TaxTMI 
TaxTMI 
2001 (4) TMI 26
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....er the taxnet for the first time. The said Act was amended from time to time to include the various services which were brought under the taxnet. Under the scheme of the Act, the impost of the tax was against the persons who provided the services and they had to collect and pay the same. Thus, this tax could be legitimately passed on to the customers and more particularly to the persons to whom the services were being offered. The "services" offered by "man dap-keepers" were included for the first time by Chapter VI of the Finance Act, 1997. Some of the relevant provisions in that Chapter are as follows: "65. (19) 'mandap' means any immovable property as defined in section 3 of the Transfer of Property Act, 1882 (4 of 1882), and includes any furniture, fixtures, light fittings and floor coverings therein let out for consideration for organising any official, social or business function. 65. (20) 'mandap keeper' means a person who allows temporary occupation of a mandap for consideration for organising any official, social or business function. 65. (41) 'taxable service' means any service provided, (p) to a client, by a mandap keeper in relation t....
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....e to be made by the letters dated March 29, 1997, and June 9, 1997, respectively. In the first representation, it was pointed out that the tax would be 'onerous" and the customers would not be ready to pay the tax. By the second representation, it was pointed out that the tax could not be remitted immediately after every marriage or function when the mandap was rented out and, therefore, reasonable time should be granted from the date of rendering the services to make the payment of tax. Shortly stated, the case of the petitioners before us is that this tax and the provisions therefor in sections 65, 66 and 67 of the Finance Act are firstly beyond the "legislative competence" of the Union of India as, in fact, in pith and substance, this tax amounts to a "tax on land and buildings", which is covered by entry 49 of the State List (List 11) of the Seventh Schedule to the Constitution of India. Learned counsel argued that presumably this legislation is under the 'residuary entry", i.e., entry 97 of the Union List (List I), and, therefore, it could have been so legislated only if the subject of legislation was not covered by any of the entries in the State List (List 11) or ....
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....ser of such a land' would be a tax on land itself and would also be covered by entry 18 of the State List (List 11), which reads as follows: '18. Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents; transfer and alienation of agricultural land; land improvement and agricultural loans; colonization." Learned counsel suggest that this would be a "tax on land" and, therefore, would be integrally connected with the "tax on collection of rents" and for this reason also, the provisions are beyond the 'legislative competence" of the Union because of the positive language of article 248(1) pertaining to the 'residuary powers" enjoyed by Parliament. In so far as the other challenge is concerned, learned counsel argue that the definition of "mandap" suggests that an immovable property should have been let out for consideration for organising any official, social or business function. Learned counsel point out that there are absolutely no guidelines in the Finance Act or the Rules to suggest as to what is meant by 'official, social or business function". According to learned counsel,....
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....ounsel was that there was no "vice" attached to the challenged provisions either regarding the "lack of legislative competence" or regarding "arbitrariness" and "unreasonableness". Learned counsel appearing on behalf of the petitioners to begin with tried to argue that in pith and substance this tax was a 'tax on land and building". Learned counsel argue that the tax depends on the very existence of the land and/or building and is, therefore, integrally connected with that subject. It was argued that even if a playground is rented out for any social, official or business function even then, the service tax liability would arise. From this learned counsel argue that the impost of the tax is entirely depended upon the existence of the immovable property which may include the land and/or building and it is only for the 'user of such land and/or building" that the tax is charged. Learned counsel argue that for the same reason even entry 18 of List II can be brought into service and, therefore, further argues that once the tax is found to be under any of these entries in List II, Parliament would have no power to legislate with the help of entry 97 of List I because of the po....
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....s and also included the charges for 'catering services". From this, learned counsel argue that it was obvious that what was being charged was the rent earned by the landlord over the piece of land which was let out for the user of the client by way of holding a social, official or business function. The argument is clearly an incorrect. Here the basic fallacy in the argument is that the nature of the tax is being judged from the "measure of the tax". Merely because the tax is charged on the amount charged by the "mandap keeper" on account of his having let out the premises, it would not mean that the tax is wholly and integrally connected with such charges and, therefore, amounts to a tax regarding the rent of such a land or pertains to the collection of rents of that land. That would be clearly an incorrect approach which has been shunned by the Supreme Court in the decision reported in Sainik Motors v. State of Rajasthan, AIR 1961 SC 1480. There, the Supreme Court was considering as to whether the State in the guise of taxing passengers and goods under entry 56 of List II was in pith and substance and in reality tax on the income of the stage carriage operators or at any rate....
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....ser of the immovable property in a particular manner which amounts to a service given which has been made taxable under the present provisions". These two are entirely different aspects. Therefore, when we apply the theory of pith and substance to the present tax, it does not in any way come near the barred borderline of entry 18 or entry 49 of List II let apart its entry into that barred territory. It will be seen that impost of the tax under entry 49 of List II would essentially be vis-a-vis the land and/or building as the case may be whereby such tax under entry 49 would be essentially connected with the proprietary or ownership rights in the said land and/or building. The following observations of Hidayatullah J., in the decision reported in Second GTO v. D. H. Nazareth [1970] 76 ITR 713 (SC), are extremely relevant in this behalf. They are: 'Since entry 49 of the State List contemplates a tax directly levied by reason of the general ownership of lands and buildings, it cannot include the go-tax as levied by Parliament." When we consider the definition of "mandap keeper" on whom alone is the impost of service tax, it is obvious that such person need not be having a....
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....t the present challenged legislation cannot and does not come within the scope of that entry. The present legislation is clearly in respect of the 'services" which area was totally untapped till the advent of the 'service tax". We have already referred to the background of the "service tax". In this behalf, it will be better to see that the concept of "service tax" is a totally novel concept, which was introduced for the first time in the year 1994. Learned counsel for the respondent heavily relied on the speech of the then Finance Minister on the floor of the House while introducing the service tax for the first time. In paragraph 87 of his speech, the then Finance Minister has referred to the fact that the "service sector" which accounts for 40 per cent. of our Gross Domestic Product (GDP) was not subjected to the taxation and that there was a need to widen the base for domestic indirect taxes. The Finance Minister argued that there was no sound reason for exempting the service sector from taxation when "goods" are taxed and that in many countries 'goods" and "services" were treated alike for tax purposes. A reference was also made to the report of the Taxation Ref....
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....purpose of ascertaining what was the reason for introducing that clause.' Be that as it may, it is clear that this is a tax on service and is entirely independent of and different from the existing taxes covered by the taxes provided in List II. That itself would suggest that this cannot come within the arena of entry 49 of List II also. In the decision reported in India Cement Ltd. v. State of Tamil Nadu [1991] 188 ITR 690; AIR 1990 SC 85, when the apex court was considering the legality and constitutional validity of the cess on royalty on mineral rights again the scope of entry 49 of List 11 came to be considered. The Supreme Court held that cess on royalty could not be sustained under entry 49 of List II as being a tax on land. It was further held that royalty on mineral rights was not a tax on land but a payment for the "user of the land'. It would mean that the apex court has pointed out a "subtle distinction" between the 'tax on the land" and the 'tax for the user of the land". The case of the "mandap keepers", from the very language of the provisions, would be clearly covered by the law laid down in this case regarding the "user of the land". In the pr....
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....s clearly beyond the "legislative competence" of Parliament as that subject is covered in entry 54 of List II, which we have quoted already. In support of the argument, learned counsel heavily relies on the provisions of article 366(29A)(f) of the Constitution, which we have already quoted in the earlier part of this judgment. The contention is that if the service of catering by a mandap keeper is included in the 'services" provided by the "mandap keeper" then, it would amount to a tax on "sale or purchase of goods" as it would be totally covered under clause (f) of article 366(29A). Under clause (f) of article 366(29A), a tax on the supply by way of or a part of any service or in any other manner whatsoever of food or any other article for human consumption or any drink, intoxicating or otherwise, will be included in the tax on sale or purchase of goods. Learned counsel argues that this tax is directly covered by entry 54 as such the supply of food is deemed to be a sale thereof by the person making the supply by way of a service. The argument is extremely attractive. By way of a reply, learned senior counsel for the Department, however, suggested that article 366(29A)(f) w....
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....tion of "legislative competence" of Parliament in enacting the "Expenditure-tax Act" was involved and the term "chargeable expenditure" in that Act included the expenditure incurred in or payments made to a hotel in connection with the provisions of (a) ... (not relevant) ... and (b) food or drink by the hotel whether at the hotel or outside or by any other person at hotel. Learned counsel further argues that entry 54 of List II fell directly for consideration, which would be clear from the references to it in paragraphs 10, 11, 13 and 19 of the apex court's judgment. While the references in paragraphs 10 and 11 pertain to the contentions raised, in paragraphs 13 and 19, the Supreme Court discusses the aspect of sale of goods. In paragraph 13, the Supreme Court says: "The crucial questions, therefore, are whether the economists' concept of such a tax qualifies and conditions the legislative power and, more importantly, whether 'expenditure' laid out on what may be assumed to be 'luxuries' or on the purchase of goods admits of being isolated and identified as a distinct aspect susceptible of recognition as a distinct field of tax legislation." In paragr....
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....t in that case was that the aspect of expenditure was a "distinct and separate" aspect from the aspect of taxability on account of the sale of goods or on account of its being luxuries. We can safely take same logic and point out that in the present matters also, the aspect of service is totally "independent of" and "distinct" from the aspect of "supply of food or drink" as the case may be. In the Federation of Hotel and Restaurant's case [1989] 178 ITR 97 (SC), also the question which fell for consideration was as to whether the tax on 'expenditure" was validly imposed by Parliament when the said expenditure pertained to food or drink supplied by the hotel whether at the hotel or outside or by any other person at the hotel. Mr. Chandrasekaran argues very forcefully that in spite of the striking similarity of the language in between section 5 of the Expenditure-tax Act and clause (f) of article 366(29A), there could be simply no question of the said tax being covered under entry 54 of the State List (List II) for the simple reason, the Supreme Court had found that the aspect of expenditure was "distinct and separate". In the same manner, learned counsel points out that the ....
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....s case [1989] 178 ITR 97 (SC), in para. 17 of the judgment of Venkatachaliah J., as his Lordship then was, the court says: "The subject of a tax is different from the measure of the levy. The measure of the tax is not determinative of its essential character or of the competence of the Legislature. In Sainik Motors v. State of Rajasthan [1962] 1 SCR 517; AIR 1961 SC 1480, the provisions of a State law levying a tax on passengers and goods under Entry 56 of List I were assailed on the ground that the State was, in the guise of taxing passengers and goods, in substance and reality taxing the income of the stage carriage operators or, at any rate, was taxing the 'fares and freights', both outside of its powers. It was pointed out that the operators were required to pay the tax calculated at a rate related to the value of the fare and freight. Repelling the contention, Hidayatullah J., speaking for the court, said: 'We do not agree that the Act, in its pith and substance, lays the tax upon income and not upon passengers and goods. Section 3, in terms, speaks of the charge of the "tax in respect of all passengers carried and goods transported by motor vehicles", and....
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....electricity (referable to entry 53 of List 11)." This should put an end to the argument. However, Mr. Mohan Parasaran again pointed out that there would be 'double taxation", i.e., firstly, the "mandap keeper" would have to pay 'sales tax" on the food, drink, etc., which he supplies and, secondly, such supply of Food, drink,. etc., would also attract the "service tax" because the charges thereof would be included in the "gross amount" which he charges from the customers for the "user of the mandap". The apex court has, on more than one occasion, pointed out that there could be two levies by two separate enactments and that by itself would not be a vitiating factor. There is one more reason why we say that this "service" is 'distinct and separate". It will be seen that the definition of "caterer", which we have already quoted above, provides that it means "any person who supplies, either directly or indirectly, any food, edible preparations, alcoholic and non-alcoholic beverages or crockery and similar articles or accoutrements for any purpose or occasion". It can, therefore, be said that "catering service" could be given even without the supply of food, drink, etc....
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....niture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor and floor show, is what is the subject of levy. The Supreme Court says that the customer pays for the supply and it is on that payment that the restaurant-owners must be taxed. The argument raised by the restaurant-owners that the bills should be split was not accepted in paragraph 8 in that case. This reiterates our finding that even if there is a tax on the "sale of food" that is a " separate aspect" by itself which would have no concern with this "distinct aspect" of 'service". A reference came to be made to the decisions in Rainbow Colour Lab v. State of Madhya Pradesh [2000] 118 STC 9; AIR 2000 SC 808 and Associated Cement Companies Ltd. v. Commissioner of Customs, AIR 2001 SC 862. Both the decisions and more particularly the decision in Associated Cement Companies Ltd. case, AIR 2001 SC 862 would be really of no consequence as all that it provides is that after the introduction of the Forty-sixth amendment, there cannot be a splitting of the works contract. The apex court holds in paragraphs 24, 25 and 26 that the conclusion arrived at in Rainbow Colour Lab's case [2000] 118 STC 9; A....
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.... India [1989] 178 ITR 97. Learned counsel further argues that it was not necessary that there have to be rules and guidelines in every provision. According to learned counsel the only test is that there should not be any vice of arbitrariness attached to any of the provisions which are in challenge. Our attention was invited to the decisions in Benilal v. State of Maharashtra [1995] Suppl. 1 SCC 235; Mafatlal Industries Ltd. v. Union of India [1998] 111 STC 467; [1997] 5 SCC 536 and In re Special Courts Bill, 1978, AIR 1979 SC 478. Before going to the case law, it will be better to consider the language of section 65(22) and (23) of the Finance Act. The objection by learned counsel for the petitioners is that there is no guidance as to which kind of function would be 'social", 'official" or "business", which would come in the dragnet of the Finance Act. In fact, according to us, there is nothing confusing in the sections which requires any explanation. When any provision is to be understood, the first rule is that it has to be understood by its reference to the language. The terms given in the provisions clearly are to be understood by their plain meaning which are un....
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....acket 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 involved .... The court must always remember that 'legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry'; 'that exact wisdom and nice adaption of remedy are not always possible' and that 'judgment is largely a prophecy based on meagre and uninterpreted experience'." Similarly, in the same decision, the following observations in Kesavananda Bharati Sripadagalvaru v. State of Kerala, AIR 1973 SC 1461; [1973] 4 SCC 225 were also approved. The observations are quoted in paragraph 88 of the judgment. They are "'In e....