TMI Blog2007 (8) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... tax falls in Entry 97, List I of the Seventh Schedule to the Constitution. 2. The question which arises for determination in this civil appeal concerns the constitutional status of the levy of service tax and the legislative competence of Parliament to impose service tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to the Constitution. The issue arising in this appeal questions the competence of Parliament to levy service tax on practising chartered accountants and architects having regard to Entry 60 List II of the Seventh Schedule to the Constitution and Article 276 of the Constitution. Background Facts 3. On 1.6.1998 Finance Bill, 1998 was introduced in Parliament. Clause 119 of the Notes sought to substitute Sections 65, 66 and 68 and amend Section 67 of the Finance Act, 1994 relating to service tax so as to levy a tax on services rendered by a practising chartered accountant, cost accountant and architect to a client in professional capacity at the rate of five per cent of the amount charged to the client. On 3.6.1998, Bombay Chartered Accountants Association made a representation to the Central Government objecting to the aforestat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of duties on commodities. Therefore, in the year 1994-95, the then Union Finance Minister introduced the new concept of "service tax" by imposing tax on services of telephones, non-life insurance and stock-brokers. That list has increased since then. Knowledge economy has made "services" an important revenue-earner. 6. At this stage, we may refer to the concept of "Value Added Tax" (VAT), which is a general tax that applies, in principle, to all commercial activities involving production of goods and provision of services. VAT is a consumption tax as it is borne by the consumer. 7. In the light of what is stated above, it is clear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service tax is a value added tax. 8. As stated above, service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services. Therefore, for our understanding, broadly "services" fall into two categories, namely, proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 referred to Service Tax. It defined "assessee" to mean a person responsible for collecting the service tax. Under the Act, "service tax" was defined to mean tax chargeable under Chapter V. Under the Act, "taxable service" was defined to mean any service provided by a stock-broker to an investor in connection with the sale or purchase of securities listed on a recognized stock exchange; services rendered to a subscriber by the telegraph authority; and services rendered by an insurer to a policy holder. Under the Act, it was clarified that words and expressions not defined in Chapter V but used therein shall bear the same meaning as given in the Central Excise Act, 1944. Section 66 stated that service tax shall be levied at the rate of five per cent of the value of taxable services provided to any person by the service provider who was responsible for collecting the service tax. It was similar to Section 3 of Central Excise Act, 1944. Section 67 dealt with valuation of taxable services. Section 68 dealt with collection and recovery of service tax. Section 71 dealt with assessment. Section 72 dealt with best judgment assessment. Section 73 dealt with value of taxable services escap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the 1 st day of April, 1996 in the manner provided in clause (2). Explanation.- For the purposes of this clause,- (a) the expression "taxes on the sale or purchase of goods" shall mean taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce; (b) the expression "taxes on the consignment of goods" shall mean taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce. (2) The net proceeds in any financial year of any such tax, except in so far as those proceeds represent proceeds attributable to Union territories, shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax is leviable in that year, and shall be distributed among those States in accordance with such principles of distribution as may be formulated by Parliament by law. (3) Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-State trade or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that service tax was a tax on profession. It was submitted that service tax fell within the ambit of Entry 60 of List II. It was submitted that the word profession in the said Entry was not limited by any restriction/qualification and, therefore, it must be read with the widest possible sense. It was submitted that the word "profession" has been defined in Black's Law dictionary to mean a vocation requiring advance education and training. It was submitted that the word "profession" has been defined in the English dictionary by Collins to mean an "occupation" requiring special training in the liberal arts or sciences, especially one of the three learned professions, law, theology, or medicine. It was contended on behalf of the appellants that there was no difference between tax on profession and tax on services. According to the learned counsel, the word "profession" in Entry 60 List II was synonymous with the word "service" and, therefore, tax on profession would include tax on service, which tax could be levied only by the State Legislature. It was submitted that there cannot be a profession without service. It was submitted that service rendered by a chartered accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is kept in mind, then it becomes clear that the Constitution framers intended the State Legislature alone to be competent to impose taxes on professions, trades, callings and employments and that they did not intend to give such a power to Parliament. Learned counsel submitted that if due weight-age is given to the aforestated two expressions then the word "profession" in Article 276(1) and Entry 60 of List II would cover every aspect of the concept of professions, trades, callings and employments. It was submitted that profession cannot exist without service as service is the core of profession. Learned counsel submitted that if the above two expressions in Article 276(1) are given due weightage then there would be no difference between the words "profession" and "service"; that these two words would be interchangeable and if used interchangeably, it is clear that the State Legislature alone has the absolute competence to levy tax on services as there was no difference between the two words, namely, 'service" and "profession". Reliance was also placed on Article 276(3) in support of the contention that the Constitution itself had made a dichotomy between taxes on professions, tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important to note, that "service tax" is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client. 18. In Moti Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad 1995(76) E.L.T.241(SC) we get a clue of an important principle, namely, "principle of equivalence". In that judgment, this Court was required to explain the words "excisable goods" and 'produced or manufactured'. It was held by this Court that the expression "excisable goods" has been defined in Section 2 of the Central Excise Act, 1944 to mean goods specified in the Schedule. It was held that the object for having a schedule in the Act was to fix rates under different entries including residuary entry. At this stage, we may say that the object of the Finance Act is also to fix rates of duty under different entries. However, the question which arose before this Court in Moti Laminates (supra) was the meaning of the word 'goods" in Central Excise Act, 1944. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is in-built into the concept of service tax, which has received legal support in the form of Finance Act, 1994. To give an illustration, an Event Manager (professional) undertakes an activity, namely, of organizing shows. He belongs to the profession of Event Manager. As long as he is in the business or calling or profession of an Event Manager, he is liable to pay the tax on profession, calling or trade under Entry 60 of List II. However, that tax under Entry 60 of List II will not cover his activity of organizing shows for consideration which provide entertainment to the connoisseurs. For each show he plans and creates based on his skill, experience and training. In each show he undertakes an activity which is commercial and which he places before his audience for its consumption. The tax on service is levied for each show. This situation is very similar to a situation where goods are manufacture or produced with the intention of being cleared for home consumpt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e collected by enhancement of the rate of tax or by the levy of a fresh charge vide the Finance Act. Parliament, through the medium of Finance Act, may do what the amendment to the IT Act, 1961 by a separate Amendment Act, can do. It was further held that, the Finance Acts, though annual Acts, are not necessarily temporary Acts as they may contain provisions of a general character which are of permanent operation. Thus, Parliament is competent to introduce a charging provision in a Finance Act. In the said judgment, it had been further held that even an additional charge (surcharge) can be levied by Finance Act for the purposes of the Union. 23. The aforestated judgment was in the context of the IT Act, 1961. However, the ratio of that judgment would apply equally to the Finance Acts enacted annually for enhancement of the rate of excise duty by levy of a fresh charge under that Act. Applying the test laid down in the aforestated judgment of this Court, we hold that a new charge by way of service tax or tax on service came to be levied statutorily by the said Finance Act, 1994, which has subsequently attained Constitutional status by virtue of the Constitution (Eighty-eighth A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich an extended construction can be given as that test cannot be applied to taxation. Taxing entries are distinct entries. This distinction between the abovementioned two groups of entries is also manifest in the language of Article 248 clauses (1) and (2) as also in the language of Entry 97 in List I of the Seventh Schedule to the Constitution. [See M.P.V. Sundararamier Co. v. The State of Andhra Pradesh and anr. [AIR1958 SC 468 para 51] 27. The above distinction between the group of general entries and the group of taxing entries to the Lists in the Seventh Schedule has also been highlighted in the case of Southern Pharmaceuticals Chemicals v. State of Kerala reported in (1981) 4 SCC 391 in which this Court took the view that enactment of the Medicinal Act, 1955 by Parliament under Entry 84 List I does not prevent the State Legislature from making a law under Entry 8 List II as Entry 8 was a general entry whereas Entry 84 List I was a taxing entry. This distinction has been brought to light in another judgment of this Court to which one of us, Kapadia, J., was a party in the case of State of Bihar and ors. v. Shri Baidyanath Ayurved Bhawan (P) Ltd . and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be extended to include services. This is what is called as an Aspect Theory. If the argument of the appellants is accepted, then there would be no difference between interpretation of a general entry and interpretation of a taxing entry in List I and List II of the Seventh Schedule to the Constitution. Therefore, "professions" will not include services under Entry 60. For the above reasons, we hold that Parliament had absolute jurisdiction and legislative competence to levy tax on services. While interpreting the legislative heads under List II, we have to go by schematic interpretation of the three Lists in the Seventh Schedule to the Constitution and not by dictionary meaning of the words "profession" or "professional" as was sought to be argued on behalf of the appellants otherwise the distinction between general entries and taxing entries under the three Lists would stand obliterated. The words 'in relation to" and the words 'with respect to" are no doubt words of wide amplitude but one has to keep in mind the context in which they are used. (iv) Meaning of the words Taxes "on" professions: 29. As stated above, Entry 60 List II refers to taxes on professions etc. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax on pension under Entry 82 of List I. The controversy was that "pension" is a retiral benefit. It was argued that pension was an incident of "employment' and, therefore, Parliament had no legislative competence to impose income tax under Entry 82 of List I and that the State Legislature alone had absolute jurisdiction to make a law imposing tax on pension. This argument was rejected on the ground that Entry 60 of List II refers to "Tax on employments", as such. So long as a person is in the employment, he does not earn pension. He earns pension only on retirement. On retirement, he ceases to be in the employment, therefore, on retirement the receipt of pension constitutes "income" in the hands of the pensioner and, therefore, Parliament had legislative competence to enact Income Tax Act, 1961 under which pension was taxable as income. This example demonstrates the meaning of the word "Taxes on professions, callings, trades and employments". It also indicates two aspects of the same item, namely, pension. One aspect falls in the category of "employment", the other falls in the category of "income". Therefore, there is no merit in the contention advanced on behalf of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that is to say on every incidence of the exercise of the particular trade or calling. It was held that if there was no show, there was no tax. It was further observed that a lawyer has to pay tax to take out a licence irrespective of whether he actually practices or not. That tax is a tax for the privilege of having the right to exercises the profession if and when the person taking out the license chooses to do so. It was held that the impugned tax on entertainment levied by the Cantonment Board was a tax on the act of entertainment resulting in a show and, therefore, the impugned law imposing tax on entertainment fell under Entry 50 of the Provincial List in Schedule VII to the GOI Act, 1935 and not under Entry 46 (similar to Entry 60 of List II). Therefore, it was held that Bombay Legislature had power to enact the law imposing tax on entertainment which had nothing to do with the law imposing tax on the privilege of carrying on any profession, trade or calling under Entry 46. (similar to Entry 60 of List II in the present case.) Therefore, this Court has clarified the dichotomy between tax on privilege of carrying on any trade or calling on one hand and the tax on the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matograph shows, taxes on entry of goods. A tax on profession can be imposed if a person carries out a profession whereas a tax on income can be imposed only if there is income. Therefore, a tax on profession is irrespective of the question of income. Article 276 enables the State Legislature to make laws for imposition of taxes on profession, for the benefit of the State, Municipality, District Board etc. by stating that such law shall not be invalid on the ground that it relates to a tax on income. There is a distinction between a tax on professions, trades, callings and employments and a tax on income arising out of such professions, trades etc.. In the former case, it will have to be paid by any person practising that trade, profession etc., whether he derives any income from it or not. This is where the above example of pensioner becomes relevant. A pensioner does not carry out any profession, trade, business or calling. A tax on profession is not a tax on employment. At the time, the tax is levied, the pensioner is not in employment, but he receives an amount of pension that receipt constitutes his income though it might be for past services from an employment. 33. As st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o taxes on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry 92C/97 of List I operate in different spheres. (vi) Discussions of Judgments cited on behalf of the appellants : 34. In the case of Godfrey Phillips India Ltd. and anr. V. State of U.P. and ors. reported in (2005) 2 SCC 515 the assessees/appellants, who were either manufacturers, dealers or sellers of tobacco, had challenged the levy of luxury tax on tobacco and tobacco products by treating them as "luxuries" within the meaning of the word in Entry 62 of List II of the Seventh Schedule to the Constitution of India. Uttar Pradesh Tax on Luxuries Act, 1995 and certain other State enactments imposed luxury tax on tobacco by treating it as "luxury" within the meaning of the word in Entry 62 of List II. It was held by the Constitution Bench of this Court that the word "luxuries" in Entry 62, List II refers to activities of enjoyment, indulgence or pleasure and since none of the impugned enactments had sought to tax any activity and since the impugned enactments sought to tax "goods" as luxuries it was held that the said U.P. Tax on Luxuries Act, 1995, Andhra Pradesh Tax on Luxuries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th respect to tax on passengers and goods carried on National Highway was within the exclusive legislative competence of Parliament and, therefore, Section 3(3) of 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 in either of 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 Lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the word "services". 38. In the case of Gujarat Ambuja Cements Ltd. and anr. v. Union of India and anr. reported in (2005) 4 SCC 214 it was held that service tax is not a tax on goods or on passengers but it was on the transportation itself and, therefore, it falls under residuary power of Parliament under Entry 97 of the Seventh Schedule to the Constitution. It was further held that service tax is not a levy on passengers or goods but on the event of service in connection with the carriage of goods and, therefore, it was not possible to hold that the Act was in pith and substance within the State's exclusive powers under Entry 56 of List II. It was held that service tax came within Entry 97 of List I. In the present case, as stated above, we are concerned with Entry 60 of List II. As stated above, service tax is on performance based services itself. It is on professional advice, tax planning, auditing, costing etc. On each of the exercise undertaken tax becomes payable. Therefore, the above judgment has no application. 39. In the case of Bharat Sanchar Nigam Ltd. and anr. v. Union of India and ors. reported in (2006) 3 SCC 1 the question which aro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lates to taxes on lands and buildings, Entry 60 relates to taxes on professions and, therefore, the true nature of the tax in that case was not a tax on income but it was a tax referable to Entry 49 and Entry 60 of List II. It was held that the impugned tax was a composite tax, one of its components being the "circumstance", namely, the financial position of the assessee. It may be clarified that in the case of R.R. Engineering Co. (supra) the validity of the levy was under challenge and that levy constituted what is called a composite tax. We do not see any relevance of the judgment in the case of R.R. Engineering Co. (supra) to the facts of the present case. In the present case, we are not concerned with a composite tax. Hence, the judgment of this Court in the case of R.R. Engineering Co. (supra) has no relevance to the facts of the present case. Conclusion : 41. For the above reasons, we find no merit in Civil Appeal No. 7128 of 2001 filed by All India Federation of Tax Practitioners and ors.. We hold that Parliament has legislative competence to levy service tax by way of impugned Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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