TaxTMI 
TaxTMI 
2001 (10) TMI 20
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.... offered by the architects and chartered accountants have been brought under the tax net, which is to be charged at five per cent. of the value of the taxable service provided to any person by the architects or the chartered accountants. Section 116 of the Finance (No. 2) Act, 1998, is in challenge, as amended by Act 32 of 1994, and has first defined the said services and included them in the tax net. The relevant portions of the Finance Act are as under: "65. Definitions.--In this Chapter, unless the context otherwise requires, (5) 'architect' means any person whose name is, for the time being, entered in the register of architects maintained under section 23 of the Architects Act, 1972 (20 of 1972), and also includes any commercial concern engaged in any manner, whether directly or indirectly, in rendering services in the field of architecture; (31) 'practising chartered accountant' means a person who is a member of the Institute of Chartered Accountants of India and is holding a certificate of practice granted under the provisions of the Chartered Accountants Act, 1949 (38 of 1949), and includes any concern engaged in rendering services in the field of chartered accountancy.....
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.... entry 60 of the State List (List II), Parliament was not competent to legislate the present enactments. It will be better to see the wording of article 248 and entry 60 of the State List (List II), which read as under: "60. Taxes on professions, trades, callings and employments." Before we venture upon to consider the rival contentions, it will be better to see the legislative history of the Finance Act providing taxation on the various " services". In the budget presented in February, 1994, "service tax" was sought to be levied on stock brokers, non-life insurance agents and telephone bills. The provisions came into being with effect from July 1, 1994. It was during that budget presentation speech that the need for taxing the service sector was reiterated realising that the service sector constitutes about 40 per cent. of the national GDP which till then was tax-free. The need was all the more felt to tax the service sector because while the goods" manufactured were taxed, the service sector", which was growing rapidly and was bound to grow further was, however, generally ignored. The tax net was then widened by the Finance (No. 2) Act, 1996, to include some other service se....
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....ady covered by entry 60. According to learned counsel, the true test would be to examine as to whether the State Government could have legitimately legislated the impugned legislation. Learned counsel argues that if the answer is "yes" then, the impugned legislation is clearly beyond the legislative competence of Parliament owing to the positive language of article 248(1). For this purpose, Mr. Datar argues that sections 65, 66 and 67 should be bodily lifted from the Central enactment and treated as if it is a State enactment. Learned counsel argues that that there would be no impediment or fetter against the State Government as such an enactment would have to be held within the legislative competence of the State Legislature with the aid of entry 60. Mr. Mohan Parasaran also supported the said argument by pointing out that the language of the impugned legislation itself was clear enough to suggest that the legislation was integrally connected with the profession. Mr. Chandrasekaran, the learned senior counsel appearing on behalf of the respondents, however, defended the constitutionality of the enactment and the legislative competence of Parliament contending that in pith and su....
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....f is specific that a matter can be brought under that entry only if it is not enumerated in List II or List III and in the case of a tax if it is not mentioned in either of those lists. In a Federal Constitution like ours where there is a division of legislative subjects but the residuary power is vested in Parliament, such residuary power cannot be so expansively interpreted as to whittle down the power of the State Legislature. That might affect and jeopardise the very federal principle. The federal nature of the Constitution demands that an interpretation which would allow the exercise of legislative power by Parliament pursuant to the residuary powers vested in it to trench upon State legislation and which would thereby destroy or belittle state autonomy must be rejected." In Union of India v. Harbhajan Singh Dhillon [1972] 83 ITR 582 (SC); AIR 1972 SC 1061, the Supreme Court observes: "Be that as it may, we have the three lists and a residuary power and, therefore, it seems to us that in this context if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in L....
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....city have been made taxable and, therefore, such service cannot be considered to be separate from the profession itself because the professionals have no other task to do excepting to provide professional services and it is only on account of that, they become taxable even under the "professional tax" inflicted under entry 60. The argument goes further and says that, therefore, the tax levied against the "professional services" given in a professional capacity, i.e., as an architect or as a chartered accountant, has to be viewed as a tax on profession itself. Learned counsel pointed out that the term "services rendered in a professional capacity" is not made applicable to any other services covered in section 65(48) barring the above mentioned four services, which services are governed by specific enactments. Learned counsel also point out that while valuing the said services, section 67(r) and (s) provide that the "gross amount" charged for the services rendered in the professional capacity has been viewed as the valuation of the taxable service rendered. In short, the argument is that the service offered which has been made taxable cannot be different from the profession itself b....
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....The taxation which aimed at three services to begin with, the scope thereof has now been broadened and various services, including professional services, have now been taken into its fold. The Supreme Court observed in paragraph 8 as follows (K.P. Varghese v. ITO [1981] 131 ITR 597, 608 (SC)): "Now it is true that the speeches made by the members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible." The Supreme Court, in this case, was considering the scope of section 52(2) of the Income-tax Act, 1961. We have referred to what w....
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....uestion of income." The significance of Kamta Prasad Aggarwal's case, AIR 1974 SC 685 is that therein there is no reference to the earlier decision in Western India Theatres' case, AIR 1959 SC 582. Even Kamta Prasad Aggarwal's case, AIR 1974 SC 685 has remained uncontradicted so far. Learned senior counsel, however, contended that the observations regarding the professional tax made in Western India Theatres' case, AIR 1959 SC 582, could not be said to be the ratio decidendi of that decision. Learned counsel urges that the judgment cannot be interpreted to mean that the tax on profession must be only on the privilege of carrying on a particular profession. The further argument is that it is open to the State Government or the local boards to levy the tax on professions with reference to his "gross income" as a measure of tax. Even as regards the observations in Kamta Prasad Aggarwal's case, AIR 1974 SC 685, the contention was, the decision is not an authority for the proposition that tax on profession cannot have reference to gross professional receipts. We do not think that the comment about Kamta Prasad Aggarwal's case, AIR 1974 SC 685 or Western India Theatres' case, AIR 19....
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.... that the observations made regarding the professional tax are not as restrictive as learned counsel suggests. The Supreme Court therein clearly brought out the distinction that if there was no show, there was no tax while the professional tax, which a professional has to pay, is irrespective of whether he actually practices that profession or not. In describing the professional tax, the Supreme Court very clearly brought out the distinction between "professional tax" and "entertainment tax". Similar is the position in Kamta Prasad Aggarwal's case, AIR 1974 SC 685. In that case, the Supreme Court said a tax on profession is not necessarily connected with income. Learned counsel laid heavy stress on the word "necessarily" and pointed out that even as per the Supreme Court, a tax on profession could not be connected or linked with the income. Learned counsel also argued that there are other instances where the courts have viewed that the professional tax could be connected with income. Reliance was placed on the decisions in Sushil Chander Anand v. State Of U.P., AIR 1969 All 317 [FB] and T. K. Abraham v. State of Travancore-Cochin, AIR 1958 Ker 129 [FB]. The first is the Full Be....
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....because of entry 60 of List I1. For this purpose, learned counsel relied on the language of the sections to which we have already made a reference earlier. Learned counsel argued further that since professionals like architects, chartered accountants and cost accountants can give nothing except their "services" and if those services are made taxable then, there would be a link between those services and the profession and in effect, it would be a tax on profession. We do not agree because we are completely convinced that the apex court has been looking at the professional tax as the tax for having a privilege to carry on that profession in that State. In both the earlier referred cases of Western India Theatres' case, AIR 1959 SC 582 and Kamta Prasad Aggarwal's case, AIR 1974 SC 685, the Supreme Court has very clearly said that the professional tax has no connection or link with the income thereof. It virtually means that a privilege to practice a profession has got no relation or link with the income thereof which comes only as a result of the services provided by the professionals. Therefore, there is a clear distinction between the privilege to carry on a profession and the se....
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....ion raised by learned senior counsel for the petitioners regarding the language of the provisions levying the service tax was that under section 65(48)(p) and (s) what was made taxable was the services offered by a professional in his "professional capacity". Our attention was also invited to the provisions in respect of practising cost accountants and company secretaries, which say that only the professional services offered by them were made taxable. So also, the argument was directed by learned counsel for the petitioners that for evaluation purposes, section 67(r) and (s) provide that the gross amount charged for the services rendered by a professional in his "professional capacity" would be the valuation of the "taxable service". It was on this backdrop that we have proceeded firstly to consider as to what is the implication of a professional tax as covered by the entry 60 of List II. We have then pointed out as to what is the view taken by the Supreme Court regarding the professional tax and how it would be different from the service tax, which essentially is not qua the profession but qua the services provided by the professionals in their "professional capacity". However, t....
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.... aspect, viz., the expenditure aspect of the transaction and held the same to be falling within the union power. It held that aspect to be distinguished from the aspect of luxury or sale of goods. It observed in paragraph 19 as follows: "The submissions of the learned Attorney General that the tax is essentially a tax on expenditure and not on luxuries or sale of goods falling within the State power, must, in our opinion, be accepted. As contended by the learned Attorney General, the distinct aspect, namely, 'the expenditure' aspect of the transaction falling within the union power must be distinguished and the legislative competence to impose a tax thereon sustained." This decision of the Supreme Court is very clear to support a proposition that even if this service tax was linked with the professional income or the professional services even then, it had a "distinct aspect" of services. The tax was not on the basis that a professional was carrying on his profession like a chartered accountant or a cost accountant. The tax was, on the other hand, on the 'professional services" offered by him to the clients and the service aspect was a distinct aspect and could not be confused wi....
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....ween the service tax and the professional tax. The Supreme Court in that case made a specific reference to the observations of A. H.F. Lefroy in his Canadian Constitution as also to the passage from Laskin's Canadian Constitutional Law extracted in the judgment of Venkatachaliah J., as his Lordship then was. It also made a reference to the observations of the Federal Court in Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1939, In re [1939] FCR 18; AIR 1939 FC 1; [1938-50] 1 STC 1 (FC), which touched upon the "aspect" theory. It referred to the following observations: "Here are two separate enactments, each in one aspect conferring the power to impose a tax upon goods; and it would accord with sound principles of construction to take the more general power, that which extends to the whole of India, as subject to an exception created by the particular power, that which extends to the province only." The court also referred to the observations made in Kerala State Electricity Board v. Indian Aluminium Co. Ltd. [1976] 1 SCR 552, 573-574; AIR 1976 SC 1031, 1044 to the following effect: "...one thing that has always got to be kept clear in one's mind ....
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.... 84 of List I) and also a tax on the consumption or sale of electricity (referable to entry 53 of List I1)." In the same vein are the observations made by the apex court in paragraph 46: where the apex court dealt with the power to levy taxes with respect to property. The apex court relied upon the decision in Ralla Ram v. Province of East Punjab, AIR 1949 FC 81 to hold that there were different types of levies one on land and buildings (generally, but not necessarily, measurable by reference to the income derived or capable of being derived) and the other on the income (actually or notionally) derived from it. Similar kind of observations were made in respect of the decision in Sainik Motors v. State of Rajasthan, AIR 1961 SC 1480 in respect of the tax on passengers. We have already commented upon Sainik Motors' case, AIR 1961 SC 1480, in our separate judgment in W.P. No. 20 of 1998, etc., while we were dealing with the similar kind of challenge in respect of the service tax levied on "tour operators". The challenge there was that the tax was in relation to the profession or calling by the tour operators and, therefore, was beyond the legislative competence. We have taken a view....
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....ly given a restricted interpretation to entry 60 of List II holding that it covers only a right or privilege to practice a profession. Learned counsel very fervently argued that such a restricted interpretation could not be given to the entry. In our opinion, firstly to hold that the entry covers a tax which can be levied on account of a particular person practising a particular trade or calling would not be giving a restricted interpretation to the entry. One must in this behalf keep in mind that the entries do not create the power for taxing. They merely indicate the subjects for the legislation by Parliament and the States. Once there were clear observations available in the apex court judgments to the effect that the professional tax was for the carrying on of a profession, there would be no question of giving any other interpretation not warranted by the entry. Again, in rendering this criticism, the petitioners are ignoring article 276(2) of the Constitution of India which suggests that the taxes on profession would be irrespective of the income in the sense that whatever the income, there would be a limit to a tax and, thus, it will not be linked with the income. In viewing ....
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....rect because it is for the Legislature to select any particular service or any particular subject for taxing. The celebrated judgment in Federation of Hotel and Restaurant's case [1989] 178 ITR 97 (SC), aptly covers the subject. In paragraph 20: the apex court observes that though the taxing laws are outside article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. In the decision reported in Mafatlal Industries Ltd. v. Union of India [1997] 5 SCC 536 also, the apex court has approved the "theory of discretion" in the Legislature. There, the observations in the reported decision of R.K. Garg v. Union of India [1982] 133 ITR 239, 255; [1981] 4 SCC 675 have been approved in paragraph 87. The observations are: "...laws relating to economic activities shou....
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....er authorities under section 144A of the Income-tax Act or appearing before the Commissioner of Income-tax representing before the officers of the valuation of sale of the Income-tax Department. Learned counsel further pointed out that chartered accountants had to do multifarious jobs as drafting the appeal petitions, filing the same before the Commissioner or filing petitions under section 262 before the Commissioner of Income-tax and at times, a chartered accountant has to brief a lawyer when an appeal is filed before the Income-tax Appellate Tribunal or in the higher courts. In fact, in the petition in paragraph 3 all kinds of the services which the chartered accountants perform have been enumerated. It is then pointed out that there are no guidelines in the impugned legislation to suggest, as to which precisely is the service which is a taxable service out of the multifarious services offered by the chartered accountants. A practical difficulty was pointed out by learned counsel that chartered accountants normally issue a composite bill for all these services and such bill cannot be split up with regard to the multifarious services offered by the chartered accountants. From th....
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....ior counsel, Mr. Arvind P. Datar as also learned counsel Mr. Mohan Parasaran and other learned counsel appearing on behalf of the petitioners as also the valuable assistance given to us by learned senior Central Government standing counsel Mr. Chandrasekaran and the learned Additional Central Government standing counsel, Mr. Veeraraghavan. We record our appreciation. While the application made on behalf of the chartered accountants was being argued by learned counsel senior counsel, the other learned counsel representing the writ petitioners in the various other groups made oral representations also. All these applications are for grant of certificate under article 132 on the ground that the questions involved are substantial questions of law as to the interpretation of the Constitution. In his forceful address, learned senior counsel, Mr. Arvind P. Datar, argued that the certificate was necessary because our judgment whereby we have dismissed the writ petitions challenging the legislative competence of the service tax in respect of the chartered accountants would be affecting a large number of persons. There would be no dispute about that. Learned senior counsel with reference....