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TMI Blog2002 (1) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... service tax levied on its members by reason of sections 64 to 96 of the Finance Act, 1994 (32 of 1994), as amended by the Finance (No. 2) Act, 1998. Background of the levy: As an off-shoot of the recommendations of the Dr. Raja Chelliah Committee in 1990, for the first time, in the Union Budget for 1994-95, a levy of service tax on service relating to three categories, i.e., stock brokers, general insurers and telephone services was imposed. The Raja Chelliah Committee had observed that indirect tax at the Central level should be broadly neutral in relation to production and consumption of goods and should, in course of time, cover commodities and services. It felt that the country should move towards full-fledged Value Added Tax (VAT) in due course covering services and commodities. It was envisaged that as the Central excise on commodities would get gradually transformed into a value added tax at the manufacturing level, service tax will get woven into the system. The Committee, therefore, recommended charging of tax on services such as advertising, insurance, share broking, telecom, etc., to begin with. The purpose of service tax is to broaden the tax base, augment revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " The expression "taxable service", in relation to chartered accountants, is defined in section 65(48)(s) as under: 'taxable service' means any service provided, -. (s) to a client, by a practising chartered accountant in his professional capacity, in any manner;" Section 66 is the charging section and provides that, from a stipulated date, service tax at the rate of 5 percent of the value of taxable service would be charged on the taxable service provider. Section 67 indicates the manner of valuation of taxable services. Clause (r) of section 67 provides that in relation to the service provided by a practising chartered accountant to a client, the value of taxable service shall be the gross amount received by such accountant from the client for services rendered in professional capacity in any manner. Section 68 makes it obligatory on every person providing taxable service to pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed. Originally, when introduced in the Finance Act, 1994, the service tax had to be collected by the provider and paid to the Central Government, in much the same manner as tax deducted at sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy service tax as done under the Finance Act. He urged that the service tax is in "pith and substance" a tax on the practice of a "profession, trade, calling and employment' relatable to entry 60 in List II (State List) of Schedule VII to the Constitution, and, therefore, beyond the competence of Parliament. Alternatively, it is contended that, relating the service tax to the gross charges collected by the practising chartered accountants would amount to double taxation on the income earned by the chartered accountants and, therefore, unconstitutional. Legislative competence of Parliament: The legislative competence of Parliament is determined by article 246 read with article 248 and List I of the Seventh Schedule. By reason of article 246(1), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I (Union List) of Schedule VII. By reason of article 248, Parliament has also been invested with residuary powers and has exclusive power to make any law in respect of any matter not enumerated in the Concurrent List or State List, including imposition of a tax not mentioned in either of those lists. It is now settled law that when it comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sense and that each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it". In Indian Aluminium Co. v. State of Kerala, AIR 1996 SC 1431, the view in Navinchandra Mafatlal's case [1954] 26 ITR 758 (SC) was reiterated and it was held that the words in the Lists of Schedule VII should be read in their ordinary, natural and grammatical meaning, subject to the rider that in construing the words in a constitutional enactment conferring legislative power, the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude. Placing reliance on these two judgments, learned counsel for the petitioner contends that the widest liberal construction must be put on the words in entry 60 of List II in the Seventh Schedule to the Constitution. The entry uses the words "taxes on professions, trades, callings and employments". This would include tax on profession and professional service also. The service tax levied by the Finance (No. 2) Act, 1998, is nothing but a tax on the professional services rendered by practising chartered accountants, and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, the levy was to fall on the receiver and enjoyer of the amusement, entertainment, etc., and not on the provider of it. The decision in Navinchandra Mafatlal's case [1954] 26 ITR 758 (SC) was relied upon. The Supreme Court, while agreeing that constitutional entries empowering legislation must be liberally interpreted, held that the entry contemplates a law with respect to these matters (luxuries, entertainments or amusements) as objects and a law which imposes tax on the act of entertaining is within the entry, whether it falls on the giver or the receiver of that entertainment. It also rejected the contention that the imposition of the tax was for the privilege of carrying on any trade or calling and held, "it is a tax imposed on every show, that is to say, on every instance of the exercise of the particular trade, calling or employment. If there is no show, there is no tax". It observed, "a lawyer has to pay tax or fee to take out a licence irrespective of whether or not he actually practises. That tax is a tax for the privilege of having the right to exercise the profession if and when the person taking out the licence chooses to do so". Entry 60 of List II must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "aspect legislation" must be kept in mind. In Federation of Hotel and Restaurant Association of India v. Union of India [1989] 178 ITR 97 (SC); [1989] 3 SCC 634, the tax was levied on chargeable expenditure incurred in the class of hotels wherein room charges were more than Rs. 400 per day per individual or more. Its constitutional validity was challenged on the ground that, in pith and substance, it was a tax on "luxuries" falling within entry 62 of List II of the Seventh Schedule, or a tax on the consideration paid for the purchase of goods constituting an impost of the nature envisaged in entry 54 of List II, and, therefore, outside the legislative competence of Parliament. The Constitutional Bench of the Supreme Court rejected the challenge, elaborating the theory of "aspects legislation". The Supreme Court observed: "30. In Lefroy's 'Canada's Federal System', the learned author referring to the 'aspects of legislation' under sections 91 and 92 of the Canadian Constitution, i.e., British North America Act, 1867, observes that 'one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of legislative p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subjects and others are of a kind mostly dealt with in connection with another. As in the case of a pocket gadget compactly assembling knife blade, screwdriver, fishscaler, nailfile, etc., a description of it must mention everything but in characterizing it the particular use proposed to be made of it determines what it is.' '. . . I pause to comment on certain correlations of operative incompatibility and the "aspect" doctrine. Both grapple with the issues arising from the composite nature of a statute, one as regards the preclusory impact of federal law on provincial measures bearing on constituents of federally regulated conduct, the other to identify what parts of the whole making up a "matter" bring it within a class of subjects....' 37. It is trite that the true nature and character of the legislation must be determined with reference to a question of the power of the Legislature. The consequences and effects of the legislation are not the same thing as the legislative subject matter. It is the true nature and character of the legislation and not its ultimate economic results that matters. 38. Indeed, as an instance of different aspects of the same matter, being the top ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere fact that a person had previously been in a profession or carried on a trade, etc., cannot justify a tax under the said entry. The tax on the receipt of pension or on the income from investments is in truth and substance a tax on income. At the same time, when the tax was levied, the pensioner was in no employment, but was only in receipt of income though for past services in an employment. Hence, the levy was held to be constitutionally invalid. Section 142A(1) of the Government of India Act, 1935 (which corresponds to article 176(1)), was relied upon by the Corporation of Madras. The Supreme Court rejected the argument by holding that that section would assist the State only if the tax imposed were one on a profession, trade calling, or employment, and in that event the section provided that such a tax shall not be deemed to be a tax on income, but where the tax imposed is one not on a profession, etc., at all, it did not mean that the State might levy a tax on income and call it profession tax. In our view, the judgment of the Supreme Court in C. Rajagopalachari's case [1964] 53 ITR 454 is clearly distinguishable. The appellant, Sri Rajagopalachari had ceased to be a practi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and contended that these judgments hold that the expression "business" and "profession" are interchangeable, though the term business has larger amplitude. In our view, these judgments are not helpful in resolving the questions raised to us. The decision in Kisan Supdu Ingale v. Bhusawal Borough Municipality, AIR 1966 Bom 15, particularly the observations of the Division Bench of the Bombay High Court in para. 2 were relied upon. This is an authority for the proposition that "service" would be covered by the expression 'employment" used in entry 60 of List II. The contention of learned counsel for the petitioner is that if service is equivalent to employment, then tax on service would be relatable to entry 60 in List II of Schedule VII, and, therefore, constitutionally beyond the legislative competence of Parliament. We have already pointed out that under "aspect legislation", it is open to different Legislatures to legislate with regard to different aspects of the same subject matter. Even assuming that "service" is contemplated by term "employment" in entry 60 in List II, it only means that the aspect of entering into service would be within the taxing competence of the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is not the subject-matter of "tax on profession", within the meaning of entry 60 in the State List, as held by the Supreme Court in Western India Theatres Ltd.'s case, AIR 1959 SC 582. The tax on profession is really a tax on the privilege of being engaged in a profession, and not with regard to any other aspect of the profession. The aspect of value of service rendered in the profession is not related to any entry in List II. Consequently, it is perfectly permissible for Parliament to legislate for a tax thereupon. The contention of Mr. Paikeday, must therefore, fail. Mr. Paikeday, then contended that tax on profession, trade, callings and employments, within the meaning of entry 60 in List II, can only fall upon a person, not merely because of entry into the profession, but also his rendering services in the profession. He would have us read the words in entry 60 of List II ejusdum generis. He contends that to profession, trade, calling or employment, there is one thing in common, i.e., service, which is most of the time paid for. Thus, according to Mr. Paikeday, placing a liberal interpretation on entry 60 of List II, it would include a tax on service and the income conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment of the Bench of nine judges in S. R. Bommai v. Union of India, AIR 1994-SC 1918, is pressed into service to establish that ours is a federal constitution. There is no difficulty in accepting the principle that because under the scheme of our Constitution greater power is conferred upon the Centre vis-a-vis the States, it does not mean that the States are mere appendages of the Centre. Within the spheres allotted to them, the States are supreme. The Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. The Supreme Court was pleased to observe in S. R. Bommai's case, AIR 1994 SC 1918: "Federalism envisaged in the Constitution of India is a basic feature in which the Union of India is permanent within the territorial limits set in article I of the Constitution and is indestructible. The State is the creature of the Constitution and the law made by articles 2 to 4 with no territorial integrity, but a permanent entity with its boundaries alterable by a law made by Parliament. Neither the relative importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are couched in careful and elaborate words with inclusive and excluding language in the case of some, which has made the Constitution, to use the words of Gwyer C. J. in In re, the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 [1939] FCR 18; AIR 1939 FC 1; [1938-50] 1 STC 1, 'unique among federal constitutions in the length and detail of its legislative lists'. In the layout of such elaborately worded matters in the Lists and in the context of article 246(1), the residuary power contained in article 248 and entry 97, List I, must be construed as meaning power in respect of matters not enumerated in any of the three Lists. Such a residuary power cannot, therefore, be ordinarily claimed in respect of a matter already dealt with under an article or an entry in any one of the three Lists." There is no difficulty in applying this principle. In fact, Harbhajan Singh Dhillon's case [1972] 83 ITR 582 (SC) was considered and reiterated in Federation of Hotel and Restaurant Association of India's case [1989] 178 ITR 97 (SC). The principle, merely, is that the residuary power does not arise if there is an enumerated entry. It is nobody's case that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions in V. Pattabhiraman v. Asstt. Commr. of Urban Land Tax, AIR 1971 Mad 61 [FBI; Ajoy Kumar Mukherjee V. Local Board of Barpeta, AIR 1965 SC 1561, Kunnathat Thathunni Moopil Nair v. State of Kerala, AIR 1961 SC 552; Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. [1970] 75 ITR 603; [1969] 2 SCC 55, and the judgment of Maurice Gwyer C. J. in Subrahmanyan Chettiar v. Muttuswami Goundan, AIR 1941 FC 47, were noticed and approved by the Supreme Court. It also reiterated the distinction made between the subject of a tax and the measure of a levy articulated by Federation of Hotel and Restaurant Association of India's case [1989] 178 ITR 97 (SC). It was pointed out in Governor General in Council v. Province of Madras, AIR 1945 PC 98, that although the excise duty and a tax on a sale of goods was leviable at the same time when the manufactured article leaves the factory of the manufacturer: "the two taxes, the one levied on a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But, in law there is no overlapping. The taxes are separate and distinct imposts. If in fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts are concerned, there is a difference made by law, between the privilege of being a member of the Institute of Chartered Accountants and practising the profession of chartered accountants. Consequently, it is submitted that while interpreting entry 60 in List II of Schedule VII, as far as chartered accountants are concerned, the distinction made by the Supreme Court in Western India Theatres Ltd.'s case AIR 1959 SC 582, no longer holds good. Hence, it is urged that the proposition that a tax relatable to entry 60 in List II would be only on the privilege of entering and being a member of the profession does not hold good in the case of practising chartered accountants, who are not only required to be members of the Institute of Chartered Accountants, but are also required to hold a certificate of practice as provided in section 6(1) of the said Act. In our view, this argument has no substance. Whatever be the definition of the expressions, "chartered accountant" and "practising chartered accountant" for the purpose of the Chartered Accountants Act, when it comes to the expression "practising chartered accountant" for the purpose of the Finance (No. 2) Act, we must apply the defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. If there is equality and uniformity within each group, the law would not be discriminatory. The decided cases show that the Legislature is permitted to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. Elaborating this principle, the Supreme Court in Federation of Hotel and Restaurant Association of India [1989] 178 ITR 97 observed: "But, with all this latitude, certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or class of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... path to judicial wisdom and institutional prestige and stability." In G. K. Krishnan v. State of Tamil Nadu, AIR 1975 SC 583; [1975] 1 SCC 375, 389, para. 38, Mathew J. referred with approval to the following observations of the Supreme Court of USA in San Antonio School District v. Rodrigues [1973] 411 US 1: " Thus we stand on familiar ground when we continue to acknowledge that the justices of this court lack both the expertise and the familiarity with local problems so necessary to the making of wise decisions with respect to the raising and disposition of public revenues. Yet, we are urged to direct the States either to alter drastically the present system or to throw out the property tax altogether in favour of some other form of taxation. No scheme of taxation, whether the tax is imposed on property, income, or purchases of goods and services, has yet been devised which is free of all discriminatory impact. In such a complex arena in which no perfect alternatives exist, the court does well not to impose too rigorous a standard of scrutiny lest all local fiscal schemes become subjects of criticism under the Equal Protection Clause." In ITO v. N. Takin Roy Rymbai [1976] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificate of commencement of business or commencement of other business under section 149 of the Companies Act, 1956 (1 of 1956); or (v) signing of the annual return of listed companies under section 161 of the Companies Act, 1956 (1 of 1956); or (vi) certification that requirements of Schedule XIII to the Companies Act, 1956 (1 of 1956) have been complied with as regards statutory guidelines for appointment of managerial personnel and payment of managerial remuneration to them without the approval of the Central Government under section 269 and Schedule XIII of the Companies Act, 1956 (1 of 1956); or (vii) certification of documents to be filed by- companies with the Registrar of Companies under the Companies Act, 1956 (1 of 1956); or (viii) certification in Form No. I that the whole of the amount remaining unpaid or unclaimed for a period of three years from the date of transfer to the special account under sub-section (1) and sub-section (2) of section 205A of the Companies Act, 1956 (1 of 1956) has been transferred to the General Revenue Account of the Central Government under the Companies Un paid Dividend (Transfer to General Revenue Account of the Central Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such matters as: (a) Drafting of prospectus and memorandum containing salient features of prospectus. Drafting and filing of listing agreement and completing formalities with Stock Exchanges, Registrar of Companies and SEBI. (b) Preparation of publicity budget, advice regarding arrangements for selection of (i) ad-media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the underwriting agreement, distribution of publicity and issue material including application form, prospectus and brochure and deciding on the quantum of issue materials (in doing so, the relevant provisions of the code of ethics must be kept in mind) (c) Advice regarding selection of various agencies connected with issue, namely, registrars to issue, printers and advertising agencies. (d) Advice on the post issue activities, e.g., follow up steps which include listing of instruments and despatch of certificates and refunds, with the various agencies connected with the work. Explanation.-For removal of doubts, it is hereby clarified that the activities of banking, underwriting, and portfolio ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such other conditions. It has to be kept in mind that tax on services is a new attempt made by Parliament and its efficacy can be determined after considerable time of trial and error. If, in the final analysis, the levy is to be paid by the public at large, being passed on to them or at least presumed to be passed on to them under section 12B of the Central Excise Act, 1944, the machinery to be evolved for collection of the levy would depend on the experience and the wisdom gathered from experience. Crudities and inequities of the provisions do not render the statute arbitrary, irrational or constitutionally invalid. The Supreme Court of USA in Secretary of Agriculture v. Central Roig Refining Co. [1949] 338 US 604 observed: "this court is not a Tribunal for relief from crudities and inequities of complicated experimental economic legislation". The Supreme Court in Hoechst Pharmaceuticals Ltd. v. State of Bihar [1985] 154 ITR 64; AIR 1983 SC 1019, echoed a similar sentiment: "On questions of economic regulations and related matters, the court must defer to the legislative judgment. When the power to tax exists, the extent of the burden is a matter for the discretion of the law-m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of adjusting the competing interests and the claims as the Legislature possesses the greatest freedom in such areas. It is also well-settled that lack of perfection in a legislative measure does not necessarily imply its constitutionality as no economic measure has so far been discovered which is free from all discriminatory impact and that in such a complex area in which no foolproof device exists, the court should be slow in imposing strict and rigorous standard of scrutiny by reason of which all local fiscal schemes may be subjected to criticism under the equal protection clause. Having regard to these settled principles the impugned judgment of the High Court could not be sustained." While dealing with the challenge to the constitutional validity of an economic legislation, it would be useful to be mindful of the note of caution expressed by the Supreme Court in R. K. Garg v. Union of India [1982] 133 ITR 239; AIR 1981 SC 2138, 2147: ". . . laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J., that the Legislature should be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the Legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the Legislature in dealing with complex economic issues." The above observations were reiterated with approval by the Supreme Court in Mafatlal Industries Ltd. v. Union of India [1997] 5 SCC 536, 618-619 [1998] 111 STC 467. The words of wisdom of Khanna J. in His Holiness Kesavananda Bharati Sripadagalvaru v. State of Kerala [1973] 4 SCC 225 (para. 1535), 821; AIR 1973 SC 1461 serve as a beacon light. The learned judge says: "In exercising the power of judicial review, the courts cannot be oblivious of the practical needs of the Government. The door has to be left open for trial and error. Constitutional law like other mortal contrivances has to take some chances. Opportunity must be allowed for vindicating reasonable belief by experience." The Supreme Court in State of Uttar Pradesh v. Kamla Palace, AIR 2000 SC 617; [2000] 1 SCC 557, threw considerable light on dealing with the challenge to a fiscal statute as violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey do not speak for Parliament. No Act of Parliament may be struck down because of the understanding or misunderstanding of Parliamentary intention by the executive Government or because their (the Government's) spokesmen do not bring out relevant circumstances but indulge in empty and self-defeating affidavits. They do not and they cannot bind Parliament. Validity of legislation is not to be judged merely by affidavits filed on behalf of the State, but by all the relevant circumstances which the court may ultimately find and more especially by what may be gathered from what the Legislature has itself said. The learned Additional Solicitor General brought to our notice, the judgment of the Bombay High Court in All India Federation of Tax Practitioners v. Union of India [2002] 256 ITR 401, wherein the Division Bench of the Bombay High Court considered the challenge to the constitutional validity of the very same taxing statute in the case of practising chartered accountants. The challenge was repelled on the ground that, in pith and substance, the levy is a tax on the service rendered by professionals for remuneration. If the professional does not render any service, there will b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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