2001 (10) TMI 20 - HC - Service Tax

Service Tax Upheld on Professionals: Court Validates Finance Act 1998 Provisions

The court upheld the constitutional validity of the service tax provisions in the Finance Act, 1998, imposing a 5% tax on architects and chartered ... Legislative Powers, Service Tax - In so far as the argument about the interpretation of article 276(2) is concerned, that would be essentially related only to the tax on professions and not to the other taxes. Therefore, there will be no question of considering the necessity of issuing a certificate in so far as the other groups are concerned. In so far as the group profession is concerned, we have held that there would be no question of holding the said tax as a tax on profession particularly in view of the earlier judgment in Kamta Prasad's case, and also in the case of Western India Theatres Ltd. v. Cantonment Board, - In our opinion, the questions stood concluded there. A reference was made to article 276(2) only to meet the argument that the State Government could levy a tax relating to a percentage of professional income. We have pointed out that such tax could not have been levied as it was likely to hit article 276(2) because such tax was likely to exceed the limit fixed by that article. We do not think that we will be justified in granting these petitions as prayed. The petitions are rejected. Issues Involved:1. Constitutional validity of the provisions of the Finance Act, 1998, as amended, imposing service tax on architects and chartered accountants.2. Legislative competence of Parliament to levy service tax on professions regulated by separate enactments.3. Distinction between service tax and professional tax.4. Alleged arbitrariness and vagueness of the service tax provisions.Issue-wise Detailed Analysis:1. Constitutional Validity of Service Tax Provisions:The architects and chartered accountants challenged the constitutional validity of the Finance Act provisions that imposed a 5% service tax on their services. The petitioners argued that the tax was essentially a 'tax on profession,' which falls under entry 60 of the State List (List II), thus beyond Parliament's legislative competence. The court examined the legislative history and intent behind the Finance Act, noting that the service sector, constituting 40% of the national GDP, was previously untaxed. The court concluded that the service tax aimed at taxing the service sector, including professional services, was constitutionally valid.2. Legislative Competence of Parliament:The petitioners contended that since architects and chartered accountants are governed by separate enactments (Architects Act, 1972, and Chartered Accountants Act, 1949), the tax on their services should be viewed as a tax on profession. They argued that the tax falls under entry 60 of the State List, and Parliament lacked the competence to legislate it under the residuary entry 97 of the Union List. The court, however, held that the service tax pertained to services provided by professionals and not the profession itself. The court relied on the 'aspect theory,' distinguishing between the privilege of carrying on a profession and the services rendered in a professional capacity. The court upheld Parliament's competence to levy the service tax under entry 97 of the Union List.3. Distinction Between Service Tax and Professional Tax:The court emphasized the distinction between a professional tax and a service tax. A professional tax is levied on the privilege of carrying on a profession, irrespective of income, and is subject to a ceiling of Rs. 2,500 under Article 276(2) of the Constitution. In contrast, the service tax is levied on the services provided by professionals, which can be passed on to the client. The court cited previous judgments, including Western India Theatres Ltd. v. Cantonment Board and Kamta Prasad Aggarwal v. Executive Officer, to support this distinction. The court concluded that the service tax on professional services did not overlap with the professional tax covered under entry 60 of the State List.4. Alleged Arbitrariness and Vagueness:The petitioners argued that the provisions of the Finance Act were arbitrary and vague, as they did not clearly define the taxable services among the multifarious services provided by chartered accountants. The court rejected this argument, noting that the Act and subsequent notifications clearly specified the taxable services. The court also referred to the machinery available under the Act for resolving any disputes regarding the nature of services. The court held that the provisions did not violate Article 14 of the Constitution and were not arbitrary.Conclusion:The court dismissed the writ petitions, upholding the constitutional validity of the service tax provisions and Parliament's legislative competence to enact them. The court distinguished between the service tax and professional tax, emphasizing the distinct aspects of the services provided by professionals. The court also rejected the argument of arbitrariness and vagueness, finding the provisions clear and well-defined. The petitions were dismissed without any orders as to costs.