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TMI Blog2011 (9) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... tituted sub-clause (zzzz) in the present incarnation and gave retrospective effect to cure the deficiency. It is well settled in law that it is open to the legislature to pass a legislation retrospectively and remove the base on which a judgment is delivered. - WP(C) No.3398/2010 - - - Dated:- 23-9-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE SANJIV KHANNA, JJ. For Petitioners: Mr.Harish Salve, Dr. A.M. Singhvi, Mr. S. Ganesh, Mr. N.K. Kaul, Sr. Advocates with Mr. Rishi Agarwala, Mr. Ameet Naik, Mr. Akshay Ringe, Mr.Nikhil Rohtagi, Mr. Vatsal Shah, Mr.S.Sukumaran, Mr.Anand Sukumaran and Mr.Bhupesh Kumar Pathak, Ms. Dhanashree Deoskar, Mr. Aneesh Patnaik, For Respondents: Mr.A.S.Chandhiok, ASG with Mr. Bhagat Singh, Mr.H.C.Bhatia, Ms.Sonia Sharma, Mr.Gurpreet S. Parwanda and Mr.Sumit Batra, Mr. Jatan Singh, Mr.Ruchir Mishra, Mr. S.P. Kansal, Mr. Vikrant Sharma, Mr. Ravinder Agarwal, Ms. Anjana Gosain, Mr.Sachin Datta, Mr.B.V.Niren, Advocates for respondent Union of India. DIPAK MISRA, CJ In this batch of writ petitions preferred under Article 226 of the Constitution of India, the constitutional validity of Section 65(105)(zzzz) of the Finance Act, 1995 (for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax. Reference has been made to sub-section 90(a) which was inserted in Section 65 of the Finance Act, 1994 by the Finance Act, 2007 to tax any service provided to any person by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce . The renting of immovable property has been defined to include renting, letting, leasing, licensing and other similar arrangements of immovable property for use in the course of furtherance of business or commerce including use as factory, building, warehouse, exhibition halls, multiple use building, etc. The said provision came into force with effect from 1.6.2007. It is urged that contrary to the express words of the provisions of the Act, the first respondent, placing an erroneous interpretation on Section 65(105)(zzzz) as it stood in 2007, issued a notification No.24/2007 dated 22.5.2007. After the notification was issued, a circular dated 4.1.2008 was issued by the Ministry of Finance of the Union of India. The constitutional validity of the notification and the circular was questioned before this Court in the case of Home Solution Retail India Ltd. v. Union of India, 158 (2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court also noted that service tax is a tax on service and not on the service provider. 34. From the above discussion, it is apparent that service tax is a value added tax. It is a tax on value addition provided by a service provider. It is obvious that it must have connection with a service and, there must be some value addition by that service. If there is no value addition, then there is no service. With this in mind, it would be instructive to analyse the provisions of Section 65(105)(zzzz). It has reference to a service provided or to be provided to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce . The wordings of the provision are so structured as to entail a service provided or to be provided to A‟ by B‟ in relation to C‟. Here, A‟ is the recipient of the service, B‟ is the service provider and C‟ is the subject matter. As pointed out above by Mr Ganesh, the expression in relation to‟ may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, in relation to‟ would include the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz). 36. In view of the foregoing discussion, we hold that Section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent that they authorize the levy of service tax on renting of immovable property per se, they are set aside. 37. Before parting with this batch of cases, we would like to observe that we have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above. [Emphasis added] 4. From the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommerce includes use of immovable property as factories, office buildings, ware houses, theaters, exhibition halls and multiple-use buildings; Explanation No.2: - For the removal of doubts, it is hereby declared that for the purposes of this clause renting of immovable property includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property; Section 66-Charge of Service Tax- Section 66-Charge of Service Tax- There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub clauses .(zzzz) . of Clause (105) of Section 65 and collected in such manner as may be prescribed. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub clauses .(zzzz) . of Clause (105) of Section 65 and collected in such manner as may be prescribed. Section 65(105) taxable service means any service provided or to be provided (zzzz) to any person, by any other person in relation to renting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , animal husbandry, mining purposes; (b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land; (c) land used for educational, sports, circus, entertainment and parking purposes; and (d) building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities. Explanation 2 For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purpose shall be deemed to be immovable property for use in the course or furtherance of business or commerce; Be it noted, the amendments have been brought with retrospective effect. 6. Challenging the validity of the amendments, Mr. Harish N. Salve, learned senior counsel, has submitted that the Parliament has no authority to enact the impugned legislation as renting of immovable property is a tax on lands and buildings which squarely comes within Entry 49 of List II of the Seventh Schedule of the Constitution of India. The learned senior counsel further submitted that the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration of Hotel Restaurant Association of India (supra) limits itself only to such aspects which could be directly covered by a specific entry in the two Lists. It is urged by him that if Entry 97 is taken recourse to despite the specific Entry of List II, it would create conflict and render the specific Entry of List II subservient to the residuary Entry of List I which is not permissible under the Constitutional scheme. Pressing into service the decision in Godfrey Phillips India Ltd. Vs. State of U.P., (2005) 2 SCC 515, he further submitted that in the Indian context, if an aspect is covered by an Entry in List I, then it cannot be said that another aspect cannot be taxed under an Entry within List II. The same logic, however, does not extend to a situation where the contest or cavil is between the residuary Entry within List I and a specific Entry within List II. 9. Mr. Salve has further argued that in the light of the judgment rendered in Home Solutions (supra), renting by the landlord for commercial purposes to the tenant, per se, could not be construed as rendering of service. The concept of service seeker and service provider as enunciated in the Finance Act 1994 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court in Kesoram Industries Limited (supra). 11. Dr. Singhvi, drawing analogy from the internationally followed principles, further submitted that even internationally, leasing / letting of immovable property is exempted from value added taxation since it has been construed that the same does not provide any value addition and since the Government of India has sought to rely upon the internationally accepted value added tax regime, it needs to follow the same fully and exempt leasing / letting of immovable property from the domain of value added tax. In this regard, he has placed reliance on the decision of the House of Lords in Commissioners of Custom and Excise v. Sinclair Collis Limited (2001) UKHL 30 (7th June, 2001). 12. The learned senior counsel has further drawn inspiration from the observations of the European Union Court in Belgium v. Temco Europe SA [Case C-284/03 of 18.11.2004] wherein it has been held that if the leasing/ letting of immovable property is a passive transaction, then it would be exempted. 13. Mr. S. Ganesh, learned senior counsel, analysing the anatomy of the provisions under Section 65, submitted that among the taxable services, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is proponed that it has been held by the Apex Court that the very same transaction cannot be subjected to tax by both the Parliament and the State Legislature. 17. Questioning the levy of service tax on renting of immovable property with retrospective effect from 1st June 2007, he submitted that there can be no retrospective authorization of penal action to be taken against assessees including, in particular, the imposition of penalties or penal interest and prosecution, and that such retrospective imposition of penal action would be unconstitutional in the light of the decision in Star India Pvt. Ltd v. CCE, (2005) 7 SCC 203. 18. Mr. S.K. Bagaria, learned senior counsel, relying on All India Federation of Tax Practitioners (supra) and Association of Leasing and Financial Service Companies vs. Union of India and ors., (2011) 2 SCC 352, delineated at the outset the essential features of service tax to mean that it is leviable only on services provided by the service provider to its customer and it is fundamentally and inseparably connected with the value addition. The learned senior counsel has further submitted that renting of immovable property for use in the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilding in question. Therefore, the Parliament, by merely giving it a label of service, cannot subject it to service tax as such an exercise is nothing but a colourable exercise of power. 22. Mr. A.S. Chandhiok, learned Additional Solicitor General, countering the aforesaid submissions, has contended that by virtue of the amendment incorporated by the Finance Act, 2010, the levy is on the very activity of renting, leasing, letting, licensing of the immovable property or permitting the immovable property through any arrangement whatsoever to be used in the course or furtherance of business or commerce and for the said purpose, transfer of right, title and interest is totally irrelevant. It is his further submission that the activity which is sought to be taxed under Section 65(105)(zzzz) is allowing/permitting the usage of immovable property in the course and furtherance of business which is neither covered under the Transfer of Property Act nor under the Indian Easements Act and by no means is a tax on land and building to come within the ambit and sweep of Entry 49 of List II of the Seventh Schedule of the Constitution. Combating the submission as regards the legislative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing else and in the case of DG Fose and Co.(Agents) Pvt. Ltd. (supra), tax was levied directly on building and was measured on the basis of annual value which was challenged on the ground that the State Legislature had no competence because only the Union had the power to levy tax on annual capital value which was rejected by the court by reiterating the law that the legislature was free to take a decision as to the measure of tax but the same is not the situation in the case at hand. The learned ASG, deriving strength from the decisions in Tamil Nadu Kalyana Mandapam Assn. (supra); All India Federation of Tax Practitioners and Ors. (supra) and Association of Leasing and Financial Service Companies (supra), also submitted that levy of service tax under Article 248(2) read with Entry 97 of List I is permissible. 25. On the nature of service tax, the learned ASG submitted that besides the fact that service is inherent under Section 65(90a) and Section 65(105)(zzzz), there is value addition and the whole activity has an inseparable nexus with commercial activity. Emphasizing on the concept of Value Added Tax (VAT), it is submitted by him that VAT was based on the additional s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the name given to a tax is immaterial and has no impact or bearing on the issue of its constitutional validity. It is also submitted that the mere fact that Section 65 (105) (zzzz) of the Finance Act regarded the letting of immovable property for commercial purpose as a service and proceeded to levy service tax on the same does not lead to the conclusion that the said tax was in reality and in substance a service tax. The issue of constitutional validity of a tax/levy depends on its essential nature and not merely its nomenclature. 29. It is further reiterated that it is a settled legal position that the legal fiction contained in the provisions of law enacted by the Legislature does not confer any legislative competence upon the Legislature. In this context, the decisions in State of Madras v. Gannon Dunkerley Co. Ltd., (1959) SCR 379, Bhopal Sugar Industries v. Sales Tax Officer, (1964) 1 SCR 481, Twentieth Century Finance Co. Ltd. v. State of Maharashtra, (2000) 6 SCC 12; All India Federation of Tax Practitioner s case (supra) Tamil Nadu Kalyanmandapam Association (supra) and Association of Leasing and Financial Service Companies (supra) have been pressed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of an apparent conflict between different entries, it is the duty of the Court to reconcile them. When it appears to the Court that there is apparent overlapping between the two entries, the doctrine of pith and substance has to be applied to find out the true nature of a legislation and the entry within which it would fall. In case of conflict between the entries in List I and List II, the same has to be decided by application of the principle of pith and substance . The doctrine of pith and substance means that if an enactment substantially falls within the powers expressly conferred by the Constitution upon the legislature which enacted it, it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another legislature. When a law is impugned as being ultra-vires of the legislative competence, what is required to be ascertained is the true character of the legislation. If, on such an examination, it is found that the legislation is in substance one on a matter assigned to the legislature, then it must be held to be valid in its entirety even though it might incidentally trench on matters which are beyond its competence. In order to exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State Act may be declared ultra vires. Clause I of Article 246 of the Constitution of India does not provide for the competence of the Parliament or the State Legislatures as is ordinarily understood but merely provides for the respective legislative fields. Furthermore, the Courts should proceed to construe a statute with a view to uphold its constitutionality. 34. In Welfare Association, A.R.P., Maharashtra and another v. Ranjit P. Gohil and others, (2003) 9 SCC 358, while dealing with the concept of colourable legislation, it has been held that the said doctrine fundamentally dealt with the question of competency of a particular legislature to enact a particular law. If the legislature is competent to pass a particular law, the motives which impelled it to act are really irrelevant. On the other hand, if the legislature lacks competency, the question of motives does not arise at all. Whether a statute is constitutional or not is thus always a question of power (vide Cooley s Constitutional Limitations, Vol.1, p.379). The crucial question to be asked is whether there has been a transgression of legislative authority as conferred by the Constitution which is the source o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration; and an endeavour must be made to solve it, as the Judicial Committee have said by having recourse to the context and scheme of the Act, and a reconciliation attempted between two apparently conflicting jurisdictions by reading the two entries together and by interpreting, and, where necessary, modifying, the language of the one by that of the other. If indeed such a reconciliation should prove impossible, then, and only then, will the non obstante clause operate and the federal power prevail; for the clause ought to be regarded as a last resource, a witness to the imperfections of human expression and the fallibility of legal draftsmanship. After so stating, their Lordships further proceeded to state as follows: 7. .It is well settled that the entries in the three lists are only legislative heads or fields of legislation and they demarcate the area over which the appropriate legislature can operate. The legislative entries must be given a large and liberal interpretation, the reason being that the allocation of subjects to the list is not by way of scientific or logical definition but is a mere enumeration of broad and comprehensive categories .. 36. We have refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the power to levy tax on lands and buildings under Entry 49 of List II did not trench upon a power conferred on the Parliament by Entry 88 of List I and, therefore, the enactment of the Wealth Tax Act by the Parliament was not ultra vires. In the said case, it has been opined as follows: But the legislative authority of Parliament is not determined by visualizing the possibility of exceptional cases of taxes under two different heads operating similarly on tax payers. Again entry 49 List II of the Seventh Schedule contemplates the levy of tax on lands and buildings or both as units. It is normally not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and buildings is directly imposed on lands and buildings, and bears a definite relation to it. Tax on the capital value of assets bears no definable relation to lands and buildings which may form a component of the total assets of the assessee. By legislation in exercise of power under entry 86 List I tax is contemplated to be levied on the value of the assets. For the purpose of levying tax under entry 49 List II the State Legislature may ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the matter of computation bear similarity to a tax on lands and buildings levied on the capital or annual value under Entry 49, List II. But in a normal case a tax on capital value of assets bears no definable relation to lands and buildings which may or may not form a component of the total assets of the assessee. But Entry 49 of List II, contemplates a levy of tax on lands and buildings or both as units. It is not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and buildings, is directly imposed on lands and buildings and bears a definite relation to it. Tax on the capital value of assets bears no definable relation to lands and buildings which may form a component of the total assets of the assessee. By legislation in exercise of power under Entry 86, List I tax is contemplated to be levied on the value of the assets. For the purpose of levying tax under Entry 49, List II the State Legislature may adopt for determining the incidence of tax the annual or the capital value of the lands and buildings. But the adoption of the annual or capital value of lands and buildings for determining tax liability w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral ownership of lands and buildings but is a levy upon a particular act which is transmission of title by gift. The two are not the same thing and the incidence of tax is not the same. The Apex Court ruled that since Entry 49 of the State List contemplates a tax directly levied by reason of general ownership of lands and buildings, it cannot include gift tax as levied by the Parliament and, there being no other entry which covers a gift tax, the residuary power of the Parliament could be exercised to enact the law. 42. In D.G. Bose Co. (Agents) Pvt. Ltd. (supra), the constitutional validity of the Kerala Building Tax Act, 1975 was challenged before the High Court of Kerala which upheld the validity of the Act. The principal contention that was canvassed before the Apex Court was that the subject matter of the Act being a tax on building is a tax on the capital value of the asset of an individual or a company and falls within the scope of Entry 86 of List I of the Seventh Schedule of the Constitution and not under Entry 49 of List II and, therefore, it travels beyond the legislative competence of the State Legislature. Their Lordships referred to the concept of tax as defined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. (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. 66. In short, the tax under entry 49 List II is not a personal tax but a tax on property. 44. In Kesoram Industries Ltd. Ors., (supra), the Constitution Bench, after dwelling upon the principle of interpretation relating to Articles 246, 265 and the Seventh Schedule of the Constitution and the scheme and nature of the power to legislate, per majority, opined that if any power to tax is clearly mentioned in List II, the same would not be available to be exercised by the Parliament based on the presumption of residuary power. In the said case, while dealing with the concept of land in terms of Entry 49, List II, it has been stated that it has wide connotation and the land remains land though it may be subject to different uses. The nature of use of the land would not enable a piece of land to be taken out of the meaning of land itself. It has been ruled therein that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legislature as mentioned in Entry 86 of List I. These two taxes are separate and distinct in nature and it cannot be said that there is any overlapping or that the State Legislature is not competent to levy such tax on lands and buildings merely on the ground that they have been subjected to another tax as a component of the total assets of the person concerned. 46. From the aforesaid enunciation of law in various authorities, the following principles can be culled out: (a) Under Entry 49 of List II, the State Legislature is competent to impose tax either on lands or buildings or on both. It is basically a tax on property. (b) Entry 49 of List II of the Seventh Schedule contemplates levy of tax on lands and buildings or both as units. (c) The levy of tax on lands and buildings is not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and buildings is directly imposed on lands and buildings and bears a definite relation to it. (d) The tax on land and building is a fundamental tax resting upon the general ownership of the lands and buildings but would not include a particular act like a tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable piece of legislation by the Parliament and there is a direct entrenchment. Emphasis has been laid on the first Home Solutions case (supra) to bolster the submission that in the absence of any value addition, which is the essential and fundamental component of service tax, the levy is unconstitutional. Regard being had to the aforesaid facets, we think it seemly to advert to the principles that have been laid down by the Apex Court pertaining to service tax in various decisions. 48. In T.N. Kalyana Mandapam Association (supra), the assail was to the constitutional validity of Sections 66, 67(o) of the Finance Act, 1994 and Rule 2(1)(d)(ix) of the Service Tax Rules, 1994 and other provisions relating to Kalyana Mandapams and Mandap keepers. Sub- sections 65(8), (19) and (20) of the Finance Act, 1994 defined caterer‟, mandap‟ and mandap keepers‟. Section 65(41)(p) defines taxable service‟ to mean any service provided to a client by a mandap keeper in relation to the use of a mandap in any manner including the facilities provided to the client in relation to such use and also the services, if any, rendered as a caterer. The challenge to the consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethods and even rates for taxation, if it does so reasonably. The courts view the laws relating to economic activities with greater latitude than other matters. 54. Therefore, a levy of service tax on a particular kind of service could not be struck down on the ground that it does not conform to a common understanding of the word service so long as it does not transgress any specific restriction contained in the Constitution. 55. In fact, making available a premises for a period of a few hours for the specific purpose of being utilized as a mandap whether with or without other services would itself be a service and cannot be classified as any other kind of legal concept. It does not certainly involve transfer of movable property nor does it involve transfer of movable property of any kind known to law either under the Transfer of Property Act or otherwise and can only be classified as a service. 49. In Gujarat Ambuja Cement Ltd. v. Union of India, AIR 2005 SC 3020, the challenge was to the legislative competence of the Parliament to impose service tax on carriage of goods by transport operators. It was urged that the matter came exclusively under Entry 56 of List II of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislative competence of the Parliament to levy service tax vide the Finance Act, 1994 and the Finance (No.2) Act, 1998 was assailed before the Apex Court. The issue that arose pertained to the competence of the Parliament to levy service tax on practising Chartered Accountants and Architects having regard to Entry 60, List II of the Seventh Schedule to the Constitution and Article 276 of the Constitution. Their Lordships referred to the reasons for imposition of service tax, the scheme of the Finance Act, 1994 and the Finance Act, 1998, the relevant provisions of the Constitution of India and dealt with the meaning of service tax. While dealing with the concept and meaning of service tax, their Lordships opined that the concept of service tax is an economic concept. Thereafter, the Apex Court proceeded to state that as an economic concept, there is no distinction between the consumption of goods and consumption of service as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide the Constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important to note that service tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country. After so stating, their Lordships proceeded to advert to the meaning of the words taxes on professions and held as follows: 34. As stated above, Entry 60, List II refers to taxes on professions, etc. It is the tax on the individual person/firm or company. It is the tax on the status. A chartered accountant or a cost accountant obtains a licence or a privilege from the competent body to practice. On that privilege as such the State is competent to levy a tax under Entry 60. However, as stated above, Entry 60 is not a general entry. It cannot be read to include every activity undertaken by a chartered accountant/cost accountant/architect for consideration. Service tax is a tax on each activity undertaken by a chartered accountant/cost accountant or an architect. The cost accountant/chartered accountant/architect charges his client for advice or for auditing of accounts. Similarly, a cost accountant charges his client for advice as well as doing the work of costing. For each transaction or contract, the chartered accountant/cost accountant renders profession based services. The activity undertaken by the chartered accountant or the cost accountant or an architect has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the activity which an entertainer undertakes on each occasion. The tax on privilege to practice the profession, therefore, falls under Entry 60, List II. It is quite different from tax on services. Keeping in mind the aforestated dichotomy, it is clear that tax on service does not fall under Entry 60, List II. Therefore, Parliament has absolute jurisdiction and legislative competence to enact the law imposing tax on services under Entry 97, List I of the Seventh Schedule to the Constitution. Eventually, it has been held in the said case that the tax on services do not fall under Entry 60, List II and the service would fall under Entry 92-C/97 of List I. Be it noted, it has been held therein that service tax is a value added tax and the value addition is on account of activities like planning, consultation, advising, etc. It is an activity which provides value addition as in the case of manufacture of goods which attracts excise duty. Their Lordships, in the said case, opined that the tax falls on the activity which is the subject matter of service tax, if the word service is to be substituted in the place of goods by applying the principle of equivalence. 51. In Associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing of premises on a temporary basis for organizing any official, social or business function but also other facilities supplied in relation thereto. (iii) Levy of service tax on a particular kind of service cannot be struck down on the ground that it does not conform to a common understanding of the word service‟ as long as it does not transgress any specific restriction embodied in the Constitution. (iv) Service tax is a levy on the event of service. (v) The concept of service tax is an economic concept. (vi) Consumption of service‟ as in case of consumption of goods‟ satisfies human needs. (vii) Service tax is a value added tax which, in turn, is a general tax applicable to all commercial activities involving provision of service. (viii) Value added tax is a general tax as well as destination based consumption tax leviable on services provided within the country. (ix) The principle of equivalence is in-built into the concept of service tax. (x) The activity undertaken in a transaction can have two components, namely, activity undertaken by a person pertaining to his performance and skill and, secondly the person who avails th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the 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 be brought under that Entry only if it is not enumerated in List II or List III and in the case of a tax if it is not mentioned in either of those Lists. In a Federal Constitution like ours, where there is a division of legislative subjects but the residuary power is vested in the Parliament, such residuary power cannot be so expansively interpreted as to whittle down the power of the State Legislature. That might affect and jeopardize the very federal principle. The federal nature of the Constitution demands that an interpretation which would allow the exercise of legislative power by the Parliament pursuant to the residuary powers vested in it to trench upon the State legislation and which would thereby destroy or belittle state autonomy must be rejected. In the said case, it has been further opined that where the competing entries are an entry in List II and Entry 97 of List I, the entry in the State List must be given a broad and plentiful interpretation. 55. In Harbhajan Singh Dhillon (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whenever legislative competence is in question attempt of the Courts is to find out whether the legislation squarely falls in one or the other entry. If a particular legislation is covered by any specific entry well and would be : is it beyond the legislative competence of Parliament? In undertaking this exercise it is quite often known that a legislation may be covered by more than one entry because an analysis has shown that the entries are overlapping. If the legislation may fall in one entry partly and part of it may be covered by the residuary entry, the legislation would nonetheless be immune from the attack on the ground of legislative competence. After so stating, their Lordships proceeded to state that with the advancement of society, expanding horizons of scientific and technical knowledge, probe into the mystery of creation, it is impossible to conceive that every imaginable head of legislation within human comprehension and within the foreseeable future could have been within the contemplation of the founding fathers and was, therefore, specifically enumerated in one or the other of the three Lists, meaning thereby that the three Lists were exhaustive of Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of tax, all taxable events pertaining to the object are within that field of legislation unless the event is specifically provided for elsewhere under a different legislative head. Where there is the possibility of legislative overlap, courts have resolved the issue according to settled principles of construction of entries in the legislative lists. 59. In Federation of Hotel Restaurant v. Union of India and others, AIR 1990 SC 1637, it has been held that the question of legislative practice as to what a particular legislative entry could be held to embrace is inapposite while dealing with a tax which is sui generis or non-descript imposed in exercise of the residuary powers so long as such tax is not specifically enumerated in Lists II and III. 60. As the tabular chart that we have reproduced would clearly show, Section 65 is the provision which deals with the charging of service tax. Section 66(105) defines taxable service to mean any service provided or to be provided to any person, by any other person by renting immovable property or any other service in relation to such renting for use in the course of or furtherance of business or commerce. Section 65(90a) has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any value addition. If the definition in Section 65(90a) is taken into consideration, there is a deeming concept with regard to service and the taxable service is based or founded on renting of immovable property. The learned senior counsel for the petitioner would contend that the Parliament cannot, by deeming fiction, create a tax liability to bring it within the purview of Entry 97 of List I as that would be an indirect entrenchment on Entry 49 of List II. Per-contra, Mr. Chandhiok, relying on the decision in Tamil Nadu Kalyana Mandapam Assn. (supra), submits that the concept of service, as is understood by a layman, is not applicable to the concept of taxing statute under the constitutional framework. He would further contend that once this Court holds that the levy does not pertain to a tax on land or building but an activity like renting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce, it would come within the residuary power of the Parliament and the same should put the controversy to rest. 62. As presently advised, we shall dwell upon the concept of value addition. The hub of the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be appositely understood. A rent is basically a reward paid for the use of the land. The tenant or the occupant pays the same to use the premises. In the economic concept, rent can be categorized into two heads, namely, contract rent and economic rent. Contract rent fundamentally refers to the total amount of money paid for use of the land and economic rent is a part of the total payment which is made for the use of land and it is estimated on many a ground. The economic rent can be contract rent minus interest on the capital invested. To give an example, a tenant pays ₹ 20,000/- per year as contract rent but the interest on capital invested is ₹ 3,000/- per year. Thus, the remaining amount, that is, ₹ 17,000/- (Rs.20,000.00 ₹ 3,000.00) is paid for the use of the land. 65. The concept of economic rent can also represent an amount which a factor can earn in its next best alternative use. To give an example, a piece of land yields in a particular use ₹ 5,000 in a year. If it is transferred to its next best use, it can earn a better income. At one point of time, the Theory of Rent was propagated by David Ricardo. According to the Ricardian theory, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause of scarcity of land or building, goodwill, accessibility and similar ancillary advantages which constitute value addition. 66. The modern economic theory of rent also has a nexus with demand and supply. In this analysis, rental is hiked because supply of land is scarce in relation to its demand. This economic concept is called scarcity theory of rent . This includes the facet of competition and quality. According to the modern theory, rent is not peculiar to land alone but arises in the case of many a factor which earn over and above the transfer earnings. There is a distinction between actual earnings and transfer earnings . According to the modern analysis of rent, it is not peculiar to land alone and the concept of transfer earning is more attracted towards the building depending upon its use. As an economic concept, it has been developed that rent qua building or premises or, for that matter, land has a nexus, an inseparable one, with the potentiality of its use in a competitive market. The economic growth has an effect on rent. In this regard, modern economists have evolved certain methods, namely, technical progress in methods of production, development in mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Entry 97 of List I. 70. In view of our conclusion, the decision in the first Home Solution case does not lay down the law correctly inasmuch as in the said decision, it has been categorically laid down that even if a building/land is let out for commercial or business purposes, there is no value addition. Being of this view, we overrule the said decision. 71. The next limb of attack is with regard to the retrospective applicability of the provision. The learned counsel for the petitioners have submitted that the tax and the penalty could not have been imposed with retrospective effect. It is worth noting that the Parliament, keeping in view the first Home Solution case, substituted sub-clause (zzzz) in the present incarnation and gave retrospective effect to cure the deficiency. It is well settled in law that it is open to the legislature to pass a legislation retrospectively and remove the base on which a judgment is delivered. The said view has been stated in Bakhtawar Trust and others v. M.D. Narayan and others, (2003) 5 SCC 298. In the said case, in paragraphs 20 and 26, it has been held thus: 20. In Vijay Mills Company Ltd. and Ors. v. State of Gujarat and Ors., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible for the legislature to remove a defect in earlier legislation and the defect can be removed both retrospectively and prospectively by legislative action and the previous actions can be validated. 73. On the question of penalty due to non-payment of tax, it is open to the government to examine whether any waiver or exemption can be granted. It may be noted that the appeal against Home Solutions-I is pending before the Supreme Court but the operation of the said judgment has not been stayed. 74. Quite apart from the above, as we have overruled the first Home Solution case, we are disposed to think that the provisions would operate from 2007 and the amendment brought by the Parliament is by way of ex abundanti cautela. 75. In view of the aforesaid analysis, we proceed to enumerate our conclusions in seriatim as follows: (a) The provisions, namely, Section 65(105)(zzzz) and Section 66 of the Finance Act, 1994 and as amended by the Finance Act, 2010, are intra vires the Constitution of India. (b) The decision rendered in the first Home Solution case does not lay down the correct law as we have held that there is value addition when the premises is let out for u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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