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TMI Blog2011 (8) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act of 1994 defined taxable services, among other things. Section 66 provided for the charge of service tax on taxable services. Section 67 dealt with the valuation of taxable services for charging service tax. Section 68 provided for the payment of service tax. Section 66 stipulated that there shall be levied a tax at the rate of 12% "of the value of taxable services" referred to in clause (105) of Section 65. Among the taxable services is the taxable service in subclause (zzzz), to which the constitutional challenge in these proceedings relates. Subclause (zzzz) was initially inserted by the Finance Act of 2007 with effect from 1 June 2007. Taxable service was defined to mean "any 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 expression "renting of immovable property" was defined in clause (90)(a) of Section 65 as follows : "(90a) "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her person, by renting of immovable property or any other service in relation to such renting, for use in the course or for furtherance of, business or commerce." The challenge in this batch of Petitions before the Court is to the constitutional validity of the imposition of a service tax under subclause (zzzz) of clause (105) of Section 65 read with Section 66 of the Finance Act of 1994 as amended. Submissions: 4. The submissions which have been urged before the Court by Counsel appearing on behalf of the Petitioners raise three areas of challenge : (i) The imposition of a service tax on an activity involving renting of immovable property, it is urged, is substantively ultra vires the charging section. The submission proceeds on the basis that the essence of a service tax is the rendering of a service or a value addition and in the case of renting of immovable property, no service is involved; (ii) The legislative competence of Parliament is questioned on the ground that the tax is on renting of immovable property which, according to the Petitioners, would fall within the legislative competence of the States under Entry 49 of List II of the Seventh Schedule to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act did not transgress a specific restriction contained in the Constitution the legislative competence of Parliament could not be questioned on the ground that a particular kind of service as legislated upon did not conform to the common understanding of the word "service". 7. The decision in Tamil Nadu Mandapam was followed by a subsequent judgment in Gujarat Ambuja Cement Ltd. vs. Union of India.AIR 2005 SC 3020 The decision in Gujarat Ambuja once again reiterated that the legislation enacted by Parliament for the imposition of a service tax is traceable to the residuary powers of Parliament under Entry 97 of List I. In Gujarat Ambuja, the Court ruled that since service tax is not a levy on passengers and goods but on the event of service in connection with the carriage of goods, there was no substance in the contention that in pith and substance the Act fell within the exclusive legislative power of the State under Entry 56 of List II. 8. The third decision of the Supreme Court to which a reference would be necessary is the decision in All India Federation of Tax Practitioners vs. Union of India.(2007) 7 SCC 527 By that decision, the Supreme Court reiterated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, the power of the State Legislature is not only to make laws imposing taxes on lands and buildings, but to enact legislation with respect to taxes on lands and buildings; (iii) Entry 49 of List II must receive the broadest possible interpretation and amplitude; (iv) Especially when read in the context of Entry 97 of List I, the width and ambit of Entry 49 of List II cannot be curtailed with reference to the residuary power of Parliament; and (v) A tax whether levied on the basis of rent, annual value, or capital value would constitute a tax on lands having regard to the ambit of Entry 49 of List II. A tax based on leasing of a land and computed by rental value cannot be rested on Entry 97 of List I because it is in substance, a tax on a transaction of letting of land and Entry 49 of List II would preclude a levy by Parliament of a service tax on letting. 12. The legislative power of Parliament and of the State Legislature to enact legislation is contained in Article 245 of the Constitution. Parliament has, by Article 246(1), exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule. This power of Parliament is prefaced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t held that merely because the Income Tax Act adopted annual value as the standard for determining income, it would not necessarily follow that if the same standard were to be employed as a measure for any other tax, that tax also became a tax on income. Annual value, in other words, was a measure of the tax. Ralla Ram's case is an authority for the proposition that it is the essential nature of the tax and not the nature of the machinery which must be looked at in determining the validity of the impost. 14. A Constitution Bench of the Supreme Court in Sudhir Chandra vs. Wealth Tax Officer, AIR 1969 SC 59 dealt with a challenge to the constitutional validity of the Wealth Tax Act of 1957. The legislation was questioned on the ground that it transgressed upon a field reserved to the State Legislature under Entry 49 of List II. While explaining the scope of Entry 49, the Supreme Court held 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 taxpayers. Again entry 49, List II of the Seventh Schedule contemplates the levy of tax on lands a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax is not the same. Since Entry 49 of the State List contemplates a tax directly levied by reason of the general ownership of lands and buildings, it cannot include the gift tax as levied by Parliament. There being no other entry which covers a gift tax, the residuary powers of Parliament could be exercised to enact a law." (emphasis supplied). 16. This principle was reiterated subsequently in a judgment of the Constitution Bench in D.G.Gose & Co. vs. State of Kerala. (1980) 2 SCC 410 The Constitution Bench held that a tax on buildings is "a direct tax on the assessee's buildings as such, and is not a personal tax without reference to any particular property". If the State Legislature was competent to levy a tax on buildings, it was open to it to decide how best to levy it. If the tax was to be annual, one of the modes of levying tax would be the annual value of the building. Equally, if the State Legislature decided to impose a nonrecurring tax on buildings, the measure of the tax could be capital value of the building computed on the basis of the capital cost of construction, the market value or on the basis of the rent multiplied by a factor which the legislature m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was the charging provision, it was stipulated that on the issue of an order under subsection (1), the Board may grant a licence for the use of any land as a market and impose an annual tax thereon. While upholding the validity of the tax, the Supreme Court noted that the tax was, in substance, a tax on the land but the charge only arises on land which was used for a market. This is evident from the following observations in the judgment : "It seems to us on a close reading of subsection (2) that when that subsection speaks of "annual tax thereon", the tax is on the land but the charge arises only when the land is used for a market. This will also be clear from the subsequent provisions of Section 62 which show that the tax is on land though its imposition depends upon user of the land as a market. Subsection (3) shows that as soon as subsection (1) and (2) are complied with, the local board shall make an order that the owner of any land used as a market shall take out the licence. Thus the tax is on the land and it is the owner of the land who has to take out the licence for its use as a market. The form of the tax i.e. its being an annual tax as contrasted to a tax for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ildings. The income or yield would only constitute a measure of the tax and would not alter the nature or character of the levy. The cess was calculated on the basis of the yield but that, ruled the Supreme Court, was only a measure of the tax. The tax continued to be a tax upon the land which was classified as a separate category and as a separate unit for the purposes of levy and the assessment of the cess quantified on the basis of the quantum of produce of the tea estate. The tax in Goodricke was, therefore, clearly a tax on land as a unit, the measure of tax being the yield of the land. The residuary power of Parliament to legislate : 20. The decision of Seven Judges of the Supreme Court in Union of India vs. H.S.Dhillon AIR 1972 SC 1061 is significant both in the context of the ambit of the residuary powers under Entry 97 of List I as well as in defining the ambit of the legislative entry contained in Entry 49 of List II. The decision in Dhillon's case arose out of a judgment of the High Court of Punjab and Haryana which had held that the amended provisions of the Wealth Tax Act, 1957 were ultra vires the Constitution of India in so far as they included the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . vs. Lt. Governor of Delhi, AIR 1979 SC 1550 a Bench of two Learned Judges of the Supreme Court held that the scope and ambit of Entry 97 ought not to be whittled down or circumscribed by a process of interpretation and in that context observed as follows : "Complex modern governmental administration in a federal set up providing distribution of legislative powers coupled with power of judicial review may raise such situations that a subject of legislation may not squarely fall in any specific entry in List I or III. Simultaneously on correct appraisal it may not be covered by any entry in List II though apparently or on a superficial view it may be covered by an entry in List II. In such a situation Parliament would have power to legislate on the subject in exercise of residuary power under Entry 97, List I and it would not be proper to unduly circumscribe,corrode or whittle down this power by saying that subject of legislation was present to the mind of the framers of the Constitution because apparently it falls in one of the entries in List II and thereby deny power to legislate under Entry 97. The history of freedom struggle demonstrates in unequivocal terms the import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a Federal Constitution like ours where there is a division of legislative subjects but the residuary power is vested in Parliament, such residuary power cannot be so expansively interpreted as to whittle down the power of the State Legislature. That might affect and jeopardise the very federal principle. The federal nature of the Constitution demands that an interpretation which would allow the exercise of legislative power by Parliament pursuant to the residuary powers vested in it to trench upon State legislation and which would thereby destroy or belittle state autonomy must be rejected. ... It is, therefore, but proper 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." 23. The legislative entries contained in the three lists of the Seventh Schedule to the Constitution must of necessity receive a broad and liberal construction. Parliament and the State legislatures have the power to make laws with respect to the matters enunciated in the Union and State lists under clauses 1 and 3 respectively of Article 246. The power conferred upon Parliament by Article 246( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what has been imposed by Parliament in the present case is a tax on land and buildings. To an analysis of the essential character of the levy we now proceed. The character of the levy 24. The charging provision, Section 66, imposes a tax on taxable services. The charging section refers to diverse sub clauses of Clause 105 of Section 65. The charge of tax is on a taxable service. Taxable services in turn are defined in Clause 105 of Section 65. Sub clause (zzzz) brings in within the purview of a taxable service a service provided or to be provided to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or for the furtherance of business or commerce. The expression "renting of immovable property" is defined by Clause (90a) of Section 65 so as to include renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce. Clause (i), however, excludes renting of immovable property by a religious body or to a religious body and Clause (ii) excludes renting of immovable property to an educational body o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 user. The tax would remain a tax on land and would not become a tax on the nature of its user. \ (7) To be a tax on land, the levy must have some direct and definite relationship with the land. So long as the tax is a tax on land by bearing such relationship with the land, it is open for the legislature for the purpose of levying tax to adopt any one of the wellknown modes of determining the value of the land such as annual or capital value of the land or its productivity. The methodology adopted, having an indirect relationship with the land, would not alter the nature of the tax as being one on land." 26. The decision in Kesoram Industries, while it emphasises that the expression "land" in Entry 49 of List II has a wide connotation, holds that in order to be a tax on land, the levy must have a direct and definite relationship with the land. However, a levy which has a direct and definite relationship with land may legitimately adopt one of the wellknown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liament and the State legislatures to legislate with respect to the matters contained in List I and List II respectively. The Supreme Court noted that "where the entry describes an object 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."22 Having observed as aforesaid, the Supreme Court took note of the fact that even when an entry speaks of a levy of a tax on goods, it does not include the right to impose taxes on taxable events which have been separately provided for under other taxation entries. Since there could be no overlapping in a field of taxation, a tax if specifically provided for under one legislative entry would effectively narrow down the field of taxation available under other related entries. Consequently, when considering the ambit of a specified or express power in relation to an unspecified or residuary power, it would be natural to impart a broader meaning to the former over the latter. Hence, the judgment in Godfrey Phillips postulates that entries elucidating objects of taxation must properly be construed to encompass all taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rine, Parliament when it legislates upon a matter is entitled to make an assessment of fact on the basis of which the legislation is designed and drafted. An underlying assessment of fact by Parliament on the basis of which a law has been enacted cannot be amenable to judicial review absent a case of manifest arbitrariness. That apart, it is equally well settled that the legislature in enacting a law is entitled to provide for a deeming fiction. The only limitation on the exercise of the power is that by a deeming fiction the legislature cannot transgress upon a constitutional restriction or a field of legislation that is reserved to another legislature. In the present case, there is no constitutional restriction or a question of transgression into the legislative field that is carved out to the State legislatures, once the Court comes to the conclusion that the law in question is not a law with respect to any of the matters contained in the State List. Once the Court comes to the conclusion that the law is not a law with respect to the legislative entry of taxes on land and buildings, the field of the legislation would necessarily fall within List I and more particularly, the resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or directly in the final product. In order to avoid a cascading effect, Cenvat Credit Rules have been framed. Rule 3(i)(ix) of the Cenvat Credit Rules 2004 contemplates the grant of Cenvat credit. In addition, it has been stated in the reply that under the General Agreement on Trading Services (GATS) the Central Product Classification inter alia contemplates that an element of service is involved in the renting of property. 30. We have adverted to the affidavit in reply in order to buttress the point that a legislative hypothesis contained in parliamentary legislation cannot be questioned on the ground that the assumption of fact is in error. Parliament is entitled to make assessments of fact on the basis of which it legislates. Indeed, such assessments of fact are intrinsic to the very nature of the legislative exercise and the Court which exercises the power of judicial review particularly in fiscal matters would not be justified in reexamining the wisdom or the correctness of such an exercise by Parliament. The legislature in fiscal matters is entitled to a high degree of latitude in designing legislation and in formulating methodologies for the recoveries of fiscal exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the main provision. The Court held that if a proviso is so inconsistent, it would be ultra vires the main provision and would be struck down. Hence as a general rule, it would be proper to construe all the provisions of the statute together without making either of them redundant or otiose. Mathuram Agarwal's case dealt with Section 127 of the M.P. Municipalities Act 1961 which authorised the imposition inter alia of a tax payable by owners of houses, buildings or lands situated within the limits of a municipality with reference to the annual letting value. The rate of taxation was specified in a table appended to Section 127A. The rate at which the tax had to be levied commenced with property, the annual letting value of which exceeded Rs.1,800/per annum and in such a case, the tax was to be levied at 6% of the annual letting value. No rate of tax was prescribed for a property, the annual letting value of which was less than Rs.1,800/. The proviso to sub section (2) of Section 127A, however, stipulated that if any such building or land was in the ownership of a person, who owns any other building or land in the same municipality, the annual letting value of such building or land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on the fields which are set out in List I and List III of the Seventh Schedule. The plenary power of Parliament to legislate can extend to enacting legislation both with prospective and with retrospective effect. That however, is subject to the mandate of Article 14 of the Constitution. 35. The notes on clauses when the Finance Bill of 2007 was introduced in Parliament would indicate that the intent of Parliament was specifically to bring the renting of immovable property within the fold of taxable services when used in course or furtherance of business or commerce. As a matter of fact, Parliament had used language of width and amplitude in the original provision which adverted to a service provided or to be provided "in relation to renting of immovable property" for use in the course or furtherance of business or commerce. The expression "in relation to renting of immovable property" was broad enough to include both the renting of immovable property as well as services in relation to the renting of immovable property. The Delhi High Court by its judgment in Home Solution's case struck down both a notification and a circular issued by the Union Ministry of Finance. (A Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effective after the change of the law.' See also, Bakhtawar Trust vs. M.D. Narayan, (2003) 5 SCC 298, ¶ 2026, State of Himachal Pradesh vs. Narain Singh, (2009) 13 SCC 165, ¶ 26. VBC 63 wp2238.10-4.8 amendment in the present case passes muster on that test. 38. The constitutional validity of the provision has been upheld by the High Courts of Punjab & Haryana and Orissa in Shubh Timb Steels Limited vs. Union of India, (2010) 236 CTR (P&H) 562 and Utkal Builders Limited vs. Union of India. (2011) 186 ECR 74 (Orissa). 39. For the reasons which we have indicated herein above, we do not find any substance in the challenge raised before the Court. All the Petitions shall accordingly stand dismissed. Rule is accordingly discharged. There shall be no order as to costs. 40. Mr. Seervai, Counsel appearing on behalf of the Petitioners in Writ Petition 2151 of 2007 submitted that the Court should within the meaning of Article 132 of the Constitution, certify that the case involves a substantial question of law as to the interpretation of the Constitution. We are not inclined to grant the prayer for the reason that the scope and ambit of Entry 49 of List II of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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