# + ALL INDIA FEDERATION OF TAX PRACTITIONERS & ORS v. UNION OF INDIA AND ORS

- **Citation:** [2007] 9 S.C.R. 147
- **Court:** Supreme Court of India
- **Decided:** 2007-08-21
- **Case number:** Civil Appeal No. 7128of2001
- **Bench:** S.H. Kapadia, B. Sudershan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/all-india-federation-of-tax-practitioners-ors-v-union-of-india-and-ors-23266
- **Pages:** 30

## Headnote

Constitution of India, 1950-Articles 246(/), 276, 268A and Schedule
VII List I Entries 92 C and 97 and List II Entry 60-Service Tax-Levy ofA
B
On Chartered Accountants, Cost Accountants and Architects-By Central C
legislation-Legislative competence of Parliament to levy the tax in view of
Entry 60 of State List of Seventh Schedule-Held: Parliament has legislative
competence to levy the Service Tax under Entry 97 of Union List of Seventh
Schedule-Entry 60 of State List of Seventh Schedule refers to 'professions'
which will not include services~onstitution (Eighty-eighth Amendment)
Act, 2003-Finance Act, 1994-Finance Act, 1998.
D
Interpretation of Constitution-Interpretation of Legislative headsHe/d: While interpreting such heads, the court has to go by schematic
interpretation of the three lists of the Seventh Schedule and not by dictionary
meaning of the words.
Doctrines/Principles:
Doctrine of Pith and Substance-Applicability of
Principle of equivalence-Application of
Tax/Taxation:
Service Tax and Professional Tax-Distinction between.
Tax on profession and tax on income-Distinction between.
E
F
Words and Phrases-'Services; 'Service Tax; 'Taxable service'-Meaning G
of
The question for consideration in the present appeal was regarding
constitutional status of the levy of service tax on Chartered Accountants, Cost
147
H
148
SUPREME COURT REPORTS
(2007] 9 S.C.R.
A Accountant and Architects by Finance Act, 1994 and Finance (No. 2) Act,
1998, and the legislative competence of Parliament to impose service tax under
Article 246 (1) r/w Entry 97 of List I of Seventh Schedule, in view of Entry 60
1
B
· of List Ilof Seventh Schedule.
Dismissing the appe\ctl, the Court
HELD: 1. Parliament has legislative competence to levy service tax by
way of Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered
·accountants, cost accountants and architects. The above position now stands
fortified by the Constitution (Eighty-eighth Amendment) Act, 2003 which has
inserted Article 268A and Entry 92C which clearly indicates that Entry 60
C of List II and Entry 92C of List I operate in different spheres. However, there
is no challenge to the Constitutional validity of the said Constitution (Eightyeighth. Amendment) Act, 2003 before this Court.
(Para 41) (175-G, H; 176-AI
·Godfrey Phillips India Ltd. and Anr. v. State of U.P. and Ors., (2005) 2
D SCC 515 and International Tourist Corporation and Ors. v. State of Haryana
and Ors., (1981) 2 SCC 318, relied on.
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
E of India and Anr., (2005) 4 SCC 214; Bharat Sanchar Nigam Ltd. and Anr. v.
Union of India and Ors., (2006) 3 SCC 1 and R.R. Engineering Co. v. Zita
Parishad, Bareilly and Anr., (1980) 3 SCC 330, distinguished.
2. The source of the concept of service tax lies in economics. It is an
economic concept. It has evolved on account of Service Industry becoming a
F major contributor to the GDP of an economy, particularly knowledge-based
economy. With the enactment of Finance Act, 1994, the Central Government
derived its authority from the residuary Entry 97 of the Union List of Seventh
Schedule to the Constitution of India for levying tax on seriices. The legal
backup was further provided by the introduction of Article 268A in the
G Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which
stated that taxes on services shall be charged by the Central Government and
appropriated between the Union Government and the States. Simultaneously,
a new Entry 92C was also introduced in the Union List for the levy of service
tax. As an economic concept, there is no distinction between the consumption
. of goods and consumption of services as both satisfy human needs. It is this
H economic concept based on the legal principle of equivalence which now stands
+
+
ALL INDIA FEDERATION OF TAX

## Text

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-+
ALL INDIA FEDERATION OF TAX PRACTITIONERS & ORS.
v.
UNION OF INDIA AND ORS.
AUGUST 21, 2007
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]
Constitution of India, 1950-Articles 246(/), 276, 268A and Schedule
VII List I Entries 92 C and 97 and List II Entry 60-Service Tax-Levy ofA
B
On Chartered Accountants, Cost Accountants and Architects-By Central C
legislation-Legislative competence of Parliament to levy the tax in view of
Entry 60 of State List of Seventh Schedule-Held: Parliament has legislative
competence to levy the Service Tax under Entry 97 of Union List of Seventh
Schedule-Entry 60 of State List of Seventh Schedule refers to 'professions'
which will not include services~onstitution (Eighty-eighth Amendment)
Act, 2003-Finance Act, 1994-Finance Act, 1998.
D
Interpretation of Constitution-Interpretation of Legislative headsHe/d: While interpreting such heads, the court has to go by schematic
interpretation of the three lists of the Seventh Schedule and not by dictionary
meaning of the words.
Doctrines/Principles:
Doctrine of Pith and Substance-Applicability of
Principle of equivalence-Application of
Tax/Taxation:
Service Tax and Professional Tax-Distinction between.
Tax on profession and tax on income-Distinction between.
E
F
Words and Phrases-'Services; 'Service Tax; 'Taxable service'-Meaning G
of
The question for consideration in the present appeal was regarding
constitutional status of the levy of service tax on Chartered Accountants, Cost
147
H
148
SUPREME COURT REPORTS
(2007] 9 S.C.R.
A Accountant and Architects by Finance Act, 1994 and Finance (No. 2) Act,
1998, and the legislative competence of Parliament to impose service tax under
Article 246 (1) r/w Entry 97 of List I of Seventh Schedule, in view of Entry 60
1
B
· of List Ilof Seventh Schedule.
Dismissing the appe\ctl, the Court
HELD: 1. Parliament has legislative competence to levy service tax by
way of Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered
·accountants, cost accountants and architects. The above position now stands
fortified by the Constitution (Eighty-eighth Amendment) Act, 2003 which has
inserted Article 268A and Entry 92C which clearly indicates that Entry 60
C of List II and Entry 92C of List I operate in different spheres. However, there
is no challenge to the Constitutional validity of the said Constitution (Eightyeighth. Amendment) Act, 2003 before this Court.
(Para 41) (175-G, H; 176-AI
·Godfrey Phillips India Ltd. and Anr. v. State of U.P. and Ors., (2005) 2
D SCC 515 and International Tourist Corporation and Ors. v. State of Haryana
and Ors., (1981) 2 SCC 318, relied on.
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
E of India and Anr., (2005) 4 SCC 214; Bharat Sanchar Nigam Ltd. and Anr. v.
Union of India and Ors., (2006) 3 SCC 1 and R.R. Engineering Co. v. Zita
Parishad, Bareilly and Anr., (1980) 3 SCC 330, distinguished.
2. The source of the concept of service tax lies in economics. It is an
economic concept. It has evolved on account of Service Industry becoming a
F major contributor to the GDP of an economy, particularly knowledge-based
economy. With the enactment of Finance Act, 1994, the Central Government
derived its authority from the residuary Entry 97 of the Union List of Seventh
Schedule to the Constitution of India for levying tax on seriices. The legal
backup was further provided by the introduction of Article 268A in the
G Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which
stated that taxes on services shall be charged by the Central Government and
appropriated between the Union Government and the States. Simultaneously,
a new Entry 92C was also introduced in the Union List for the levy of service
tax. As an economic concept, there is no distinction between the consumption
. of goods and consumption of services as both satisfy human needs. It is this
H economic concept based on the legal principle of equivalence which now stands
+
+
ALL INDIA FEDERATION OF TAX PRACTITIONERS "· U.O.l.
149
incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) A
Act, 2003. Further, it is important to note, that "service tax" is a value added
tax which in turn is a general tax which applies to all commercial activities
involving production of goods and provision of services. Moreover, VAT is a
consumption tax as it is borne by the client. (Para 171 [161-A, DI ·
Moti laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad, B
(1995) 76 E.L.T.241 (SC), referred to.
3. Finance Act is passed every year to fix the rate of tax. This is the
primary object for enacting the Finance Act. But it does not mean that a new
distinct charge cannot be introduced by the Finance Act. This is, however, C
subject to the Finance Act complying with the Constitutional limitations.
Additional tax revenue can be collected either by increasing the rate or by
levy of a fresh charge. All levies through the medium of the Finance Act may
either enhance the rate or levy a fresh charge. The Finance Act can also make
an extensive modification in an Act. (Para 21) (163-D, E)
The Madurai District Central Co-operative Bank Ltd v. The Third
Income Tax Officer, Madurai, AIR (1975) SC 2016, relied on.
4.1. Though it is correct that legislative Entries in the Seventh Schedule
D
are legislative heads/fields and, therefore, they should be given widest
interpretation. However,_,there are two groups of entries in each of the three E
Lists in the Seventh Schedule. In List I, Entries 1 to 81 refer to several matters
over which Parliament has authority to legislate. But Entries 82 to 92
enumerate the taxes which could be imposed by a law of Plrliament. 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 F
separately mentioned in the second group. List II, Entries 1 to 44 form one
group mentioning the "subjects" on which States could legislate. Entries 45
to 63 in that List form another group, and they deal in with taxes. Taxation is
not intended to be compromised in the main subject in which an exten, d
construction can be given as that test cannot be applied to taxation. Taxing
entries are distinct entries. This distinction between the two groups of entries G
is also manifest in the language of Article 248 clauses (1) and (2) as also in
the language of Entry 97 in List I of the Seventh Schedule to the Constitution.
(Paras 25 and 26) (164-F, G; 165-C, DJ
MP. V. Sundararamier and Co. v. The State of Andhra Pradesh and Anr., H
AIR (1958) SC 468; Southern Pharmaceuticals and Chemicals v. State of
150
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A Kera/a, (1981) 4 SCC 391 and State of Bihar and Ors. v. Shree Baidyanath
Ayurved Bhawan (P) Ltd and Ors., (2005) 2 SCC 762, relied on.
4.2. Entry 60 of List II of VII Schedule mentions "Taxes on professions,
trades, callings and employments". Entry 60 is a taxing entry. It is not a
general entry. Therefore, tax on professions etc. has fo be read as a levy on
B 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. "Professions" will not include services. Parliament had
absolute jurisdiction and legislative competence to levy tax on services. While
interpreting the legislative heads under List II, the Court has to go by
C 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
D the context in which they are used. (Para 28( (166-F, G, H; 167-A]
5. Entry 60 List II of VII Schedule refers to taxes on professions etc .. It
is the tax on the individual person/firm or company. It is the tax on the status.
A chartered accountant or a cost accountant obtains a licence or a privilege
E from the competent Body to practise. On that privilege as such the State is
competent to levy a tax under Entry 60. However, Entry 60 is not a general
entry. It cannot be read to include every activity undertaken by a chartered
accountant/cost accountant/architect for consideration. Service tax is a tax
on each activity undertaken by a chartered accountant/cost accountant or an
architect. The activity undertaken by the chartered accountant or cost
F accountant is similar to saleable or marketable commodities produced by the
assessee and cleared by the assessee for home consumption under the Central
Excise Act. For each contract, tax is levied under the Finance Acts, 1994 and
1998. Tax cannot be levied under that Act without service being provided
whereas a professional tax under Entry 60 is a tax on his status. It is the tax
G on the status of a cost accountant or a chartered accountant. As long as a
person/firm remains in the profession, he/it has to pay professional tax. That
tax has nothing to do with the commercial activities which he undertakes for
his client: Even if the chartered accountant has no work throughout the
accounting year, still he has to pay professional tax. He has to pay the tax till .
he remains in the profession. This is the ambit and scope of Entry 60 List II
· H which is a taxing entry. Therefore, Entry 60 contemplates tax on professions,
+
ALL INDIA FEDERATION OF TAX PRACTITIONERS v. U.0.1.
151
as such. (Para 29) (167-C, G]
Western India Theatres Ltd. v. Cantonment Board, AIR (1959) SC 582,
relied on.
6.1. The States' pow~r to tax professions etc. is founded on Entry 60 of
A
List II and the purpose of Article 276 is not to amend that power but to provide B
that such tax on professions, trades etc. shall not be invalidated on the ground
that it relates to a tax on income. 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, the exercise of power by the State overlaps with its power
under some other Entry, then the limitation under Article 276(2) shall have C
no relevance. Thus, Article 276 will not apply to levy of tax on "circumstances
and property" which is referable to Entry 49 and Entry 60 of List II and
amongst other Items to Entry 58, taxes on cinematograph shows, taxes on
entry of goods. 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 D
that it relates to a tax on income. (Para 32) (170-C, D, E)
6.2. Constitutional law is about concepts and principles. Some of these
principles have evolved out of judicial decisions. The entries dealing with
taxation are distinct entries vis-a-vis the general entries. It is for this reason
that the doctrine of pith and substance has an important role to play while E
deciding the scope of each of the entries in the three Lists in the Seventh
Schedule to the Constitution. This doctrine of pith and substance flows from
the words in Article 246(1), namely, "with respect to" any of the matters
enumerated in List I". The bottom line of the said doctrine is to look at the
legislation as a whole and if it has a substantial connection with the Entry, F
the matter may be taken to be legislation on the topic. That is why due
weightage should be given to the words "with respect to" in Article 246 as it
brings in the doctrine of "pith and substance" for understanding the scope of
legislative powers. Competence to legislate flows from Articles 245, 246 and
the other Articles in Part XI. A legislation like Finance Act can be supported
on the basis ofa number of Entries. (Para 3311170-H; 171-A, CJ
G
6.3. 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 H
152
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A the tax shall be levied by the authority of law. 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. Taxes on services is a different subject as compared to taxes
B on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry
92C/97 of List I operate in different spheres. (Para 33} (171-D, E, F)
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7128of2001.
From the final Judgment and Order dated 22.02.2001 of the High Court
C of Judicature at Bombay in Writ Petition No. 142of1999.
Shyam Divan, P.H. Parekh, E.R. Kumar, Ranjeeta Rohatgi, Vasuman
Khandelwal, Arjun Garg, Iksha Rai and Subhranshu (for Mis. P.H. Parekh &
Co.) for the Appellants.
V. Shekhar, Shalini Kumar and B. Krishna Prasad for the Respondents.
The Judgment of the Court were delivered by _
KAPADIA, J. I. This is an appeal filed by All India Federation of Tax
Practitioners against the Division Bench judgment of the Bombay High Court
dated 22.2.200.1 in Writ PetitiOn No. 142/99 upholding the legislative
E competence of Parliament to levy service tax vide Finance Act, 1994 and
Finance Act, 1998. According to the impugned judgment, service tax falls in
Entry 97, List I -of the Seventh Schedule to the Constitution.
2. The question which arises for determination in this civil appeal
F concerns the constitutional status of the levy of service tax and the legislative
competence of Parliament to impose service tax under Article246(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 ·tevy 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
G Constitution.
Background Facts
3. 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
H Section 67 of the Finance Act, 1994 relating to service tax so as to levy a tax
.-
ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. [KAPADIA,J.]
153
on services rendered by a practising chartered accountant, cost accountant A
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 aforestated Bill. On 1.8.1998 the Finance Bill was however
passed and the Finance (No. 2) Act, 1998 received the assent of the President B
of India. The Act came into force with effect from l.4.1998. On 7. l 0.1998,
Union of India issued Notification No. 57/98 inter alia exempting taxable
services other than accounting and auditing. On 16. l 0.1998, 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. C
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.
Reason for Imposition of Service Tax
4. Service tax is an indirect tax levied on certain services provided by
certain categories of persons including companies, association, firms, body
D
of individuals etc .. Service se~tor contributes about 64% to the GDP. "Services"
constitute heterogeneous spectrum of economic activities. Today services
cover wide range of activities such as management, banking, insurance,
hospitality, consultancy, communication, administration, entertainment, research E
and development activities forming part of retailing sector. Service sector is
today occupying the centre stage of the Indian economy. It has become an
Industry by itself. In the contemporary world, development of service sector
has become synonymous with the advancement of the economy. Economics
hold the view that there is no distinction between the consumption of goods p
and consumption of services as both satisfy the human needs.
5. In late seventies, Government oflndia initiated an exercise to explore
alternative revenue sources due to resource constraints. The primary sources
of revenue are direct and indirect taxes. Central excise duty is a tax on the
goods produced in India whereas customs duty is the tax on imports. The G
word "goods" has to be understood in contradistinction to the word "services".
Customs and excise duty constitute two major sources of indirect taxes in
India. Both are consumption specific in the sense that they do not constitute
a charge on the business but on the client. However, by 1994, Government
of India found revenue receipts from customs and excise on the decline due H
154
SUPREME COURT REPORTS
[2007) 9 S.C.R.
A to W.T.O. commitments and due to rationalization of duties on commodities.
Therefore, in the year 1994-95, the then Union Finance Minister introduced
the new concept of "service tax" by imposing tax on services of telephones,
non-life insurance and stock-brokers. That list has increased since then.
Knowledge economy has made "services" an important revenue-earner.
B
6. At this stage, we may refer to the concept of "Value Added Tax"
(VAT), which is a general tax that applies, in principle, to ~II commercial
activities involving production of goods and provision of services. VAT is
a consumption tax as it is borne by the consumer.
7. In the light of what is stated above, it is clear that Service Tax is a
C 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. Service tax is a value added tax.
D
8. As stated above, service tax is VAT. Just as excise duty is a tax on ·
value addition on goods, service tax is on value additioin by rendition of
services. Therefore, for our understanding, broadly "services" fall into two
categories, namely, property based services and performance based services.
Property based services cover service providers such as architects, interior
designers, real estate agents, construction services, mandapwalas etc ..
E Performance based services are services provided by service providers like
stock-brokers, practising chartered accountants, practising cost accountants,
security agencies, tour operators, event managers, travel agents etc ..
9. Government of India in order to tap new areas of taxation and to
identify the hidden one appointed Tax Reforms Committee under the
F Chairmanship of Dr. Chelliah in August, 1991. The recommendations made by
the Committee were accepted and the Service Tax was introduced in the
Budget for 1994-95 through the-Finance Act, 1994. Under the said enactment,
Service Tax is the tax on notified services provided or to be provided. After
its introduction, the constitutional validity of the services taxed by the Central
G Government was challenged before the Constitution Bench of .this Court
which took the view that the Central Government derived its authority from
Entry' 97 of List I of the Seventh Schedule to the Constitution for levying tax
on services provided.
10. To provide necessary legal backup, the Government introduced a
H new Article 268A in the Constitution in the year 2003 by Constitution (Eighty-
ALL INDIA FEDERATION OFTAX PRACTfflONERS v. U.0.1. [KAPADIA,J.)
155
eighth Amendment) Act, 2003, which provides that taxes on services shall be
charged by Union of India and shall be appropriated by Union of India and
the States. A new Entry 92C was also introduced in the Union List for the
levy of taxes on services. Section 65( 16) of the Finance Act, 1994 provided
A
for definition of "taxable service" to mean any service provided by stockbroker, telegraph authority, and by insurer. Section 67 provided for valuation B
of taxable service based on gross receipts. In cases where value of taxable
service could not be decided then the cost of providing the service constituted
the basis of the assessable value of taxable service.
11. At this stage, we may state that the above discussion shows that
what was the economic concept, namely, that there is no distinction between C
consumption of goods and consumption of services is translated into a legal
principle of taxation by the aforestated Finance Acts of 1994 and 1998.
Scheme of the Finance Act, 1994 and Finance Act, 1998
12. Chapter V of the Finance Act, 1994 referred to Service Tax. It defined D
"assessee" to mean a person responsible for collecting the service tax. Under
the Act, "service tax" was defined to mean tax chargeable under Chapter V.
Under the Act, "taxable service" was defined to mean any service provided
by a stock-broker to an investor in connection with the sale or purchase of
securities listed on a recognized stock exchange; services rendered to a E
subscriber by the telegraph authority; and services rendered by an insurer to
a policy holder. Under the Act, it was clarified that words and expressions not
defined in Chapter V but used therein shall bear the same meaning as given
in the Central Excise Act, 1944. Section 66 stated that service tax shall be
levied at the rate of five per cent of the value of taxable services provided
to any person by the service provider who was responsible for collecting the F
service tax. It was similar to Section 3 of Central Excise Act, 1944. Section 67
dealt with valuation of taxable services. Section 68 dealt with collection and
.recovery of.service tax. Section 71 dealt with assessment. Section 72 dealt
with best judgment assessment. Section 73 dealt with value of taxable services
escaping assessment. Section 83 inter alia stated that Section 9C, 90, 11 B G
etc. of the Central Excise Act shall apply also to collection and recovery of
service tax. Further, it may be stated that the administration of service tax is
given to the authorities under the Central Excise Act.
13. Broadly, to the same effect, is the Finance Act of 1998. The said Act
has increased the list of notified services so as to include advertising agencies, H
156
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A travel agencies, architects, caterers, clearing and forwarding agents, credit
rating agencies, customs house agents, practising chartered accountants,
practising cost accountants, real estate agents, security agencies etc .. We are
concerned in this case with the services provided by architects, chartered
accountants and cost accountants covered by the Finance Act, 1998.
B
Relevant Provisions of the Constitution of India
14. The relevant provisions of the Constitution of India are as follows:
"Article 246. Subject-matter of laws made by Parliament and by the
Legislatures of States.-(1) Notwithstanding anything in clauses (2)
C
and (3), Parliament has exclusive power to make laws with respect to
any of the matters enumerated in List I in the Seventh Schedule (in
this Constitution referred to as the "Union List".
D
Article 265. Taxes not to be imposed save by authority of law.-No tax
shall be levied or collected except by authority of law.
E
F
Article 268A. Service tax levied by Union and collected and
appropriated by the Union and the States.-(l) Taxes on services
shall be levied by the Government of India and such tax shall be ·
collected and appropriated by the Government of India and the States
in the manner provided in clause (2).
(2) The proceeds in any financial year of any such tax levied in
accordance with the provisions of clause (I) shall be-
(a) collected by the Government of India and the States;
(b) appropriated by the Government of India and the States,
in accordance with such principles of collection and appropriation as
G
may be formulated by Parliament by law.
H
Article 269. Taxes levied and collected by the Union but assigned
to the States.-( I) Taxes on the sales or purchase of goods and taxes
on the consignment of goods shall be levied and collected by the
Government of India but shall be assigned and shall be deemed to
have been assigned to the States on or after the I st day of April, 1996
-~
ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. (KAPADIA,J.]
in the manner provided in clause (2).
Explanation.-For the purposes of this clause,-
157
A
(a)
the expression "taxes on the sale or purchase of goods" shall
mean taxes on sale or purchase of goods other than ne•vspapers,
where such sale or purchase takes place in the course of inter- B
State trade or commerce;
(b) the expression "taxes on the consignment of goods" shall mean
taxes on the consignment of goods (whether the consignment is
to the person making it or to any other person), where such
consignmen
1t takes place in the course of inter-State trade or C
commerce.
(2) The net proceeds in any financial year of any such tax, except in
so far as those proceeds represent proceeds attributable to Union
territories, shall not form part of the Consolidated Fund of India, but .
shall be assigned to the States within which that tax is leviable in that D
year, and shall be distributed among those States in accordance with
such principles of distribution as may be formulated by Parliament by
law.
(3) Parliament may by law formulate principles for determining when
a sal.e or purchase of, or consignment of, goods takes place in the E
course of inter-State trade or commerce.
Article 276. Taxes on professions, trades, callings and emp/oyments.-
(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, F
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 G
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 as aforesaid H
158
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(2007) 9 S.C.R.
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 truces on income accruing from or arising
out of professions, trades, callings and employments."
Entry No. 92C o~ List I of the Seventh Schedule to the Constitution
B
is as follows:
c
D
E
"92C. Taxes on services."
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 truces on entertainments, amusements,
betting and gambling."
Entry 38 of List III of the Seventh Schedule to the Constitution is as
follows:
"38. Electricity."
Arguments:
15. The basic argument advanced on behalf of the appellant-Federation
F before us was on Entry 60 of List II of the Seventh Schedule reproduced
above. The said Entry refers to taxes on professions, trades callings and
employments. The argument advanced by Shri Shyam Divan, learned counsel
on behalf of the appellant, was that every entry in the Lists in the Seventh
Schedule represents a field of legislation. Therefore, it should be read in a
G
broad sense. The appellant did not dispute before us the proposition that the
service tax was a tax on service and that it was not a tax on the service
providers. The basic contention of the appellant was that the State Legislature
alone has an absolute jurisdiction and legislative competence to levy service
true. It was submitted that service tax was a tax on profession. It was submitted
that service true fell within the ambit of Entry 60 of List II. It was submitted
H that the word profession in the said Entry was not limited by any restriction/
-:{
)
ALLINDIAFEDERATIONOFTAXPRACTJTJONERSv. U.0.1. [KAPADIA,J.]
159
qualification and, therefore, it must be read with the widest possible sense. A
It was submitted that the word "profession" has been defined in Black's Law
dictionary to mean a vocation requiring advance education and training. It
was submitted that the word "profession" has been defined in the E~glish
dictionary by Collins to mean an "occupation" requiring special training in the
liberal arts or sciences, especially one of the three learned professions, law, B
theology, or medicine. lt was .contended on behalf of the appellants that there
was no difference between tax on profession and tax on services. According
to the learned counsel, the word 'profession' in Entry 60 List U was synonymous
with the word 'service' and, therefore, tax on profession would include tax on
service, which tax could be levied only by the State Legislature. lt was
submitted that there cannot be a profession without service. It was submitted C
that service rendered by a chartered accountant/cost accountant to his client
is the service rendered as a professional. lt was urged on behalf of the
appellant that it was not the case of the appellant that services cannot be
taxed. 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 D
tax. It was submitted that under the Finance Acts, taxability was limited to
rendition of professional services and, therefore, tax on profes:;ion under
Entry 60 of List II would include tax on service. In short, according to the
learned counsel, the word 'profession' in Entry 60 of List II was nothing but
service and, therefore, levy of service tax came within the competence of State E
Legislature alone. Placing reliance on Article 276(1), learned counsel on behalf
of the appellants submitted that the words used in Article 276(1), namely, no
law of the State Legislature relating to taxes in respect of professions, callings
etc. were words of widest amplitudes· and, therefore, the word "profession"
would cover every aspect connected with it; that the word "service" was not
an aspect of the word "profession" it was in fact synonymous to each other; F .
that they were inseparable and, therefore, tax on services could be levied only
by State Legislature. Learned counsel urged that the expression "relating to"
and the expression "in respect or• are the two expressions which have linkage
to levy of taxes on profession, calling etc. and to the words profession; trade,
calling etc. in Article 276(1) and, therefore, ifthe aforestated two expressions G
are read in their proper context, they indiCate the intentioa of the Constitution
framers in incorporating taxes on profession under a separate Legislative
Head. According to the learned counsel, therefore, this Court must give a
wide interpretation to the words taxes on professions, trades, callings etc.
Learned counsel submitted that the words in respect of professions, trades,
callings etc. in Article 276(1) indicate amplitude and the wide field open to the H
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SUPREME COURT REPORTS
[2007) 9 S.C.R.
A State Legislature to make laws imposing taxes on professions, trades, callings
etc .. It was urged that the above two expressions, namely, 'relating to' and 'in
respect of ' are known in law· as words of widest amplitude and if the
significance of the said two expressions is kept in mind, then it becomes clear
that the Constitution framers intended the State Legislature alone to be
B competent to impose taxes on professions, trades, callings and employments
and that they did not intend to give such a power to Parliament. Learned
counsel submi~ed that if due weightage is given to the aforestated two
expressions then the word 'profession' .in Article 276(1) and Entry 60 of List
II would cover every aspect of the concept of professions, trades, callings
and employments. It was submitted that profession cannot exist . without
C service as service is the core of profession. Learned counsel submitted that
if the above two expressions in Article 276(1) are given due weightage then
there would be no difference between the words "profession" and "service";
that these two words would be interchangeable and if used interchangeably,
it is clear that the State Legislature alone has the absolute competence to levy
tax on s~rvices as there was no difference between the two words, namely,
D "service" and "profession". Reliance was also placed on 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 inc.omes arising out of professions, trades, callings and
employments on the other and that the said dichotomy between tax on·
E 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.
F
16. Shri V. Shekhar, learned senior c~unsel 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
' ,
G 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 whic~ Entry 92C is inserted, the controversy is closed and, therefore,
there is no question of going behind the said entry which has accepted the
.:Y.
validity of the impugned judgments by Constitutional Amendments.·
H
Findings:
'
ALL INDIA FEDERATION OF TAX PRACTITIONERS v. U.0.1. [KAPADIA, J.)
161
(i) Meaning of "Service Tax":
A
17. As stated above, the source of the concept of service tax lies in
economics. It is an economic concept. It has evolved on account of Service
Industry becoming a major contributor to the GDP of an economy, particularly
knowledge-based economy. With the enactment of Finance Act, 1994, the
Central Government derived its authority from the residuary Entry 97 of the B
Union List for levying tax on services. The legal backup wa.s further provided
by the introduction of Article 268A in the Constitution vide Constitution
(Eighty-eighth Amendment) Act, 2003 which stated that taxes on services
shall be charged by the Central Government and appropriated between the
Union Government and the States. Simultaneously, a new Entry 92C was also C
introduced in the Union List for the levy of service tax. As stated above, as
an economic concept, there is no distinction between the consumption of
goods and consumption of services as both satisfy human needs. It is this
economic concept based on the legal principle of equivalence which now
stands incorporated in the Constitution vide Constitution (Eighty-eighth
Amendment) Act, 2003. Further, it is important to note, that "service tax" is D
a value added tax which in tum is a general tax which applies to all commercial
activities involving production of goods and provision of services. Moreover,
VAT· is a consumption tax as it is borne by the client.
18. In Moti Laminates Pvt. Ltd. v. Collector of Central Excise,
Ahmedabad(1995) (76) E.L.T.24l(SC) we get a clue of an important principle, E
namely, "principle of equivalence". In that judgment, this Court was required
to explain the words "excisable goods" and "produce<.. vr manufactured". It
was held
1)y this Court that the expression "excisable goods" has been
defined in Section 2 of the Central Excise Act, 1944 to mean goods specified
in the Schedule. It was held that the object for having a schedule in the Act F
was to fix rates under different entries including residuary entry. At this stage,
we may say that the object of the Finance Act is also to fix rates of duty under
different entries. However, the question which arose before this Court in Moti
Laminates (supra) was the meaning of the word "goods" in Central Excise
Act, 1944. This Court noticed that Section 3 of the 1944 Act levied duty on
all excisable goods mentioned in the schedule provided they are produced G
and manufactured, therefore, this Court laid down the test that where goods
are specified in the schedule they are excisable goods but whether such
goods can be subjected to duty would depend on whether they were produced
or manufactured by the assessee. This Court further explained that the
expression "produced or manufactured" would mean that the goods produced H
162
SUPREME COURT REPORTS
(2007] 9 S.C.R.
A must.satisfy the test of saleability/marketability. The reason being that the
duty under the 1944 Act is on manufacture/production but the manufacture/
prod.uction is intended for taking such goods to. the market for sale. It was
observed that the· obvious reason for levying excise duty linked with
production or manufacture is that the goods so produced must be a distinct
B commodity known in the market. We quote hereiribelow para 7 of the· said
judgment, which is as follows:
D
"The duty of excise being on production and manufacture which
means bringing out a new commodity, it is implicit that such goods
must be .useable, moveable, saleable and marketable. The duty is on
manufacture or production but the production or manufacture is carried
on for taking such goods to the market for sale. The obvious rationale
for levying excise duty linking it with production or manufacture is
that the goods so produced must be a distinct commodity known as
such in common parlance or tC> the commercial community for purposes
of buying and selling. Since the solution that was produced could not
be use~ as such without any further processing or application of heat
or pressure, it could not be considered as goods on which any excise
duty could be levied.''
· Therefore, even if an item is manufactured or produced, it will not fall in the
concept of goods till the test of marketability is satisfied. In the case of Moti
E Laminates (supra) the 'solution' was an intermediate product produced in the
course of manufacture of laminated sheets. It had a short shelf life. It was not
marketable, therefore, this Court took the view that the solution was not
"goods" and, therefore, not dutiable.
F
19. The importance of the above judgment of this Court is twofold.
Firstly, 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, which correspondingly stands consumed by the service
receiver. It is this p~inciple o( equivalence which is in-built into the concept
G of service "tax, which has received legal support in the form of Finance Act,
1994 ..