2004 (4) TMI 1 - SC - Service Tax

Parliament's power to levy service tax on mandap-keepers upheld as predominantly service; Sections 65-67 and Rule 2(1)(d)(ix) valid

TAMIL NADU KALYANA MANDAPAM ASSN. Versus UNION OF INDIA

The SC upheld Parliament's competence to levy service tax on mandap-keepers, ruling the charges are for services (including provision of premises and ... Service Tax - nature and character of services by mandap keepers to their clients - sale of goods Or on hire purchase activities - Legislative competence of Parliament to levy service tax on Mandap-Keepers - Sections 66, 67(o) of the Finance Act, 1994 and Rule 2(1)(d)(ix) of the Service Tax Rules, 1994 and other provisions related to Kalyana Mandapams and Mandap-Keepers to be intra vires of the Constitution of India - application of the 'Aspect Theory' - Held That:- It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that service tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter. Taxable services, could include the mere providing of premises on a temporary basis for organizing any official, social or business functions, but would also include other facilities supplied in relation thereto. No distinction from restaurants, hotels etc. which provide limited access to property for specific purpose. 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. Section 65 clause 41 sub-clause (p) of the Finance Act, 1994, defines the taxable service (which is the subject matter of levy of service tax) as any service provided to a customer by a mandap-keeper in relation to use of a mandap in any manner including the facilities provided to a customer in relation to such use also the services, if any, rendered as a caterer. The nature and character of this service tax is evident from the fact that the transaction between a mandap-keeper and his customer is definitely not in the nature of a sale of hire purchase of goods. It is essentially that of providing a service. In fact, as pointed out earlier, the manner of service provided assumes predominance over the providing of food in such situations which is a definite indicator of the supremacy of the service aspect. The legislature in its wisdom noticed the said supremacy and identified the same as a potential region to collect indirect taxes. Moreover, it has been a well established judicial principle that so long as the legislation is in substance, on a matter assigned to a legislature enacting that statute, it must be held valid in its entirety even though it may trench upon matters beyond its competence. Incidental encroachment does not invalidate such a statute on the grounds that it is beyond the competence of the legislature. Article 246(1) of the Constitution specifies that the Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution. As per Article 246(3), the State Government has exclusive powers to make laws with respect to matters enumerated in List II (State List). In respect of matters enumerated in List III (Concurrent List) both Parliament and State Government have powers to make laws. The service tax is made by Parliament under the above residuary powers. The impugned Act was challenged on the ground that it infringed on the State's power to levy tax on luxury vide Entry 62 of the State List. The appellants have not made out any case either on facts or on law and there is no merit in this appeal. We, therefore, have no hesitation in dismissing this appeal by confirming the judgment of the High Court for our own reasons recorded in this judgment. Issues Involved:1. Legislative competence of Parliament to levy service tax on Mandap-Keepers.2. Whether the service tax on Mandap-Keepers is a tax on goods and/or land.3. Applicability of Article 366(29A)(f) regarding the sale of goods.4. Validity of the High Court's application of the 'Aspect Theory.'5. Whether the service tax provisions violate Articles 14 and 19(1)(g) of the Constitution.6. Interpretation of the Finance Act, 1994, and related notifications.Issue-wise Detailed Analysis:1. Legislative Competence of Parliament to Levy Service Tax on Mandap-Keepers:The appellant argued that the service tax on Mandap-Keepers is a colorable legislation and unconstitutional as it is a tax on 'goods' and/or 'land.' The appellant contended that the definitions of 'Mandap' and 'Mandap-Keepers' fall within the domain of the State Legislature under Entries 54, 49, and 18 of List II of the Seventh Schedule read with Article 246 of the Constitution. The respondents countered that the service tax is a tax on the consideration received for allowing temporary occupation of the Mandap for organizing functions and not a tax on 'goods' and/or 'land.' The court held that the service tax is not a tax on land per se but on the use of the immovable property in a particular manner, which amounts to providing a service. The court upheld the legislative competence of Parliament to levy service tax under Entry 97 of List I.2. Whether the Service Tax on Mandap-Keepers is a Tax on Goods and/or Land:The appellant argued that the service tax is essentially a tax on land and goods, which falls under the State's jurisdiction. The court noted that for a tax to be considered a tax on land, it must be directly on the land, not on the income derived from it. The court cited several judgments to affirm that the service tax is not a tax on land but on the service provided by Mandap-Keepers. The court also clarified that the tax on catering services does not amount to a tax on the sale and purchase of goods.3. Applicability of Article 366(29A)(f) Regarding the Sale of Goods:The appellant argued that Article 366(29A)(f) deems any service related to providing food and drinks as a sale of goods, thereby precluding the imposition of service tax. The court held that Article 366(29A)(f) permits the State to impose a tax on the supply of food and drinks but does not conceptually include the supply of services within the definition of the sale and purchase of goods. The court emphasized that the concept of catering includes rendering service, and the service aspect can be taxed separately from the supply aspect.4. Validity of the High Court's Application of the 'Aspect Theory':The appellant contended that the High Court erred in applying the 'Aspect Theory' from the case of Federation of Hotel and Restaurant v. Union of India, which was not relevant due to the non-consideration of Article 366(29A)(f). The court upheld the High Court's application of the 'Aspect Theory,' stating that the service aspect can be distinguished from the supply aspect, and the reliance on the Federation of Hotel and Restaurant case was appropriate.5. Whether the Service Tax Provisions Violate Articles 14 and 19(1)(g) of the Constitution:The respondents argued that the levy and collection of service tax by the Union Parliament on Mandap-Keepers is not violative of Articles 14 and 19(1)(g) of the Constitution. The court agreed with the respondents, stating that the service tax is a tax on the service provided and not on the goods or land, and therefore does not infringe upon the constitutional rights of the Mandap-Keepers.6. Interpretation of the Finance Act, 1994, and Related Notifications:The court examined the relevant sections of the Finance Act, 1994, and the notifications issued under it. The court noted that the service tax is levied on the gross amount charged by Mandap-Keepers for the use of the Mandap, including facilities provided and catering services. The court upheld the validity of the Finance Act and related notifications, stating that the service tax is within the legislative competence of Parliament and does not violate any constitutional provisions.Conclusion:The court dismissed the appeal, confirming the judgment of the High Court. The court held that the service tax on Mandap-Keepers is within the legislative competence of Parliament, does not violate Articles 14 and 19(1)(g) of the Constitution, and is not a tax on goods or land. The court upheld the application of the 'Aspect Theory' and the interpretation of the Finance Act, 1994, and related notifications.