2007 Supreme(SC) 1092

2007(6) Supreme 452
Supreme Court of india
S. H. Kapadia & B. Sudershan Reddy, JJ.
(From Bombay High Court)
All India Federation of Tax Practitioners & Ors. — Petitioner
versus
Union of India & Ors. — Respondents
Appeal (civil) 7128 of 2001
Decided on : 21-08-2007

important points
Taxing entries are distinct entries.
Once the State seeks to exercise its power under Entry 60 List II, it has to comply with the provisions of Article 276.
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.

Headnote:(a)Words and Phrases – Service – Services constitute heterogeneous spectrum of economic activities covering wide range of activities such as management, banking, insurance, hospitality, consultancy, communication, administration, entertainment, research and development activities forming part of retailing sector – Service sector has become an Industry by itself – Economists hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs.(Para 4)

       (b)Words and Phrases – Service tax – Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country.(Para 7)

       (c)Constitution of India – Article 276 r/w Entry 60, List II, Seventh Schedule (and Article 246(1) r/w Entry 97, List I, Seventh Schedule) – Legislative competency to impose Service tax – Service tax is a tax on service and it is not a tax on the service providers – With the enactment of Finance Act, 1994, the Central Government deriving its authority from the residuary Entry 97 of the Union List for levying tax on services – The legal backup being further provided by the introduction of Article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 – Finance Acts, though annual Acts, are not necessarily temporary Acts as they may contain provisions of a general character which are of permanent operation – Parliament is competent to introduce a charging provision in a Finance Act – Imposition of service tax or tax on service has been levied statutorily and validly by the said Finance Act, 1994, which has subsequently attained Constitutional status by virtue of the Constitution (Eighty-eighth Amendment) Act, 2003. (Paras 15, 17, 23)

       AIR 1975 SC 2016 – Relied upon.

       (d)Words and Phrase – Principle of equivalence – Applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration – The principle of equivalence equates consumption of goods with consumption of services as both satisfy the human needs – In the case of Internet Service Provider, service tax is leviable for on-line information and database provided by web sites; but no service tax is leviable on E-commerce as there is no Database Access.(Para 19)

       1995(76) E.L.T. 241(SC) – Relied upon.

       (e)Interpretation of Constitution- Taxing Entries – Settled that Legislative Entries in the Seventh Schedule are legislative heads/fields and, therefore, they should be given widest interpretation – However, there are two groups of entries in each of the three Lists in the Seventh Schedule – While the main subject of legislation finds place in the first group, a tax in relation thereto is separately mentioned in the second group – Taxation is not intended to be compromised in the main subject in which an extended construction can be given as that test cannot be applied to taxation – Taxing entries are distinct entries. (Paras 25 and 26)

       AIR 1958 SC 468; (1981) 4 SCC 391; (2005) 2 SCC 762 – Relied upon.

       (f)Doctrine – Aspect Theory – Entry 60 of List II, a taxing entry and not a general entry, mentions Taxes on professions, trades, callings and employment – Therefore, that tax on professions etc. has to be read as a levy on professions, trades, callings etc. as such; and Entry 60 cannot be extended to include services –Held therefore that Parliament had absolute jurisdiction and legislative competence to levy tax on services. (Para 28)

       (g)Constitution of India – Article 276 r/w Entry 60, List II, Seventh Schedule – The activity undertaken by the chartered accountant or cost accountant is similar to a saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act – Tax cannot be levied under that Act without service being provided whereas a professional tax under Entry 60 is a tax on his status – As long as a person/firm remains in the profession, he/it has to pay professional tax. (Paras 29 and 30)

       AIR 1959 SC 582 – Relied upon.

       (h)Entry 60 List II, Seventh Schedule, r/w Article 276 – Once the State seeks to exercise its power under Entry 60 List II, it has to comply with the provisions of Article 276 – Where, however, such exercise of power overlaps with its power under some other Entry, then the limitation under Article 276(2) shall have no relevance – 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. – 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.(Paras 32 and 33)

       (2005) 2 SCC 515; (1981) 2 SCC 318; (2004) 5 SCC 632; (2004) 5 SCC 632; (2006) 3 SCC 1 : (1989) 4 SCC 155; (2005) 4 SCC 214 – Distinguished.

       Facts of the case:

       On 1.6.1998 Finance Bill, 1998 was introduced in Parliament. Clause 119 of the Notes sought to substitute Sections 65, 66 and 68 and amend Section 67 of the Finance Act, 1994 relating to service tax so as to levy a tax on services rendered by a practising chartered accountant, cost accountant and architect to a client in professional capacity at the rate of five per cent of the amount charged to the client. On 3.6.1998, Bombay Chartered Accountants Association made a representation to the Central Government objecting to the afore-stated Bill. On 1.8.1998 the Finance Bill was however passed and the Finance (No. 2) Act, 1998 received the assent of the President of India. The Act came into force with effect from 1.4.1998. On 7.10.1998, Union of India issued Notification No. 57/98 inter alia exempting taxable services other than accounting and auditing. On 16.10.1998, Union of India issued another Notification No. 59/98 inter alia reducing the scope of the exemption. On 20.1.1999, Writ Petition No.142/99 was filed by the Federation in the Bombay High Court challenging the validity of the levy of service tax. By the impugned judgment dated 22.2.2001 the Bombay High Court rejected the writ petition and upheld the legislative competence of Parliament to levy service tax.

       Findings of the Court:

       Service Tax is a VAT which in turn is destination based consumption tax.

       Entry 60 cannot be extended to include services.

       Imposition of service tax or tax on service has been levied statutorily and validly by the said Finance Act, 1994, which has subsequently attained Constitutional status by virtue of the Constitution (Eighty-eighth Amendment) Act, 2003.

       Parliament had absolute jurisdiction and legislative competence to levy tax on services.

       Result: Appeal dismissed.