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TMI Blog2011 (8) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has been brought about to validate the provision. Whether the case was involving substantial question of law – Held that: - the scope and ambit of Entry 49 of List II of the Seventh Schedule and of the residuary power of legislation of Parliament have been considered by several judgments of the Constitution Bench of the Supreme Court and this Court has followed the law as expounded therein. - the case does not involve a substantial question of law as to the interpretation of the Constitution. – Decided in favour of revenue. - 2238 OF 2010, 2151/07, 411/08, 1319, 1399, 1400, 1424,1453, 1454, 1474, 1509, 1594, 1653, 1676, 1729, 1735,1772, 1781, 1826, 1827, 2030,2031, 2108, 2140, 2188, 2217, 2225, 2226, 2292, 2388, 2592, 2594, 2673 OF 2010, 210, 641, 777, 778, 1041 OF 2011, - - - Dated:- 4-8-2011 - DR.D.Y.CHANDRACHUD AND ANOOP V. MOHTA, JJ. Mr.Aspi Chinoy, Senior Advocate with Mr.Vineet Naik, Mr.Ameet Naik, Mr.Vatsal Shah, Mr.Lavin C.Hirani and Mr.Vaibhav M.Bhure i/b. Naik Naik Company for the Petitioner in WP 2238/10. Mr.D.J.Khambata, Additional Solicitor General, with Mr.Arif Doctor, Mr.Aashish Agarwal, Mr.Gautam Ankhad, Mr.Aditya Mehta, Mr.Rohan Cama, Ms.Nair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Delhi High Court in Home Solution Retail India Ltd. vs. Union of India 2009 DLT 722 (DB) on 18 April 2009. A Division Bench of the Delhi High Court held that service tax was a value added tax and there was no value addition which could be discerned from the renting of immovable property for use in the course or furtherance of business. The view of the Delhi High Court was that Section 65(105)(zzzz) did not in terms entail that the renting out of immovable property for use in the course or furtherance of business or commerce would constitute a taxable service and be exigible to service tax. The notification and the circular issued by the Union Government were consequently held to be ultra vires the Act and were set aside to the extent that they authorised the levy of service tax on renting of immovable property. The Delhi High Court did not decide the constitutional challenge for, in the course of the concluding paragraph of the judgment, the Division Bench noted that it was not examining the plea in challenge to the legislative competence of Parliament in the context of Entry 49 of List II of the Seventh Schedule to the Constitution. 3. Following the decision of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dapkeeper in relation to the use of a mandap in any manner including the facilities provided to the client in relation to such use and to include services rendered as a caterer. The Supreme Court held that service tax was imposed by Parliament in pursuance of its residuary powers under Entry 97 of List I read with Article 246. The Supreme Court held that the tax was not a tax on land within the meaning of Entry 49 List II since to constitute a tax on land, it must be a tax directly on land and a tax on income from land cannot come within the purview of the said entry . The Supreme Court laid down that since there was no specific entry in List II or List III of the Seventh Schedule, the question of Parliament lacking legislative competence would not arise. The Court noted that the mere fact that service tax was levied as a percentage of gross charges for catering would not alter the legislative competence of Parliament, for it is well settled that the measure of taxation cannot affect the nature of taxation. The Supreme Court ruled that the competence of Parliament to enact the legislation would not depend upon whether, as a matter of fact, any service was made available by a Manda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries in List II. The Supreme Court held that the taxable event under the legislation is the rendition of service and the tax is not on material or sale. The Court upheld the validity of the levy of a service tax on the value of taxable services referred to in Section 65(105)(zm), being services rendered to any person by a banking company or a financial institution, including a NonBanking Financial Company or any other body corporate or commercial concern in relation to banking and other financial services. 10. Now, in the backdrop of these decisions it is necessary for the Court to address the constitutional challenge in these petitions. Legislative Competence : 11. The constitutional challenge to the legislative competence of Parliament is premised on the submission that the tax which has been imposed on a taxable service which is defined to mean renting of immovable property is a tax on lands and buildings within the meaning of Entry 49 of List II of the Seventh Schedule. The contention of the Petitioners is that all four judgments of the Supreme Court to which a reference has been made earlier, did not deal with a situation where the legislation would fall within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny event under Entry 97 of List I read with Article 248. The essential question that falls for determination in the present case is as to whether the levy of a service tax on a taxable service which Parliament defined to be the renting of immovable property falls within the exclusive province of the State Legislatures under Entry 49 of List II. The scope and ambit of Entry 49 of List II has fallen for interpretation in several judgments of the Supreme Court to which it would now be necessary to turn. Taxes on lands and buildings : 13. In Ralla Ram vs. The Province of East Punjab, AIR 1949 FC 81 the issue before the Federal Court was whether the provisions of the Punjab Urban Immovable Property Tax Act, 1940, fell beyond the legislative competence of the provincial legislatures. Section 3 of the Act provided a charge of an annual tax on buildings and lands situated in the rating areas as stipulated in the Schedule at a particular rate. The annual value of the land or building was to be ascertained by estimating the gross annual rent at which land or building may be let for use or employment or which such building might reasonably be expected to let from year to year. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat however wide a taxing entry in the State List may be, it would still not authorise a tax which is not expressly mentioned. If the pith and substance of the law did not fall within the purview of Entry 49 of the State List, Parliament, it was held, would undoubtedly possess that power under Article 248 and Entry 97 of the Union List. While holding that the Gift Tax Act, 1958 was not a tax on lands and buildings, the Constitution Bench came to the conclusion that Entry 49 postulates a tax resting upon the general ownership of lands and buildings and a tax which is imposed directly upon lands and buildings : The pith and substance of Gift Tax Act is to place the tax on the gift of property which may include land and buildings. It is not a tax imposed directly upon lands and buildings but is a tax upon the value of the total gifts made in an year which is above the exempted limit. There is no tax upon lands or buildings as units of taxation. Indeed the lands and buildings are valued to find out the total amount of the gift and what is taxed is the gift. The value of the lands and buildings is only the measure of the value of the gift. A gifttax is thus not a tax on lands and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple of law is that a tax on lands and buildings is a tax on the general ownership of lands and buildings. In order that a tax must fall under Entry 49 of List II, the tax must be one directly on lands and buildings. A tax which is levied on the income which is received from lands or buildings is not a tax on lands or buildings. A tax levied on an activity or service rendered on or in connection with lands and buildings does not fall within the description of a tax on lands and buildings. 19. But, the submission which has been urged on behalf of the Petitioners is that a tax on land within the meaning of Entry 49 of List II can take into account the use to which the land is put. The service tax imposed by Parliament on renting of immovable property, it was urged, takes account of the user of the land or building. Hence, the argument postulates that this is a tax which the State legislatures could conceivably impose under Entry 49 of List II. In order to buttress this submission, a reference was made to a judgment of the Supreme Court in Ajoy Kumar Mukherjee vs. Local Board of Barpeta. AIR 1965 SC 1561 In that case, a tax was imposed under Section 62 of the Assam Local SelfG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the validity of a cess imposed under the West Bengal Rural Employment and Production Act, 1976. Section 4(1) levied the cess on all immovable properties on which a road or public work cess is assessed or liable to be assessed. By an Amending Act of 1981, the rural employment cess was to be levied in respect of land other than tea estates at a stipulated rate of development value and in respect of a tea estate at a rate prescribed on the despatches from the tea estate. In Buxa Dooars Tea Co. Ltd. vs. State of W.B., (1989) 3 SCC 211 a Bench of two Learned Judges had come to the conclusion that the measure of the tax, namely, despatches of tea did not bear a reasonable nexus to the character of the levy. Upon the invalidation of the levy, the Act was amended so as to stipulate that rural employment cess shall be levied annually on a tea estate at a stipulated rate based on the production of tea leaves. The levy was challenged in Goodricke on the ground that it was not a tax on lands and buildings. The Supreme Court held that the subject matter of the tax and the levy was land. The entire land covered in the tea estate was treated as a separate category of land as a unit for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Supreme Court in Assistant Commissioner of Urban Land Tax vs.Buckingham Carnatic Co. Ltd., AIR 1970 SC 169 in which it was held that a tax on lands and buildings is one which is directly imposed on lands and buildings and bears a definite relation to it. Similarly, there was a reference to the decision in Hazareth s case (supra) which ruled that Entry 49 of the State List contemplates a tax directly levied by reason of the general ownership of lands and buildings and would not include a gift tax as levied by Parliament. The ambit of the expression tax on lands and buildings under Entry 49 of List II was summarised thus in the judgment in Dhillon : (1) It must be a tax on units, that is lands and buildings separately as units. (2) The Tax cannot be a tax on totality, i.e. it is not a composite tax on the value of all lands and buildings. (3) The tax is not concerned with the division of interest in the building or land. In other words, it is not concerned whether one person owns or occupies it or two or more persons own or occupy it. The Court held that a tax under Entry 49 of List II is not a personal tax, but a tax on property. Significantly th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation allow the statute not covered by it to intrude upon this field. 22. The decision in International Tourist Corporation vs. State of Haryana, (1981) 2 SCC 318 involved a situation where the State of Haryana had levied a tax on passengers and goods carried by motor vehicles. The constitutional validity of Section 3(3) of the Punjab Passengers and Goods Taxation Act, 1952 was questioned in so far as it permitted the levy of a tax on passengers and goods carried by carriages plying along the national highways. The submission of the Appellants before the Supreme Court relying on the judgment in Dhillon s case was that there was nothing in the Constitution to prevent Parliament from legislating upon the subject and the power to legislate with respect to tax on passengers and goods carried on national highways would lie within the exclusive legislative competence of Parliament. While repelling that submission, the Supreme Court held thus: Before exclusive legislative competence can be claimed for Parliament by resort to the residuary power, the legislative incompetence of the State legislature must be clearly established. Entry 97 itself is specific in that a matter can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise. International Tourist Corporation does not as it could not have lay down principles contrary to the earlier decisions. The residuary power postulates that a subject does not fall within List II or List III. But to decide that, it has to be determined whether that subject does fall within the natural and proper scope of an entry in List II or III. A subject which does not fall within any Entry in List II cannot be held to fall within that list on an artificial construction so as to invalidate a law enacted by Parliament. For instance, while the Court must give a broad and liberal interpretation to Entry 49 of List II, the interpretation to be placed on that entry must nevertheless be meaningful. In each case, the Court must have regard to the true nature and character of the levy in determining as to whether in pith and substance, the tax is a tax on land and buildings. If the essential nature of the levy is the imposition of a tax on land and buildings, it would fall within Entry 49 of List II. If on the other hand, the essential nature and character of the levy is not a tax on land and buildings, then the exercise of interpretation would not bring within its purview ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he charge of tax is not on lands or buildings. The charge of tax is on a taxable service. The measure of tax is the gross amount charged by the service provider. The charge of tax is not on lands or buildings as a unit nor is the tax on lands or buildings. To be a tax on lands and buildings under Entry 49 of List II, the tax must be directly a tax on lands and buildings. That is not the true character of an impost on taxable services. 25. Counsel appearing on behalf of the Petitioners has placed reliance on the judgment of the Supreme Court in the State of West Bengal v. Kesoram Industries Limited (2004) 10 SCC 201. in support of the submission that the law in the present case is a law which imposes a tax on land and buildings. In paragraph 129 of the judgment the Supreme Court inter alia laid down the following principles : (6) Land , the term as occurring in Entry 49 of List II, has a wide, connotation. Land remains land though it may be subjected to different user. The nature of user of the land would not enable a piece of land being taken out of the meaning of land itself. Different uses to which the land is subjected or is capable of being subjected provide the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeded to impose a levy of service tax. The measure of tax under Section 67 is the gross amount charged by the service provider for the service which is provided or which is to be provided by him. In the case of renting of immovable property, the measure is the rental. The measure of the tax does by no means indicate that the tax is a tax imposed on land or buildings. 27. The decision of the Supreme Court in Godfrey Phillips India Limited v. State of Utter Pradesh (2005) 2 SCC 515. involved a challenge to State legislation imposing a tax on goods which was sought to be sustained as a tax on luxuries under Entry 62 of List II. The Supreme Court observed that the argument of the assessees was that the tax leviable under Entry 62 of List II cannot be a tax on goods as that would not only allow the State to levy sales tax in contravention of Article 286, but would permit a trespass on the legislative field reserved to Parliament under Entries 83 and 84 of List I. The judgment in Godfrey Phillips lays down the principle that under Article 246 exclusive powers are conferred upon Parliament and upon State legislatures to legislate on a particular matter which includes the power to legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cter of the levy. The enactment by Parliament in the present case of service tax has been held by the Supreme Court to fall within the purview of Entry 97. That principle which has been enunciated in the four decisions of the Supreme Court specifically on the issue of service tax does not require to be revisited in relation to the imposition of service tax under Clause (zzzz) of Section 65 (105). The essential nature and character of the levy is one which is referable to the residuary power of Parliament under Article 248 of the Constitution read with Entry 97. Parliament, it may be noted, introduced Entry 92C into List I by the Constitution (Eighty Eighth Amendment) Act 2003 to specifically deal with taxes on services. That provision has still not been enforced. In the circumstances, the true nature and character of the levy of service tax in the present case is a levy under the residuary power which has been conferred upon Parliament. 28. The submission, however, of the Petitioners is that there is no service involved in the letting of immovable property and consequently it was not open to Parliament to impose a service tax on the supposition that a taxable service is involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act by the Court that a service is provided in the transaction which is brought to tax. For a law which does not fall within List II of the Seventh Schedule would in any event fall within the legislative competence of Parliament under its residuary power. 29. In the affidavit in reply that has been filed in these proceedings it has been stated that renting of property is considered to add value to the activity of the person who has rented the property. When a person has a property at a particular location, he is able to charge a higher sum for the merchandise sold therefrom than he would be able to charge if he were to sell the same merchandise from a place which does not have a same locational advantage. Renting of a property, it has been submitted, adds value to the activities of a person renting the property. Value addition, it has been submitted, does not necessarily mean that certain intrinsic changes must occur in what has been offered. For instance, some goods while passing through various stages of sale do not undergo any intrinsic change, but a value addition does take place and is accordingly taxed by the concerned authorities. The concept of a value addition tax has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him. We have already explained how a small number of shareholders controlling a private company adopt this device. Having regard to the fact that the legislature was aware of such devices, would it not be competent to the legislature to devise a fiction for treating the ostensible loan as the receipt of dividend ? In our opinion, it would be difficult to hold that in making the fiction, the legislature has travelled beyond the legislative field assigned to it by entry 82 in List I. 32. Finally, it may be noted that Counsel appearing on behalf of the Petitioners sought to place reliance on the judgments of the Supreme Court in J.K. Industries v. Chief Inspector of Factories and Boilers (1996) 6 SCC 665 and Mathuram Agarwal v. State of Madhya Pradesh. (1999) 8 SCC 667 The submission is that the levy of service tax on renting of immovable property under clause (zzzz) is ultra vires the charging provision. J.K. Industries involved the interpretation of the provisions inter alia of Section 2(n) of the Factories Act 1948. The Supreme Court held, that a proviso may, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices involved in the renting of property to the charge of service tax cannot be questioned. The assumption by a legislative body that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the Court as being so manifestly absurd or perverse as to lead to an inference that Parliament had treated as a service, an item which in no rational sense could be regarded as involving service. But more significantly, even if the Court were to proceed on the basis, suggested by the Petitioners that no element of service is involved, that would not make the legislation beyond the legislative competence of Parliament. So long as the legislation does not trench upon a field which has been reserved to the State legislatures, the only conclusion that can be drawn is that the law must be treated as valid and within the purview of the field set apart for Parliament. There is, it must be emphasised, no violation set up of any provision in Part III of the Constitution, (save and except on the issue of retrospectivity which would be considered subsequently). Retrospectivity : 34. The challenge to the legislation on the ground t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res in financial year 200910. 37. The object of the amendment, brought about with retrospective effect, is to expressly bring the legislative provision in conformity with the original parliamentary intent. The Supreme Court held in Bakhtawar Trust v. M.D. Narayan (2003) 5 SCC 298 that it is open to the legislature to alter the law retrospectively provided the alteration is made in such a manner that it would be no more possible for the Court to arrive at the same verdict. The purpose and object of validating legislation is to ensure a fundamental change of circumstances upon which the earlier judgment was founded. This may be done by reenacting retrospectively a valid and legal taxing provision and then by a fiction making the tax already collected stand under the reenacted law.27 The 27 See Shri P.C. Mills vs. Broach Municipality, (1969) 2 SCC 283, 4 quoted in Bhubaneshwar Singh and Bimla Devi Poddar vs. Union of India, (1994) 6 SCC 77, 11: Sometimes the legislature gives its own meaning and interpretation of the law under which the tax was collected and by legislative fiat makes the new meaning binding upon Courts. The legislature may follow any one method or all of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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