2005 (3) TMI 492 - SC - Service Tax

Constitutional validity of service-tax amendments confirmed; levy applies to goods transport and clearing/forwarding services, Article 14 not violated

GUJARAT AMBUJA CEMENTS LTD. Versus UNION OF INDIA

SC upheld the constitutional validity of the service-tax levy as amended by the Finance Acts, rejecting the challenge that the amendments unlawfully ... Clearing and forwarding agents - Constitutional validity of Sections 116 and 117 of the Finance Act, 2000 and Section 158 of the Finance Act, 2003 - striking down Rules 2(1)(d), (xii) and (xvii) of the Service Tax Rules, 1994 (as amended in 1997) - amended by imposing the tax in effect on the customers of clearing and forwarding agents and goods transport operators - legislative measure to offend Article 14 of the Constitution - levy of service tax on carriage of goods by transport operators was legislatively competent - HELD THAT:- As we have said, Rule 2(1)(d) (xii) and (xvii) had been held to be illegal in Laghu Udhyog Bharati [1999 (7) TMI 1 - SUPREME COURT] only because the charging provisions of the Act provided otherwise. Now that the charging section itself has been amended so as to make the provisions of the Act and the Rules compatible, the criticism of the earlier law upheld by this Court can no longer be availed of. There is thus no question of the Finance Act, 2000 overruling the decision of this Court in Laghu Udhyog Bharati as the law itself has been changed. A legislature is competent to remove infirmities retrospectively and make any imposition of tax declared invalid, valid. This has been the uniform approach of this Court. Such exercise in validation must of course also be legislatively competent and legally sustainable. Those issues are considered separately. On the first question, we hold that the law must be taken as having always been as is now brought about by the Finance Act, 2000. The statutory foundation for the decision in Laghu Udhyog Bharati has been replaced and the decision has thereby ceased to be relevant for the purposes of construing the present provisions (vide Ujagar Prints v. Union of India). Therefore subject to our decision on the question of the legislative competence of Parliament to enact the law, and assuming the amendments in 2003 to be legal for the time being, we reject the submission of the writ petitioners that by the amendments brought about by Sections 116 and 117 of the Finance Act, 2000, the decision in Laghu Udhyog Bharati has been legislatively overruled. It is also not the writ petitioners' case that within the separate classes of services covered by the different clauses in Section 65(41), there is any discrimination or that the law operates unequally within the classes. According to them the discrimination lies in the method of collection of the tax followed. But as we have said this is not of the essence of the tax and the mere difference in the machinery provisions between the different classes of service cannot found a challenge of discrimination. If the legislature thinks that it will facilitate the collection of the tax due from such specified traders on a rationally discernible basis, there is nothing in the said legislative measure to offend Article 14 of the Constitution. It is therefore outside the judicial ken to determine whether the Parliament should have specified a common mode for recovery of the tax as a convenient administrative measure in respect of a particular class. That is ultimately a question of policy which must be left to legislative wisdom. This challenge also accordingly fails. Although the challenge to the constitutional validity and legality of the levy of service tax is rejected, the writ petitioners have some subsidiary complaints. They say that although the levy of service tax from the users of the services rendered by the goods transport operators was introduced with effect from 16th November, 1997, the levy was exempted for the period subsequent to 2nd June, 1998 in view of the notification dated 2nd June, 1998 which is still operative. Yet the respondents had raised demands for service tax for periods subsequent to 2nd June, 1998. It has been conceded by the Union of India that the amendments made in the Act would have to be read alongwith the notifications so that the levy and collection of service tax would be only in respect of services rendered by goods transport operators between the period from 16th November, 1997 to 2nd June, 1998. Similarly there can be no tax liability on users of the services of the clearing and forwarding agents beyond 1-9-1999 when by Notification No. 7/99, dated 23-8-1999, the levy of service tax on the services provided by clearing and forwarding agents were exempted. Furthermore the liability to pay interest or penalty on outstanding amounts will arise only if the dues are not paid within the period of two weeks from the order passed by this Court on 17th November, 2003. In those cases in which the tax may have been paid but not refunded to the writ petitioners, for whatever reason, there is no question of levy of any interest or penalty at all. Issues Involved:1. Constitutional validity of Sections 116 and 117 of the Finance Act, 2000, and Section 158 of the Finance Act, 2003.2. Legislative competence of Parliament to enact the law.3. Discriminatory operation of the service tax levy on specific services.4. Validity of retrospective amendments and validation provisions.5. Subsidiary complaints regarding exemption periods and penalties.Detailed Analysis:1. Constitutional Validity of Sections 116 and 117 of the Finance Act, 2000, and Section 158 of the Finance Act, 2003:The writ petitions challenged the constitutional validity of Sections 116 and 117 of the Finance Act, 2000, and Section 158 of the Finance Act, 2003, which sought to override the Supreme Court's decision in Laghu Udyog Bharati v. Union of India. The petitioners argued that the amendments did not remove the basis of the Laghu Udyog Bharati decision, which struck down Rules 2(1)(d), (xii), and (xvii) of the Service Tax Rules, 1994.The Court noted that the amendments in the Finance Act, 2000, and 2003 modified the definitions and provisions to align the Act with the Rules, thereby removing the conflict identified in Laghu Udyog Bharati. The amendments changed the charging provisions to make the recipient of the services liable for the tax, thus removing the basis for the earlier decision.2. Legislative Competence of Parliament to Enact the Law:The petitioners contended that the imposition of service tax on goods transport operators encroached upon the State Government's power under Entry 56 of List II of the Seventh Schedule to the Constitution. They argued that Parliament could not use the residuary Entry 97 of List I to levy a tax on the transport of goods.The Court held that the service tax was not a tax on goods and passengers but on the service of transportation itself. The distinction between the object of tax, the incidence of tax, and the machinery for collection was emphasized. The Court concluded that the service tax fell within the residuary power of Parliament under Entry 97 of List I, as it was a tax on the event of service in connection with the carriage of goods.3. Discriminatory Operation of the Service Tax Levy on Specific Services:The petitioners argued that the service tax operated in a discriminatory manner by singling out customers of goods transport operators and clearing and forwarding agents while exempting recipients of other similar services.The Court rejected this argument, stating that the legislature has wide discretion in classification for tax purposes. The Court found no hostile discrimination within the classes of services covered by the different clauses in Section 65(41). The difference in the machinery provisions for tax collection between different classes of service did not constitute discrimination.4. Validity of Retrospective Amendments and Validation Provisions:The Court examined whether the retrospective amendments and validation provisions in Sections 116 and 117 of the Finance Act, 2000, and Section 158 of the Finance Act, 2003, were valid. It was noted that validation of a tax declared illegal could be done if the grounds of invalidity were removed.The Court held that the amendments effectively removed the basis for the earlier decision in Laghu Udyog Bharati by aligning the Act's provisions with the Rules. The statutory foundation for the decision had been replaced, making the decision irrelevant for construing the present provisions. The amendments were found to be within the legislative competence of Parliament.5. Subsidiary Complaints Regarding Exemption Periods and Penalties:The petitioners raised issues about the levy of service tax beyond the exemption periods and the imposition of penalties. The Court clarified that the levy of service tax on services rendered by goods transport operators was only applicable between 16th November 1997 and 2nd June 1998. Similarly, the tax on services by clearing and forwarding agents was exempted beyond 1st September 1999.The Court also addressed the issue of interest and penalties, stating that liability for interest or penalties would arise only if dues were not paid within the specified period. In cases where tax was paid but not refunded, there would be no liability for interest or penalties.Conclusion:The writ petitions were dismissed, upholding the constitutional validity and legislative competence of the amendments to the Finance Act. The Court provided clarifications regarding the exemption periods and penalties, ensuring that the levy and collection of service tax were aligned with the notifications and amendments.