2001 (4) TMI 13 - HC - Service Tax

Court upholds constitutionality of Finance Act, 1994 provisions on service tax calculation

The court dismissed the writ petitions challenging the constitutionality of certain provisions of the Finance Act, 1994. It held that Section 67(k) ... Levying of service tax on airline agent - petitioners pray for a writ of declaration or any other appropriate writ or order in the nature of writ by declaring the provisions contained in section 65(3) and section 67(k) of the Finance Act, 1994, as amended in the year 1996, and rule 2(d)(viii) of the Service Tax Rules as amended as unconstitutional and void. - we do not find any merit in the writ petitions which are liable to be dismissed and are ordered to be dismissed - levying of service tax on airline agent is valid Issues Involved:1. Constitutionality of Section 65(3) and Section 67(k) of the Finance Act, 1994.2. Inconsistency between Section 67(k) and Section 65(3), Section 65(48)(1), and Section 66(3) of the Finance Act, 1994.3. Validity of Rule 6(7) of the Service Tax Rules, 1994.4. Legislative competence and rule-making power under Section 94 of the Finance Act, 1994.Issue-wise Detailed Analysis:1. Constitutionality of Section 65(3) and Section 67(k) of the Finance Act, 1994:The petitioners initially challenged the constitutionality of Section 65(3) and Section 67(k) of the Finance Act, 1994, on the grounds that they violated Article 19(1)(g) and Article 14 of the Constitution. However, during the arguments, the petitioners abandoned this challenge and focused on other propositions.2. Inconsistency between Section 67(k) and Section 65(3), Section 65(48)(1), and Section 66(3) of the Finance Act, 1994:The petitioners argued that Section 67(k), which defines the value of taxable services provided by air travel agents, is inconsistent with Section 65(3) and Section 65(48)(1), which define 'air travel agents' and 'taxable service' respectively, as well as Section 66(3) which provides for the charge of service tax. The court analyzed the definitions and concluded that the commission earned by air travel agents from airlines is directly connected to the services provided to customers. Therefore, the measure of tax under Section 67(k) is not inconsistent with the nature of the taxable service defined in the other sections.3. Validity of Rule 6(7) of the Service Tax Rules, 1994:The petitioners contended that Rule 6(7), which provides an alternative mode of levy based on the basic fare of air travel, is ultra vires the rule-making power and void. The court noted that Rule 6(7) is optional and provides a beneficial alternative method for calculating service tax. The court relied on the Supreme Court's decision in Builders Association of India v. State of Kerala, which upheld similar optional methods of taxation, stating that those who opt for such methods cannot subsequently challenge their validity. The court also found that Rule 6(7) does not amount to an independent levy but is a modality for collection of tax, and therefore, it is within the rule-making power under Section 94.4. Legislative competence and rule-making power under Section 94 of the Finance Act, 1994:The court examined whether Rule 6(7) exceeded the rule-making power conferred by Section 94. It concluded that Rule 6(7) is consistent with the purposes of the Act and does not introduce a new policy or independent system of levy. The rule is seen as a beneficial provision for taxpayers, allowing an alternative method of tax calculation. The court found no breach of fundamental rights or constitutional provisions by Rule 6(7) and upheld its validity.Conclusion:The court dismissed the writ petitions, holding that Section 67(k) is not inconsistent with the definitions in Section 65 and the charging provision in Section 66. It also upheld the validity of Rule 6(7), finding it within the rule-making power and beneficial for taxpayers. The court emphasized that those who opted for the alternative method provided by Rule 6(7) cannot challenge its validity.