Gujarat
Ambuja Cements Ltd. & Anr Vs. Union
of India & Anr [2005] Insc 186 (17 March 2005)
Ruma
Pal & Arun Kumar
With
W.P)
Nos. 411, 431, 432, 450, 466, 467, 493, 551, 564, and 573 of 2000.
W.P)
Nos. 1, 122, 123, 209, 234, 283, 311 and 493 of 2001.
W.P)
Nos. 606 of 2002 W.P.(C) Nos. 294, 584, 585 of 2003
W.P)
Nos.26, 328, 329 of 2004 C.A. No. 9247 of 2003 RUMA PAL, J.
These
writ petitions have been filed challenging the constitutional validity of
Sections 116 and 117 of the Finance Act 2000 and Section 158 of the Finance
Act, 2003 by which the Union of India & Ors. (1999) 6 SCC 418, striking
down Rules 2(1)(d), (xii) and (xvii) of the Service Tax Rules, 1994 (as amended
in 1997) was sought to be overcome.
The
writ petitioners are the customers or clients of goods transport operators and
forwarding and clearing agents. There are three main grounds on which they have
based their challenge. They contend that the basis of the decision rendered in Laghu
Udyog Bharati had not been removed or displaced by the impugned sections and
could not therefore overrule, replace or override this Court's decision. The
second ground of challenge is that Parliament was legislatively incompetent to
enact the law. It is stated that the imposition of the impugned levy encroaches
upon the State Government's power as defined in Entry 56 of List II of the
Seventh Schedule to the Constitution which pertains to 'Taxes on goods and
passengers covered by road or on inland waterways'. The submission is that
Parliament could not by resorting to the residuary Entry 97 of List 1 of the
Seventh Schedule circumvent Entry 56 of List II and in the guise of levying
service tax in fact levy a tax on the transport of goods.
The
constitutional validity of the imposition has also been challenged on the
ground that it operated in discriminatory manner by singling out only the
customers of goods transport operators and clearing and forwarding agents to
pay tax whereas the recipients of other kinds of similar services were not
subjected to such imposition.
Service
tax was introduced for the first time under Chapter V of the Finance Act, 1994.
Section 66 of the Act was the charging section and provided for the levy of
service tax at the rate of five per cent of the value of the taxable services
provided to any person by the person responsible for collecting the service
tax. In other words, the levy was on the provider of the taxable services.
"Taxable service" was defined in Section 65 to include only three
services namely any service provided to an investor by a stock broker, to a
subscriber by the telegraph authority and to a policy holder by an insurer
carrying on general insurance business. Section 68 required every person
providing taxable service to collect the service tax at specified rates. Section
69 of the Finance Act, 1994 provided for the registration of the persons
responsible for collecting service tax. Sub-sections (2) and (5) indicated that
it was the provider of the service who was responsible for collecting the tax
and obliged to get registered.
These
Sections viz., 65, 66, 68 and 69 are pivotal to the present issue. They were
amended thrice. The remaining sections of the 1994 Act substantially continued
as originally enacted with minor changes. Under Section 70 of the Finance Act,
1994, every person responsible for collecting the service tax must furnish or
cause to be furnished to the Central Excise Officer in the prescribed form and
verified in the prescribed manner, a quarterly return. Sections 71, 72, 73 and
74 deal with the filing of returns, provisions for assessment, reopening of
assessments and rectification of mistakes of assessment orders. Section 75
provides for payment of interest at the rate of one-half per cent for every
month or part of a month by which the person responsible for collecting the
service tax, delays in paying the tax to the credit of the Central Government.
Section 76 deals with the imposition of penalty for failure to collect the
service tax.
Section
77 deals with the penalty for failure to furnish the prescribed return. Section
78 deals with the penalty for suppressing the value of taxable service and
Section 79 for penalty for failure to comply with notices. No other section is
required to be noted except Section 94 of the Act which empowers the Central Government
to make rules for carrying out the provisions of Chapter V of the Act. Pursuant
to such power, the Service Tax Rules, 1994 were framed.
By the
Finance Act, 1997 the first amendments to Section 65, of the Finance Act 1994
were made inter alia, by extending the meaning of 'taxable service' from three
services to 18 different services categorized in Section 65(41), clauses (a) to
(r). We are only concerned with clauses (j) and (m) of sub- section (41) to
Section 65. Clause (j) made service to a client by clearing and forwarding
agents in relation to clearing and forwarding operations, a taxable service.
Similarly, service to a customer of a goods transport operator in relation to
carriage of goods by road in a goods carriage was, by clause (m), also included
within the umbrella of taxable service. The phrases "clearing and
forwarding agent" and "goods transport operator" were defined as
follows:
(j)
"clearing and forwarding agent" means any person who is engaged in
providing any service, either directly or indirectly, connected with clearing
and forwarding operations in any manner to any other person and includes a
consignment agent" (m) "goods transport operator" means any
commercial concern engaged in the transportation of goods but does not include a
courier agency" The charge of service tax in respect of the services
rendered by clearing and forwarding agents and goods transport operates
remained on the person responsible for collecting the service tax under Section
66 (3).
"66(3)
With effect from the date notified under Section 84 of the Finance Act, 1997,
there shall be charged a service tax at the rate of five per cent of the value
of the taxable services referred to in sub-clauses (g), (h), (i), (j), (k),
(l), (m), (n), (o), (p), (q),and (r ) of clause (41) of Section 65 which are
provided to any person by the person responsible for collecting the service
tax." The 'person responsible for collecting the service tax' under this
Section was therefore the person providing the service. The phrase itself was
also defined under sub-section (28) of Section 65 to mean "a person who is
required to collect service tax under this chapter or is required to pay any
other sum of money under this Chapter and includes every person in respect of
whom any proceedings under this Chapter have been taken" and 'assessee'
was defined in sub-section (5) of Section 65 as meaning "a person
responsible for collecting the service tax and includes his agent". By the
1997 amendment under Section 68-1A the service tax in respect of taxable
services from items (g) to (r) of Section 65 (41) was directed to be collected
from "such person and in such manner as may be prescribed" and it was
said that all provisions of Chapter V "shall" apply to such person as
if he is the person responsible for collecting the service tax in relation to
such services. However, Sub-sections (2) and (5) of Section 69 continued to
refer to the persons responsible for collecting the service as the provider of
the taxable service.
We are
told that the goods transport operators as well as the clearing and forwarding
agents went on an all India strike protesting against the
imposition of service tax on them. Perhaps this might have precipitated an
amendment to the Service Tax Rules 1994. Rules 2(1)(d),(xii) and (xvii) of the
Service Tax Rules, 1994 were amended by imposing the tax in effect on the
customers of clearing and forwarding agents and goods transport operators. As
far as clearing and forwarding agents were concerned the relevant amendments to
the Rules were carried out and brought into effect by two notifications both
dated 16th July 1997. As far as the levy of service tax
on customers of goods and transport operators were concerned, the amendments
were made and brought into effect with effect from 16th November, 1997.
The
imposition of service tax on customers was challenged by many of the present
petitioners in Laghu Udyog Bharati.
During
the pendency of writ petitions, on 2nd June 1998 notification No.49/98 was
issued exempting services provided by goods transport operators from the levy
of service tax altogether and by the Finance Act, 1998 all provisions in the
Finance Act, 1994 including Section 65 (41) sub-clause (m) relating to the levy
of service tax on services provided by goods transport operators were omitted
with effect from 16th October, 1998. By the Finance Act (No. 2), 1998, Section
69 was also amended. The various sub-sections including sub sections (2) and
(5) were omitted. The body of the sections now require every person liable to
pay service tax to make an application for registration without indicating who
was so liable. The Service Tax Rules, 1994 were consequently also amended by
the Service Tax (Amendment) Rules, 1998 to delete the provisions relating to
service by goods transport operators.
These
facts were taken into account by this Court in Laghu Udyog Bharati but because
the exemption granted on 2nd June 1998 was prospective and no exemption had
been granted with regard to the period from 16th July, 1997 to 2nd June 1998
and also because customers of clearing and forwarding agents continued to be
liable to pay service tax, the writ petitions were disposed of on merits.
In
upholding the challenge to Rule 2(1)(d), (xii) and (xvii), this Court noted:
"It
is clear from the reading of these provisions that according to the Finance Act
the charge of tax is on the person who is responsible for collecting the
service tax. It is he, who by virtue of the provisions of Section 65(5) is
regarded as an assessee. He is the person who provides the service." It
was held that in the circumstances " the definitions contained in Rule
2(d) (xii) and (xvii), which seek to make the customers or the clients as the assessee,
are clearly in conflict with Section 65 and 66 of the Act." This Court
construed Section 68(1-A) to hold that "Section 68(1-A) cannot be so
interpreted as to make a person an assessee even though he may not be
responsible for collecting the service tax". What the Court in effect said
was that since the charging section (Section 66) provided for the tax to be
paid by the provider, Section 68-1A, which was merely the section which laid
the machinery for collecting the tax, would not change the nature of the tax.
Finally
this Court said that Sections 70 and 71 clearly showed "that the return
which has to be filed pertains to the payment which are received by the person
rendering the service in respect of the value of the taxable services. Surely,
this is a type of information which cannot, under any circumstances, be
supplied by the customer. Moreover the operative part of sub-section (1) of
Section 70 clearly stipulates that it is a person responsible for collecting
the service tax who is to furnish the return".
In the
circumstances it was concluded that "by rules which are framed, the person
who is receiving the services cannot be made responsible for filing the return
and paying the tax. Such a position is certainly not contemplated by the
Act".
Striking
down the Service Tax Rules 2(1)(d) (xii) and (xvii), this Court directed that
any tax which had been paid by the customers or clients of the clearing and
forwarding agents or of the goods transporters should be refunded within 12
weeks from their making a demand for refund. Consequently, the present writ
petitioners made applications for refund of the tax paid by them. In some
cases, the tax was refunded. In certain cases the refund was not made on the
ground that the petitioners had failed to prove that the tax paid had not been
passed on to other persons. In some case as in W.P. No. 563 of 2000 the
customer deducted service tax from the freight charges payable to the
transporters/petitioner. After the decision in Laghu Bharati Udyog, the
customer refunded the money to the transporter in question.
At
this stage on 12th May
2000, the Finance Act
2000 sought to amend Finance Act of 1994 in the manner indicated in Section
116:
"116
Amendment of Act 32 of 1994.During the period commencing on and from the 16th
day of July, 1997 and ending with the 16th day of October, 1998, the provisions
of Chapter V of the Finance Act, 1994 shall be deemed to have had effect
subject to the following modifications, namely:-
(a) In
section 65.-- (1) for clause (6), the following clause had been substituted
namely:-
(6)
"assessee" means a person liable for collecting the service tax and
includes
(i) his
agent; or
(ii)
in relation to services provided by a clearing and forwarding agent, every
person who engages a clearing and forwarding agent and by whom remuneration or
commission (by whatever name called) is paid for such services to the said
agent; or
(iii) in
relation to services provided by a goods transport operator, every person who
pays or is liable to pay the freight either himself or through his agent for
the transportation of goods by road in a goods carriage;
(ii) after
clause (18), the following clauses had been substituted, namely:-
'(18A)
"goods carriage" has the meaning assigned to it in clause (14) of
section 2 of the Motor Vehicles Act, 1988;
(18B)
"goods transport operator" means any commercial concern engage in the
transportation of goods but does not include a courier agency; :
(iii) in
clause (48), after sub-clause (m), the following sub-clause had been inserted
namely:- "(ma) to a customer, by a goods transport operator in relation to
carriage of goods by road in a goods carriage;
(b) in
section 66, for sub-section (3), the following sub-section had been substituted
namely:- "(3) On and from the 16th day of July, 1997, there shall be
levied a tax at the rate of five per cent, of the value of taxable services
referred to in sub-clauses (g), (h), (i),(j),(k) (l), (m), (ma), (n) and (o) of
clause (48) of section 65 and collected in such manner as may be
prescribed,";
(c) in
section 67, after clause (k), the following clause had been inserted, namely:-
"(ka)
in relation to service provided by goods transport operator to a customer,
shall be the gross amount charged by such operator for services in relation to
carrying goods by road in goods carriage and includes the freight charges but
does not include any insurance charges;".
Section
117 of the Finance Act, 2000 seeks to retrospectively validate the taxes
earlier collected under the Service Tax Rules which this court had directed to
be refunded. It reads:-
117.
Validation of certain action taken under Service Tax Rules.-- Notwithstanding
anything contained in any judgment, decree or order of any court, tribunal or
other authority, sub-clauses (xii) and (xvii) of clause (d) of sub-rule (1) of
rule 2 of the Service Tax Rules, 1994 as they stood immediately before the
commencement of the Service Tax (Amendment)Rules, 1998 shall be deemed to be
valid and to have always been valid as if the said sub-clauses had been in
force at all material times and accordingly,-
(i)
any action taken or anything done or purported to have been taken or done a any
time during the period commencing on and from the 16th day of July, 1997 and
ending with the day, the Finance Act, 2000 receives the assent of the President
shall be deemed to be valid and always to have been valid for all purposes, as
validly and effectively taken or done;
(ii)
any service tax refunded in pursuance of any judgment, decree or order of any
court striking down sub-clauses (xii) and (xvii) of clause (d) of sub-rule (1)
of rule 2 of the Service Tax Rules, 1994 before the date on which the Finance
Act, 2000 receives the assent of the President shall be recoverable within a
period of thirty days from the date on which the Finance Act 2000 receives the
assent of the President, and in the event of non payment of such service tax
refunded within this period, in addition to the amount of service tax
recoverable, interest at the rate of twenty-four per cent, per annum shall be
payable, from the date immediately after the expiry of the said period of
thirty days, till the date of payment.
Explanation.For the removal of doubts, it is
hereby declared that no act or omission on the part of any person shall be
punishable as an offence which would not have been so punishable if this
section had not come into force." While the writ petitions challenging the
validity of the amendments made by the Finance Act 2000 to Chapter V of the
Finance Act, 1994 were pending, the Finance Act, 2003 was assented to by the
President on 14th May
2003. By Section 158
of that Act, Sections 68(1), 71 and Section 94 of the 1994 Act were further
amended. Section 158 provides:
"During
the period commencing on and from 16th day of July, 1997 and ending with the
16th day of October 1998, the provisions of Chapter V of Finance Act, 1994, as
modified by Section 116 of the Finance Act, 2000, shall have effect subject to
the following further modifications, namely: -
(a) in
section 68, in sub-section (I), the following proviso shall be inserted at the
end and shall be deemed to have been inserted on and from the 16th day of July,
1997, namely, : - Provided that
(i) in
relation to services provided by a clearing and forwarding agent, every person
who engages a clearing and forwarding agent and by whom remuneration or commission
(by whatever name called) is paid for such services to the said agent for the
period commencing on and from the 16th day of July, 1997 and ending with the
16th day of October, 1998; or
(ii)
in relation to services provided by goods transport operator every person who
pays or is liable to pay the freight, either himself or through his agent for
the transportation of goods by road in good carriage for the period commencing
on and from the 16th day of November, 1997 and ending with the 2nd day of June,
1998. shall be deemed always to have been a person liable to pay service tax,
for such services provided to him, to the credit of the Central
Government."
In
addition, Section 71 which provides for the filing of returns was amended to
provide, with retrospective effect, for the insertion of Section 71A. Under the
newly inserted section, the provisions of Sections 69 and 70 do not apply to a
person referred to in the proviso to sub-section (1) of Section 68 as far as
the filing of returns in respect of service tax for the period commencing from
16th July 1997 was concerned. It seeks to provide that "such persons shall
furnish return to the Central Excise Officer within six months from the day on
which the Finance Bill, 2003 receives the assent of the President in the
prescribed manner on the basis of the self assessment of the service tax and
the provisions of Section 71 shall apply accordingly". This period was
extended by this Court by order dated 17.11.2003 for a period of two weeks with
effect from the date of the order. Section 94 as originally enacted for the
rule making power of the Central Government was amended to read with effect
from 16th July 1997, that the Central Government would
also have the power to frame rules relating to the manner of furnishing returns
under Section 71A.
There
cannot be any doubt that the object of these sections is to nullify the effect
of this Court's decision in Laghu Udhyog Bharati by retrospectively amending
and validating provisions held to be illegal. It is a well settled principle
that validation of a tax declared illegal may be done only if the grounds of
illegality or invalidity are capable of being removed and are in fact removed
and the tax thus made legal (vide Prithvi Cotton Mills Ltd. vs. Broach Borough Municipality
: 1970 1 SCR 388 Indian Sankaran Nair V. Devaki (1996) 11 SCC 428; R.Krishna Bhat
v. State of Karnataka (2001) 4 SCC 227; N.A. Cooperative Mkg.
Federation v. Union of India AIR 2003 SC 1329). As a proposition of law this cannot be
and is not disputed. The question is whether by enacting Sections 116 and 117
of the Finance Act, 2000 and Section 158 of the Finance Act 2003, the bases on
which this Court struck down Rule 2(1)(d), (xii) and (xvii) of the Service Tax
Rules, 1994 had been displaced or removed.
As we
read the decision in Laghu Udhyog Bharati, the basis was the patent conflict
between Sections 65, 66 , 68(1) and 71 of the Finance Act, 1994 as amended in
1997 on the one hand and Rules 2(1) (d) (xii) and (xvii) of the Service Tax
Rules 1994 on the other. Each of these sections of the Finance Act 1994 as
amended in 1997 proceeded on the basis that the tax was imposable on the person
providing the service. All the other sections regarding the liability to
furnish returns, assessments, penalties etc. flowed from that. It was because unamended
Section 66 spoke of the liability to pay tax in respect of services "which
are provided to any person by the person responsible for collecting the service
tax" and Section 65(5) defined "assessee" as meaning "a person
responsible for collecting the service tax", that this Court held that
clauses (xii) and (xvii) of Rule 2(1) (d) of the Service Tax Rules were
illegal.
As is
apparent from Section 116 of the Finance Act, 2000, all the material portions
of the two Sections which were found to be incompatible with the Service Tax
Rules were themselves amended so that now in the body of the Act by virtue of
the amendment to the word "assessee" in Section 65(5) and the
amendment to Section 66(3), the liability to pay the tax is not on the person
providing the taxable service but, as far as the service provided by clearing
and forwarding agents and goods transport operators are concerned, on the
person who pays for the services. As far as Section 68(1A) is concerned by virtue
of the proviso added in 2003, the persons availing of the services of goods
transport operators or clearing and forwarding agents have explicitly been made
liable to pay the service tax.
As we
have said, Rule 2(1)(d) (xii) and (xvii) had been held to be illegal in Laghu Udhyog
Bharati 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 vs. 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.
The
next question is whether the levy of service tax on carriage of goods by
transport operators was legislatively competent. Laghu Udhyog Bharati did not
consider the question of legislative competency. Before we consider the scope
of the impugned Act, it is necessary to determine the scope of the two
Legislative Entries namely Entry 97 of List I and Entry 56 of List II. It has
been recognized in Godfrey Phillips (supra) that there is a complete and
careful demarcation of taxes in the Constitution and there is no overlapping as
far as the fields of taxation are concerned. This mutual exclusivity which has
been reflected in Article 246(1) means that taxing entries must be construed so
as to maintain exclusivity. Although generally speaking a liberal
interpretation must be given to taxing entries, this would not bring within its
purview a tax on subject matter which a fair reading of the entry does not
cover. If in substance, the statute is not referable to a field given to the
State, the Court will not by any principle of interpretation allow a statute
not covered by it to intrude upon this field.
Undisputedly,
Chapter V of the Finance Tax Act, 1994 was enacted with reference to the
residuary power defined in Entry 97 of List I. But as has been held in
International Tourist Corporation vs. State of Haryana (1981) 2 SCC 319;
"before
exclusive legislative competence can be claimed for Parliament by resort to the
residuary power, the legislative incompetence of the State legislature must be
clearly established. Entry 97 itself is specific in 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
that case Section 3(3) of the Punjab Passengers and Goods Taxation Act, 1952
was challenged by transport operators. The Act provided for the levy of the tax
on passengers and goods plying in the State of Haryana. According to the
transport operators, the State could not levy tax on passengers and goods
carried by vehicles plying entirely along the national highways. According to
them this was solely within the power of the Centre under Entry 23 read with 97
of List I.
The
submission was held to be patently fallacious by this Court.
It was
held that Entry 56 of List II did not exclude national highways so that the
passengers and goods carried on national highways would fall directly and
squarely within Entry 56 of List II. It was said that the State played a role
in the maintenance of the national highway and there was sufficient nexus
between the tax and passengers goods carried on the national highway to justify
the imposition.
The
writ petitioners in this case have, relying on this judgment, argued that the
Act falls squarely within Entry 56 of List II and therefore could not be
referred to Entry 97 of List I. We do not agree.
There
is a distinction between the object of tax, the incidence of tax and the
machinery for the collection of the tax.
The
distinction is important but is apt to be confused. Legislative competence is
to be determined with reference to the object of the levy and not with
reference to its incidence or machinery.
There
is a further distinction between the objects of taxation in our constitutional
scheme. The object of tax may be an article or substance such as a tax on land
and buildings under Entry 49 of List II, or a tax on animals and boats under
Entry 58 List II or on a taxable event such as manufacture of goods under Entry
84 of List-I, import or export of goods under Entry 83 of List-I, entry of
goods under Entry 52 of List II or sale of goods under Entry 54 List II to name
a few. Theoretically, of course, as we have held Scale Page 367, ultimately
even a tax on goods will be on the taxable event of ownership or possession. We
need not go into this question except to emphasise that, broadly speaking the
subject matter of taxation under Entry 56 of List II are goods and passengers.
The phrase "carried by roads or natural water ways" carves out the
kind of goods or passengers which or who can be subjected to tax under the
Entry. The ambit and purport of the of Bihar 1963(1) SCR 897 where it was said
in language which we cannot better:- "Entry 56 of the Second List refers
to taxes on goods and passengers carried by road or on inland waterways. It is
clear that the State Legislatures are authorized to levy taxes on goods and
passengers by this entry. It is not on all goods and passengers that taxes can
be imposed under this entry;
it is
on goods and passengers carried by road or on inland waterways that taxes can
be imposed. The expression "carried by road or on inland waterways"
is an adjectival clause qualifying goods and passengers, that is to say, it is
goods and passengers of the said description that have to be taxed under this
entry. Nevertheless, it is obvious that the goods as such cannot pay taxes, and
so taxes levied on goods have to be recovered from some persons, and these
persons must have an intimate or direct connection or nexus with the goods
before they can be called upon to pay the taxes in respect of the carried
goods. Similarly, passengers who are carried are taxed under the entry. But,
usually, it would be inexpedient, if not impossible, to recover the tax
directly from the passengers and so, it would be expedient and convenient to
provide for the recovery of the said tax from the owners of the vehicles
themselves". (p.908) Rajasthan 1962(1) SCR 517).
Having
determined the parameters of the two legislative entries the principles for
determining the constitutionality of a Statute come into play. These principles
may briefly be summarized thus:
a) The
substance of the impugned Act must be looked at to determine whether it is in
pith and substance within a particular entry whatever its ancilliary effect may
be.
(Prafulla
Kumar Mukerjee vs. Bank of Commerce Ltd. & Madras 1957 SCR 399; State of
Rajasthan v. G. Chawla 1959 Supp. (1) SCR 904; Katra Education Society v. State
of U.P. 1996 (3) SCR 328; D.C. Johar & Sons (P) Ltd. v. STO Ernakulam 1971
(27) STC 120; Kanan Devan Hills Produce v. State of Kerala (1972) 2 SCC 218).
b)
Where the encroachment is ostensibly ancillary but in truth beyond the
competence of the enacting authority, the statute will be a colourable piece of
legislation and Constitutionally invalid (A.S. Krishna v. State of madras
(supra); A.B. Abdul Kadir v. State of Kerala (1976) 3 SCC 219, 232; Federation
of Hotel & Restaurant v. Union of India (supra at p.651). If the statute is
legislatively competent the enquiry into the motive which persuaded Parliament
or the State legislature into passing the Act is irrelevant. (Dharam Dutt &
Ors. v. Union of India & Ors. 2004(1) SCALE 425).
c) Apart
from passing the test of legislative competency, the Act must be otherwise
legally valid and would also have to pass the test of constitutionality in the
sense that it cannot be in violation of the provisions of the constitution nor
can it operate extraterritorially. (See: Poppat Lal Shah v. State of Madras
1953 SCR 677).
The
provisions relating to service tax in the Finance Act, 1994 make it clear under
Section 64(3) that the Act applies only to taxable services. Taxable services
has been defined, as we have already noted, in Section 65(41). Each of the
clauses of that sub section refers to the different kinds of services provided.
Most of the taxable services cannot be said to be in any way related to goods
or passengers carried by road or waterways. For example, Section 65(41) (g)
provides for service rendered to a client by a consulting engineer, Section
65(41)(k) refers to service to a client by a manpower recruitment agency,
Section 65(41) (o) refers to service by pandal or shamiana contractors and so
on. The rate of service tax has been fixed under Section 66. Section 67
provides for valuation of taxable service for the purposes of charging tax. The
provision for valuation of service rendered by collecting and forwarding agents
has been dealt with under sub-clause (j) and service provided by goods
transport operators has been provided under clauses (l). (subsequently
renumbered as clause (ma)). These clauses read respectively as under:-
"(j) in relation to service provided by a clearing and forwarding agent to
a client, shall be the gross amount charged by such agent from the client for
services of clearing and forwarding operations in any manner." "(ma)
in relation to service provided by goods transport operator to a customer,
shall be the gross amount charged by such operator for services in relation to
carrying goods by road in a goods carriage and includes the freight charges but
does not include any insurance charges".
As far
as clause (j) is concerned it does not speak of goods or passengers, nor to
carriage of goods nor is it limited to service by road or inland waterways.
Clause (ma) shows that the valuation of the service tax includes the freight
charges, but is not limited to it.
It is
clear therefore that Section 66 read with Section 65(41)(j) and (ma) Chapter V
of the Finance Act 1994 do not seek to levy tax on goods or passengers. The
subject matter of tax under those provisions of the Finance Act 1994 is not
goods and passengers, but the service of transportation itself. It is a levy
distinct from the levy envisaged under Entry 56. It may be that both the levies
are to be measured on the same basis, but that does not make the levy the same.
As was held in Federation of Hotel and Restaurant Association of India etc. v.
Union of India & Ors., (1989) 3 SCC 634:
"..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. Indeed, the law 'with respect to' a subject might
incidentally 'affect' another subject in some way; but that is not the same
thing as the law being on the latter subject.
There might
be overlapping; but the overlapping must be in law. The same transaction may
involve two or more taxable events in its different aspects. But the fact that
there is an overlapping does not detract from the distinctiveness of the
aspects." (pg.652-653) Since service Tax is not a levy on passengers and
goods but on the event of service in connection with the carriage of goods, it
is not therefore possible to hold that the Act in pith and substance is within
the States exclusive power under Entry 56 of List II. What the Act ostensibly
seeks to tax is what it, in substance, taxes. In the circumstances, the Act
could not be termed to be a colourable piece of legislation. It is not the case
of the petitioners that the Act is referable to any other entry apart from
Entry 56 of List II. Therefore the negation of the petitioners submission
perforce leads to the conclusion that the Act falls within the residuary power
of Parliament under Entry 97 of List I.
Incidentally
a similar challenge to the legislative competence of Parliament to levy service
tax was negatived in Tamil Nadu Kalyana Mandapam Assn. V. Union of India 2004
(167) ELT 3 (S.C) which was a case where the levy of service tax was challenged
by owners of Kalayan Mandapam/ Mandap Keepers. By virtue of the 1997 amendment
service provided to a client by Mandap keepers including the services if any
rendered as a caterer was treated as a taxable service. The challenge, inter-alia,
was that service tax on Mandap keepers was colourable legislation as the said
tax was not on service but was in pith and substance only a tax on the sale of
goods and/or a tax on land. The writ petition filed before the Madras High
Court was rejected and the constitutionality of the levy was upheld. It was
then urged before this Court by the appellants that Entries 18, 14 and 54 of
List II covered the levy in question and, therefore, resort could not be had to
Entry 97 in List I of the Seventh Schedule of the Constitution. It was held by
this Court that although certain items of the service might have been referable
to any other entry, the service element was the "more weighty, visible and
predominant". Therefore, the nature and character of the levy of the
service tax was distinct from a tax on the sale or hire purchase of goods and
from a tax on land.
The
point at which the collection of the tax is to be made is a question of
legislative convenience and part of the machinery for realization and recovery
of the tax. The manner of the collection has been described as "an
accident of administration;
it is
not of the essence of the duty" . It will not change and does not affect
the essential nature of the tax. Subject to the legislative competence of the
Taxing Authority a duty can be imposed at the stage which the authority finds
to be convenient and the most effective whatever stage it may be. The Central
Government is therefore legally competent to evolve a suitable machinery for
collection of the service tax subject to the maintenance of a rational
connection between the tax and the person on whom it is imposed. By Sections
116 and 117 of the Finance Act 2000, the tax is sought to be levied from the
recipients of the services.
They
cannot claim that they are not connected with the service since the service is
rendered to them.
In a
similar fact situation under an Ordinance the Central Government was authorized
to levy and collect a duty of excise on all coal and coke dispatched from
collieries. Rules framed under the Ordinance provided for collection of the
excise duty by the railway administration by means of a surcharge on freight
recoverable either from the consignor or the consignee. The imposition of
excise duty on the consignee was challenged on the ground that the consignee
had nothing to do with the manufacture or production of the coal. Negativing
this submission this Court in R.C. Jall V. Union of India AIR 1962 SC 1281,
1286 said:- "The argument confuses the incidence of taxation with the
machinery provided for the collection thereof ".
In Rai
Ramakrishna (supra) the tax under Entry 56 of List II was held to be
competently levied on the bus operators or bus owners even though the object of
levy was passengers ( which they were not) because there was a direct
connection between the object of the tax viz., goods and passengers and the
owners of the transport carrying the goods or passengers. There is thus nothing
inherently illegal or unconstitutional to provide for service tax to be paid by
the availer or user.
The
writ petitioners have relying upon the decision in Dwarka Prasad v. Dwarka Das Saraf
1976 (1) SCC 128, contended that the amendment to section 68 by the
introduction of a proviso in 2003, was invalid. It is submitted that as the
body of the section did not cover the subject matter, there was no question of
creating an exception in respect thereto by a proviso.
According
to the writ petitioners, the proviso cannot expand the body by creating a
separate charge. It is submitted that by merely amending the definition of the
word "assessee" it could not be understood to mean that thereby all
customers of the services in question were liable.
The
submission is misconceived for several reasons.
Section
68 is a machinery section in that it provides for the incidence of taxation and
is not the charging section which is Section 66. The amendments to Section 66
brought about in 2000 changed the point of collection of tax from the provider
of the service to 'such manner as may be prescribed'. Section 68(1A) as it
stood in 1997 provided for the collection and recovery of service tax in
respect of the services referred in clauses (g) to (r) of Section 65(41), which
included both the services with which we are concerned, from such person and in
such manner as may be prescribed. The 1998 Finance Act maintained this. Now the
Service Tax Rules 1994 provided for the collection and recovery of tax from the
user or payers for the services. This was the prescribed method. All that the
proviso to Section 68(1A) did was to prescribe the procedure for collection
with reference to services of goods transport operators and clearing agents
which services had already been expressly included under the Finance Act 2000
into the definition of taxable service.
The
decision in Dwarka Prasad vs. Dwarka Das Saraf (supra) relied upon by the writ
petitioner does not in any way forbid a proviso from supplementing the enacting
clause. All that the decision says is that a proviso must prima facie be read
and considered in relation to the principal matter to which it is a proviso. It
is not a separate or an independent enactment. The introduction of the proviso
to Section 68(1)(A) by the Finance Act, 2003 does not seek in any manner seek
to expand that sub- section. In fact it gives effect to it.
The
final challenge to the 2000 amendment to the Service Tax Act, 1994 is that it
operated in a discriminatory manner in that it chose the recipient of the
services to be the assessee only in the case of services rendered by goods
transport operators and clearing and forwarding agents. We are unable to accept
the submission. Because of the inherent complexity of fiscal adjustments of
diverse elements in the field of tax, the legislature is permitted a large
discretion in the matter of classification to determine not only what should be
taxed but also the manner in which the tax may be imposed. Courts are extremely
circumspect in questioning the reasonability of such classification but after a
"judicial generosity is extended to legislative wisdom, if there is writ
on the statute perversity, madness in the method or gross disparity, judicial
credibility may snap and the measure may meet with its funeral". (Vide: Ganga
Sugar Corporation vs. State of U.P. ) The same judicial wariness was expressed
in Federation of Hotel and Restaurant Association of India etc. v. Union of India
& Ors., (1989) 3 SCC 634 where it was said:
"It
is now well settled that though taxing laws are not outside Article 14,
however, having regard to the wide variety of diverse economic criteria that go
into the formulation of a fiscal policy 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. A legislature does not, as an old saying goes, have to tax
everything in order to be able to tax something. If there is equality and
uniformity within each group, the law would not be discriminatory.
Decisions
of this Court on the matter have permitted the legislatures to exercise an
extremely wide discretion in classifying items for tax purposes, so long as it
refrains from clear and hostile discrimination against particular persons or
classes." (pg.659) (Emphasis added) In the case before us the
discrimination is not, even according to the writ petitioners, by reason of the
subject matter of tax. 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 along with 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 23.8.99, 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.
With
these clarifications, the writ petitions are dismissed without any order as to
costs.
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