengers:
The court rejected the argument that the Service Tax is essentially a tax on passengers. It clarified that Service Tax is levied on the service provided by the tour operator to the client or customer, distinct from a tax on income or goods. The domain of the vehicle remains with the owner or permit holder, and the tax is on the service rendered, not on the passengers.

4. Whether the Service Tax Legislation is Discriminatory and Violative of Article 14:
The petitioners contended that the legislation is discriminatory as it excludes stage carriage operators from the Service Tax net. The court dismissed this argument, stating that the legislature has wide latitude in formulating fiscal policy and selecting subjects for taxation. The law is not discriminatory as long as it deals equally within each defined group. The court cited the Supreme Court's rulings that fiscal legislation is permitted a large discretion in classification and does not have to tax everything to be valid.

5. Identification and Measurement of the Service Element for Taxation Purposes:
The petitioners argued that there is no machinery to identify or measure the service element, leading to the entire transaction being taxed. The court noted that the government decided to charge only 40% of the gross amount charged by tour operators, aligning with the Supreme Court's stance that the measure of taxation does not affect its nature. The court emphasized that the service aspect in tour operations is predominant and distinguishable from the mere hire of vehicles, justifying the levy of Service Tax on the entire service provided by tour operators.

Conclusion:
The court upheld the validity of the Service Tax on tour operators, dismissing the writ petitions. It affirmed the legislative competence of the Parliament to levy Service Tax and clarified that the tax is on the service provided, not on the passengers or the vehicle hire. The court also rejected the claims of discrimination and the lack of machinery for identifying the service element, emphasizing the distinct nature of Service Tax as a tax on services rendered.

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