2025 (5) TMI 1835 - SC - Service Tax

Levy and collection of entertainment tax on Direct-to-Home (DTH) broadcasting services and cable television operators - liability to pay entertainment tax under the provisions of the respective State enactments which are relatable to Entry 62 List II of the Seventh Schedule of the Constitution - Principles of interpretation of tax - doctrine of pith and substance - Aspect Theory or Aspect Doctrine - principle of legislative competence - discrimination and violation of Article 14 of the Constitution - Meaning and Scope of the expression Luxuries Entertainments and Amusements - petitions filed under Article 32 of the Constitution - HELD THAT - We find that the aforesaid observations of this Court squarely exposit the fallacy in the reasoning of the High Court. Even if the statistics presented before the High Court regarding the cable TV operators and their subscribers evinced that the exemption given by the amendment and retrospective exemption granted by the proviso pushed 90% of the operators outside the scope of taxation the High Court ought to have taken note of the apparent intent of the legislature to tax only those with more than 7500 connections. The High Court was obligated to glean the intent of the legislation by accounting for the exemption provided and not by masking it. The exemption and the proviso inserted by way of an amendment was clearly a statutory tool employed by the legislature to give effect to its conscious decision to levy tax only on the cable operators with more than seven thousand and five hundred connections. Furthermore there is no reason for striking down a law as unconstitutional merely on the premise that the subscriber could evade or avoid tax liability simply by taking services of an operator with less than seven thousand and five hundred connections. Where the legislation is passed in accordance with constitutional prescriptions a good faith presumption is accorded to the legislature. Similarly it is presumed that the legislature acted with due and elaborate understanding of the societal context for which it legislates. Herein the legislature perhaps factored that operators with more than 7500 connections ordinarily give add-on features that closely relate to the character of luxury. Be that as it may. Unless a violation of fundamental rights or lack of legislative competence is proved Courts must be circumspect in interfering with the validity of legislations. It is trite law that this threshold is even stricter in economic legislations. In any event if the High Court was of the view that the exemption created was unconstitutional then the correct course would have been to strike down the exemption and direct recovery of tax payable from all assessees for the relevant time period in accordance with sub-section (1) of Section 4. Instead the High Court has done the opposite. It declared as unconstitutional the provisions of the Kerala Act of 1976 authorizing levy and collection on Cable TV Operators with connections of seven thousand and five hundred and above. As a result the revenue payable by a category of assessees who do not fall within the exemption clause is stalled. This not only affects the State s exchequer but also does not further the plea of equality pressed into service by the assessees. The High Court could have struck down the exemption and directed all cable TV Operators to pay the tax. Instead while holding that there was a discrimination and violation of Article 14 of the Constitution the High Court has granted an exemption to even the assessee who was liable to pay the entertainment tax under the Kerala Act. By placing the assessee on par with those exempted from payment of entertainment tax the principle of equality is not applied in its true spirit to the facts of the case. Rather the High Court has treated unequals as equals which is in fact a detriment to the plea of equality raised by the petitioner assessee. Rather than striking down the proviso if the High Court was of the opinion there was a violation of the equality clause under the Constitution the High Court has extended the exemption clause to the assessee also which is impressible. As a result no cable TV operator would have to pay any entertainment tax. This lacuna in the judgment requires a course connection and hence that portion and particularly paragraph No.6 of the judgment of Kerala High Court dated 28.06.2012 is set aside. The writ petition filed by the assessee is dismissed and the civil appeal filed by the State of Kerala is liable to be allowed and is allowed. Thus the judgment of the Kerala High Court is liable to be set aside only on the question of holding that the levy of luxury tax on cable TV operators above 7500 connections being discriminatory and violative of Article 14 of the Constitution of India and thereby declaring it to be unconstitutional. We summarise our discussion and conclusions as under The Civil Appeals filed by the appellants/assessees arising from the judgments of the High Courts of Delhi Gauhati Gujarat Jharkhand Madras Orissa Punjab Haryana Rajasthan and Uttarakhand are dismissed. The appeal filed by the State of Kerala is allowed. The appeals arising out of the judgments of Allahabad High Court are allowed in part. The provisions relevant to this case under the Kerala Tax on Luxuries Act 1976; Uttar Pradesh Entertainment and Betting Tax Act 1979; Rajasthan Entertainments Advertisements Tax Act 1957 and the Rules thereunder; Gujarat Entertainment Tax Act 1977 and Gujarat Entertainment Tax (Exhibition by means of Direct-to-Home Broadcasting Services) Rules 2010; Jharkhand Entertainment Tax Act 2012 and Jharkhand Entertainment Tax Rules 2013; Punjab Entertainment Duty Act 1955 (Amendment in 2010); Delhi Entertainment and Betting Tax Rules 1997; Assam Amusements and Betting Tax Act 1939; Orissa Entertainment Tax Rules 2006 along with the Orissa Entertainment Tax (Amendment) Tax Rules 2010 are upheld. The correctness of the findings of the High Court of Madras with regard to the charging section in the State enactment being defective is assailed by the State of Tamil Nadu in separate appeals which are not part of this batch of appeals and accordingly have not been taken up for our consideration herein. Insofar as the Andhra Pradesh Entertainment Tax Act 1939 (as adopted by State of Telangana) is concerned we do not express any opinion as the challenge and applicability of the same is pending before the High Court of Andhra Pradesh. All contentions regarding the assessment orders arising under the Andhra Pradesh State enactment are kept open to be advanced before the appropriate forum. The Writ Petitions filed before this Court under Article 32 of the Constitution of India are accordingly disposed of. Having regard to the judgments of this Court in MPV Sundararamier and H.S. Dhillon 1958 (3) TMI 40 - SUPREME COURT we observe that under the Constitution of India the power to tax is not an incidental or ancillary power. The power to tax cannot be implied within a regulatory entry under our Constitution. There is also a distinction between the power to regulate and control and the power to tax. However occasionally a levy may be imposed as a regulatory measure. Thus the taxation entries under List I and List II (there being no taxation entry in the Concurrent List) are clearly demarcated within the scope of the entries in the aforesaid respective Lists. The effect of this principle is that the subject of taxation is considered to be a distinct matter for the purposes of legislative competence and the power to tax cannot be deduced from the general legislative entry as an ancillary power. The expression broadcasting has been assigned the meaning as per clause (c) of Section 2 of the Prasar Bharti (Broadcasting Corporation of India) Act 1990 in terms of definition clause in Section 65(13) of the Finance Act 1994 as amended by the Finance Act 2001. Under the Prasar Bharti (Broadcasting Corporation of India) Act 1990 the expression broadcasting includes dissemination of any form of communication by transmission of electro-magnetic waves through space or through cables intended to be received by the general public either directly or indirectly through the medium of relay stations. The expression entertainments/ entertainment has been discussed in the cases of Geeta Enterprises Drive-in Enterprises and Purvi Communications 1983 (9) TMI 319 - SUPREME COURT . The expression entertainments/entertainment includes within its scope and ambit not only the provider of entertainment but also the receiver inter alia through the medium of television. Thus entertainment through television network either through cable television or DTH through set-top box with the object of providing entertainment to the viewer can be taxed in terms of Entry 62 - List II. We follow the judgment of this Court in Western India Theatres Ltd. in observing that Entry 62 - List II contemplates a tax on entertainments or amusements as objects on which a tax can be imposed and therefore it is not possible to differentiate between an entertainment provider and an entertainment receiver. If the above reasoning is applied then both entertainment tax as well as service tax can be imposed on the activity of broadcasting through television for the purpose of entertainment of the subscriber or the receiver thereof. The two taxes are different aspects of the same activity which enable two different legislatures to impose tax under distinct taxation entries in two different Lists. The principle is well settled that two taxes which are separate and distinct imposed on two aspects of an activity are permissible as in law there is no overlapping. This is because the taxes are relatable to distinct taxation entries in separate legislative Lists. In the instant case the Parliament under the Finance Act 1994 and its amendments is not imposing a tax on entertainment. Such a tax is being imposed by the State Legislatures as entertainment is a luxury within the meaning of Entry 62 - List II. In the same way the Finance Act along with its amendments seeks to impose a tax on the service rendered by the broadcasting agency which is imposed under Entry 97 List I. In the same vein under Entry 62 List II the State Governments are not imposing any service tax on the assessees. The Parliament under the Finance Act 1994 and its amendments is not imposing a tax on entertainment. Such a tax is being imposed by the State Legislatures as entertainment is a luxury within the meaning of Entry 62 - List II. In the same way the Finance Act along with its amendments seeks to impose a tax on the service rendered by the broadcasting agency which is imposed under Entry 97 List I. In the same vein under Entry 62 List II the State Governments are not imposing any service tax on the assessees. The doctrine of pith and substance is applied to consider the vires of a legislation impugned on the basis of the principle of legislative competence in the context of legislative relationship between the Centre and the State. We observe that the aspect theory has no relevance as such in determining the constitutionality of any provision on the ground of legislative competence in India. Thus the constitutional validity of a taxing statute on the ground of legislative competence has to be examined in the context of the doctrine of pith and substance as envisaged under Article 246 of the Constitution of India read with the respective entries in the List. Once the contours of an entry under which a legislation is sought to be made is ascertained the next step is to study the legislation in question in order to ascertain whether it falls within the contours of that Entry. If it does fall within the contours of a particular entry in a particular List then that particular legislature which has enacted it would have the legislative competence to enact such a legislation. But a legislation incidentally touching upon an entry in another List does not render it invalid it means that so long as a piece of legislation is in pith and substance falling within an entry in a particular List it would be valid as the legislature which has enacted it has the legislative competence to do so. Thus the aspect theory is used to determine if in fact there are different aspects within the activity sought to be taxed and whether the taxable event which forms the basis of the levy in a legislative enactment corresponds to any aspect in the activity sought to be taxed. While applying the aspect theory to the present case it is noted that the activity of broadcasting is for the purpose of entertainment of the subscriber as held in Purvi Communications. No entertainment can be presented to the viewers unless the broadcaster transmits the signals for instantaneous presentation of any performance film or any programme on their television. Thus there are two aspects in this activity; the first is the act of transmission of signals of the content to the subscribers. The second aspect here concerns not only the content of the signals but the effect of the decryption of the signals by the Set-Top Boxes and the viewing cards inside these boxes provided by the assessees to the subscribers which is providing and receiving of entertainment through the television. Without the apparatus provided for by the assessees to decrypt the signals the subscriber would not be able to watch the content that is transmitted the content being for the purpose of entertainment. The television entertainment provided by them through their modus operandi i.e. by broadcasting is a luxury within the meaning of Entry 62 - List II. The assessees who are engaged in the activity of providing entertainment are liable to pay service tax on the activity of broadcasting under the provisions of the Finance Act 1994 read with relevant amendments and are also liable to pay entertainment tax in terms of Entry 62 - List II as being a specie of luxuries. Therefore both the taxes one by the State Legislature and the other by the Parliament are leviable on the activity of the assessees herein. This is because by rendering the service of broadcasting the assesses are entertaining the subscribers within the meaning of Entry 62 - List II. There is no overlapping in fact or in law inasmuch as different aspects of the same activity are being taxed under two different legislations by two different legislatures. This is because the activity of broadcasting is a service and liable to service tax imposed by the Parliament (Entry 97 List I) and the activity of entertainment is a subject falling under Entry 62 - List II and therefore the assessees herein are liable to pay entertainment tax as well. Hence the State Legislatures as well as the Parliament both have the legislative competence to levy entertainment tax as well as service tax respectively on the activity carried out by the assessees herein. As far as the judgment of the Allahabad High Court dated 20.07.2012 is concerned we observe that the High Court could not have construed the amendments made to the UP Act of 1979 as a clarification to include the DTH service which is a new technology within the purview of the original Act. Hence to that limited extent the appeal filed against the judgment of the Allahabad High Court is allowed in part. The judgment dated 28.06.2012 passed by the Kerala High Court which declared the levy and collection of luxury tax on cable TV operators with connections of 7500 or above as unconstitutional for being discriminatory is incorrect. The Kerala High Court could have struck down the exemption granted and directed all cable TV operators to pay the tax instead of holding that there is discrimination and violation of Article 14 of the Constitution against the assessees herein. As a result the High Court has granted an exemption to the assessee who is liable to pay entertainment tax under the Kerala Act. As a result unequals have been treated as equals which is detrimental to the plea of equality sought to be raised by the assessee. Thus paragraph 6 of the judgment of the Kerala High Court dated 28.06.2012 is set aside. The Writ Petition filed by the assessee before the High Court is dismissed and the Civil Appeal filed by the State of Kerala is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether the State legislatures have the legislative competence under Entry 62 of List II of the Seventh Schedule of the Constitution to levy entertainment tax on Direct-to-Home (DTH) broadcasting services and cable television operators.

- Whether the Parliament alone has exclusive legislative competence under Entry 31 and Entry 97 of List I to impose service tax on broadcasting services, including DTH services.

- Whether the imposition of both entertainment tax by States and service tax by the Centre on the same activity (broadcasting/DTH services) is constitutionally permissible.

- The applicability and scope of the doctrine of pith and substance and the aspect (double aspect) theory in resolving overlapping taxation powers between Union and State legislatures.

- Whether the expression "entertainments" in Entry 62 - List II and relevant State enactments includes entertainment provided through DTH and cable television services, including entertainment in private spaces.

- Whether the State enactments imposing entertainment tax on DTH services satisfy the parameters of taxation, including clarity of taxable event, measure, rate, and incidence of tax.

- The constitutional validity of retrospective operation of amendments expanding entertainment tax to DTH services.

- Whether the classification provisions in State enactments, such as exemption of cable operators with less than 7,500 connections, violate Article 14 of the Constitution.

- The correctness and applicability of prior judgments, notably Purvi Communication and Geeta Enterprises, in interpreting the scope of entertainment tax and legislative competence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legislative Competence to Levy Entertainment Tax on DTH Services

Legal Framework and Precedents: Article 246 of the Constitution and the Seventh Schedule demarcate legislative powers. Entry 62 of List II empowers States to impose taxes on luxuries, including entertainments and amusements. Entry 31 and Entry 97 of List I empower Parliament to legislate on broadcasting and residuary matters including service tax. The doctrine of pith and substance governs legislative competence, and the aspect theory is used to reconcile overlapping taxation.

Precedents include Purvi Communication (upholding entertainment tax on cable operators), Geeta Enterprises (interpreting "entertainment" as requiring public colour), Western India Theatres (tax on entertainment may be imposed on giver or receiver), Suresh (upholding State entertainment tax on cable TV), and Federation of Hotel & Restaurant Association of India (applying aspect theory to taxation).

Court's Reasoning and Findings: The Court held that the expression "entertainments" in Entry 62 - List II is broad and includes entertainment provided through DTH and cable television, irrespective of whether it is consumed in public or private spaces. Technological advances have expanded modes of entertainment beyond public venues to private homes and personal devices. The activity of providing entertainment through television signals is a luxury within the meaning of Entry 62 - List II.

Broadcasting is a form of communication under Entry 31 - List I, which is regulatory in nature and does not include taxation powers. Service tax on broadcasting services is levied under Entry 97 - List I. The State legislatures have exclusive competence to tax entertainment under Entry 62 - List II, and this does not encroach upon the Union's power to tax broadcasting services.

The Court emphasized that the legislative competence to tax is distinct from the power to regulate. Taxation entries are specific and exclusive; they cannot be implied from regulatory entries. The Court rejected the appellants' argument that the entire activity is broadcasting service and thus only service tax is leviable.

Application of Law to Facts: The Court analyzed the modus operandi of DTH operators, noting two aspects: the act of relaying signals (broadcasting service) and the effect of providing entertainment to subscribers. Both aspects are taxable under different entries by different legislatures. The Court held that both entertainment tax and service tax can coexist as they relate to different aspects of the same activity.

Treatment of Competing Arguments: The appellants argued that the activity is indivisible and only broadcasting service is provided, which is subject to service tax by Parliament. They contended that entertainment tax on the same activity is unconstitutional double taxation. They also relied on Geeta Enterprises for the requirement of "public colour" in entertainment.

The States contended that entertainment tax is on the activity of entertainment, which is distinct from broadcasting service. They relied on Purvi Communication, Western India Theatres, and other precedents to establish legislative competence. They argued that the aspect theory allows both taxes to coexist without conflict.

Conclusion: The Court concluded that the State legislatures have legislative competence under Entry 62 - List II to levy entertainment tax on DTH services and cable television operators. The activity of broadcasting service is taxable by Parliament under Entry 97 - List I. Both taxes can coexist as they relate to distinct aspects of the activity. The appellants are liable to pay both entertainment tax and service tax.

Issue 2: Applicability and Scope of the Aspect Theory and Doctrine of Pith and Substance

Legal Framework and Precedents: The doctrine of pith and substance determines the true character of legislation to resolve conflicts between Union and State legislative powers. The aspect theory, borrowed from Canadian jurisprudence, is used in India primarily to determine applicability of taxing statutes on different aspects of an activity rather than legislative competence.

Key precedents include Federation of Hotel & Restaurant Association of India (explaining aspect theory), Bharat Sanchar Nigam Limited (distinguishing sale and service aspects), and State of Karnataka vs. State of Meghalaya (harmonizing overlapping entries).

Court's Reasoning and Findings: The Court held that the doctrine of pith and substance is the primary tool for determining legislative competence. The aspect theory has no role in deciding constitutionality of legislation but is relevant to determine whether a taxing statute applies to a particular aspect of an activity.

The Court explained that an activity may have multiple aspects, each taxable under different laws by different legislatures if the aspects correspond to distinct legislative entries. Overlapping in fact does not amount to overlapping in law.

Application of Law to Facts: Applying the aspect theory, the Court found that the activity of DTH operators has two aspects: broadcasting service (taxable by Parliament) and entertainment (taxable by States). The aspect theory supports the coexistence of service tax and entertainment tax on the same activity.

Treatment of Competing Arguments: The appellants argued that the activity is indivisible and aspect theory does not apply. The States argued that aspect theory allows separate taxation of different aspects without conflict.

Conclusion: The Court clarified that aspect theory is a tool to interpret applicability of taxing statutes on different aspects of an activity and does not affect legislative competence. Both taxes are valid as they relate to different aspects of the same activity.

Issue 3: Interpretation of "Entertainments" and Requirement of Public Colour

Legal Framework and Precedents: The Court examined the meaning of "entertainments" in Entry 62 - List II and relevant State enactments. Geeta Enterprises held that entertainment tax requires a public colour, i.e., entertainment must be public. Purvi Communication held that entertainment tax applies to cable operators providing entertainment to subscribers, including private viewing.

Court's Reasoning and Findings: The Court held that the expression "entertainments" must be given a broad, liberal, and expansive interpretation consistent with technological advances. Entertainment can be provided and consumed in private spaces, such as homes or personal devices, and still be subject to entertainment tax.

The Court distinguished Geeta Enterprises as limited to statutory interpretation of a 1937 Act and not the constitutional entry. Purvi Communication's broader interpretation of entertainment including private viewing via cable TV was upheld.

Application of Law to Facts: The Court held that entertainment provided through DTH services to subscribers at their premises falls within the ambit of "entertainments" under Entry 62 - List II and relevant State enactments.

Treatment of Competing Arguments: The appellants argued that entertainment tax applies only to public entertainments and not private viewing. The States argued that public/private distinction is outdated given technological changes and that the tax applies to entertainment regardless of venue.

Conclusion: The Court rejected the requirement of "public colour" for entertainment tax and upheld the broader interpretation that entertainment through DTH and cable TV is taxable.

Issue 4: Parameters of Taxation and Validity of State Enactments

Legal Framework and Precedents: The Court referred to established principles that a taxing statute must clearly specify the taxable event, measure, rate, and incidence of tax (Govind Saran Ganga Saran). It examined the relevant provisions of various State Acts imposing entertainment tax on DTH and cable services.

Court's Reasoning and Findings: The Court found that the State enactments clearly define the taxable event as providing entertainment through DTH or cable services, specify the measure and rate of tax, and identify the incidence of tax on proprietors or service providers. These parameters satisfy constitutional requirements.

However, the Court noted exceptions such as the Madras High Court's finding of defective charging provisions in Tamil Nadu's Act, which was not part of this batch of appeals.

Application of Law to Facts: The Court upheld the validity of the relevant State enactments as meeting the parameters of taxation and legislative competence.

Treatment of Competing Arguments: The appellants contended that some State enactments lack clarity on taxable events or impose tax on gross receipts without segregating service and entertainment components, violating constitutional principles. The States argued that the statutes are clear and within legislative competence.

Conclusion: The Court upheld the validity of the State enactments except for specific challenges not before it.

Issue 5: Retrospective Operation of Amendments and Levy of Tax Prior to Amendments

Legal Framework and Precedents: The Court examined the retrospective operation of amendments expanding entertainment tax to DTH services, considering principles against retrospective taxation without express legislative provision.

Court's Reasoning and Findings: The Court held that prior to specific amendments, DTH services were not covered under the respective State Acts. The amendments were not merely clarificatory but substantive and could not be given retrospective effect. Therefore, entertainment tax could not be levied for periods prior to the amendments coming into force.

Application of Law to Facts: The Court allowed appeals challenging retrospective tax demands for periods before amendments, notably in Uttar Pradesh.

Conclusion: Retrospective levy of entertainment tax on DTH services prior to specific statutory inclusion is invalid.

Issue 6: Article 14 Challenge to Classification in Kerala Tax on Luxuries Act

Legal Framework and Precedents: Article 14 prohibits arbitrary classification. The Court referred to precedents allowing wide latitude to legislature in classification for taxation purposes (East India Tobacco Company, P.M. Ashwathanarayana, Hoechst Pharmaceuticals).

Court's Reasoning and Findings: The Kerala High Court struck down the provision exempting cable operators with less than 7,500 connections from luxury tax as discriminatory. However, the Supreme Court held that the legislature has wide discretion in classification and the exemption was a valid legislative policy to tax only larger operators.

The Court found the High Court erred in extending exemption to all operators, effectively treating unequals as equals, contrary to the principle of equality.

Application of Law to Facts: The Court restored the validity of the classification and exemption for smaller operators, dismissing the writ petition.

Conclusion: The classification in the Kerala Act is constitutionally valid and not violative of Article 14.

3. SIGNIFICANT HOLDINGS

"The expression 'entertainments' in Entry 62 - List II is a word of general import and includes entertainment provided through television, cable, and DTH services, irrespective of whether it is consumed in public or private spaces."

"Broadcasting is a form of communication under Entry 31 - List I which is regulatory in nature and does not include taxation powers. Service tax on broadcasting services is levied under Entry 97 - List I. The State legislatures have exclusive competence to tax entertainment under Entry 62 - List II, and this does not encroach upon the Union's power to tax broadcasting services."

"The doctrine of pith and substance is the primary test for legislative competence. The aspect theory is a tool to determine applicability of taxing statutes on different aspects of an activity and does not affect legislative competence."

"Both entertainment tax by States and service tax by the Centre on DTH broadcasting services are constitutionally valid as they relate to distinct aspects of the same activity."

"Retrospective levy of entertainment tax on DTH services prior to specific statutory inclusion is invalid."

"Legislative classification for taxation enjoys wide latitude and the exemption of cable operators with less than 7,500 connections in Kerala Tax on Luxuries Act is constitutionally valid."

"The parameters of taxation including taxable event, measure, rate, and incidence of tax must be clearly defined in taxing statutes; the State enactments under consideration satisfy these requirements."