2007 (8) TMI 1 - SC - Service Tax

Supreme Court affirms Parliament's power on service tax, distinguishes from profession tax.

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

The Supreme Court upheld Parliament's legislative competence to impose service tax under Entry 97 of List I, ruling it distinct from taxes on professions ... Parliament has legislative competence to levy service tax on chartered accountants, cost accountants and architects. 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.