9911796707
TMI Blog2012 (8) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 averred in the petition that the petitioner is engaged in renting/leasing warehouses and storage space for agro and other products. The Act of 1994 was introduced by the Union of India under which service tax on few commodities was levied and by the year 2007, more than 106 taxable services were brought in the net of service tax which was in the nature of indirect tax. Vide Act of 2010 read with notification no. 23/2007 ST dated 22.5.2007, levy of service tax was introduced on renting of property service by virtue of clause 65(105)(zzzz) read with section 65(90a) defining taxable service w.e.f. 1.6.2.2007. The petitioner was allotted service tax registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 adopted in all cases by the learned counsel appearing on behalf of the respondents union of India and ors. It was contended that Section 65(105)(zzzz) of the Act of 1994 covers 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 of furtherance of business or commerce. Section 65(90a) clarifies that 'renting of immovable property includes renting, letting, leasing, licensing or other similar arrangement of immovable property for use in the course of furtherance of business or commerce. The provisions cover the substantive activities of renting in addition to all other ancillary services w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Retail India Ltd. (supra); no element of service is involved in renting out the immovable property and thus, the impugned provisions be declared ultra vires the Constitution. 9. The learned counsel appearing on. behalf of the respondents have submitted that renting out the immovable property is service and there is value addition; the DB decision of the Delhi High Court in Home Solution Retail India Ltd. (supra) has been overruled by the Larger Bench of the Delhi High Court itself in the case of Home Solutions Retails, (India) Ltd. v. Union of India [2011] 33 STT 95/13 taxmann.com 188 alongwith various other writ petitions; service is not tax on building or land which is subject ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub clauses (zzzz).... of clause (105) of Section 65 and collected in such manner as may be prescribed. Section 65(105) "taxable service" means any service provided or to be provided- (zzzz) to any person, by any other person in relation to renting of immovable property for use in the course 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp;(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, boarding houses, holiday accommodation, tents, camping facilities. Explanation 2- For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purpose shall be deemed to be immovable property for use in the course or furtherance of business or commerce." 14. Prior to amendment, the 'taxable service' means 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. After amendment, it has been provided that 'taxable service' means any service provided or to be provided to any pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er year as contract rent but the interest on capital invested is Rs. 3,000/- per year. Thus, the remaining amount, that is, Rs. 17,000/- (Rs. 20,000.00 - Rs. 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 Rs. 5,000 in a year. If it is transferred to its next best use, it can earn a better income. At one point of time, the Theory of Rent was propagated by David Ricardo. According to the Ricardian theory, rent has differential surplus and the same arises due to certain facets relating to fertility, productivity, extensive cultivation, quality, etc. Ricardo fundamentally considered rent as a surplus accruing to superior land over inferior land called "marginal land". It also depended upon shifting of population. Be it noted, the rent varies depending upon advantages. To give an example, two decades back, a market is established in zone 'A', thereafter, a railway station starts in another zone called 'B'. The cost of a particular item on being transported from zone 'A' to outside the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between "actual earnings" and "transfer earnings". According to the modern analysis of rent, it is not peculiar to land alone and the concept of transfer earning is more attracted towards the building depending upon its use. As an economic concept, it has been developed that rent qua building or premises or, for that matter, land has a nexus, an inseparable one, with the potentiality of its use in a competitive market. The economic growth has an effect on rent. In this regard, modern economists have evolved certain methods, namely, technical progress in methods of production, development in means of transportation and population growth, we have referred to these concepts only to highlight that the legislature has not imposed tax on mere letting but associated it with business or commercial use. Thus, it comes within the concept of activity and the value addition is inherent. It is worth noting that the language employed in the dictionary clause and the charging section, that is, "commercial use for business purposes" have their own significance. In Black's law dictionary, "commercial" has been defined as "relates to or is connected with trade and traffic or commerce in gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 same repelled and the retrospective amendment was declared as constitutionally valid. 21. The High Court of Bombay in the case of Retailers Association, of India (supra) has upheld the constitutional validity of imposition of service tax under sub-clause (zzzz) of clause (105) of Section 65 read with section 66 of the Finance Act of 1994 as amended holding that the legislative basis that has been adopted by Parliament in subjecting taxable services involved in the renting of property to the charge of service tax cannot be questioned. The assumption by a legislature body that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the court as being so manifestly absurd or perverse as to lead to an inference that Parliamen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try 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 relation to property and not by renting of property. Renting of property for commercial purposes is certainly a service and has value for the service receiver. Moreover, the aspect of service element in renting transaction is certainly an independent aspect covered under Entry 92 C read with Entry 97 of List I. In any case, subject-matter of impugned levy being outside the scope of Entry 49 of List II, power of Union Legislature is undoubted. Question whether levy will be harsh being in addition to income tax and property tax is not a matter for this Court once there |s legislative competence for the levy. Even if it is held that transaction of transfer of right in immovable property did not involve value addition, the provision cannot be held to be void in absence of encroachment on List II. 23. The Orissa Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia (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 business or commerce and is, therefore, clearly covered by Section 65(90-a) of the Finance Act, 1994 and 'service tax' is clearly leviable thereon. Although challenge in the present case has been made to the Amendment Act of 2010 to section 66(105) (zzzz), we find no justification to entertain the present writ application since we are also of the view that the amendment is clearly clarificatory in nature and Parliament certainly possesses the necessary legislative competence to declare the said amendment to be retrospective in operation and, therefore, we do not find any error or lack of competence in such legislation." 24. Cinemax India Ltd. v. Union of India [2011] 12 taxmann.com 492 the High Court of Gujarat has upheld the constitutional validity of sub clause (zzzz) of clause (105) of Section 65 of Finance Act, 1994 as amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alidation 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 been stated in Bakhtawar Trust v. M.D. Narayan [2003] 5 SCC 289. 30. In State of HP v. Narain Singh [2009] 13 SCC 165 it has been held that it would be permissible for the legislature to remove a defect in earlier legislation and the defect can be removed both retrospectively and prospectively by legislative action and the previous actions can be validated. Parliament, it is well settled, has the plenary power to enact legislation 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, it is also well settled that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary, object of vali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 large number of statutes being declared invalid because the legislature enacting them may appear to have legislated in a forbidden sphere. Hence the rule which has been evolved by the Judicial Committee, whereby the impugned statute is examined to ascertain its 'pith and substance', or its 'true nature and character', for the purpose of determining whether it is legislation with respect to matters in this list or in that." 28. This necessitates as an "essential of federal Government the role of an impartial body, independent of general and regional Governments", to decide upon the meaning of division of powers. The court is this body. 29. The position in the present case assumes a slightly different complexion. It is not any part of the Petitioners' case that "expenditure tax" is one of the taxes within the States power or that it is a forbidden field for the union Parliament, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 context of concepts of Duties of Excise and Tax on Sale of Goods said: "... The two taxes, the one levied on a manufacturer in respect of his goods, the other on 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 separated and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale." 32. Referring to the "aspect" doctrine Laskin's Canadian Constitutional Law states: "The 'aspect' doctrine bears some resemblance to those just noted but, unlike them, deals not with what the 'matter' is but with what it 'comes within'.. .(p. 115) "...it applies where some of the constitutive elements about whose com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Kesoram Industries Ltd. (supra) has laid down thus:- "31. Article 245 of the Constitution is the fountain source of legislative power. It provides - subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a state may make laws for the whole or any part of the state. The legislative field between Parliament and the legislature of any state is divided by Article 246 of the Constitution. Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh schedule, called the "Union List". Subject to the said power of Parliament, the legislature of any state has power to make laws with respect to any or the matters enumerated in List III, called the "concurrent List", subject to the abovesaid two, the legislature of any State has exclusive power to make laws with respect to any of the matters enumerated in List II, called the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament's legislative competence must be upheld, where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such a situation the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence. The court has to look at the substance of the matter. The doctrine of pith and substance is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main objects and to the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 language used in Entry 49 in List II. The levy of tax, calculated at the rate,, of a certain' per centum of the market value of the urban land, was held to be intra vires the powers of the State Legislature and not trenching upon Entry 86 in List I. So is the view taken by another Constitution Bench in Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality [1969] 2 SCC 283 where the submission that the levy was not a rate on lands and buildings as appropriately understood but rather a tax on capital value, was discarded. 45. R.R. Engg. Co. v. Zila Parishad, Bareilly [1980] 3 SCC 330 is a case of circumstances and property tax levied on the basis of income which the Assessee receives . from his profession, trade, calling or property. The plea that the tax was a tax on income was discarded. The test propounded by the Constitution Bench is that an excessive levy on circumstances may tend to' blur the distinction between a tax on income and a tax on circumstances, income will th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control" is separate and distinct from the power of taxation and so are the two fields for purposes of legislation. Taxation may be capable of being comprised in the main subject of general legislative head by placing an extended construction, but that is not the rule for deciding the appropriate legislative field for taxation between List I and List II. As the fields of taxation are to be found clearly enumerated in Lists I and II. there can be no overlapping. There may be overlapping in fact but there would be no overlapping in law. The subject-matter of two taxes by reference to the two lists is different. Simply because, the methodology or mechanism adopted for assessment and quantification is similar, the two taxes cannot be said to be overlapping. This is the distinction between the subject of a tax and the measure of a tax. (3) The nature of tax levied is different from the measure of tax. While the subject of tax is clear and well defined, the amount of tax is capable of being measured in many ways for the purpose of quantification. Defining the subject of tax is a simple task; devising the measure of taxation is a far more complex exercise and therefore the legislature ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 well-known modes of determining the value of the land such as annual or capital value of the land or is productivity. The methodology adopted, having an indirect relationship with the land, would not alter the nature of the tax as being one on land. (8) The primary object and the essential purpose of legislation must be distinguished from its ultimate or incidental results or consequences, for determining the character of the levy. A levy essentially in the nature of a tax and within the power of the State Legislature cannot be annulled as unconstitutional merely because it may have an effect on the price of the commodity. A State legislation, which makes provisions for levying a cess, whether by way of tax to augment the revenue resources of the state or by way of fee to render services as quid pro quo but without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h subjects as are not included in Entries 45 to 63 of List II. It follows that taxes on lands and buildings in Entry 49 of List II cannot be levied by the Union. Taxes on mineral rights, a subject in Entry 50 of List II, can also not be levied by the Union though as stated in Entry 50 itself the Union may impose limitations on the power of the State and such limitations, if any, imposed by Parliament by law relating to mineral development to that extent shall circumscribe the States' power to legislate. Power to tax mineral rights is with the States; the power to lay down limitations on exercise of such power, in the interest of regulation, development or control, as the case may be, is with the Union. This is the result achieved by homogeneous reading of Entry 50 in List II and Entries 52 and 54 in List I. so long as a tax or fee on mineral rights remains 1n pith and substance a tax for augmenting the revenue resources of the State or a fee for rendering services by the State and it does not impinge upon regulation of mines and mineral development or upon control of industry by the central Government, it is not unconstitutional. 34. All India Federation of Tax Practitioners v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taxing entry. Therefore, Entry 60 contemplates tax on professions, as such. Entry 60, List II refers to "tax on employments". ** ** ** 43. As stated above, every entry in the Lists has to be given a schematic interpretation, as stated above, constitutional law is about concepts and principles. Some of these principles have evolved out of judicial decisions. The said test is also applicable to taxation laws. That is the reason why the entries in the Lists have been divided into two groups, one dealing with general subjects and other dealing with taxation. The entries dealing with taxation are distinct entries vis-a-vis the general entries. It is for this reason that the doctrine of pith and substance has an important role to pi ay while deciding the scope of each of the entries in the three Lists in the Seventh Schedule to the constitution. This doctrine of pith and substance flows from the words in Article 246(1), quoted above, namely, "with respect to any of the matters enumerated in List I". The bottom line of the said doctrine is to look at the legislation as a whole and if it has a substantial connection with the entry, the matter may be taken to be legislation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Haryana Passengers and Goods Taxation Act, 1952 was beyond the legislative competence of the State Legislature. This argument was rejected by the Division Bench of this Court, which took the view that before exclusive legislative competence can be claimed for Parliament by resort to Entry 97, List I, the legislative competence of the State Legislature must be established. Entry 97 itself was specific. In that, a matter can be brought under that entry only if it is not enumerated in Lists II or III, and in the case of a tax, if it is not mentioned those Lists, we do not dispute the above proposition. That proposition is well settled. This court is concerned with the application of the said principle in this case. In the present matter, as stated hereinabove, the State Legislature is empowered to levy tax on professions, trades, callings, etc., as such and, therefore, the word services" cannot be read as synonymous to the word "profession" in Entry 60. Therefore, tax on services do not fall under Entry 60, List II. That, service tax would fall under Entry 92-C/Entry 97 of List-I. ** ** ** 48. In T.N. Kalyana Mandapam Assn. v. Union of India [2004] 5 SCC 632, the Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Meaning of "service tax" 22. As stated above, the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of service industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy, with the enactment of the Finance Act, 1994, the central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268A in the Constitution vide the constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide the constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural or paddy lands or buildings was challenged and the High Court allowed the writ petition holding that entry 49 of list II read with entry 18 of the same list reserved the power to tax land and buildings to the State Legislature and Parliament could not use the residuary power conferred by entry 97 of List I and on appeal, the Apex Court held that it is not a tax imposed directly upon lands and buildings but is a tax upon the value of the total gifts made in a year which is above the exempted limit. There is no tax upon lands or buildings as units of taxation. 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. The Apex Court allowed the appeals holding:- "10. The pith and substance of Gift Tax Act is to place the tax on the gift of property which may include land and buildings. It is not a tax imposed directly upon lands and buildings but is a tax upon the value of the total gifts made in an year which is above the exempted lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods". 40. In Association of Leasing & Financial Service Companies v. Union of India [2011] 2 SCC 352 the Apex Court held that the service tax imposed by Section 66 of the Finance Act, 1994 (as amended) on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12) of the said Act, insofar as it relates to financial leasing services including equipment leasing and hire-purchase was within the legislative competence of the Parliament under Entry 97, List I of the Seventh Schedule to the Constitution. The Apex Court held that a tax may be levied on an object or on the event of taxation. Service tax is tax on activity whereas sales tax is tax on sale of a thing or goods. Taxable event under service tax is each exercise/activity undertaken by service provider and it is imposed every time service is rendered to customer/client. Further, service tax is a value added tax. The Apex Court further held that interest or finance charges together with lease management fee/processing fee/documentation charges are consideration for services rendered and ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
