TMI Blog2016 (8) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the adjudicating authority - writ petition dismissed – decided in favor of revenue - W.P.(C) 1120/2015 & CM No.1991/2015, W.P.(C) 5498/2015 & CM Nos.9883/2015 & 10428/2015, W.P.(C) 5713/2015 & CM No.10271/2015 - - - Dated:- 5-8-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr V. Lakshmikumaran with Mr M. P. Devnath, Mr Abhishek Anand, Mr Vivek Sharma, Mr Yogendra Aldak and Mr Karan Sachdev, Advocates For the Respondents : Mr Sanjay Jain, ASG with Mr R. D. Bhardwaj, CGSC, Mr Bhagwan Swaroop Shukla, CGSC, Mr Shreshth Jain, Mr Vidur Mohan, Mr Aakash Nagar and Mr Jitendra Kr. Tripathi, CGP Mr Satish Kumar, Senior Standing counsel for Service Tax. Ms Noopur Singhal, Advocate or Mr Anil Grover, Advocate for State of Haryana JUDGMENT Dr. S. Muralidhar, J. 1. These are three petitions filed under Article 226 of the Constitution of India challenging the constitutional validity of Section 66B of the Finance Act, 1994 ( FA 1994 ) read with 65B(40) and Section 66D of the FA 1994 as amended by Clause (f) of Section 107 and Clause (2) of Section 109 of Finance Act, 2015 ( FA 2015 ) respectively, along with Notification No. 14/2015/-ST dated 19th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant facts, as regards W.P. (C) 1120 of 2015, are that Kool Breweries Ltd. ( KBL ) was engaged in the manufacturing, brewing and bottling of alcoholic liquor for human consumption i.e. beer of their own brands as well as brands owned by others. KBL held the requisite licenses from the Haryana State Government and has been paying State Excise Duty under the provisions of Punjab Excise Act 1914 ( PE Act ), as applicable to the State of Haryana on the beer manufactured by it, whether under its own or other brand names. It is stated that in terms of the scheme of amalgamation approved by the High Court of Punjab Haryana by order dated 24th March 2014, KBL amalgamated with CIPL. The appointed date for the amalgamation in terms of the above order was 1st April 2013. It is accordingly contended that the expression Petitioner in W.P.(C) No. 1120 of 2015 would mean CIPL as well as KBL which had merged with CIPL with effect from 1st April 2013. 5. KBL entered into an agreement with UBL on 7th February 2011 for the purposes of manufacture and sale of beer under the brand name of Kingfisher . UBL agreed to provide process parameters to KBL. UBL also permitted KBL to use the trademarks o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hapter 22 of the First Schedule to the CET which exclusively covered beverages, spirits and vinegar clarified that the said Chapter 22 did not cover alcoholic liquors for human consumption. Therefore, they did not fall within the definition of excisable goods as mentioned in Clause (b) of the Explanation to Section 65 (19) of the FA 1994. Thus, 'alcoholic liquor for human consumption' did not fall under the purview of excisable goods and so was not covered within the exclusion clause of definition of Business Auxiliary Services , under Section 65(19) of the Finance Act, 1994. However, since 1st July 2012 the processes undertaken by KBL were covered under the negative list of services and therefore not amenable to service tax. The case of the Respondents in the SCN was that KBL had resorted to fraud, suppression of facts and wilful misstatements and, therefore, the extended period of limitation could be invoked. The Petitioner had wrongly availed the exemption granted by Notification No. 39/2009-ST dated 23rd September 2009 and deposited service tax of ₹ 22,64,427 along with interest of ₹ 7,09,346 on 26th March 2013. 8. The concept of a 'negative li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, Globus Spirits Limited ( GSL ) and Aroma India Pvt. Ltd. ( AIPL ), who are discharging state excise duty on contract manufacturing activity, sought to be impleaded as Petitioners 3 and 4 respectively in the aforementioned writ petition. For the reasons therein, their application CM 10428 of 2015 is allowed and GSL and AIPL are permitted to be impleaded as co-petitioners in W.P. (C) No. 5498 of 2015. 11. The third petition i.e. W.P.(C) No. 5713 of 2015 is by the Confederation of Indian Alcohol Beverages Companies ( CIABC ), an apex body of the branded segment of the leading Indian made foreign liquor manufactures and marketers which has been formed with the object of promoting and protecting the interests of the members in the business of alcoholic beverages. The prayers in these petitions are identical to the prayers in the writ petition filed by ISWAI and AIBA. Submissions of the Petitioners 12. Mr. V. Lakshmikumaran, learned counsel appearing for the Petitioners made the following submissions: (i) There is a complete and careful demarcation of taxes in the Constitution and there is no overlapping as far as the fields of taxation are concerned. The mutual exclusivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be two levies namely excise duty and service tax. (v) Reliance is placed on the decision in Navinchandra Mafatlal v. CIT (1954) 26 ITR 758 (SC), wherein it was emphasised that the words of a legislative entry had to be given the widest possible scope and ambit. This was followed in Godfrey Philips Ltd. v. State of UP 2005(2) SCC 515 and Hoechst Pharmaceuticals v. State of Bihar 1983 (4) SCC 45. The reliance is also placed on decisions in International Tourist Corporation v. State of Haryana (1981) 2 SCC 318 which emphasised that a Union legislation could be traced to Entry 97 of List I if it is not enumerated in List II or List III and in the case of a tax if it is not mentioned in either of those Lists . The nomenclature of levy was not of relevance to determine its real character and what has to be examined is the true nature of the tax imposed in reference to the charge, i.e. the taxable event and the incidence of levy. Here it was the manufacture of alcoholic liquor for human consumption. A reference is placed on the decisions in State of Kerala v. Maharashtra Distilleries Ltd. (2005) 11 SCC 1 and Municipal Council, Kota v. Delhi Cloth General Mills Co. Ltd. (2001) 3 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore only one taxable event. He pointed out that although Entry 92C in the Union List covers taxes on services it had not yet been brought into operation. Consequently, when the activity was already covered by Entry 51 of List II, namely the activity of manufacture of alcoholic liquor for human consumption, then the question of resorting to Entry 97 of List I to justify the levy of service tax did not arise. Submissions of the Respondents 13. In reply to the above submissions, it is submitted by Mr. Sanjay Jain, learned Additional Solicitor General of India, on behalf of the Respondents as under: (i) The service tax in the present case was not being levied on the activity of manufacture of alcohol but on the service aspect of the contract manufacturing of alcohol on behalf of the principal manufacturer/brand owner. (ii) There may be different types of arrangements for manufacture of alcoholic beverages. There may be a brand licensing arrangement under which the job worker to whom the task of manufacturing alcoholic beverages is given holds licence while the property, risk and reward of the products so manufactured, rest with the licensee/manufacturer. The brand o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Division 88 of the Central Product Classification ( CPC ) for goods and services circulated by the United Nations Statistical Commission. (viii) It is legally permissible that the same activity may involve two or more taxable events. One aspect is the service rendered to the principal manufacturer' which is amenable to service tax. The other is the manufacturing aspect which is amenable to state excise duty. The mere fact that there can be overlapping of two aspects does not impinge upon the power to levy tax on both aspects. (ix) Since the aspect of rendering of services by manufacturing alcohol for another person is distinct from the activity of manufacture of alcohol for one s own per se, it cannot be said that service tax is levied on the same activity on which the State excise duty is also levied. In other words the Parliament is not seeking to legislate on a topic exclusively within the domain of the State under Entry 51 of List II of the Seventh Schedule of the Constitution. (x) Reliance is placed on the decisions in State of Madhya Pradesh v. Rakesh Kohli (2012) 6 SCC 312, Association of Leasing and Financial Service Companies v. Union of India (2011) 2 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any State would have exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule of the Constitution , i.e., State List. 15. Under Entry 84 of List I read with Article 246 (1) Parliament has the exclusive legislative power to enact a law for levy and collection of excise duty on the manufacture of alcoholic liquor, tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption and narcotics. Entry 51 of the State List, i.e. List II, is a mirror image of Entry 84 of the Union List. It is the State which has the exclusive power to make laws for levy of duty of excise on the activity of manufacture or produce of alcoholic liquors for human consumption in the State. 16. The Constitution Bench of the Supreme Court in Union of India v. Shri Harbhajan Singh Dhillon 1971 (2) SCC 779 explained that before resort can be had to residuary Entry 97 of the Union List, to explain the legislative competence of Parliament to enact a taxing statute, it has to be first ascertained whether the tax legislation in question is covered by any specific entry in List II. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who receive any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. Explanation 2 For the purposes of this clause, transaction in money shall not include any include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation 3. For the purposes of this Chapter, - (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 by amendment to the FA was to inter alia bring within the net of service tax, the activity of manufacture 'for another person' of alcoholic liquor for human consumption. Pith and substance doctrine 25. The case of the Petitioners is that by amending Section 65(19) of the FA 1994, the Parliament was seeking to usurp the exclusive jurisdiction of the State Legislature to levy excise duty on the manufacture of alcoholic liquor for human consumption. It is submitted that since service tax is not leviable on the activity of manufacture of goods, the amendment to Section 65(19) of the FA 1994 is a colourable exercise of legislative power impinging on the exclusive legislative domain of the State Legislature. 26. The two competing entries in the present case are Entry 51 of List II which according to the Petitioners covers the entire field as far as manufacture of alcoholic liquor or human consumption is concerned, whether it is manufactured by oneself or through another by way of job work. The competing entry, relied upon by the Respondents to sustain the legislation, is Entry 97 of List I which is the residual entry. The question that then arises is whether 'in pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nized. The Constitution gives independent sources of taxation to the Union and the States. The Supreme Court explained the approach to be adopted in the event of seemingly conflicting entries in the lists: In the case of a seeming conflict between the entries in the two Lists, the entries should be read together without giving a narrow and restricted sense to either of them. Secondly, an attempt should be made to see whether the two entries cannot be reconciled so as to avoid a conflict of jurisdiction. It should be considered whether a fair reconciliation can be achieved by giving to the language of the Union Legislative List a meaning which, if loss wide than it might in another context bear, is yet one that can properly be given to it and equally giving to the language of the State Legislative List a meaning which it can properly bear. The non obstante clause in Article 246(1) must operate only if such reconciliation should prove impossible. Thirdly, no question of conflict between the two Lists will arise if the impugned legislation by the application of the doctrine of 'pith and substance' appears to fall exclusively under one list, and the encroachment upon anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of a tax if it is not mentioned in either of those Lists. In 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.... 29. In All India Federation of Tax Practitioners v. Union of India (supra), the Supreme Court explained the 'pith and substance' doctrine in the following words: 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value addition is on account of the activity that provides value addition. In a situation of 'job work' it is not difficult to envision such value addition as a result of the activity of manufacture being undertaken by one entity for another. It is this aspect of service involved in job work that is sought to be captured here and made amenable to service tax. 33. In Federation of Hotel and Restaurant Association of India v. Union of India (1989) 3 SCC 634 the Supreme Court explained the concept in the following passages wherein: 30. .......subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power.... 31. Indeed, the law with respect to a subject might incidentally affect another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping, but the overlapping must be in law. The same transaction 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. ... 34. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost accountant it is an activity undertaken by him based on his performance and skill. But from the point of view of his client, the chartered accountant/cost accountant is his service provider. It is a tax on services . The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act. 36. Consequently, even applying the aspect doctrine it is possible to recognise the legislative competence of Parliament in seeing to bring within the service tax net the activity of job work involved in the manufacture of alcoholic liquor for human consumption. 37. Although several types of arrangements by which the job work undertaken by one entity for another were referred to, the case involving KBL and UBL appears to be one of contract manufacturing. In any event, this need not by itself detain the Court as that should be the task of the adjudicating authority called upon to adjudicate the SCN issued. Suffice it to note that as rightly pointed out by Mr. Jain that, if the brand owner itself is also manufacturing the product, the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by one party to another and therefore, amenable to service tax. It is traceable to Entry 97 of List I as it does not fall within the ambit of any of the taxing entries in List II. Failed challenges to levy of service tax 41.1 It is of interest, and perhaps not a mere coincidence, that the challenges to the constitutional validity of service tax levy in different contexts have by and large failed. In Gujarat Ambuja Cements Limited v. Union of India (supra) the legislative competence of Parliament to impose service tax on transport of goods was challenged. It was contended that under Entry 56 of List II which pertained to tax on goods and passengers carried by roads or inland waterways was fully covered and therefore, the Parliament has no legislative power to levy tax on the transport of those goods. The Court explained there is a distinction between the object of tax, the incidence of tax and the machinery of the collection of the tax. The legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. It is explained that the subject matter of the tax, as far as the provision of the FA 1994 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only be classified as a service. 42.3 The Court then concluded as under: 58. A tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire-purchase activities. ... 43. Reliance by the Petitioner on the decision of the Supreme Court in Bharat Sanchar Nigam Limited v. Union of India (supra) appears to be misplaced. The question involved in that case was whether the providing of telephone connection may be a composite contract of service and sale. While there may be a transfer of a right to use goods in the providing of access or a telephone connection by the telephone service provider to a subscriber, at the same time there was also the provision of the service itself. It was pointed out that the decision in BSNL v. Union of India (supra) recognises the aspect doctrine. The Court did not permit the State to levy taxes on the service aspect and upheld the levy of service tax on the provisions of telephone service. It was concluded in that case that there was no element of sale of goods involved. 44. In Sat Pal and Co. v. Lt. Governor of Delhi (supra) it was held that even if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that financing as an activity was different and distinct from lease/hire purchase in the essence. It was held: ...the activities undertaken by NBFCs of equipment leasing and hue- purchase finance are facilities extended by NBFCs to their customers; that, they are financial services rendered by NBFCs to their customers and that they fall within the meaning of the words 'banking and other financial services' which is sought to be brought within the service tax net under Section 66 of the Finance Act, 1994. ....the impugned tax is levied on these services as taxable services. It is not a tax on material or sale. The taxable event is rendition of service. Hence, the impugned tax is different and distinct from tax on sale of goods under Entry 54, List II of the Seventh Schedule to the Constitution. 47.2 It was observed that the taxable event is the service which is rendered by the finance company to its customer(s). The value of taxable service under Section 67 is income by way of interest/finance charges (measures of tax) which is not determinative of the character of the levy. Thus Section 67 of the Finance Act, 1994 seeks to tax financial services rendered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore it is a fallacy to equate the two activities viz., manufacture of such alcoholic liquor by and for oneself and undertaking manufacture for another. The changes brought about in 2015 was intended to capture the latter aspect which is unique to job work for the purposes of levy of service tax. In his budget speech on 28th February 2015, the Finance Minister explained, inter alia, that service tax was to be levied on service by way of carrying out any processes as job work for production or manufacture of alcoholic liquor for human consumption It is significant that the Respondents in their written submissions have confirmed that service tax is only being imposed on the value of the services provided by the job worker/contract manufacturer and not on the whole sale price of alcohol. Conclusion 50. Consequently, in the present case the Court is satisfied that what is sought to be made amenable to service tax is the activity of contract manufacturing of alcoholic liquors fit for human consumption by one entity for another. Such provision of service which is in pith and substance not covered under Entry 51 of List II of the Seventh Schedule to the Constitution of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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