2015 (12) TMI 1625 - HC - VAT and Sales Tax

Validity of Tax on DTH Services Upheld, Exclusion of Cable Operators Struck Down

The court found that the Kerala Tax on Luxuries Act's levy on Direct to Home Services (DTH) was constitutionally valid under Entry 62 of List II of the ... Constitutional validity of the Kerala Tax on Luxuries Act - levy of luxury tax on Direct to Home Services - legislative incompetence of the State Legislature - whether the cable TV connection enjoyed by a customer could be termed as a luxury enjoyed by the Customer? - Held that: - The levy of luxury tax under the same enactment– The Kerala Tax on Luxuries Act, 1976– on broadcasting services provided by cable operators, was also found to be within the legislative competence of the State legislature. Inasmuch as it is the case of the petitioners in these writ petitions that the services rendered by them are similar to the services provided by the cable operators, I do not see any reason to deviate from the views expressed by the division bench of this court on the legislative competence of the State legislature in introducing the levy of luxury tax on DTH services. The levy of service tax is traceable to Entry 97 of List I of the VIIth Schedule to the Constitution, which is a residual entry. The power, to legislate under a residual entry in List I, is available to the Parliament only in respect of matters that are not relatable to any specific entry in Lists II and III. Thus, once it is found that the legislation in question is relatable to Entry 61 of List II, then the Legislative competence of the State Legislature is absolute and it is the validity of the Central Legislation, in respect of the same field of legislation, that would come under a cloud. Even if the levy of service tax is traceable to Entry 92C of List I of the VII Schedule, an application of the doctrine of pith and substance would clearly indicate that the levy is essentially on the luxury provided through the provision of DTH services. The aspects theory of taxation that was recognised by the Supreme Court in Federation of Hotel & Restaurant Association of India v. Union of India – [1989 (5) TMI 50 - SUPREME Court] would operate against the petitioners to find that the State legislature had the competence to legislate on the aspect of “luxury” provided by the petitioners to their customers, notwithstanding that the Parliament may have the legislative competence to legislate on the aspect of “service” rendered to the customers. While the State Legislature has the legislative competence to levy a tax on the luxury provided by a Direct to Home [DTH] Broadcasting service provider, the levy of luxury tax on DTH service providers to the exclusion of a similar levy on cable operators with effect from 01.04.2011 is discriminatory and violative of Article 14 of the Constitution of India - Taxes, if any paid by the petitioners during the period from 01.04.2011, shall be refunded. The notice demanding tax for the period from 1.4.2010 to 31.3.2011 was stayed during the pendency of the writ petition, with liberty to the respondents to pass fresh orders after complying with the rules of natural justice, and in particular, after affording the petitioner an opportunity of being heard - appeal allowed by way of remand. Issues Involved:1. Constitutional validity of the Kerala Tax on Luxuries Act as it pertains to DTH services.2. Legislative competence of the State Legislature to levy luxury tax on DTH services.3. Discrimination between DTH operators and cable operators under Article 14 of the Constitution.Issue-wise Detailed Analysis:1. Constitutional Validity of the Kerala Tax on Luxuries Act:The writ petitions challenge the constitutional validity of the Kerala Tax on Luxuries Act, specifically its application to Direct to Home Services (DTH). The petitioners, companies providing DTH services, argue that the Act's provisions unfairly target DTH services while excluding cable operators from similar taxation. The court examines the legislative history and the amendments to the Act, noting that a similar levy on cable operators was previously upheld by the court but later amended to exclude operators with fewer than 7500 connections. The court ultimately finds that the levy of luxury tax on DTH services is within the legislative competence of the State Legislature, as it falls under Entry 62 of List II of the VIIth Schedule to the Constitution of India.2. Legislative Competence of the State Legislature:The petitioners argue that the provision of DTH services is already subject to service tax under the Finance Act, 1994, and thus should not be subject to luxury tax by the State Legislature. The court references the Supreme Court's decisions in Godfrey Philips India Limited and State of West Bengal v. Purvi Communication P. Ltd., which establish that Entry 62 of List II permits the levy of tax on activities of indulgence, enjoyment, or pleasure. The court also notes that the levy of service tax is traceable to Entry 97 of List I, a residual entry, and does not preclude the State Legislature from imposing a luxury tax on DTH services. The court concludes that the State Legislature has the competence to levy a tax on the luxury provided through DTH services.3. Discrimination Between DTH Operators and Cable Operators:The petitioners contend that the levy of luxury tax on DTH operators, while excluding cable operators, is discriminatory and violates Article 14 of the Constitution. The court examines the similarities between DTH and cable services, noting that both provide similar content and are regulated by the same authority (TRAI). The State Government argues that the technological differences between the two services justify the different tax treatment. However, the court finds that these technological differences do not affect the content of the luxury provided to subscribers. The court concludes that the classification based on technological differences is not a valid basis for tax discrimination and that the levy on DTH operators, to the exclusion of cable operators, is discriminatory and violates Article 14.Conclusion:The court allows the writ petitions, declaring that while the State Legislature has the competence to levy a tax on the luxury provided by DTH services, the exclusion of cable operators from a similar levy is discriminatory and violates Article 14 of the Constitution. Taxes paid by the petitioners from 01.04.2011 shall be refunded, subject to the petitioners proving that they would not be unjustly enriched by the refund. The court also quashes the demand notice for the period from 01.04.2010 to 31.03.2011 and directs the respondents to pass fresh orders after hearing the petitioner.