TMI Blog2014 (11) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... islative competence to levy Service tax on sub-clauses (zzzzv) and (zzzzw) of clause (105) of Section 65 of the Act. - Decided against the assessee. - Writ Petition Nos. 2033 of 2014 with 1966 of 2014 and 52327 of 2013 (T-RES) - - - Dated:- 3-11-2014 - B.V. Nagarathna, J. Shri Chandranath Ariga. K., Advocate, for the Petitioner. Shri C. Shashikanth, Central Government Counsel, for the Respondent. ORDER Petitioners have assailed sub-clauses (zzzzv) and (zzzzw) of Clause (105) of Section 65 of Finance Act, 1994, under which Service tax was introduced. These sub-clauses were inserted by the Finance Act of 2011. The common ground on which challenge to the aforesaid clauses is made is that the levy of Service tax in terms of those clauses is beyond the legislative competence of the Parliament. The substance of the grievance of the petitioners is that by the impugned amendments made to the Finance Act, 1994, Service tax is being levied illegally on transactions made by the petitioners. 2. In W.P. No. 2033/2014 and W.P. No. 1966/2014, the petitioners are running a hotel in the name and style of Hotel Ballal Tourist in a town called Moodabidri and Ballal Reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that there is no merit in these writ petitions and the same may be dismissed. 6. Countering this submission, learned counsel for petitioners would submit that those decisions are not applicable to the case at hand and that the decision of the Hon ble Supreme Court in the case of K. Damodaraswamy Naidu Bros. and Others v. State of T.N. and Another [2001 (1) SCC 521] and the decision of the learned Single Judge of the Kerala High Court in the case of Kerala Classified Hotels and Resorts Association v. Union of India - 2013 (31) S.T.R. 457 (Ker.) are applicable and therefore, the impugned amendments made in the year 2011 by insertion of sub-clauses (zzzzv) and (zzzzw) to Clause (105) of Section 65 of the Finance Act, 1994, would have to be declared as unconstitutional. 7. In the context of the aforesaid decisions, learned counsel for the petitioners contended that by virtue of the 46th amendment made to the Constitution, sub-clause (f) of Clause (29A) was inserted to Article 366, to include tax on the supply, by way of or as part of any service or any other manner whatsoever, goods, being food or any other article for human consumption and that when such an amendment has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution? 12. Service tax was introduced in India by the Finance Act of 1994. That law was legislated by the Parliament on the strength of the residuary entry that is Eniry-97 List-I of the VII Schedule r/w Articles 248 and 246(1) of the Constitution. Under the said Act, a number of services were sought to be taxed. There have been a number of amendments made to the said law by the Parliament from time-to-time. Amendment made to the Finance Act of 2011 by insertion of sub-clause (zzzzv) and (zzzzw) to Clause 105 of Section 65 are impugned in these writ petitions. 13. Sections 65(105)(zzzzv) and (zzzzw) of Chapter V of Finance Act, 1994 read as under :- 65. Definitions - In this chapter unless the context otherwise requires- X X X X X (105) taxable service means any service provided or to be provided. X X X X X (zzzzv) to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises; (zzzzw) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merated in List II or List III including any tax not mentioned in either of those Lists. Article 268A and entry 92C are not yet in force as they have not been notified yet. Entry 54 of List II reads as under :- Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I. 15. At this stage, it could be noted that Entry 97 of List I is a residuary Entry under which Parliament is empowered to make laws in respect of any matter not enumerated in List II or List III, including any tax not mentioned in either of those laws. But Entry 54 of List II specifically deals with taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I, is a subject on which the State Legislature can enact laws. 16. The submission of respondents counsel is that Entry 97 of List I derives its powers from Article 248 of the Constitution which gives power to the Parliament to make a law imposing a tax, not mentioned in either of two other lists namely List II and III and therefore Service Tax is leviable by the part. 17. In the context of those entries, the contention of the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, transactions in goods referable to sub-clauses (a) to (f) of Clause (29A) of Article 366 of the Constitution were amenable to sales tax or value added tax by the State legislatures, which was subject to Article 286 and Article 265 of the Constitution. 20. Before discussing the point for consideration, it would be relevant to quote Hon'ble Supreme Court s observations in Federation of Hotels and Restaurant Association of India v. UOI - (1989) 178 ITR 97 (SC). It states that law with respect to a subject might incidentally affect a another subject in some way, but that is not the same thing as the law being on the latter subject. There may be overlapping but the overlapping must be in law. The transaction may involve two or more taxable events in its different aspects. But the fact that there is an over lapping does not detract from the distinctiveness of the aspects. The consequences and facts of the legislation are not the same thing as the legislative subject matter. 21. In Bharat Sanchar Nigam Ltd. and Another v. Union of India - [(2006) 3 SCC 1 (BSNL) = 2006 (34) S.T.R. 161 (S.C.)], the controversy that came up for decision before the Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In that decision, Hon'ble Supreme Court at Paragraphs 15 and 17 observed as under :- 15. Even in the case of restaurants and other such places where customers go to be served with food and drink for immediate consumption at the premises, two conflicting views appear to prevail in the American courts. According to one view, an implied warranty of wholesomeness and fitness for human consumption arises in the case of food served by a public eating place. The transaction, in this view, constitutes a sale within the rules giving rise to such a warranty. The nature of the contract in the sale of food by a restaurant to customers implies a reliance, it is said, on the skill and judgment of the restaurant-keeper to furnish food fit for human consumption. The other view is that such an implied warranty does not arise in such transactions. This view is based on the theory that the transaction does not constitute a sale inasmuch as the proprietor of an eating place does not sell but utters provisions, and that it is the service that is predominant, the passing of title being merely incidental. The two conflicting views present a choice between liability arising from a contract of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in sub-clauses (b) and (f) of clause (29A) of Article 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the Sales Tax Authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases. 45. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley s case, namely, if there is an instrument of contract which may be composite in form in any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. (a) In State of West Bengal v. Kesoram Industries Ltd. [(2004) 10 SCC 201], Hon ble Supreme Court while elucidating on the aspect theory has held that there can be no question of conflict solely on account of two aspects of the same transaction being utilized by two legislatures for two levies, both of which may be taxes or fees or one which may be a tax and other a fee failing within two fields of legislation respectively, available to them. So long as the essential character of levy is not departed from within the four corners of the particular entry, the measure of tax or on the manner of tax levied, will not have any vitiating effect. Hon ble Supreme Court also referred to what is known as the power of taxation and measure of taxation, by stating that there may be more than one taxable events in a single transaction. When these taxable events involves different kinds of taxes and different aspects of taxation, there could not be any confusion regarding powers of taxation. Also, tax may be levied on an object or on an event of taxation. (b) In Imagic Creative (P) Ltd. v. Commissioner of Commercial Taxes and Others reported in (2008) 2 SCC 614 = 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... composite contract. Thus, different aspects of the same transaction can involve more than one taxable event. There is nothing to prevent taxation of different aspects of the same transaction as separate taxable events. It is a well-established judicial principle that so long as the legislation is in substance on the matter assigned to the Legislature enacting the statute, it must be held valid in its entirety even though it may incidentally trench upon matters beyond its competence. vide T.N. Kalyana Mandapam Association v. Union of India [(2004) 135 STC 480] = 2006 (3) S.T.R. 260 (S.C.) = 2004 (167) E.L.T. 3 (S.C.). 26. In the aforesaid decision on the point under consideration, the Hon ble Supreme Court has opined as follows :- 42. On article 366(29A)(f), we are of the view that it only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article such transfer, delivery or supply of any goods shall be deemed to be a sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s far from holding that the parliament is incompetent to impose and levy a tax on services provided in an air-conditioned Restaurant . 28. In K. Damodaraswamy Naidu Bros. and Others v. State of T.N. and Another reported in (2000) 1 SCC 521, on which reliance is placed by petitioners counsel, wherein it has opined as follows :- The provisions of sub-clause (f) of Clause (29A) of Article 366 need to be analysed. Sub -clause (f) permits the States to impose a tax on the supply of food and drink. The supply can be by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. The words of Sub-clause (i) have found place in the Sales Tax Acts of most States and, as we have seen, they have been used in the said Tamil Nadu Act. The tax, therefore, is on the supply of food or drink and it is not of relevance that the supply is by way of a service or as part of a service. In our view, therefore, the price that the customer pays for the supply of food in a restaurant cannot be split up as suggested by learned Counsel. The supply of food by the restaurant owner to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of service is also contained, then the purport and object for which the Constitution had to be amended and clause (29A) had been inserted in Article 366, must be kept in mind. Payments of Service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of Service tax and sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It was also stated that different elements of a transaction provide for attracting different nature of levy and that it was difficult to hold that sales tax would be payable on the value of the entire contract, irrespective of the element of service provided. Thus, in the said decision, it was held that the entire consideration paid under the agreement cannot be the subject matter of Service tax nor could it be the subject matter of sales tax. Otherwise, it would amount to double taxation. Since catering contract involves supply of goods and services, the consideration received under such contract has to be apportioned between that part of the contract involving supply of goods and the part involving supply of service and appropriate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with any service tax in exercise of the residuary power of the Central Government under entry 97 of List I of the Constitution of India. The aforesaid observations are clearly against the aspect theory which envisages that in respect of a single transaction, there can be taxation levied on different aspects of it. In fact, the Bombay High Court in Indian Hotels and Restaurants while referring to the decision of the Kerala High Court has held that the Kerala decision neither observes nor holds that the tax in question is covered by the State List (Entry 54). A categoric finding in that regard was necessary. The Bombay High Court has relied upon T.N. Kalyana Mandapam Association and has rejected the contention of the petitioner therein that Kalyana Mandapams cannot be equated -with Restaurants. It has further opined that tax on sale of goods involved in the said service levied, does not mean that the Service tax cannot be levied on the service aspect of catering. That means that when a restaurant renders to any person a service, tax on sale of goods involved in the said service can be levied separately. That does not mean that Service tax cannot be levied on the aspect of servin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported in ILR 2013 Karnataka 569 = 2015 (37) S.T.R. 211 (Kar.), while considering sub-clauses (zzq) (zzzh) and sub-clause (zzzzu) of Clause (105) of Section 65 of the Finance Act, 1994, has held that Parliament had the legislative competence to impose Service tax on those transactions which are relatable to service rendered during the course of sale of land and buildings which is distinct from the tax that is levied on the construction of flats end buildings which is a works contract. The reasoning given by the learned Single Judge, by analogy, is applicable to the present case. The aforesaid case deals with Article 366(29A)(b) of the Constitution which, according to the Hon ble Supreme Court in BSNL is on par with sub-clause (f) of that Article, with which this instant case is concerned with. 33. In view of the aforesaid detailed discussion, I am inclined to follow the view of the Bombay High Court which has rightly held that the Parliament had the legislative competence to levy Service tax on sub-clauses (zzzzv) and (zzzzw) of clause (105) of Section 65 of the Act. With respect, I hold that the reasoning of the Kerala High Court is not correct. 34. In the result, the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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