2013 (2) TMI 356 - HC - Service Tax

Court affirms constitutionality of Finance Act provision on service tax valuation, rejects discrimination claims

SECURITY AGENCIES ASSOCIATION Versus UNION OF INDIA

The court upheld the constitutional validity of Section 67 of the Finance Act, 1994, and the inclusion of expenses and salaries in the 'Gross amount' for ... Constitutional validity of Section 67 - Expenses and salary paid to the Security Guards by Security Agency – Petitioner’s Challenge is against fixation of the value of ‘taxable service’ under Section 67, reckoning the ‘Gross amount, without segregating the expenses towards salary and statutory payments under the ESI/EPF, which constitute the major portion of the total figure involved - Contention of the petitioner is that they are virtually ‘Man Power Recruiting Agents’ and that their service should be valued on the quantum of the commission they receive – Held that:- How the tax has to be realised, what should be the manner of imposition, what should be the extent of liability to be mulcted upon, who are the persons/class/individuals to be brought within the service tax net etc., are matters for the Government to decide, as a measure of policy. It is in furtherance of the said policy, that the law has been enacted by the Parliament by virtue of the power conferred upon it as per the residual entry, i.e., Entry 97 of List I of the Seventh Schedule. As observed in T.N. Kalyana Mandapam Assn. v. Union of India and Others[2004 (4) TMI 1 - SUPREME COURT OF INDIA] 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 the Parliament in the matter. Further Man Power Recruiting Agency service is a separate entity which was brought within the Service Tax Net w.e.f. 7-7-1997 as per the Finance Act, 1997, whereas the Security Agency Service was brought in for the first time only w.e.f. 16-10-1998, as per the Finance Act, 1998. Both the above terms have been separately defined under Section 65 – In the case of the latter, the Security Agency is the ‘Employer’ of the security personnel deployed to cater to the requirements of the service receivers, for which the service receivers effect the payment to the service providers, as per the terms of the contract – The ‘Master and Servant relationship is between the Security Agency and the Security Personnel engaged and not between the Service Receivers and the Security Personnel. The service providers are very much authorised and entitled to pass on the liability towards salary and statutory payments to the ‘Service Receivers’ by raising the Bills including such amounts payable as Service tax. The role of the Security Agencies like the petitioners is only to act as ‘agents’ in the matter of collection of Service tax. - Decided in favor of revenue. Issues Involved:1. Constitutional validity of Section 67 of the Finance Act, 1994.2. Inclusion of expenses and salary in the 'Gross amount' for service tax valuation.3. Alleged discrimination against security agencies.4. Legislative competence of the Parliament to enact the law.5. Validity of the statutory prescription without segregating expenditure for service tax computation.Issue-wise Detailed Analysis:1. Constitutional Validity of Section 67 of the Finance Act, 1994:The petitioners challenged the constitutional validity of Section 67 of the Finance Act, 1994, arguing that including expenses and salaries in the 'Gross amount' for service tax valuation was ultra vires to the Constitution of India. They contended that this inclusion was violative of Articles 14 and 19(1)(g) of the Constitution, demonstrating hostile discrimination towards security agencies.2. Inclusion of Expenses and Salary in the 'Gross Amount' for Service Tax Valuation:The petitioners argued that the tax liability should be based solely on the actual charges or commission realized by them for providing security personnel. They claimed that the bulk of the amounts received were spent on salaries and statutory payments, which should be excluded from the 'Gross amount' for service tax computation. The respondents, however, maintained that the statutory prescription under Section 67, which includes the 'Gross amount' without segregating the expenditure, was valid and in line with the legislative policy.3. Alleged Discrimination Against Security Agencies:The petitioners contended that the inclusion of salaries and statutory payments in the 'Gross amount' for service tax purposes was discriminatory against security agencies, unlike other service providers who were granted specific exemptions. The court, however, found no substantial evidence of hostile discrimination and held that the measure of taxation does not affect the nature of taxation.4. Legislative Competence of the Parliament to Enact the Law:The respondents argued that the Parliament had the legislative competence to enact the Finance Act, 1994, under Entry No. 97 of List I of the Seventh Schedule of the Constitution of India. The court upheld this view, stating that the legislative competence of the Parliament was not in question and that the statutory provisions were enacted in line with the government's policy.5. Validity of the Statutory Prescription Without Segregating Expenditure for Service Tax Computation:The court examined the validity of the statutory prescription under Section 67, which includes the 'Gross amount' for service tax valuation without segregating expenditure. It referred to judicial precedents, including decisions by the Madras High Court and the Supreme Court, which upheld the legislative competence and the validity of such statutory provisions. The court concluded that the measure of taxation, as determined by the government, was a policy decision and beyond the scope of judicial challenge.Conclusion:The court dismissed the writ petitions, finding no merit in the challenges raised by the petitioners. It upheld the constitutional validity of Section 67 of the Finance Act, 1994, and the inclusion of expenses and salaries in the 'Gross amount' for service tax valuation. The court emphasized that the legislative competence of the Parliament to enact the law was not in question, and the statutory provisions were in line with the government's policy. The petitioners' arguments of discrimination and the need to segregate expenditure were found to be unfounded, and the court reiterated that the measure of taxation is a matter of policy beyond judicial scrutiny.