CWP No.11597 of 2010 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No. 11597 of 2010 (O&M) Date of decision: 22.11.2010 M/s Shubh Timb Steels Limited -----Petitioner Vs. Union of India and another ----Respondents CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Jagmohan Bansal, Advocate for the petitioner. Mr. HPS Ghuman, Senior Standing Counsel for Union of India. Adarsh Kumar Goel, J. 1. This petition seeks declaration of provisions of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994 as ultravires the Constitution. 2. Case set out in the petition is that the petitioner is a public limited company and owner of commercial immoveable property at Parwanoo, District Solan in the State of Himachal Pradesh. It has let out the said property to business entities. It is receiving rent @ Rs.1,75,000/- per month as per agreement Annexure P.1. The transaction of lease is subject to levy of stamp duty under the Indian Stamp Act, 1899 and is governed by Transfer of Property Act, 1882. The subject matter of property and leasing are covered by field assigned to State legislature and, thus, outside the purview of the Central Legislature. 3. In the reply filed on behalf of the Union of India, stand taken is that renting of property was different from sale of goods or transfer of property or conveyance. The transaction is not covered by tax on sale of 1 CWP No.11597 of 2010 goods. Providing of service with respect to property was covered by service tax. Other similar transactions of service in relation to property were service of Mandap Keepers (Section 65(105) (m), Pandal Shamiana (Section 65 (105) (zzw), Convention Service (Section 65 (105) (zc), Right to use properties for business purposes under business support service (Section 65 (105) (zzzq). The levy was not covered under Entry 18 not being tax on land or building but only on service element. The tax was connected with land or building but was not on land or building. The levy was also not covered under Entry 45 being not land revenue nor by Entry 49 which contemplated direct tax. Service tax was on consideration received for allowing use of the premises. Under Article 246(1), Parliament had exclusive power to make laws in respect of matters covered under List I including residue entry. As regards retrospectivity, it has been stated that the amendment was clarificatory. The levy was already provided even under un-amended provisions. The object of the amendment was to overcome the judgment of Delhi High Court against which appeal was pending before the Hon’ble Supreme Court. Judgment of Delhi High Court having not become final, the service providers were required to collect tax even if the same could not be collected on account of the said judgment. 4. We have heard learned counsel appearing in this petition as well as learned counsel for the petitioners in connected petitions and perused the record. 5. Question for consideration is whether levy of service tax on providing of service to any person by any other person by renting of immovable property for business was covered by Entry 49 List II exclusively and not covered by Entry 92C or 97 of List I and thus, was 2 CWP No.11597 of 2010 outside the purview of the Central legislature. Further question is as to validity of levy being made retrospectively operative from 1.6.2007. 6. Contentions raised on behalf of the petitioners are as follows:- i) Subject matter of levy of service tax on providing service of renting of property was covered by Entry 49 List II and not by Entry 92C or 97 of List I. In any case, retrospectivity of the levy was beyond legislative competence. Reliance has been placed on judgment of Delhi High Court in Home solution and judgment of Hon’ble the Supreme Court in Ajay Kumar Mukherjee v. Local Board of Barpeta, AIR 1965 SC 156. ii) Transfer of property without any value addition by way of service could not be covered by the levy of service tax. 7. On the other hand, submission on behalf of Union of India is that scope of Entry 49 List II was limited to direct tax on the property and not on any activity in relation to property. In any case, Entry 49 List II had to be read subject to Entries 92C and 97 of List I. Reliance has been placed, inter-alia, on judgments of apex Court in Union of India v. Shri Harbhajan Singh Dhillon, 1971(2) SCC 790, Tamil Nadu Kalyana Mandapam Assn. v. Union of India, 2004(5) SCC 632 and All India Federation of Tax Practitioners and others v. Union of India and others, (2007) 7 SCC 527. It was also submitted that judgment of Delhi High Court did not involve the issue of validity of the levy and only involved question of validity of notification and circular to recover service tax from the lessors of property on the proceeds of renting out of property. After the said judgment, by way of amendment, instead of service in relation to renting of immovable 3 CWP No.11597 of 2010 property, the legislature has substituted expression of providing service “of renting of immoveable property.” After the amendment, renting of immoveable property itself was a service covered by the definition of taxable service. Levy of tax on property did not exclude levy of tax on service in relation to property. A tax on one aspect of subject matter did not exclude tax on another aspect of the same subject matter. In view of this settled legal position, there was no conflict in tax covered by Entry 49 List II and tax covered by Entry 92C of List I. 8. Service tax is chargeable under the provisions of Finance Act, 1994. Section 66 provides for levy of service tax on taxable service as defined under Section 65(105) read with the definition of such services under different clauses of Section 65. In the present case, the taxable service is covered by Section 65(105) (zzzz) which refers to service provided “by renting of immoveable property”. The expression “renting of immoveable property” is defined under Section 65(90a) as including renting etc. for use in the course of furtherance of business. The precise definitions are:- “65(105) ‘taxable service’ means any service provided or to be provided – xx xx xxx xxxx (zzzz)to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or, for furtherance of, business or commerce.” Explanation: xx xx xx xx xx 65(90a). ‘renting of immovable property’ includes renting, letting, leasing, licensing or other similar arrangement of immovable property for use in the course of furtherance of business or commerce but does not include – i) renting of immovable property by a religious body or to a religious body; or ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre; 4 CWP No.11597 of 2010 Explanation – for the purpose of this clause, ‘for use in the course or furtherance of business or commerce’ includes use of immovable property as factories, office, buildings, warehouses, theatres, exhibition halls and multiple-use buildings.” 9. Prior to its amendment by Finance Act, 2010, with effect from 1.6.2007, the definition of “taxable service” incorporated vide Finance Act, 2007 was as under:- “65(105) ‘taxable service’ means any service provided or to be provided – (a) to (zzzy) xxx (zzzz) to any person, by any person in relation to renting of immovable property for use in the course or furtherance of business or commerce.” 10. Contention on behalf of the petitioners is that in pith and substance, renting of a building was a transaction in respect of land and buildings covered by Entries 18, 45 and 49 of List II in respect of which exclusive jurisdiction to legislate under Article 246(3) was vested in the State Legislature. Leasing was transfer of rights and not a service and was, thus, not covered under Entry 92C of List I. It amounted to conveyance attracting stamp duty. The Delhi High Court upheld the plea of service providers vide judgment dated 18.4.2009 in Home Solution Retail India Limited v. Union of India and others, (2009) 22 VST 508. It was held that service tax was tax on value addition by service provider. As per words “in relation to”, service was to be provided in relation to renting of property and the property by itself could not be regarded as service. Renting of property did not involve any value addition. It was accordingly held that notification dated 22.5.2007 and circular dated 4.1.2008 providing for service tax on renting of property per se was ultravires the scheme of levy of service tax. By way of amendment, even renting of immovable property itself was 5 CWP No.11597 of 2010 covered by the definition of “taxable service” instead of service “in relation to renting of property”. The amendment was made retrospective which amounted to tax service provider and not service recipient as service provider could not recover the service rendered from the recipient of the service for the period prior to the amendment. 11. Issue of interpretation of taxing entries under the Constitution of India including the aspect theory have been gone into in our recent judgment dated 25.10.2010 in CWP No.10992 of 2010 (Tata Sky Limited v. State of Punjab and another) in the context of contention of validity of entertainment duty by State Legislature with reference to Entry 62 of List II as being in conflict with Entry 92C of List I. The discussion in the said judgment to the following effect will obviate repetition of discussion on the issue involved herein:- “Settled law on interpretation of scope of taxing entries 9. Before proceeding further, we may notice the settled legal position. Constitutional scheme of distribution of legislative powers between Union and the State legislatures under Article 246 of the Constitution is well known. While Parliament has exclusive power to legislate with respect to matters in List I, the State legislatures have exclusive power to make laws for matters in List II subject to exclusive power of the Parliament to legislate with respect to matters in List I. Both Parliament and State legislatures have concurrent power of legislation with respect to matters in List III subject to Central legislation prevailing in case of repugnancy. 10. Principle of Federal Supremacy can be invoked only if there is irreconcilable conflict in entries in Union and State lists. If two entries can be reconciled by harmonious construction or by applying principle of pith and substance, there is no occasion to apply the principle of federal supremacy. Concept of repugnancy under Article 254 relating to List III is different from repugnancy arising due to overlapping in List I and List II in which case principle of pith and substance is applied to determine legislative competence. Entries in the lists are not powers of legislation but fields of legislation. Taxation is distinct matter for legislative 6 CWP No.11597 of 2010 competence. Power to tax cannot be deduced from general entry. There is no overlapping in taxing power. Entries 82 to 92C and 97 of List I and Entries 45 to 63 of List II deal with taxes. There is no entry relating to tax in List III. 11. Every tax may be levied on an object or on an event of taxation. Subject of tax is distinct from incidence of taxation. Tax on property has been described as direct tax and tax on taxable event in respect of property is described as indirect tax. The distinction is based on difference in impact. While considering any particular levy, mere description of the subject matter of tax is not conclusive. 12. Subjects of tax which fall in power of a particular legislature in one aspect and purpose may fall within the legislative power of the another in other aspect and purpose. Such overlapping is not considered to be overlapping in law as the same transaction may involve two or more events in different aspects. Overlapping does not detract from distinctness of the aspects. The aspect theory, however, cannot be applied to justify encroachment in legislative fields. 13. Some of the leading judgments on the subject are M/s Hochst Pharmaceuticals Ltd. and another Vs. State of Bihar and others AIR 1983 SC 1019, Godfrey Phillips India Ltd. and another Vs. State of U.P. and others (2005) 2 SCC 515, Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others (2006) 3 SCC 1 and State of W.B. v. Kesoram Industries Ltd.,(2004) 10 SCC 201. 14. We may extract observations from Kesoram Industries: “31. Article 245 of the Constitution is the fountain source of legislative power. It provides — subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. The legislative field between Parliament and the legislature of any State is divided by Article 246 of the Constitution. Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule, called the “Union List”. Subject to the said power of Parliament, the legislature of any State has power to make laws with respect to any of the matters enumerated in List III, called the “Concurrent List”. Subject to the abovesaid two, the legislature of any State has exclusive power to make laws with respect to any of the matters enumerated in List II, called the “State List”. Under Article 248 the exclusive power of Parliament to 7 CWP No.11597 of 2010 make laws extends to any matter not enumerated in the Concurrent List or State List. The power of making any law imposing a tax not mentioned in the Concurrent List or State List vests in Parliament. This is what is called the residuary power vesting in Parliament. The principles have been succinctly summarised and restated by a Bench of three learned Judges of this Court on a review of the available decision in Hoechst Pharmaceuticals Ltd. v. State of Bihar, (1983) 4 SCC 45. They are: (1) The various entries in the three lists are not “powers” of legislation but “fields” of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States. (2) In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State law will be ultra vires and shall have to give way to the Union law. (3) Taxation is considered to be a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power. (4) The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because, to quote V. Ramaswami, J., the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of a mere simplex enumeratio of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its 8 CWP No.11597 of 2010 expanse the legislations touching incidental and ancillary matters. (5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament’s legislative competence must be upheld. Where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such a situation the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence. The court has to look at the substance of the matter. The doctrine of pith and substance is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions. Incidental and superficial encroachments are to be disregarded. (6) The doctrine of occupied field applies only when there is a clash between the Union and the State Lists within an area common to both. There the doctrine of pith and substance is to be applied and if the impugned legislation substantially falls within the power expressly conferred upon the legislature which enacted it, an incidental encroaching in the field assigned to another legislature is to be ignored. While reading the three lists, List I has priority over Lists III and II and List III has priority over List II. However, still, the predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II though it may incidentally affect any item in List I. (emphasis supplied) 43. In Ralla Ram v. Province of East Punjab, AIR 1949 FC 81 the Federal Court made it clear that every effort should be made as far as possible to reconcile the seeming conflict between the provisions of the Provincial legislation and the Federal legislation. Unless the court forms an opinion that the extent of the alleged invasion by a Provincial Legislature into the field of the Federal Legislature is so great as would justify the view that in pith and substance the impugned tax is a tax within the domain of the 9 CWP No.11597 of 2010 Federal Legislature, the levy of tax would not be liable to be struck down. The test laid down in Sir Byramjee Jeejeebhoy case, AIR 1940 Bom 65 by the Full Bench of the Bombay High Court was approved. 44. In Asstt. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55 for the purpose of attracting the applicability of Entry 49 in List II, so as to cover the impugned levy of tax on lands and buildings, the Constitution Bench laid down twin tests, namely: (i) that such tax is directly imposed on lands and buildings, and (ii) that it bears a definite relation to it. Once these tests were satisfied, it was open for the State Legislature, for the purpose of levying tax, to adopt the annual value or the capital value of the lands and buildings for determining the incidence of tax. Merely, on account of such methodology having been adopted, the State Legislature cannot be accused of having encroached upon Entry 86, 87 or 88 of List I. Entry 86 in List I proceeds on the principle of aggregation and tax is imposed on the totality of the value of all the assets. It is quite permissible to separate lands and buildings for the purpose of taxation under Entry 49 in List II. There is no reason for restricting the amplitude of the language used in Entry 49 in List II. The levy of tax, calculated at the rate of a certain per centum of the market value of the urban land, was held to be intra vires the powers of the State Legislature and not trenching upon Entry 86 in List I. So is the view taken by another Constitution Bench in Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality (1969) 2 SCC 283 where the submission that the levy was not a rate on lands and buildings as appropriately understood but rather a tax on capital value, was discarded. 45. R.R. Engg. Co. v. Zila Parishad, Bareilly, (1980) 3 SCC 330 is a case of circumstances and property tax levied on the basis of income which the assessee receives from his profession, trade, calling or property. The plea that the tax was a tax on income was discarded. The test propounded by the Constitution Bench is that an excessive levy on circumstances may tend to blur the distinction between a tax on income and a tax on circumstances. Income will then cease to be a measure or yardstick of the tax and will become the very subject-matter of the tax. Restraint in this behalf is a prudent prescription for the local authorities to follow. The Constitution Bench observed that it was only a matter of convenience that income was adopted as a yardstick or measure for assessing the tax and the evolvement of such mechanism was not conclusive on the nature of tax. 10 CWP No.11597 of 2010 Xxxx xx xx xxx 50…….The Constitution is an organic living document. Its outlook and expression as perceived and expressed by the interpreters of the Constitution must be dynamic and keep pace with the changing times. Though the basics and fundamentals of the Constitution remain unalterable, the interpretation of the flexible provisions of the Constitution can be accompanied by dynamism and lean, in case of conflict, in favour of the weaker or the one who is more needy. Several taxes are collected by the Centre and allocation of revenue is made to States from time to time. The Centre consuming the lion’s share of revenue has attracted a good amount of criticism at the hands of the States and financial experts. The interpretation of entries can afford to strike a balance, or at least try to remove imbalance, so far as it can. Any conscious whittling down of the powers of the State can be guarded against by the courts. “Let it be said that the federalism in the Indian Constitution is not a matter of administrative convenience, but one of principle — the outcome of our own historical process and a recognition of the ground realities.” (SCC p. 217, para 276) Quoting from Setalvad, M.C.: Tagore Law Lectures, “ Union and State Relations under the Indian Constitution” (Eastern Law House, Calcutta, 1974), Jeevan Reddy, J. observed: (SCC p. 217, para 276) “It is enough to note that our Constitution has certainly a bias towards Centre vis-à-vis the States.... It is equally necessary to emphasise that courts should be careful not to upset the delicately crafted constitutional scheme by a process of interpretation.” Xx xx xx xx In a nutshell 129. The relevant principles culled out from the preceding discussion are summarised as under: (1) In the scheme of the lists in the Seventh Schedule, there exists a clear distinction between the general subjects of legislation and heads of taxation. They are separately enumerated. (2) Power of “regulation and control” is separate and distinct from the power of taxation and so are the two fields for purposes of