TaxTMI 
TaxTMI 
TaxTMI 
2002 (1) TMI 15
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....ervices was imposed. The Raja Chelliah Committee had observed that indirect tax at the Central level should be broadly neutral in relation to production and consumption of goods and should, in course of time, cover commodities and services. It felt that the country should move towards full-fledged Value Added Tax (VAT) in due course covering services and commodities. It was envisaged that as the Central excise on commodities would get gradually transformed into a value added tax at the manufacturing level, service tax will get woven into the system. The Committee, therefore, recommended charging of tax on services such as advertising, insurance, share broking, telecom, etc., to begin with. The purpose of service tax is to broaden the tax base, augment revenue and enhance participation of citizens in the economic development of the nation. It was estimated that as much as 40 percent of the GDP was in the service sector and had remained unexploited and out of the tax net. The Finance (No. 2) Act, 1996, extended the scope of the levy of service tax by covering the services of advertising agencies, courier agencies and pager services. In the Finance Act, 1997, the net was widened furth....
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.... the taxable service provider. Section 67 indicates the manner of valuation of taxable services. Clause (r) of section 67 provides that in relation to the service provided by a practising chartered accountant to a client, the value of taxable service shall be the gross amount received by such accountant from the client for services rendered in professional capacity in any manner. Section 68 makes it obligatory on every person providing taxable service to pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed. Originally, when introduced in the Finance Act, 1994, the service tax had to be collected by the provider and paid to the Central Government, in much the same manner as tax deducted at source. In the Finance (No. 2) Act, 1998, the levy is on the service provider himself, and he is no longer treated as a collection agent, so to say. Section 69 requires every service provider liable to pay service tax to register with the appropriate authority, the Superintendent of Central Excise. Section 70 provides for rendering of periodical returns. Sections 71, 72, 73 and 74 provide for the procedure for assessment and rectification o....
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....uld amount to double taxation on the income earned by the chartered accountants and, therefore, unconstitutional. Legislative competence of Parliament: The legislative competence of Parliament is determined by article 246 read with article 248 and List I of the Seventh Schedule. By reason of article 246(1), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I (Union List) of Schedule VII. By reason of article 248, Parliament has also been invested with residuary powers and has exclusive power to make any law in respect of any matter not enumerated in the Concurrent List or State List, including imposition of a tax not mentioned in either of those lists. It is now settled law that when it comes to the question of determining the legislative competence of Parliament, it is unnecessary to search for entries in List I (Union List) or List III (Concurrent List), and the exercise need be limited to ensuring that Parliament has not encroached upon a subject relatable in pith and substance to an entry in List II (State List). In other words, any legislation with regard to subjects enumerated in the State List is excluded from Parliament's ....
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....e rider that in construing the words in a constitutional enactment conferring legislative power, the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude. Placing reliance on these two judgments, learned counsel for the petitioner contends that the widest liberal construction must be put on the words in entry 60 of List II in the Seventh Schedule to the Constitution. The entry uses the words "taxes on professions, trades, callings and employments". This would include tax on profession and professional service also. The service tax levied by the Finance (No. 2) Act, 1998, is nothing but a tax on the professional services rendered by practising chartered accountants, and, therefore, relatable only to entry 60 of List II in the Seventh Schedule. Consequently, it is beyond the legislative competence of Parliament. St) goes the submission of Shri. Paikeday. The above contention is met by the learned Additional Solicitor-General with equal emphasis. He does not dispute that interpreting a constitutional entry must be a liberal process and widest amplitude must be given while interpreting a constitutional entry which empower....
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....s and a law which imposes tax on the act of entertaining is within the entry, whether it falls on the giver or the receiver of that entertainment. It also rejected the contention that the imposition of the tax was for the privilege of carrying on any trade or calling and held, "it is a tax imposed on every show, that is to say, on every instance of the exercise of the particular trade, calling or employment. If there is no show, there is no tax". It observed, "a lawyer has to pay tax or fee to take out a licence irrespective of whether or not he actually practises. That tax is a tax for the privilege of having the right to exercise the profession if and when the person taking out the licence chooses to do so". Entry 60 of List II must also be interpreted in the light of article 276 of the Constitution. Article 276 was specifically enacted to validate a law made by the Legislature of a State relating to tax in respect of profession, trade, calling or employment, and to immunize it against challenge on the score of being a law relating to tax on income, a subject in the exclusive purview of the Central Government. Clause (2) of article 276, however, imposed a ceiling of Rs. 2,500 p....
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....t II of the Seventh Schedule, or a tax on the consideration paid for the purchase of goods constituting an impost of the nature envisaged in entry 54 of List II, and, therefore, outside the legislative competence of Parliament. The Constitutional Bench of the Supreme Court rejected the challenge, elaborating the theory of "aspects legislation". The Supreme Court observed: "30. In Lefroy's 'Canada's Federal System', the learned author referring to the 'aspects of legislation' under sections 91 and 92 of the Canadian Constitution, i.e., British North America Act, 1867, observes that 'one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of legislative power is that subjects which in one aspect and for one purpose fall within the power of a particular Legislature may in another aspect and for another purpose, fall within another legislative power'. Learned author says: '...that by "aspect" must be understood the aspect or point of view of the legislator in legislating the object, purpose, and scope of the legislation that the word is used subjectively of the legislator, rather than objectively of the ma....
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....ing from the composite nature of a statute, one as regards the preclusory impact of federal law on provincial measures bearing on constituents of federally regulated conduct, the other to identify what parts of the whole making up a "matter" bring it within a class of subjects....' 37. It is trite that the true nature and character of the legislation must be determined with reference to a question of the power of the Legislature. The consequences and effects of the legislation are not the same thing as the legislative subject matter. It is the true nature and character of the legislation and not its ultimate economic results that matters. 38. Indeed, as an instance of different aspects of the same matter, being the topic of legislation under different legislative powers, reference may be made to the annual letting value of a property in the occupation of a person for his own residence being, in one aspect, the measure for levy of property tax under State law and in another aspect constituting the notional or presumed income for the purpose of income-tax." The Supreme Court reiterated the above principles laid down in Sainik Motors v. State of Rajasthan, AIR 1961 SC 1480, while ....
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....of the Government of India Act, 1935 (which corresponds to article 176(1)), was relied upon by the Corporation of Madras. The Supreme Court rejected the argument by holding that that section would assist the State only if the tax imposed were one on a profession, trade calling, or employment, and in that event the section provided that such a tax shall not be deemed to be a tax on income, but where the tax imposed is one not on a profession, etc., at all, it did not mean that the State might levy a tax on income and call it profession tax. In our view, the judgment of the Supreme Court in C. Rajagopalachari's case [1964] 53 ITR 454 is clearly distinguishable. The appellant, Sri Rajagopalachari had ceased to be a practising professional and, presumably, the licence to practice a profession had been surrendered or cancelled. Thus, he was no longer in a profession. The attempt of the Corporation to tax the receipt of pension relatable to his past employment or profession was obviously not connected with the privilege of being in the profession, actively or passively. Hence, the levy was held to be unrelatable to entry 60 in List II of the Seventh Schedule. In our view, this judgment d....
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....n that "service" would be covered by the expression 'employment" used in entry 60 of List II. The contention of learned counsel for the petitioner is that if service is equivalent to employment, then tax on service would be relatable to entry 60 in List II of Schedule VII, and, therefore, constitutionally beyond the legislative competence of Parliament. We have already pointed out that under "aspect legislation", it is open to different Legislatures to legislate with regard to different aspects of the same subject matter. Even assuming that "service" is contemplated by term "employment" in entry 60 in List II, it only means that the aspect of entering into service would be within the taxing competence of the State Legislature and nothing beyond that. The judgment of the Supreme Court in Shivananjundappa v. State of Karnataka [1993] Suppl. 1 SCC 617 was relied upon to show that the classification under article 14 would be permissible if the classification for the purpose of levy of profession tax on lawyers practising within the Bangalore Urban Agglomeration differently from those practising within the municipal limits of the District Headquarters, and also classification based on....
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....Parliament to legislate for a tax thereupon. The contention of Mr. Paikeday, must therefore, fail. Mr. Paikeday, then contended that tax on profession, trade, callings and employments, within the meaning of entry 60 in List II, can only fall upon a person, not merely because of entry into the profession, but also his rendering services in the profession. He would have us read the words in entry 60 of List II ejusdum generis. He contends that to profession, trade, calling or employment, there is one thing in common, i.e., service, which is most of the time paid for. Thus, according to Mr. Paikeday, placing a liberal interpretation on entry 60 of List II, it would include a tax on service and the income consequent from such service. Hence, he submits that there is no scope for exercise of residuary powers either under article 248 or relatable to entry 97 of List I of Schedule VII. It is not possible to accept this contention. This contention, arises, because of not keeping in mind the "aspect doctrine" which the Supreme Court, borrowing from Canadian authorities, had approvingly postulated back in the decision of Federation of Hotel and Restaurant Association of India [1989] 178 ....
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....per with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. The Supreme Court was pleased to observe in S. R. Bommai's case, AIR 1994 SC 1918: "Federalism envisaged in the Constitution of India is a basic feature in which the Union of India is permanent within the territorial limits set in article I of the Constitution and is indestructible. The State is the creature of the Constitution and the law made by articles 2 to 4 with no territorial integrity, but a permanent entity with its boundaries alterable by a law made by Parliament. Neither the relative importance of the legislative entries in Schedule VII, Lists I and II of the Constitution, nor the fiscal control by the Union per se are decisive to conclude that the Constitution is unitary. The respective legislative powers are traceable to articles 245 to 254 of the Constitution. The status qua the Constitution is federal in structure and independent in the exercise of legislative and executive power." It is necessary to keep in mind the context in which these observations were mad....
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.... article 246(1), the residuary power contained in article 248 and entry 97, List I, must be construed as meaning power in respect of matters not enumerated in any of the three Lists. Such a residuary power cannot, therefore, be ordinarily claimed in respect of a matter already dealt with under an article or an entry in any one of the three Lists." There is no difficulty in applying this principle. In fact, Harbhajan Singh Dhillon's case [1972] 83 ITR 582 (SC) was considered and reiterated in Federation of Hotel and Restaurant Association of India's case [1989] 178 ITR 97 (SC). The principle, merely, is that the residuary power does not arise if there is an enumerated entry. It is nobody's case that there is an enumerated entry in any of the Lists in the Seventh Schedule relatable to "service tax". In Goodricke Group Ltd. v. State of West Bengal [1995] 98 STC 32; [1995] Suppl. (1) SCC 707, the legislative competence to impose a cess on a tea estate at a prescribed rate for each kilogram of green tea leaves produced in such estate was challenged. The question was, whether it amounted to a tax on land measured by yield, by quantum of tea leaves produced in the tea estate, and henc....
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....o reiterated the distinction made between the subject of a tax and the measure of a levy articulated by Federation of Hotel and Restaurant Association of India's case [1989] 178 ITR 97 (SC). It was pointed out in Governor General in Council v. Province of Madras, AIR 1945 PC 98, that although the excise duty and a tax on a sale of goods was leviable at the same time when the manufactured article leaves the factory of the manufacturer: "the two taxes, the one levied on a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But, in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time upon the occasion of its sale". In our view, this observation of the Supreme Court leaves no room for doubt in interpreting entry 60 of List II of Schedule VII as already held in Western India Theatres Ltd., AIR 1959 SC 582. The decided cases hold that entry 60 is to be inte....
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....tax relatable to entry 60 in List II would be only on the privilege of entering and being a member of the profession does not hold good in the case of practising chartered accountants, who are not only required to be members of the Institute of Chartered Accountants, but are also required to hold a certificate of practice as provided in section 6(1) of the said Act. In our view, this argument has no substance. Whatever be the definition of the expressions, "chartered accountant" and "practising chartered accountant" for the purpose of the Chartered Accountants Act, when it comes to the expression "practising chartered accountant" for the purpose of the Finance (No. 2) Act, we must apply the definition as given in the Finance Act itself. It is a basic canon of interpretation that each statute defines the expressions used in it and that definition should not be used for interpreting any other statute unless in any other cognate statute there is no definition, and the extrapolation would be justified. It is not possible to say that the Finance Act, which deals with a fiscal subject and the Chartered Accountants Act, 1949, are cognate statutes; nor can we borrow the definition in one f....
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....ertain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or class of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or things. It is also recognised that no precise or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience. Classifications based on differences in the value of articles or the economic superiority of the persons of incidence are well recognised. A reasonable classification is one which inclu....
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.... wise decisions with respect to the raising and disposition of public revenues. Yet, we are urged to direct the States either to alter drastically the present system or to throw out the property tax altogether in favour of some other form of taxation. No scheme of taxation, whether the tax is imposed on property, income, or purchases of goods and services, has yet been devised which is free of all discriminatory impact. In such a complex arena in which no perfect alternatives exist, the court does well not to impose too rigorous a standard of scrutiny lest all local fiscal schemes become subjects of criticism under the Equal Protection Clause." In ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82 (SC); [1976] 1 SCC 916, 922-923 para. 27, the Supreme Court held: "Given legislative competence, the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely ....
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....tral Government under section 269 and Schedule XIII of the Companies Act, 1956 (1 of 1956); or (vii) certification of documents to be filed by- companies with the Registrar of Companies under the Companies Act, 1956 (1 of 1956); or (viii) certification in Form No. I that the whole of the amount remaining unpaid or unclaimed for a period of three years from the date of transfer to the special account under sub-section (1) and sub-section (2) of section 205A of the Companies Act, 1956 (1 of 1956) has been transferred to the General Revenue Account of the Central Government under the Companies Un paid Dividend (Transfer to General Revenue Account of the Central Government) Rules, 1978; or (ix) certificate of documents under the Exports and Imports Policy (1997-2002) of the Government of India; or (x) certification for exchange control purposes which a practising chartered accountant can issue as documentary evidence in support of certain applications under the Foreign Exchange Regulation Act, 1973 (46 of 1973); or (xi) certification in respect of valuation of instruments or assets as per rule 8A(7) of the Wealth-tax Rules, 1957, from the whole of service tax leviable thereon." ....
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.... issue material including application form, prospectus and brochure and deciding on the quantum of issue materials (in doing so, the relevant provisions of the code of ethics must be kept in mind) (c) Advice regarding selection of various agencies connected with issue, namely, registrars to issue, printers and advertising agencies. (d) Advice on the post issue activities, e.g., follow up steps which include listing of instruments and despatch of certificates and refunds, with the various agencies connected with the work. Explanation.-For removal of doubts, it is hereby clarified that the activities of banking, underwriting, and portfolio management are not permitted. (xx) Investment counselling in respect of securities [as defined in the Securities Contracts (Regulation) Act, 1956] and other financial instruments. (In doing so, the relevant provisions of the code of ethics must be kept in mind). (xxi) Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the relevant provisions of the code of ethics just be kept in mind). (xxii) Quality audit. (xxiii) Environment audit. (xxiv) Energy audit." In addition, general permission has been gra....
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....render the statute arbitrary, irrational or constitutionally invalid. The Supreme Court of USA in Secretary of Agriculture v. Central Roig Refining Co. [1949] 338 US 604 observed: "this court is not a Tribunal for relief from crudities and inequities of complicated experimental economic legislation". The Supreme Court in Hoechst Pharmaceuticals Ltd. v. State of Bihar [1985] 154 ITR 64; AIR 1983 SC 1019, echoed a similar sentiment: "On questions of economic regulations and related matters, the court must defer to the legislative judgment. When the power to tax exists, the extent of the burden is a matter for the discretion of the law-makers. It is not the function of the court to consider the propriety or justness of the tax, or enter upon the realm of legislative policy. If the evident intent and general operation of the tax legislation is to adjust the burden with a fair and reasonable degree of equality, the constitutional requirement is satisfied." The contention of learned counsel that the imposition of service tax on practising chartered accountants is hit by article 14 of the Constitution has no substance and must, therefore, fail. Violation of article 19(1)(g): Finall....
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....the equal protection clause. Having regard to these settled principles the impugned judgment of the High Court could not be sustained." While dealing with the challenge to the constitutional validity of an economic legislation, it would be useful to be mindful of the note of caution expressed by the Supreme Court in R. K. Garg v. Union of India [1982] 133 ITR 239; AIR 1981 SC 2138, 2147: ". . . laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J., that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straitjacket formula and this is particularly true in the case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the Legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are....
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....alvaru v. State of Kerala [1973] 4 SCC 225 (para. 1535), 821; AIR 1973 SC 1461 serve as a beacon light. The learned judge says: "In exercising the power of judicial review, the courts cannot be oblivious of the practical needs of the Government. The door has to be left open for trial and error. Constitutional law like other mortal contrivances has to take some chances. Opportunity must be allowed for vindicating reasonable belief by experience." The Supreme Court in State of Uttar Pradesh v. Kamla Palace, AIR 2000 SC 617; [2000] 1 SCC 557, threw considerable light on dealing with the challenge to a fiscal statute as violative of articles 14 and 19 of the Constitution by saying: "Article 14 does not prohibit reasonable classification of persons, objects and transactions by the Legislature for the purpose of attaining specific ends. To satisfy the test of permissible classification, it must not be 'arbitrary, artificial or evasive' but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the Legislature. (see Special Courts Bill, 1978, Re [1979] 1 SCC 380, seven judge Bench; R. K. Garg v. Union of Ind....
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....ed from what the Legislature has itself said. The learned Additional Solicitor General brought to our notice, the judgment of the Bombay High Court in All India Federation of Tax Practitioners v. Union of India [2002] 256 ITR 401, wherein the Division Bench of the Bombay High Court considered the challenge to the constitutional validity of the very same taxing statute in the case of practising chartered accountants. The challenge was repelled on the ground that, in pith and substance, the levy is a tax on the service rendered by professionals for remuneration. If the professional does not render any service, there will be no service tax. On the other hand, professional tax is a tax for the privilege of belonging to a profession or being a member of the profession. Such a tax is irrespective of the fact whether he does or does not render professional service for remuneration. The chargeable events in the two statutes are wholly distinct and different. Service tax is totally different from levy of professional tax on professionals by the State Legislature which is a one time tax unrelated to actual service rendered for remuneration. In the two cases, the fact that there may some ov....