2000 (12) TMI 1 - HC - Service Tax

Court upholds constitutionality of service tax on professional services, dismisses discrimination claims.

CHARTERED ACCOUNTANTS ASSOCIATION Versus UNION OF INDIA

The Court upheld the constitutional validity of Sections 88 of the Finance Act, 1997 and 116 of the Finance (No. 2) Act, 1998, confirming Parliament's ... Service Tax – Services of Architect and Chartered Accountant (1) Legislative competence (2) Constitutionally validity Issues Involved:1. Constitutional validity of Section 88 of the Finance Act, 1997 and Section 116 of the Finance (No. 2) Act, 1998.2. Legislative competence of Parliament to levy service tax on professions.3. Alleged discriminatory treatment in the imposition of service tax.4. Alleged violation of freedom of profession under Article 19(1)(g).5. Alleged arbitrariness and burden of tax recovery on service providers.6. Exclusion of certain services from the tax net without specified reasons.Issue-wise Detailed Analysis:1. Constitutional Validity of Section 88 of the Finance Act, 1997 and Section 116 of the Finance (No. 2) Act, 1998:The petitioners challenged the constitutional validity of these sections, which levied service tax on consulting engineers, architects, and practicing chartered accountants. The Court examined the legislative competence of Parliament under Article 248 and Entry 97 of the Union List, noting that service tax is distinct from professional tax, which is within the State's purview under Entry 60 in List II. The Court upheld the validity of the impugned provisions, stating that the tax on services rendered by professionals is different from the tax on professions.2. Legislative Competence of Parliament to Levy Service Tax on Professions:The petitioners argued that the impugned levy was within the State Legislature's competence under Entry 60 in List II, which covers taxes on professions. The Court, however, found that the service tax was on the services rendered and not on the profession itself. It distinguished between a tax on the profession (a direct tax) and a service tax (an indirect tax), concluding that the latter falls within the legislative competence of Parliament under Article 248 read with Entry 97 of the Union List.3. Alleged Discriminatory Treatment in the Imposition of Service Tax:The petitioners contended that the service tax was discriminatory as it applied only to qualified professionals and not to non-qualified persons rendering similar services. The Court rejected this argument, stating that qualified professionals and non-qualified persons do not belong to the same class. It emphasized that the classification had a rational nexus with the object of revenue collection, given the higher fees likely charged by qualified professionals.4. Alleged Violation of Freedom of Profession under Article 19(1)(g):The petitioners claimed that the levy of service tax violated their freedom to practice their profession. The Court dismissed this contention, explaining that the service tax is an indirect tax that can be passed on to the clients, and does not impose any unreasonable restrictions on the practice of the profession.5. Alleged Arbitrariness and Burden of Tax Recovery on Service Providers:The petitioners argued that the provisions were arbitrary as they placed the burden of tax recovery on service providers with harsh penal consequences for default. The Court found no merit in this argument, noting that the legislature has wide discretion in taxation matters and that the service tax was a legitimate exercise of legislative power.6. Exclusion of Certain Services from the Tax Net Without Specified Reasons:The petitioners pointed out that while certain professional services were included in the service tax net, others like goods transport operators and outdoor caterers were excluded. The Court held that the legislature has the discretion to select the objects of taxation and that such exclusions did not render the tax arbitrary or discriminatory.Conclusion:The Court dismissed the petitions, upholding the constitutional validity of the impugned provisions and confirming the legislative competence of Parliament to levy service tax on the services rendered by professionals. It also rejected the claims of discrimination, violation of freedom of profession, and arbitrariness. The interim relief was vacated, and the petitioners were given until 28-02-2001 to comply with the tax payment without penal consequences.