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TMI Blog2005 (1) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... clearing and forwarding agents service and users of goods transport service. By Finance Act, 2000, the Parliament amended the provisions for the limited period of 16-7-1997 to 16-10-1998 to enable collection of tax from the service users also and enacted validating provisions. Therefore, the petitioner filed the Writ Petition, questioning the levy of service tax on goods being transported by the petitioners, on the grounds of legislative incompetence and discrimination. 3. The petitioners in this Writ Petition contend that they are a Public Limited Company engaged in manufacture of sugar and ferroalloys and has its factories at Samalkot and Paloncha. During the course of its business, the petitioners engage trucks for inward and outward movement of goods. The freight charges paid by the petitioner for transporting goods involves use of trucks and for the purposes of use of trucks, the fuel is also arranged by transporters. The act of transport does not merely involve personal services of transporters but also vehicles and fuel. Chapter V of the Finance Act, 1994 provide for levy of service tax on utilisation of transport services by the petitioners. It was amended by Finance Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to the petitioners, exclusively fall within the domain of State Legislature. Before going to this argument, it is necessary to reproduce the amendments that were affected to the Finance Act in 2003. Section 68 in 2003 Act reads as under : "Section 68 : Payment of service tax - Provided that - (i) in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom remuneration or commission (by whatever name called) is paid for such services to the said agent for the period commencing on and from the 16th day of July, 1997 and ending with the 16th day of October, 1998; or (ii) in relation to services provided by goods transport operator, every person who pays or is liable to pay the freight either himself or through his agent for the transportation of goods by road in a goods carriage for the period commencing on and from the 16th day of November, 1997 and ending with the 2nd day of June, 1998, shall be deemed to be a person liable to pay service tax, for such services provided to him, to the credit of the Central Government." Section 71A reads as under : "Section 71A : "Notwithstanding anythi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fence which would not have been so punishable if this section had not come into force." 6. The argument is that the Finance Act, 1994 as amended by Finance Act, 1997, Finance Act, 2000 and Finance Act, 2003, are ultra vires on the ground that taxes on goods and passengers carried by road or inland waterways is within the exclusive domain of the State legislature. Entry 56 in List-II of Schedule-VII of the Constitution reads as, "Taxes on goods and passengers carried by road or on inland waterways" and Entry 89 in List-I of Schedule-VII reads as, "Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights". The contention is that by Entry 56 in List-II, imposition of taxes on goods and passengers carried by road or by inland water ways, are in the exclusive domain of the State legislature, whereas in terms of Entry 89 in List-I, taxes on goods or passengers carried by railways, sea or air, is in the exclusive domain of the Parliament. Since the tax imposed by the impugned Acts is tax on passengers and goods carried by road, it is outside the scope of Parliament. There cannot be any dispute that tax can be levied on goods and passenger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flict with the same. 14.We have no hesitation in holding that the provisions of Rule 2(d)(xii) and (xvii), insofar as they make persons other than the clearing and forwarding agents or the persons other than the goods transport operator as being responsible for collecting the service tax, are ultra vires the Act itself. The said sub-rules are accordingly quashed." So, this was not a judgment in which the Supreme Court had gone to consider whether levying of Service Tax of the nature which has been levied, was within the competence of the Parliament or not. However, to remove the defect as pointed out by the Supreme Court, the Act itself was amended and validation provisions were also enacted. (2) Khyerbari Tea Co. Ltd. & Another v. State of Assam & Others - AIR 1964 SC 925. An Act [Assam Taxation (On Goods Carried by Road or on Inland Waterways) Act (10 of 1961)], enacted by Assam State legislature, was subject-matter of controversy in this judgment. It is a judgment of a Constitutional Bench of the Supreme Court. The relevant provision for the purpose of present case would be Section 3(1) and (2). They had been reproduced in the judgment by the Supreme Court in Para 15 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that List I does not contain any Entry by which the Central Legislature can pass an Act levying a tax on goods carried which can be said to control Entry 56 in List II. That being so, we must hold that there is no substance in the argument that the State Legislature has no power to levy a tax on tea which is carried over apart of the area of the State of Assam." 9. The argument of the learned Counsel for the petitioners is that the Constitutional Bench of the Supreme Court had held that List-I does not contain any Entry by which the Central legislature can pass an Act levying tax on goods covered in terms of Entry 56 in List-II. Since the impugned provisions levied tax on goods carried in terms of Entry 56 of List-II, the impugned legislations were invalid. It is contended by learned Counsel for petitioners that the matter stands concluded by this Constitutional Bench Judgment of the Supreme Court. There is no dispute that in this case, the tax was levied on movement of goods and therefore, the Supreme Court found it to be within the legislative competence of the State legislature, as the goods squarely fell within Entry 56 of List-II. (3) M/s. Sainik Motors, Jod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the distance covered within the State at the rate laid down in subsection (1) and shall be calculated on such amount as distance covered in the State bears to the total distance of the journey : Provided that where passengers are carried or goods transported by a motor vehicle from any place within the State to any other place within the State through the intervening territory of another State, the tax shall be levied on the full amount of the fare or freight payable for the entire journey and the owner shall issue a single ticket or receipt, as the case may be accordingly." Therefore the petitioners contended in that case that what they were receiving by way of freights or fares, was their income and the tax levied was on their income. The Supreme Court considered this argument in Para 9 of the judgment as under : "9. The first - and the main contention is that the Act in the guise of taxing passengers and goods, taxes really the income of the petitioners, or at any rate, fares and freights, and is thus unconstitutional. It is argued that the tax is borne by the operators because of competition with Railways. That the petitioners are required to bear the tax themsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned legislation terms the tax as the tax on services, it remains tax on movement of goods, for which legislation can only be made by the State legislature. (4) A.S. Karthikeyan & Others v. State of Kerala & Another - AIR 1974 SC 436. 12. In this case also, the Supreme Court was considering a similar question, which was considered in the case of M/s. Sainik Motors (3rd supra). In Para 3 of the judgment, the Supreme Court stated the questions, which were to be answered and they read as under : "3. The questions which fall for consideration in these matters are these. First, does Act 18 of 1971 levy a tax on the income of operators? Second, is the retrospective validation of levy and collection of taxes by Act 18 of 1971 legal? Third, is it competent to the legislature to amend S. 43 of the Motor Vehicles Act, 1939 called the 1939 Act by Act 34 of 1971 to include retrospectively tax within fare." Sub-section (1) of Section 3 of the Act was reproduced by the Supreme Court in Para 22 of the judgment as under : The two new sub-sections introduced to Section 3 by Act 18"22. of 1971 are first that the tax levied under sub-section (1) shall be paid by the passengers o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incidence of the tax was upon passengers and goods and not upon the income of the operators of stage carriages though "the measure of the tax is furnished by the amount of fare and freight charged". The power to enact such legislative measure is derived from Entry 56 of the State List. The Entry provides "taxes on goods and passengers carried by road or on inland waterways". In Sainik Motors case (supra) Section 3 provided "there shall be levied, charged and paid to the State Government a tax on all fares and freights in respect of passengers carried and goods transported by motor vehicles at such rates which are thereafter set out". Section 4 in Sainik Motors case (supra) provided that the "tax should be collected by the owner of the motor vehicles and paid to the State Government in the prescribed manner". Though there is no comparable provision in the present case to Section 4 in Sainik Motors case (supra) as to method of collection of tax the various provisions like levy and payment before amendment of Section 3 and levy and collection after amendment of that section, composition of tax in Section 4, submission of return in Section 5, procedure where no payment is made in Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax by Act 34 of 1971 nor was there any alteration of the character of the tax which had already been imposed. In the present case, the principal Act 25 of 1963 levied the tax. Acts 18 and 34 of 1971 were for the purpose of dispelling the doubts expressed in Thomman case, ILR (1968) 2 Ker 153 = (AIR 1969 Ker 130) (supra)." 13. In the light of these judgments, there cannot be any dispute that the State has the power to impose tax in terms of Entry 56 of List-II of Schedule-VII on movement of goods and passengers through roadways and inland waterways. And in all these cases which have been referred to hereinabove, the Supreme Court came to the conclusion that in pith and substance, the tax was on movement of goods and passengers and was not tax on income. The learned Counsel for petitioners contend that the impugned legislations also basically levy tax on movement of goods therefore, applying the tests laid down by the Supreme Court in the judgments referred to hereinabove, it must be held that the impugned legislations are outside the competence of Parliament. 14. The learned Counsel for respondents, however, submits that the tax, as a matter of fact, is not on movement of goods, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of vehicle inside the drive-in-theatre. As long as in pith and substance the levy satisfies the character of levy, i.e. "entertainment", it is wholly immaterial in what name and form it is imposed. The word "entertainment" is wide enough to comprehend in it, the luxury or comfort with which a person entertains himself. Once it is found there is a nexus between the legislative competence and subject of taxation, the levy is justified and valid. We, therefore, find that the State Legislature was competent to enact sub-clause (v) of clause (i) of Section 2 of the Act. We accordingly hold that the impugned levy is valid." 15. The learned Counsel for respondents also relied on a judgment reported in Federation of Hotel & Restaurant v. Union of India & Others - AIR 1990 SC 1637. This is a judgment of Constitutional Bench of Five Judges. Challenge in this case was to the Expenditure Tax Act, 1987, which envisaged a tax at 10% ad volerm on chargeable expenditure incurred in the class of hotels wherein room charges for any unit of residential accommodation were Rs. 400/- per day per individual. The challenge to the Act was on the ground of lack of legislative competence and of violation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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." 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 decision of powers. The Court is this body." In Para 14, it held : 14. 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 power is that subjects which in one asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered to be the same. The object of a tax on luxury is to impose a tax on the enjoyment of certain types of benefits, facilities and advantages on which the legislature wishes to impose a curb. The idea is to encourage society to cater better to the needs of those who cannot afford them. For instance, a luxury tax may, to cite a catchy example, encourage construction of "Janata" hotels rather than five star hotels. Such a tax may be on the person offering the luxury or the person enjoying it. It may be levied on the basis of the amount received for providing, or the amount paid for or expended for enjoying, the luxury. Conceivably, it could be on different bases altogether. The object of an expenditure tax - and, that, conceptually, there can be an expenditure tax is borne out by Azam Jah's case (AIR 1972 SC 2319) (supra) is to discourage expenditure which the legislature considers lavish or ostentatious. The object of the first would be to discourage certain types of living or enjoyment while that of the second would be to discourage people from incurring expenditure unproductive or undesirable channels. If a general Expenditure Tax Act, like that of 1957, had been enac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern engaged in the transportation of goods but does not include a courier agency." Section 65(41)(m) : ""Taxable service" means any service provided (a) xx xx xx (b) xx xx (c) xx xx xx (m) to a customer, by a goods transport operator in relation to carriage of goods by road in a goods carriage." Section 66(3) : "With effect from the date notified under Section 84 of the Finance Act, 1997 (26 of 1997), there shall be levied a service tax at the rate of five per cent of the value of the taxable services referred to in sub-clauses (g), (h), (i), (j), (k), (l), (m), (n) and (o) of Clause (41) of Section 65 which are provided to any person by the person responsible for collecting service tax." Sections 65(7), 65(18A) and 65(18B) of Finance Act, 2000 reads as under : "Section 65(7) : "assessee" means a person liable for collecting the service tax and includes - (i) his agent; or (ii) in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom remuneration or commission (by whatever name called) is paid for such se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to a customer by a mandap-keeper in relation to use of a mandap in any manner including the facilities provided to a customer in relation to such use also the services, if any, rendered as a caterer. The nature and character of this service tax is evident from the fact that the transaction between a mandap keeper and his customer is definitely not in the nature of a sale of hire purchase of goods. It is essentially that of providing a service. In fact, as pointed out earlier, the manner of service provided assumes predominance over the providing of food in such situations which is a definite indicator of the supremacy of the service aspect. The Legislature in its wisdom noticed the said supremacy and identified the same as a potential region to collect indirect taxes. Moreover, it has been a well established judicial principle that so long as the legislation is in substance, on a matter assigned to a legislature enacting that statute, it must be held valid in its entirety even though it may trench upon matters beyond its competence. Incidental encroachment does not invalidate such a statute on the grounds that it is beyond the competence of the Legislature (Prafulla Kumar v. Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X
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