IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 469 of 1999 and SPECIAL CIVIL APPLICATION No 7220 of 1999 For Approval and Signature: Hon'ble CHIEF JUSTICE MR DM DHARMADHIKARI and Hon'ble MR.JUSTICE M.S.SHAH ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- CHARTERED ACCOUNTANTS ASSOCIATION and GUJARAT INSTITUTE OF CIVIL ENGINEERS & ARCHITECTS Versus UNION OF INDIA -------------------------------------------------------------- Appearance: MR SN SOPARKAR and MR MIHIR H JOSHI for Petitioners MR ASIM J PANDYA for Respondent No. 1 RULE SERVED for Respondent No. 4 -------------------------------------------------------------- CORAM : CHIEF JUSTICE MR DM DHARMADHIKARI and MR.JUSTICE M.S.SHAH Date of decision: 27/12/2000 COMMON CAV JUDGEMENT (Per : MR.JUSTICE M.S.SHAH) In these petitions under Article 226 of the Constitution, the Chartered Accountants' Association and the Gujarat Institute of Civil Engineers & Architects have challenged the constitutional validity of Section 88 of the Finance Act, 1997 and Section 116 of the Finance (No. 2) Act, 1998 levying service tax on the Consulting Engineers and Architects and also on the practising Chartered Accountants. The Gujarat Institute of Civil Engineers & Architects is a registered association of Engineers and Architects of Gujarat. It has about 2600 members and Special Civil Application No. 7220/99 is filed on their behalf. Petitioner Nos. 2 and 3 in the said petition are Consulting Engineers and past/present office bearers of the said association. The Chartered Accountants' Association is an association of 1000 practising Chartered Accountants in the State of Gujarat. Special Civil Application No. 469/99 is filed by the association on behalf of its members. Petitioner No. 2 in the said petition is a practising Chartered Accountant. 2. Service tax was introduced by the Finance Act, 1994. Chapter V thereof contains the scheme and provisions relating to the tax. Section 66 imposed service tax at the rate of 5% of the value of taxable services provided to any person by the person responsible for collecting the service tax. Taxable service was defined in Section 65(1) to include certain services provided by stockbroker, telegraph authority and general insurer. The persons providing the services were liable to recover the tax and pay the same to the Central Government under Section 68 of the Act. The ambit of the levy was widened by the Finance Act, 1997 and section 65 was substituted so as to include a wide variety of services including under clause (g) services provided to a client by a consulting engineer. A few other services were also covered under the Act. It appears that representations were made against such levy by persons carrying on different professions/callings. Section 116 of the Finance Act, 1998 substituted Section 66 of the Finance Act, 1994. While a few services covered by the 1997 Act were excluded from the purview of the service tax, a few more services were included. Services provided by the Architects, Interior Decorators, Chartered Accountants, Cost Accountants and Company Secretaries were covered by the levy of tax. It appears that representations were made by the Associations representing various professions/callings. The respondent authorities thereafter issued notifications dated 7.10.1998 and 16.10.1998 clarifying which services of practising Chartered Accountants are exigible to service tax and exempting such taxable services provided by the practising Chartered Accountants/Company Secretaries/Cost Accountants in their professional capacities. 3. While admitting the petitions, the Court granted ad-interim relief restraining the respondents from enforcing in any manner the provisions of Section 88 of the Finance Act, 1997 and Section 116 of the Finance Act, 1998 in so far as they levy service tax on services provided to the respective clients by consulting engineers, architects and practising chartered accountants. It appears that the Court was informed that the provisions levying service tax on the professions have been challenged before various High Courts including Madras High Court, Calcutta High Court and Rajasthan High Court where interim stay against levy of service tax was granted. In response to the Rule, the affidavit in reply has been filed by the Assistant Commissioner, Central Excise, Service Tax Cell, Ahmedabad in each petition. 4. At the hearing of these petitions, Mr Soparkar for the Chartered Accountants Association and Mr Mihir H Joshi for the Gujarat Institute of Civil Engineers & Architects have challenged the constitutional validity of the service tax levied on the services rendered by the above professionals on the following grounds :- 4.1 What is being taxed by the impugned levy is services being rendered by the three categories of professionals. Profession by itself is nothing but rendering services in the respective professional field. It is exclusively within the competence of the State legislature to levy tax on professions as per Entry 60 in List II (State List) in the VIIth schedule to the Constitution. The relevant provisions of the Finance Act, 1997 and 1998 enacted by Parliament, therefore, suffer from the vice of lack of legislative competence as the Parliament has no power to levy tax on professions. 4.2 The impugned provisions mete out discriminatory treatment in as much as the same services being rendered by the non-qualified persons are not subjected to tax, but only the services being rendered by the professionals are subjected to tax. Similar services rendered by non-qualified persons in the field of engineering, architecture and accountancy are not subjected to tax. The classification between qualified persons and non-qualified persons is irrational, discriminatory and violative of Article 14 of the Constitution. 4.3 The levy will cost the client 5% more than what it would cost when the same services are rendered by a non-qualified person who is not covered by the levy. As such the client would prefer such other non-qualified persons. The impugned levy, therefore, violates the freedom of profession guaranteed under Article 19(1)(g) of the Constitution. 4.4 The impugned provisions are even otherwise arbitrary as they adversely affect the carrying on of the profession by Engineers, Architects and Chartered Accountants, in as much as there is no onus cast on the recipient of services to pay tax and the entire burden of recovery of payment is thrust on the persons who provide services with harsh penal consequences in the event of an involuntary default. 4.5 While bringing all the concerned professional services in the net of service tax, it has placed the services rendered by the goods transport operator, outdoor caterer and shamiana contractor etc. out of the tax net without specifying any reason for their earlier inclusion and the present exclusion. Therefore also, the impugned levy is arbitrary and discriminatory. 5. Mr Ashim Pandya, learned counsel for the Union of India has made the following submissions :- 5.1 The tax is not on the profession concerned, but on the services rendered to the client. The levy is not covered by Entry 60 in List II of the VIIth Schedule to the Constitution but it is within the legislative competence of the Parliament to make such an enactment. Under Article 248 of the Constitution read with Entry 97 of the Union List, the Parliament has exclusive power to make any law with respect to any matter not enumerated in the concurrent list and the State List. Service tax is neither mentioned in the State list nor in the Concurrent list. 5.2 Service sector contributed 46% of the gross domestic product but it was not covered by the tax net earlier. The excise duty is a tax on manufacture of goods and sales tax is a tax on sale of goods. Both these taxes are indirect taxes as the expenditure is passed on to the person purchasing the goods. However, in absence of any taxing statute in respect of services, a large number of activities were not subjected to tax although such activities were an important part of the national economy. The persons rendering such services were only subjected to income tax covered by entry 83 in List I. The persons manufacturing goods pay excise duty on the process of manufacturing goods and pay sales tax on sale of the goods and are also liable to pay income tax on the income earned by them. However, the professionals rendering services for remuneration and similarly other persons rendering service in a large number of fields for remuneration were only subjected to professional tax by the State Legislature under Entry 60 in List II and that too subject to the maximum limit of Rs.2500 per annum as imposed under Article 276(2) of the Constitution. Such tax was, however, on their profession/trade/ calling/employment irrespective of the fact whether they were earning any income or not. The Parliament, therefore, decided to tax the services being rendered by professionals and by other trades and callings. Such tax on services is, therefore, absolutely distinct and separate from the tax on profesion/trade/calling/employment. Service tax is an indirect tax which the person carrying on profession/trade/calling can pass on to the person obtaining the services. On the other hand, the tax on profession being levied by the State legislature under Entry 60 in List II is a direct tax on the person himself. 5.3 The persons qualified and the persons not qualified are two separate classes and, the classification has a rational nexus with the object sought to be achieved. Hence, there is no hostile discrimination. In Addition Advertising vs. Union of India, 1998 (1) GLR 317, a similar petition filed by the advertising agents challenging the levy of service tax has been dismissed by a Division Bench of this Court and the levy of service tax has been upheld. 5.4 The services rendered by the chartered accountants are materially different from those being rendered by other accountants who render merely arithmetical accounting which would not require special skill. The accountants other than chartered accountants are not technically qualified for making/providing financial accounting / tax planning techniques etc. It is only the chartered accountants alone who by virtue of their specialized education are in a position to provide the specialized services. Even otherwise, the services of accounting rendered by chartered accountants is qualitatively different from such services rendered by other persons. The affidavits also controvert various averments made in the petitions and the contentions raised therein. 6. CONSTITUTIONAL AND STATUTORY PROVISIONS : Art. 248. Residuary powers of legislation - (1) Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists. Art. 276. Taxes on professions, trades, callings and employments - (1) Notwithstanding anything in Article 246, 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. (2) The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings and employments shall not exceed two thousand and five hundred rupees per annum: (3) The power of the Legislature of a State to make laws 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 incomes accruing from or arising out of professions, trades, callings and employments. SEVENTH SCHEDULE List I - Union List Entry 82 - Taxes on income other than agricultural income. Entry 84 - Duties of excise on tobacco and other goods manufactured or produced in India except ... ... Entry 97 - Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists. List II - State List Entry 54 - Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I) Entry 60 - Taxes on professions, trades, callings and employments. Chapter V - Service Tax Sec. 65. In this Chapter, unless the context otherwise requires, - (5) "architect" means any person whose name is, for the time being, entered inthe register of architects maintained under section 23 of the Architects Act, 1972 (20 of 1972) and also includes any commercial concern engaged in any manner, whether directly or indirectly, in rendering services in the field of architecture. (13) "consulting engineer" means any professionally qualified engineer or an engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering. (31) "practising chartered accountant" means a person who is a member of the Institute of Chartered Accountants of India and is holding a certificate of practice granted under the provisions of the Chartered Accountants Act, 1949 (38 of 1949) and includes any concern engaged in rendering services in the field of chartered accountancy. (48) "taxable service" means any service provided - (g) to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in or or more disciplines of engineering. (p) to a client, by an architect in his professional capacity in any manner; (s) to a client, by a practising chartered accountant in his professional capacity, in any manner; Sec. 66 Charge of service tax - (1) & (2) .. .. .. .. .. (3) With effect rom the date notified under section 88 of the Finance Act, 1997 (26 of 1997), there shall be levied 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), (k), (l), (m), (n) and (o) of clause (48) of Section 65 and collected in such matter as may be prescribed. (4) With effect from the date notified under section 116 of the Finance (No. 2) Act, 1998, there shall be levied a service tax at the rate of five per cent of the value of the taxable services referred to in sub-clauses (p), (q), (r), (s), (t), (u), (v), (w), (x), (y) and (z) of clause (48) of section 65 and collector in such manner as may be prescribed. Valuation of taxable services for charging service tax. Sec. 67. For the purposes of this Chapter, the value of taxable services,- (f) in relation to service provided by a consulting engineer to a client, shall be the gross amount charged by such engineering from the client for advice, consultancy or technical assistance in any manner in one or more disciplines of engineering; (o) in relation to the service provided by an architect to a client, shall be the gross amount charged by such architect from the client for services rendered in professional capacity in any manner; (r) in relation to the service provided by a practising chartered accountant to a client, shall be the gross amount charged by such accountant from the client for services rendered in professional capacity in any manner' Payment of service tax Sec. 68 (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed. (2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service. 7. Since the submissions made on behalf of the petitioners are essentially based on certain decisions, we proceed to discuss them first. 7.1 In Currie vs. Commissioners of Inland Revenue, (1921) 2 King's Bench Division 332, the Court of Appeal laid down the following definition of the profession :- "Whether a profession is exercised or not ... ... ..... the fact that the particular man is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of conduct enforced while he is practising it. I do not for a moment say it settles the matter, but if I were deciding a question of profession I should attach some important to that particular feature". It is, therefore, submitted that profession and service are one and the same thing. There can not be a profession which does not involve rendering service. The Court was concerned with the question whether the appellant was carrying on a profession or a business. The appellant was carrying on the business of the Income Taxpayers' Appeal Agency and doing the original work of an accountant. He was not a chartered accountant, nor a member of any organized professional body. He had, however, from time to time employed a chartered accountant as a member of his staff. The appellant himself was specialized in income tax, assisting persons in the preparation of their income tax returns and claims for repayment of income tax, and advised taxpayers on general income tax and excess profits duty questions. He was paid by way of fixed fees for his accountancy work and for a portion of his income tax and excess profits duty work. For his services, in connection with income tax, etc. and particularly as regards claims to relief from income tax or for repayment of income tax, the appellant had frequently charged a percentage on the amounts discharged or recovered from the revenue authorities. The appellant's contention that he was carrying on a profession was negatived by the Tax Commissioners and in appeal, the Court of Appeal applied the above test and held that the appellant was not carrying on a profession. We do not see how this decision advances the petitioners' case. There is no dispute about the fact that the petitioners are associations whose members carry on the professions of chartered accountants/consulting engineers/architects, as the case may be. 7.2 Reliance is also placed on the following observations made by the Bombay High Court in Sukharam vs. Nagpur Corporation, AIR 1964 Bom. 200:- "Any activity which can justly be called a commercial activity, must imply some investment of capital and the activity, must run the risk of profit or loss. ... ... ... A lawyer's profession is not a kind of profession which can be said to be carried on as profession of commercial nature. It is not a commercial activity and the very nature of the work is such that it is incapable of being of a commercial nature. An activity to be a profession must be one carried on by an individual by his personal skill, intelligence and dependent on individual characteristic. ... ... ... It is the personal skill, intelligence, study, integrity which is the core of a professional activity." The Bombay Shops and Establishments Act required compulsory registration of a commercial establishment where commercial activity is carried on. The Court was called upon to examine the question whether the office of a person carrying on the profession of a lawyer was a commercial establishment. It was in this context that the Court gave a finding that the profession of an advocate is not one which could be said to partake of the character of a commercial activity or commercial transaction. Certain attributes of the profession distinguishing it from business were cited in the judgment. It was pointed out that a lawyer performs functions which are in the nature of regal function and a lawyer is part and parcel of the whole administration of justice. It is not only in his office or in his chamber that a lawyer carries on his profession. A major part of his duty requires him to attend Courts and defend cases of his clients, to attend to other tribunals where permitted and to present his client's interest in several places outside his chamber or office room. It cannot, therefore, be predicated that the profession of law or that of an advocate is carried on only in his office. It is thus clear that the Court was examining the question whether a lawyer's office could be considered to be a commercial establishment or not. All the observations relied upon by the learned counsel for the petitioners were made in that context and the Court was not at all required to examine the controversy whether the tax on services rendered by a professional is different from the tax on profession. 7.3 Reliance is placed on the decision in M/s. L.M. Chitale vs. Labour Commissioner, AIR 1964 Mad.130 for contending that it cannot be said that a profit motive underlies the carrying on of a profession or an occupation and that, therefore, there is a material difference between carrying on a profession on the one hand and carrying on occupation, trade, or business on the other hand. The facts in this case were also similar to the facts in the Bombay case. In this case, the office of a chartered architect was sought to be brought within the purview of Madras Shops and Establishment Act and the Court upheld the contention of the chartered architect that the tax was meant to cover shops and establishment which are associated with the carrying on of trade or commerce and cannot take in establishments where professional services are rendered. It is true that the Court observed that the expression "services are rendered to customers" in the definition has to be construed as services rendered to customers in the carrying on of trade or business", but this decision cannot be construed as laying down that services rendered by a professional is the same thing as a profession. Since the controversy was quite different, the observations made in the context of applicability or otherwise of Shops and Establishments Act cannot be permitted to carry too far. 7.4 Reliance is also placed on the decision of the Punjab High Court in Waliati Ram vs. Rupar Municipality, AIR 1960 Punjab 669 wherein it was held that the items in the Legislative List have to be given most liberal interpretation and have to be construed in their widest amplitude and the rule of interpretation that the words should be read in their ordinary, natural and grammatical meaning has no applicability to constitutional enactment conferring legislative powers. Hence, Entry 60 in the State list conferring power on the State Legislature to tax persons who are carrying on professions, trades, callings and employments must be given most liberal interpretation and the words in the entry must be construed in their widest amplitude. The said entry is broad based and comprehensive. In this case, what was challenged was the notification of the Punjab Government under the Punjab Municipal Act levying tax on every person carrying on a trade, profession, calling or employment in the area subject to the authority of the municipal committee. In pursuance of the notification, certain sums of money were recovered from three plaintiffs-employees of a private limited Company. The plaintiffs filed suits for the refund of the amounts so paid and sought an injunction prohibiting the Municipal Committee from recovering any further tax on the plea that the Municipal Committee had no authority to impose any tax on persons in private employment. The suits as well as the appeals were dismissed. The second appeals were carried