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TMI Blog2012 (8) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... d Sushil Sharma for the Respondent. ORDER Arun Mishra, CJ. Since common questions of law and facts are involved in these writ applications, they are being decided by this common order. 2. The facts are being noted from D.B. Civil writ Petition No. 16660/2011 Purshottam Das Malpani v. Union of India . The petitioner has questioned the levy of service tax which is being realized by the Union of India under the provisions of Section 65(105)(zzzz), 65(90a) read with section 77 of the Finance Act, 2010 (hereinafter referred to as the Act of 2010 ) and prayed to declare that the said provisions are illegal, arbitrary and ultra vires the Constitution and that renting of immovable property is not a service; prayer has also been made to declare the notification no. 23/2007 ST dated 22.5.2007 as amended to be illegal, arbitrary and ultra vires the Finance Act, 1994 (hereinafter referred to as the Act of 1994 ); prayer has further been made to declare the circular dated 26.2.2010 qua renting of immovable property as illegal and ultra vires the Act of 1994 and Constitution of India; prayer has also been made to quash the circular dated 20.9.2011. 3. It is averre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deals with taxes on lands and buildings. Thus, it was not within the power of the Union of India to levy service tax on land and building as it is a State subject. The circular dated 26.2.2010 has been issued to collect the tax on renting of immovable property by virtue of validation law i.e. Para 76 of the Finance Bill . 6. It was submitted that the provisions of Section 65(105)(zzzz), 65(90a) of the Act of 2010, notification dated 22.5.2007 and clause 77 of the Act of 2010 are ultra vires the constitution of India, particularly Articles 245, 246, 265 read with Entry 54 of the State List of seventh schedule. No service element is involved in renting out immovable property and there is no value addition, thus, service tax cannot be levied by virtue of clause 77 of the Act of 2010 as the very nature of tax will become direct in nature and the tax will be confiscatory and coercive on the petitioner and assessee. It cannot be imposed with retrospective effect. Reliance has been placed on the definition of service as provided in the Consumer Protection Act, 1986. 7. A reply to the writ petition has been filed in D.B. Civil writ Petition No. 9908/2010, which has been adopte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect from 1.6.2007. It is open to the legislature to clarify or validate a law retrospectively. Union of India has competence to levy service tax. 8. The learned counsel appearing on behalf of the petitioners have submitted that there is no value addition while renting out the immovable property, as such service tax could not have been levied; union of India has no power or authority to levy the service tax on land and building; it is in fact a service tax levied on land and building which is exclusively within the domain of the State Government under State List II Entry 49 of Seventh schedule of Constitution of India. It was not open to the legislature to enact deeming fiction of renting out immovable property being service when it was not so, that too with retrospective effect; that would have the effect of making a direct tax instead of indirect tax; it would not be possible for the landlord to realize the service tax from the lessee. Reliance has been placed on Articles 245, 246 and 265 read with entry 54 of the State List of seventh schedule of the constitution of India; Apex Court has not granted any stay against the DB decision of the Delhi High court in Home Solution R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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; 11. The provisions of section 65(90a) as stood prior to amendment by the Act of 2010 define that 'renting of immovable property' includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include renting of immovable property by a religious body or to a religious body and renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject of field, other than a commercial training or coaching centre. The definition remains the same after coming into force of Act of 2010. 12. The provisions of Sections 66 65 (105)(zzzz) prior to amendment made by the Act of 2010 are quoted below:- Section 66-Charge of Service Tax- There shall be levied a tax (hereinafter referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r use in the course of or furtherance of business or commerce. Explanation 1 -For the purposes of this sub-clause, immovable property includes:- ( i ) building and part of a building, and the land appurtenant thereto; ( ii ) land incidental to the use of such building or part of a building; ( iii ) the common or shared areas and facilities relating thereto; and ( iv ) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate, ( v ) Vacant land, given on lease or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce; But does not include- ( a ) vacant land solely used for agriculture, aquaculture, farming. forestry, 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, board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down thus:- 64. It is contended that when a property is Teased or rented, the element of service is absolutely absent. In this context, the concept of rent has to 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 trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther clarify, an element of service arises because a person who intends to avail the property on rent wishes to use it for a specific purpose. The value of the building gets accentuated because 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceptual essentiality, service tax gets attracted and the impost gets out of the purview of Entry 49 of List II of, the Seventh schedule of the Constitution and falls under the residuary entry, that is, 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. 20. The Full Bench of the Delhi High Court thus laid down that the provisions of 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; the decision rendered by the Division Bench in the case of Home Solution Retail India Ltd. ( supra ) does not lay down the correct law as there was value addition when the premises are let out for use in the course of or furtherance of business or commerce and it was accordingly, overruled; and the challenge to the amendment giving it retrospective effect was unsustainable and accordingly, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to renting of immovable property was broad enough to include both renting of immovable property as well as services in relation to renting of immovable property. Object of amendment, brought about with retrospective effect, was to expressly bring the legislative provision in conformity with original parliamentary intent. 22. The High Court of Punjab and Haryana at Chandigarh in the case of Shubh Timb Steels Ltd. ( supra ) has also upheld the constitutional validity of the provisions of Section 65(90a) and 65 (105)(zzzz) of the Finance Act, 1994 holding that renting of property for commercial purposes is certainly a service and has value for the service receiver. The Punjab and Haryana High Court further held that service tax on service of renting of property was not exclusively covered by Entry 49 List II. Entry 49 of List II relates to tax on land and building and not any activity relating thereto. Income-tax on income from property, wealth-tax on capital value of assets including land and building and gift tax on gift of land and building have been held upheld. It cannot be held that renting of property did not involve any service as service could only be in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s impact and the scope and ambit of the said provision has not been discussed and the entire focus of the Hon'ble Delhi High Court seems to have been made to the amendment of Section 66(105)(zzzz) by the Finance Act. It is a well settled principles of law that, if a judgment proceeds without taking note of or ignoring relevant provision of law, the said judgment cannot be held to have correctly decided the case. 9. Apart from the above, the Hon'ble Supreme Court in the case of Tamil Nadu Kalyana Mandapam Association v. Union of India [2004] 5 SCC 632 : 2006 (3) STR 260 (SC) : 2004 (167) ELT 3 (SC) has clearly held that, the service rendered by Mandap can be termed as property based services , This judgment has been affirmed by a latter judgment of the Hon'ble supreme Court presided over by Justice S.H. Kapadia (as His Lordship the then was) in the case of All India Federation of Tax Practitioners v. Union of India [2007] 7 SCC 527 : 2007 (7) STR 625 (SC). 10. In the present case, we are clearly of the view that the nature of the transaction made by the petitioner with its tenant clearly amounts to renting of an immovable property for the purpose of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently, submission raised by the learned counsel for the petitioners cannot be accepted. 27. The learned counsel for the petitioners has relied upon the definition of 'service' contained in the Consumer Protection Act. The said definition cannot be applied to the Finance Act and thus, it has no application1 to the present case. 28. Coming to the question of retrospectivity, as we have found that there is element of service involved in renting out the immovable property and value addition is also there in such transaction, very decision of the Division Bench of Delhi High Court has been wiped off by the subsequent Full Bench decision of Delhi High Court in the case of Home Solutions Retails (India) Ltd. ( supra ), besides that provisions of Validation Law clarifies the provisions, it is permissible for the legislature to do so to make the validation law with retrospective effect. 29. Full Bench of Delhi High Court in Home Solutions Retails (India) Ltd. ( supra ) has observed that it is well settled in Taw 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are distributed between the Union and the States, situations may arise where the two legislative fields might apparently overlap, it is the duty of the courts, however difficult it may be, to ascertain to what degree and to what extent, the authority to deal with matters falling within these classes of subjects exists in each legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and, where necessary modified by that of the other. 27. The Judicial Committee in Prafulla Kumar Mukherjee v. Bank of Commerce AIR 1947 PC 60, referred to with approval the following observations of Sir Maurice Gwyer 'C.J.' Subrahmanyan Chettiar case: It must inevitably happen from time to time that legislation, though purporting to deal with a subject in one list, touches also on a subject in another list, and the different provisions of the enactment may be so closely intertwined that, blind observance to a strictly verbal interpretation would result in a larg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r another purpose fall within another legislative power . Learned Author says: ...that by 'aspect' must be understood the aspect or point of view of the legislator in legislating the object, purpose, and scope of the legislation that the word is used subjectively of the legislator, rather than objectively of the matter legislated upon. In Union Colliery Co. of British Columbia v. Bryden 1899 AC 580, 587, Lord Haldane said: It is remarkable the way this Board has reconciled the provisions of Section 91and Section 92, by recognising that the subjects which fall within Section 91 in one aspect, may, under another aspect, fall under section 92. 31. Indeed, the law with respect to a subject might incidentally affect another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but, the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. Lord Simonds in Governor-General-in-Council v. Province of Madras AIR 1945 PC 98 in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and.-for another purpose fall within another legislative power. There might be overlapping, but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. 33. In State of West Bengal v. Kesoram Industries Ltd. [2004] 10 SCC 201, the Apex Court has clarified that there can be an overlapping in fact, as the methodology or mechanism adopted for assessment and quantification can be similar for taxes relating to different fields of taxation, but there can be no overlapping in law i.e. even though the mechanism adopted for assessment is similar but the subject matter of two taxes by reference to the two lists can be different and therefore, two taxes cannot be said to be overlapping. The Apex Court relied upon the decision in Hoechst Pharmaceuticals Ltd. v. State of Bihar [1983] 4 SCC 45 and Governor General in Council v. Province of Madras AIR 1945 PC 98. The Apex Court in the case of K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give way to the union law. (3) Taxation is considered to be a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power. (4) The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because to quote V. Ramaswami, J., the allocation or the subjects to the lists is not by way of scientific or logical definition but by way of a mere simplex enumeratio of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters. (5) Where the legislative, competence of the legislature of any State is questioned on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck down. The test laid down in Sir Byramjee Jeejeebhoy case AIR 1940 Bom. 65 by the Full Bench of the Bombay High Court was approved. 44. In Asstt. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. [1969] 2 SCC 55 for the purpose of attracting the applicability of Entry 49 in List II, so as to cover the impugned levy of tax on lands and buildings, the Constitution Bench laid down twin tests, namely: (i) that such tax is directly imposed on lands and buildings, and (ii) that it bears a definite relation ho it. Once these tests were satisfied, it was open for the State Legislature, for the purpose of levying tax, to adopt the annual value or the capital value of the lands and buildings for determining the incidence of tax. Merely, on account of such methodology having been adopted, the state legislature cannot be accused of having encroached upon Entry 86, 87 or 88 of List I. Entry 86 in List I proceeds on the principle of aggregation and tax is imposed on the totality of the value of all the assets. It is quite permissible to separate lands and buildings for the purpose of taxation under Entry 49 in List II. There is no reason for restricting the amplitude of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be guarded against by the courts. Let it be said that the federalism in the Indian Constitution is not a matter of administrative convenience, but one of principle - the outcome of our own historical process and a recognition of the ground realities. (SCC p. 217, para 276) Quoting from Setalvad, M.C.: Tagore Law Lectures, Union and State Relations under the Indian Constitution (Eastern Law House, Calcutta, 1974), Jeevan Reddy, J. observed: (SCC p. 217, para 276) It is enough to note that our constitution has certainly a bias towards Centre vis-a-vis the States. It is equally necessary to emphasise that courts should be careful not to upset the delicately crafted constitutional scheme by a process of interpretation. ** ** ** In a nutshell 129. The relevant principles culled out from the preceding discussion are summarised as under: (1) In the scheme of the lists in the Seventh Schedule, there exists a clear distinction between the general subjects of legislation and heads of taxation. They are separately enumerated. (2) Power of regulation and control is separate and dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questions step by step as under: One - Is it still possible to effect reconciliation between two entries so as to avoid conflict and overlapping? Two - In which entry the impugned legislation falls by finding out the pith and substance of the legislation? and Three - Having determined the field of legislation wherein the impugned legislation falls by applying the doctrine of pith and substance, can an incidental trenching upon another field of legislation be ignored? (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 basis for classifying land into different identifiable groups for the purpose of taxation. The nature of user of one piece of land would enable that piece of land being classified separately from another piece of land which is being subjected to another kind of user, though the two pieces of land are identically situated except for the difference in nature of us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Parliament. In spite of declaration made by reference to Entry 52 or 54, the State would be free to act in the field left but from the declaration. The legislative power to tax by reference to entries in List II is plenary unless the entry itself makes the field subject to any other entry or abstracts the field by any limitations imposable and permissible. A tax or fee levied by the State with the object of augmenting its finances and in reasonable limits does not ipso facto trench upon regulation, development or control of the subject. It is different if the tax or fee sought to be levied by the State can itself be called regulatory, the primary purpose whereof is to regulate or control and augmentation of revenue or rendering service is only secondary or incidental. (9) The heads of taxation are clearly enumerated in Entries 83 to 92B in List I and Entries 45 to 63 in List II. List III, the concurrent List, does not provide for any head of taxation. Entry 96 in List I, Entry 66 in List II and Entry 47 in List III deal with fees. The residuary power of legislation in the field of taxation spelled out by Article 248(2) and Entry 97 in List I can be applied only to such subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. From the point of view of the chartered accountant/cost accountant it is an activity undertaken 'by him based on his performance and skill. But from the point of view of his client, the chartered accountant/cost accountant is his service provider, it is a tax on services . The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the Assessee and cleared by the Assessee for home consumption under the Central Excise Act. 35. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided whereas a professional tax under Entry 60 is a tax on his status. It is the tax on the- status of a cost accountant or a chartered accountant. As long as a person/firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of Entry 60, List II wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of legislative competence. This is the underlying principle to differentiate between the two groups of entries, namely, general entries and taxing entries, we are of the view that taxes on services is a different subject as compared to taxes on professions, trades, callings, etc. Therefore, Entry 60 of List II and Entries 92-C/97 of List I operate in different spheres. ** ** ** 46. In International Tourist Corpn. v. State of Haryana [1981] 2 SCC 318, the appellants were transport operators. The State of Haryana levied a tax on passengers and goods under the Haryana Passengers and Goods Taxation Act, 1952. The Appellants questioned the vires or Section 3(3) insofar as the levy of tax on passengers and carriage of goods by their vehicles plying along the national highways. It was urged on behalf of the Appellants that there was nothing in the Constitution to prevent Parliament from combining its power to legislate with respect ; to any matters enumerated in Entries 1 to 96 of List I with its power to legislate under Entry 97 of List I and, if so, then the power to legislate with res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled as property based services, in this case, we are concerned with performance based services. However, both the categories fall within the ambit of the word services . 49. In Gujarat Ambuja cements Ltd. v. Union of India [2005] 4 SCC 214, it was held that service tax is not a tax on goods or on passengers but it was on the transportation itself and, therefore, it falls under residuary power of Parliament under Entry 97 of the Seventh Schedule to the Constitution. It was further held that service tax is not a levy on passengers or goods but on the event of service in connection with the carriage of goods and, therefore, it was not possible to hold that the Act was in pith and substance within the state's exclusive powers under Entry 56 of List II. It was held that service tax came within Entry 97 of List I. In the present case, as stated above, we are concerned with Entry 60 of List II. As stated above, service tax is on performance based services itself. It is on professional advice, tax planning, auditing, costing, etc. On each or the exercise undertaken tax becomes payable. Therefore, the above judgment has no application. 35. In All India Federation of Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee; it is imposed on the total assets which the Assessee owns, and in determining the net wealth not only the encumbrances specifically charged against any item of assets, but the general liability of the Assessee to pay his debts and to discharge his lawful obligations, have to be taken into account. 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 powers 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 dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through-out... 38. In Union of India v. H.S. Dhillon [1971] 2 SCC 779, the Apex Court held that the tax under Entry 49, List II is not a personal tax but a tax on property. 39. In BSNL v. Union of India [2006] 3 SCC 1, the principal question which arose for determination was in respect of the nature of the transaction by which mobile phone connections are enjoyed. The question was whether such connections constituted a sale or a service or both. If it was a sale then the states were legislatively competent to levy sales tax on the transaction under Entry 54, List II of the seventh Schedule to the Constitution. If it was service then the central Government alone had the legislative competence to levy service tax under Entry 97, List I and if the nature of the transaction partook of the character of both sale and service, then the moot question would be whether both the legislative authorities could levy their separate taxes together or only one of them. It was held that the subject transaction was a service and, thus, the Parliament had legislative competence to levy service tax under Entry 97, List I. In SCC para 88 of the said judgment, the Apex Court observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he constitution, Parliament had not divested itself of the powers to impose service tax and hence, taxes on services is within legislative competence of Parliament under Article 248 read with Schedule VII List I Entry 97 of Constitution. 41. Thus, we are unable to accept the submission that Union of India has no authority or power to levy service tax on renting of immovable property. The imposition of service tax on renting of immovable property was within the legislative competence of the Parliament and it does not fall within the legislative competence of the State under entry 49 of List II: of the Seventh Schedule to the Constitution. The submission is rejected. 42. It was also submitted relying upon the provisions of Articles 245, 246 and 265 of the Constitution that Union of India was not competent to impose service tax. Article 265 provides that no tax shall be levied or collected except by authority of law. Service tax is being collected by the Union of India under the authority of law and it is not a case where tax is levied without authority of law. Article 246(3) deals with the power of the State legislature to make laws for the State or any part thereof. Ther ..... 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