2007 (8) TMI 1 - SC - Service Tax

Service tax valid under Entry 97; Entry 60 limited to taxing professional status or privilege, not services

All India Federation of Tax Practitioners & Ors Versus Union of India & Ors

SC held that the levy of service tax is constitutionally distinct from state 'taxes on professions' under Entry 60, List II. Entry 60 permits the State to ... Levy of service tax on practising chartered accountants and architects - Constitutional status of the levy of service tax and the legislative competence of Parliament to impose service tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to the Constitution - Meaning of the words Taxes 'on' professions - Distinction between taxes on professions and service tax - HELD THAT:- Entry 60 List II refers to taxes on professions etc. It is the tax on the individual person/firm or company. It is the tax on the status. A chartered accountant or a cost accountant obtains a licence or a privilege from the competent Body to practice. On that privilege as such the State is competent to levy a tax under Entry 60. However, as stated above, Entry 60 is not a general entry. It cannot be read to include every activity undertaken by a chartered accountant/cost accountant/architect for consideration. Service tax is a tax on each activity undertaken by a chartered accountant/cost accountant or an architect. The cost accountant/chartered accountant/architect charges his client for advice or for auditing of accounts. The meaning of the word 'Taxes on professions, callings, trades and employments'. It also indicates two aspects of the same item, namely, pension. One aspect falls in the category of 'employment', the other falls in the category of 'income'. Therefore, there is no merit in the contention advanced on behalf of the appellant that the widest possible interpretation should be given to the word 'profession' in Entry 60 List II. We have to keep in mind while interpreting the Entries in the three Lists the distinction between the general entry and the taxing entry. A tax on profession can be imposed if a person carries out a profession whereas a tax on income can be imposed only if there is income. Therefore, a tax on profession is irrespective of the question of income. Article 276 enables the State Legislature to make laws for imposition of taxes on profession, for the benefit of the State, Municipality, District Board etc. by stating that such law shall not be invalid on the ground that it relates to a tax on income. There is a distinction between a tax on professions, trades, callings and employments and a tax on income arising out of such professions, trades etc.. In the former case, it will have to be paid by any person practising that trade, profession etc., whether he derives any income from it or not. This is where the above example of pensioner becomes relevant. A pensioner does not carry out any profession, trade, business or calling. A tax on profession is not a tax on employment. At the time, the tax is levied, the pensioner is not in employment, but he receives an amount of pension that receipt constitutes his income though it might be for past services from an employment. In the present case, we are concerned with the Constitutional status of the levy, namely, service tax. The nomenclature of a levy is not conclusive for deciding its true character and nature. For deciding the true character and nature of a particular levy, with reference to the legislative competence, the court has to look into the pith and substance of the legislation. The powers of Parliament and State Legislatures are subject to Constitutional limitations. Tax laws are governed by Part XII and Part XIII. Article 265 takes in Article 245 when it says that the tax shall be levied by the authority of law. To repeat, various entries in the Seventh Schedule show that the power to levy tax is treated as a distinct matter for the purpose of legislative competence. This is the underlying principle to differentiate between the two Groups of entries, namely, general entries and taxing entries. We are of the view that taxes on services is a different subject as compared to taxes on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry 92C/97 of List I operate in different spheres. Issues Involved:1. Constitutional status and legislative competence of Parliament to levy service tax.2. Interpretation of relevant constitutional entries and articles.3. Distinction between taxes on professions and service tax.4. Applicability of Article 276 and its significance.5. Analysis of relevant judgments cited by the appellants.Issue-wise Detailed Analysis:1. Constitutional Status and Legislative Competence of Parliament to Levy Service Tax:The primary issue in this appeal is whether Parliament has the legislative competence to impose service tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to the Constitution. The Supreme Court upheld the legislative competence of Parliament, stating that service tax falls under Entry 97, List I, and not under Entry 60 of List II. The Finance Acts of 1994 and 1998, which introduced service tax, were thus constitutionally valid.2. Interpretation of Relevant Constitutional Entries and Articles:The relevant constitutional provisions include Article 246, Article 265, Article 268A, and various entries in the Seventh Schedule. The Supreme Court emphasized that taxation entries in the Seventh Schedule are distinct and should be given a schematic interpretation. Entry 60 of List II pertains to taxes on professions, trades, callings, and employments, while Entry 97 of List I is a residuary entry that allows Parliament to legislate on matters not enumerated in Lists II or III. The Court held that service tax is a tax on the activity of providing services, not on the service provider's status, and thus falls under Entry 97.3. Distinction Between Taxes on Professions and Service Tax:The Court clarified that taxes on professions, trades, callings, and employments under Entry 60 of List II are taxes on the status or privilege of practicing a profession, not on the activities performed within that profession. In contrast, service tax is levied on each instance of service provided, making it a tax on the activity itself. This distinction aligns with the principle of equivalence, which equates the consumption of goods with the consumption of services, both satisfying human needs.4. Applicability of Article 276 and Its Significance:Article 276 allows states to levy taxes on professions, trades, callings, and employments, but it does not extend to taxing the activities performed within those professions. The Court noted that Article 276(1) ensures that state laws imposing such taxes are not invalidated on the grounds of being taxes on income. However, this does not encompass service tax, which is a tax on the activity of providing services.5. Analysis of Relevant Judgments Cited by the Appellants:The appellants cited several judgments to support their argument that service tax should fall under Entry 60 of List II. However, the Court distinguished these cases, noting that they did not address the specific issue of service tax. For instance, the Court referred to the Tamil Nadu Kalyana Mandapam Assn. case, which upheld the validity of service tax under Entry 97 of List I. The Court also discussed the principle of equivalence and the distinction between general and taxing entries, reinforcing that service tax is a tax on the activity of providing services, not on the profession itself.Conclusion:The Supreme Court dismissed the appeal, affirming that Parliament has the legislative competence to levy service tax under Entry 97 of List I. The Court also noted that the Constitution (Eighty-eighth Amendment) Act, 2003, which introduced Article 268A and Entry 92C, further clarifies that Entry 60 of List II and Entry 92C of List I operate in different spheres. The appeal was dismissed with no order as to costs.