FIRST INTERNAL ASSIGNMENT
TAXATION LAW

SUBMITTED BY: KONIKA JAIN PRN:15010143061
All India Federation Of Tax Practioners (Petitioner) v/s Union Of India & others(Respondent)

21st August 2007
(Date Of Judgement)

CITATION: (2007) 7 SCC 527 AIR 2007 SC-2990

NAME OF THE JUDGES:
S.H. Kapadia & B. Sudershan Reddy
FACTS:
* On 1st June 1998 finance bill was introduced in which Clause 119 of the Notes sought to substitute Sec 65 ,66 and 68 and amend the Section 67 of the finance act which was related to service tax in which the tax will be levied on services rendered by a practicing chartered accountant ,cost accountant and architect to a client in professional capacity at the rate of 5% .

* But on 3rd June 1998 , Bombay Chartered Accountant association made a representation to the central government objecting this bill but then also the bill was passed in August 1998 and mainly it came into force on 1st April 1998.

* Then on 7th October 1998 ,Union of India issued a notification in which taxable services are exempted other than accounting and auditing and than within the period of ten days i.e on 16th October ,1998 issued another notification in which the scope of exemption was reduced.

* And therefore, the All India Federation of Tax has filed a written petition in Bombay High Court challenging the validity of the levy of service tax.

PROCEDURAL HISTORY:
This is an appeal which was filed against the judgement given by Bombay High Court on 22nd Feb ,2001 that :

“the Parliament has the legislative competence to levy the service tax vide Finance Act 1995 and 1998 as Service tax falls in Entry 97 , list 1 of the Seventh schedule to the Constitution”

ISSUE:

* The question which arises for determination in this civil appeal concerns the constitutional status of the levy of service tax and the legislative competence of Parliament to impose service tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to the Constitution.

* The issue arising in this appeal questions the competence of Parliament to levy service tax on practising chartered accountants and architects having regard to Entry 60 List II of the Seventh Schedule to the Constitution and Article 276 of the Constitution.

RULES/RELEVANT PROVISIONS: * Article 246 : Acc. to which Parliament has an exclusive power to make law on any matter enumerated in List 1 in the seventh schedule.

* Article 265 : Acc. to which no tax shall be levied or collected except by authority of law.

* Article 268: Acc, to this tax shall be levied ,collected and appropriated by the Government or State in the manner provided or formulated by the Parliament of Law.

* Article 269 : Acc., to this

* taxes levied and collected by the Union but assigned to the States. * The net proceeds in any financial year of any such tax, shall not form part of the Consolidated Fund of India, but shall be assignedand distributed to the States in accordance with such principles of distribution as may be formulated by Parliament by law. * Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-State trade or commerce. * Article 276: Acc. to this * no law of the Legislature of a State relating to taxes for the benefit of the State or of a municipality, district board, local board or other local authority therein in respect of professions, trades, callings or employments shall be invalid on the ground that it relates to a tax on income. * The total amount payable in respect of any one person to the State or others shall not exceed two thousand and five hundred rupees per annum. * The power of the Legislature of a State to make laws as aforesaid with respect to taxes on professions, trades, callings and employments shall not be construed as limiting in any way the power of Parliament to make laws with respect to taxes on income accruing from or arising out of professions, trades, callings and employments * Entry92C. : Taxes on services of List I of the Seventh Schedule to the Constitution * Entry Nos. 53, 60 and 62 of List II of the Seventh Schedule to the Constitution are as follows: * 53. Taxes on the consumption or sale of electricity. * 60. Taxes on professions, trades, callings and employments. * 62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. * Entry 38 of List III of the Seventh Schedule to the Constitution is as follows:38. Electricity.
ARGUMENTS:
APPELLANT

Shri Shyam Diwan ,learned counsel on behalf of the appellant argument in advanced on Entry 60 of list II of the Seventh Schedule which refers to taxes on profession ,trade callings and employments. According to him every entry in the lists in the seventh schedule represents a field of legislation..Therefore it should be read in a broad sense. The basic contention of the appellant was that the State Legislature alone has an absolute jurisdiction and legislative competence to levy service tax.
It was submitted that: * Service tax fell within the ambit of Entry 60 of List II. * The word profession in the said Entry was not limited and must be read in broad sense . * It was contended on behalf of the appellant that there was no difference between tax on profession and tax on services and the word profession is synonymous with the word profession and therefore tax on be profession would include tax on service, which tax could be levied only by the State legislature. * There cannot be profession without service and the services rendered by the chartered accountants to his client is the service rendered as a professional. * The only argument advanced on behalf of the appellant was that the tax on profession was the State Entry and, therefore, Entry 97 of List I cannot be invoked and that Parliament had no legislative competence to levy service tax. * It was submitted that under the Finance Act, taxability was limited to rendition of professional services and, therefore, tax on profession under Entry 60 of List II would include tax on service. In short, according to the learned counsel, the word professional in Entry 60 of List II was nothing but service and, therefore, levy of service tax came within the competence of State Legislature alone.

* the words in respect of professions, trades, callings etc. in Article 276(1) indicate amplitude and the wide field open to the State Legislature to make laws imposing taxes on professions, trades, callings etc. * And therefore it becomes clear that the Constitution framers intended the State Legislature alone to be competent to impose taxes on professions, trades, callings and employments and that they did not intend to give such a power to Parliament. * Article 276(1) and Entry 60 of List II would cover every aspect of the concept of professions, trades, callings and employments. * Since the word profession and service are interchangeable, it is clear that the State Legislature alone has the absolute competence to levy tax on services as there was no difference between the two words, namely, service and profession. * In Article 276(3) in support of the contention that the Constitution itself had made a dichotomy between taxes on professions, trades, callings and employments on one hand and taxes on incomes arising out of professions, trades, callings and employments on the other and that the said dichotomy between tax on profession (service) vis-a- vis the tax on income arising out of professions, trades, callings etc. itself indicates that a separate field is demarcated for Parliament to enact laws imposing tax on incomes arising out of professions and, at the same time, the State Legislature alone shall have the competence to impose tax on professions, trades, callings etc.
RESPONDENT:
Shri V. Shekhar, learned senior counsel for the Department, placing reliance on judgments impugned of various High Courts, submitted that : * service tax was a tax on activities undertaken for consideration; that it was a tax on services and not on the service-provider; that the tax on profession was essentially a tax on the professional and, therefore, Parliament had the legislative competence to levy service tax under Entry 97 of List I.

* It was further submitted that with the Constitution (Eighty-eighth Amendment) Act, 2003 by which Entry 92C is inserted, the controversy is closed and, therefore, there is no question of going behind the said entry which has accepted the validity of the impugned judgments by Constitutional Amendments.

ANALYSIS/FINDINGS * -------------------------------------------------
While analyzing the case it was found that service tax is an economic concept and a major contributor in GDP of the economy. The Central Government derived its authority for levying tax through the enactment of finance act ,1994 and the residuary entry 97 of the Union List for levying tax on services. The another step which was taken by the CG is the introduction of Article 268A where taxes would be appropriated between Union and State and a new Entry 92 C was also passed. There is no distinction between consumption on goods or services as both satisfy human needs. Service tax is a value added tax which applies to all commercial activities whether production of goods or providing services.Moreover , VAT is a consumption tax as it is borne by the consumer. * The case of Moti laminates pvt ltd v/s collector of Central excise, Ahmedabad 1995 we get a clue of an imp principle of equivalence. In this it was held that the object of the for having a schedule in the act was to fix rates under different entries including residuary Entry .The object of the finance Act is also to fix rates of duty under different entries. This case judgement is very important as it applies the principle of equivalence ,that there is no difference between production or manufacture of saleable goods and production of marketable services in the form of an activity undertaken by the service provider for consideration ,as they are consumed by the client.It is this principle which is in built in the concept of the service tax .It is clear that the the service tax is VAT which in turn is both a general tax as well as destination based tax leviable on services provided within the country.

* The second important finding is related to the object of the enacting the finance act which is to fix the tax rates every year but that doesn’t mean that something new cannot be introduced in the act but it should be within constitutional limitations . In the Case of Madurai District Central Co-operative Bank Ltd. V The Third Income Tax Officer, Madurai (1975) the Court held that Court held that the IT Act,1961 and the annual Finance Acts are enacted by Parliament in exercise of the power conferred by Article 246(1) read with Entry 82 of List I. It was further held that though it was unconventional for Parliament to amend the taxing statute by incorporating the amending provision in an Act of a different pith and substance, such course would not be unconstitutional. Thus Parliament is competent to introduce a new change in the finance Act.

* The Third important analyzed is made in the perspective of the interpretation of the taxing entries in the 7th Schedule. There are two group of entries in the in each of the 3 Lists in the 7th schedule. In list 1 ,Entries 1-81 (the Parliament has the authority to legislate). In Entries 82 - 92 (the taxes which could be imposed by the law of Parliament. An examination of these two groups of entries shows that while the main subject of legislation finds place in the first group, a tax in relation thereto is separately mentioned in the second group. The above distinction between the group of general entries and the group of taxing entries to the Lists in the Seventh Schedule has also been highlighted in the case of Southern Pharmaceuticals & Chemicals v. State of Kerala 1981 Court took the view that enactment of the Medicinal Act, 1955 by Parliament under Entry 84 List I does not prevent the State Legislature from making a law under Entry 8 List II as Entry 8 was a general entry whereas Entry 84 List I was a taxing entry. Applying the above tests laid down in the aforestated judgments to the facts of the present case, we find that Entry 60 of List II, mentions Taxes on professions, trades, callings and employments. Entry 60 is a taxing entry. It is not a general entry. Therefore, we hold that tax on professions etc. has to be read as a levy on professions, trades, callings etc., as such. Therefore, Entry 60 which refers to professions cannot be extended to include services. This is what is called as an Aspect Theory. If the argument of the appellants is accepted, then there would be no difference between interpretation of a general entry and interpretation of a taxing entry in List I and List II of the Seventh Schedule to the Constitution. Therefore, professions will not include services under Entry 60. For the above reasons, we hold that Parliament had absolute jurisdiction and legislative competence to levy tax on services. While interpreting the legislative heads under List II, we have to go by schematic interpretation of the three Lists in the Seventh Schedule to the Constitution and not by dictionary meaning of the words profession or professional as was sought to be argued on behalf of the appellants otherwise the distinction between general entries and taxing entries under the three Lists would stand obliterated. The words in relation to and the words with respect to are no doubt words of wide amplitude but one has to keep in mind the context in which they are used.

* The fourth analysis is based on the case of Western India Theatres Ltd. v. Cantonment Board, 1959 ,it was held that “the tax imposed on entertainment under the Cantonment Act came within Entry 50 of the Provincial List.” The importance of this judgment lies in the fact that this judgment makes a distinction between tax imposed for the privilege of carrying on any trade or calling on one hand and a tax on every show that is to say on every incidence of the exercise of the particular trade or calling. It was held that if there was no show, there was no tax. It was further observed that a lawyer has to pay tax to take out a licence irrespective of whether he actually practices or not. That tax is a tax for the privilege of having the right to exercises the profession if and when the person taking out the license chooses to do so. In this the Court has clarified the dichotomy between tax on privilege of carrying on any trade or calling on one hand and the tax on the activity which an entertainer undertakes on each occasions. The tax on privilege to practice the profession, therefore, falls under Entry 60, List II. It is quite different from tax on services. Keeping in mind the aforestated dichotomy, it is clear that tax on service does not fall under Entry 60 List II..Therefore, Parliament has absolute jurisdiction and legislative competence to enact the law imposing tax on services under Entry 97 List I of the Seventh Schedule to the Constitution..

* The fifth analysis is done on the point that the appellant is heavily depend on Article 276, the States power to tax professions etc. is founded on Entry 60 of List II and the purpose of Article276 is not to amend that power but to provide that such tax on professions, trades etc. shall not be invalidated on the ground that it relates to a tax on income. Article 276 enables the State Legislature to make laws for imposition of taxes on profession, for the benefit of the State, Municipality, District Board etc. by stating that such law shall not be invalid on the ground that it relates to a tax on income. There is a distinction between a tax on professions, trades, callings and employments and a tax on income arising out of such professions, trades etc.. In the former case, it will have to be paid by any person practising that trade, profession etc.,whether he derives any income from it or not. This is where the example of pensioner becomes relevant. A pensioner does not carry out any profession, trade, business or calling. A tax on profession is not a tax on employment. At the time, the tax is levied, the pensioner is not in employment, but he receives an amount of pension that receipt constitutes his income though it might be for past services from an employment. very Entry in the Lists has to be given a schematic interpretation. As stated above, Constitutional law is about concepts and principles. Some of these principles have evolved out of judicial decisions. The said test is also applicable to taxation laws. That is the reason why the Entries in the Lists have been divided into two Groups, one dealing with general subjects and other dealing with taxation.

A legislation like Finance Act can be supported on the basis of a number of Entries. In the present case, the concern is with the Constitutional status of the levy, namely, service tax. The nomenclature of a levy is not conclusive for deciding its true character and nature. For deciding the true character and nature of a particular levy, with reference to the legislative competence, the court has to look into the pith and substance of the legislation. The powers of Parliament and State Legislatures are subject to Constitutional limitations. Tax laws are governed by Part XII and Part XIII. Article 265 takes in Article 245 when it says that the tax shall be levied by the authority of law. To repeat, various entries in the Seventh Schedule show that the power to levy tax is treated as a distinct matter for the purpose of legislative competence. This is the underlying principle to differentiate between the two Groups of entries, namely, general entries and taxing entries. We are of the view that taxes on services is a different subject as compared to taxes on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry 92C/97 of List I operate in different spheres.

The appellant has given the various citations for proving his point .the citations are as follows:

* Godfrey Phillips India Ltd. and anr. V. State of U.P. and ors. (2005) 2 SCC 515 * International Tourist Corporation and ors. v. State of Haryana and ors. (1981) 2 SCC 318 * Sodan Singh and ors. v. New Delhi Municipal Committee and ors. (1989) 4 SCC 155 * Tamil Nadu Kalyana Mandapam Assn. v. Union of India and ors. (2004) 5 SCC 632 * Gujarat Ambuja Cements Ltd. and anr. v. Union of India and anr. (2005) 4 SCC 214 * Bharat Sanchar Nigam Ltd. and anr. v. Union of India and ors. (2006) 3 SCC * R.R. Engineering Co. v. Zila Parishad, Bareilly and anr. (1980) 3 SCC 330

The Various Interpretation from these citation judgements are as follows:

1. In the present case, tax falls on the activity which is the subject-matter of service tax. In other words, we are substituting the words service in place of goods by applying the principle of equivalence. Under the Act, the Taxable Event is each exercise undertaken by the service-provider in giving advice on tax planning, auditing, costing etc.. It is the said principle of equivalence which equates service tax to the Central Excise Duty, one taxes the provision of services and other production of goods. Acc. para 2.14 of the recommendations made by Tax Reforms Committee headed by Dr. Chelliah which has stated that from the economic point of view, there is little difference between the taxation of commodities and taxation of services.

2. In the present matter, as stated hereinabove, the State Legislature is empowered to levy tax on professions, trades, callings etc., as such and, therefore, the word services cannot be read as synonymous to the word profession in entry 60. Therefore, tax on services do not fall under Entry 60 List II. That, service tax would fall under Entry 92C/Entry 97 of List I.

3. There is no relevance of the judgment to the present case. Here the concern is with interpretation of legislative heads under the three Lists in the Seventh Schedule to the Constitution and for that the schematic interpretation of those entries is necessary. Moreover, here the concern is with a distinct taxing entries and not general entries. Hence, the judgment in the case of Sodan Singh (supra) has no application to the present case.

4. In the present case, we are not concerned with the services rendered by a Mandap-keeper, who performs what is called as property based services. In this case, we are concerned with performance based services. However, both the categories fall within the ambit of the word services.

5. Service tax is on performance based services itself. It is on professional advice, tax planning, auditing, costing etc.. On each of the exercise undertaken tax becomes payable.therefore the judgement of this case is of no application. 6. In the present case, the main concern is with the Constitutional status of the levy. The nature of the levy must be examined and after that the conclusion came that the word profession in Entry 60 List II cannot be made synonymous with the word service and, therefore, service tax would fall under the residuary Entry 97 read with Entry 92C after 2003. This position is also made clear by Article 268A, inserted by the Constitution (Eighty-eighth Amendment) Act, 2003.

7. In the last case the Court observed that there was a basic distinction between a tax on income and a tax on circumstances and property. Hence no relevant application under this case.

DECISION
The appeal was dismissed.

CONCLUSION
From the above points it was cleared that the Parliament has legislative competence to levy service tax by way of impugned Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered accountants, cost accountants and architects. It also holds that the above position stands fortified by the Constitution (Eighty-eighth Amendment) Act, 2003 which has inserted Article 268A and Entry 92C which clearly indicates that Entry 60 of List II and Entry 92C of List I operate in different spheres. And that there is no challenge to the Constitutional validity of the said Constitution (Eighty-eighth Amendment) Act, 2003.The civil appeal was dismissed by the Court.

NOTE:
The cases where the judgement of this case is referred are: * Times internet limited v/s UOI 2013 * Home solution retail india limited v/s UOI 2009