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CASE NO.: Writ Petition (civil)  539 of 2000

PETITIONER: Gujarat Ambuja Cements Ltd.& Anr.        

RESPONDENT: Union of India & Anr.                           

DATE OF JUDGMENT: 17/03/2005

BENCH: Ruma Pal & Arun Kumar

JUDGMENT: J U D G M E N T With

W.P) Nos. 411, 431, 432, 450, 466, 467, 493, 551, 564, and 573 of 2000.

W.P) Nos. 1, 122, 123, 209, 234, 283, 311 and  493 of 2001.

W.P) Nos. 606 of 2002

W.P.(C) Nos.  294, 584, 585 of 2003

W.P) Nos.26, 328, 329 of 2004     C.A. No. 9247 of 2003

RUMA PAL, J.

       These writ petitions have been filed challenging the  constitutional validity of Sections 116 and 117 of the Finance Act  2000 and Section 158 of the Finance Act, 2003 by which the   decision of this Court in Laghu Udyog Bharati & Anr. Vs.  Union of India & Ors. (1999) 6 SCC 418,  striking down Rules  2(1)(d), (xii) and (xvii) of the Service Tax Rules, 1994 (as  amended in 1997) was sought to be overcome.          The writ petitioners are the customers or clients of goods  transport operators and forwarding and clearing agents. There  are three main grounds on which they have based their  challenge.  They contend that the basis of the decision rendered  in Laghu Udyog Bharati  had not been removed or displaced by  the impugned sections and could not therefore overrule, replace  or override this Court’s decision.  The second ground of  challenge is that Parliament was legislatively incompetent to  enact the law.  It is  stated that the imposition of the impugned  levy encroaches upon the State Government’s power as defined  in Entry 56 of List II of the Seventh Schedule to the Constitution  which pertains to ’Taxes on goods and passengers covered by  road or on inland waterways’. The submission is that Parliament  could not by resorting to the residuary Entry 97 of List 1 of the  Seventh Schedule circumvent Entry 56 of List II and in the guise  of levying service tax in fact levy a tax on the transport of goods.     The constitutional validity of the imposition has also been  challenged on the ground that it operated in discriminatory  manner  by singling out only the customers of goods transport   operators and clearing and forwarding agents to pay tax whereas  the recipients  of other kinds of similar services were not  

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subjected to such imposition.            Service tax was introduced for the first time under Chapter  V of the Finance Act, 1994.  Section 66 of the Act was  the  charging section and provided for the levy of service tax at the  rate of five per cent of the value of the taxable services provided  to any person by the person responsible for collecting the service  tax.  In other words, the levy was on  the provider of the taxable  services.  "Taxable service" was defined in Section 65 to include  only three services namely any service provided to an investor by  a stock broker, to a subscriber by the telegraph authority and to a  policy holder by an insurer carrying on general insurance  business. Section 68 required every person providing taxable  service to collect the service tax at specified rates.  Section 69 of  the Finance Act, 1994 provided for the registration of the    persons responsible for collecting service tax.  Sub-sections (2)  and (5) indicated that it was the provider of the service who was  responsible for collecting the tax and obliged to get registered.   These Sections viz., 65, 66, 68 and 69 are pivotal to the present  issue. They were amended thrice. The remaining sections of the  1994 Act substantially continued as originally enacted with minor  changes. Under Section 70 of the Finance Act, 1994, every  person responsible for collecting the service tax must furnish or  cause to be furnished to the Central Excise Officer in the  prescribed form and verified in the prescribed manner, a  quarterly return. Sections 71, 72, 73 and 74 deal with the filing of  returns, provisions for assessment, reopening of assessments  and rectification of mistakes of assessment orders.  Section 75  provides for payment of interest at the rate of one-half per cent  for every month or part of a month by which the person  responsible for collecting the service tax, delays in paying the tax  to the credit of the Central Government.  Section 76 deals with  the imposition of penalty for failure to collect the service tax.   Section 77 deals with the penalty for failure to furnish the  prescribed return. Section 78 deals with the penalty for  suppressing the value of taxable service and Section 79 for  penalty for failure to comply with notices. No other section is  required to be noted except  Section 94 of the Act which  empowers the Central Government to make rules for carrying out  the provisions of Chapter V of the Act.  Pursuant to such power,  the Service Tax  Rules, 1994 were framed.   By the Finance Act, 1997 the first amendments to Section  65, of the Finance Act 1994 were made inter alia, by extending  the meaning of ’taxable service’ from three services to 18  different services categorized in Section 65(41), clauses (a) to   (r).  We are only concerned with clauses (j) and (m) of sub- section (41) to Section 65.  Clause (j) made service to a client  by clearing and forwarding agents in relation to clearing and  forwarding operations, a taxable service.  Similarly, service to a  customer of a goods transport operator in relation to carriage of  goods by road in a goods carriage was, by clause (m), also  included within the umbrella of taxable service. The phrases  "clearing and forwarding agent" and "goods transport operator"   were defined as follows:   

(j) "clearing and forwarding agent" means any  person who is engaged in providing any  service, either directly or indirectly,  connected with clearing and forwarding  operations in any manner to any other  person and includes a consignment agent"

(m) "goods transport operator" means   any  commercial concern engaged in the  transportation of goods but does not include

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a courier agency"

          The charge of service tax in respect of the services  rendered by clearing and forwarding agents and goods  transport operates remained on the person responsible for  collecting the service tax under Section 66 (3).

"66(3) With effect from the date notified  under Section 84 of the Finance Act,  1997, there shall be charged 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), (l),  (m), (n), (o), (p), (q),and (r ) of clause  (41) of Section 65 which are provided to  any person by the person responsible  for collecting the service tax."  

         The ’person responsible for collecting the service tax’  under this Section was therefore the person providing the  service. The phrase itself was also defined under sub-section  (28) of    Section 65 to mean "a person who is required to collect  service tax under this chapter or is required to pay any other sum  of money under this Chapter and includes every person in  respect of whom any proceedings under this Chapter have been  taken" and ’assessee’ was defined in sub-section (5) of Section  65 as meaning "a person responsible for collecting the service  tax and includes his agent".  By the 1997 amendment under  Section 68-1A the service tax in respect of taxable services from  items (g) to (r ) of Section 65 (41) was directed to be collected  from "such person and in such manner as may be prescribed"  and it was said that all provisions of Chapter V "shall" apply to  such person as if he is the person responsible for collecting the  service tax in relation to such services.     However, Sub-sections  (2) and (5) of Section 69 continued to refer to the persons  responsible for collecting the service as the provider of the  taxable service.           We are told that the goods transport operators as well as  the clearing and forwarding agents went on an all India strike  protesting against the imposition of service tax on them. Perhaps  this might have precipitated an amendment to the Service Tax  Rules 1994.      Rules 2(1)(d),(xii) and (xvii) of the Service Tax  Rules, 1994 were amended by imposing the tax in effect on the  customers of clearing and forwarding agents and goods transport  operators.  As far as clearing and forwarding agents were  concerned the relevant amendments to the Rules were carried  out and brought into effect by two notifications both dated 16th  July 1997. As far as the levy of service tax on customers of  goods and transport operators were concerned, the amendments  were made and brought into effect with effect from 16th  November, 1997.         The imposition of service tax on customers was challenged  by many of the present petitioners in Laghu Udyog Bharati.  During the pendency of writ petitions, on 2nd June 1998  notification No.49/98 was issued exempting services provided by  goods transport operators from the levy of service tax altogether  and by the Finance Act, 1998 all provisions in the Finance Act,  1994 including Section 65 (41) sub-clause (m) relating to the levy  of service tax on services provided by goods transport operators   were omitted with effect from 16th October, 1998.  By the Finance  Act (No. 2), 1998, Section 69 was also amended.   The various  sub-sections including sub sections (2) and (5) were omitted. The  body of the sections now require every person liable to pay

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service tax to make an application for registration without  indicating who was so liable.   The Service Tax Rules, 1994 were  consequently also amended by the Service Tax (Amendment)  Rules, 1998 to delete the provisions relating to service by goods  transport operators.   These facts were taken into account by this Court in Laghu  Udyog Bharati but because the exemption granted on 2nd June  1998 was prospective and no exemption had been granted with   regard to the period from 16th July, 1997 to 2nd June 1998 and  also because customers of clearing and forwarding agents  continued to be liable to pay service tax, the writ petitions were  disposed of on merits.      In upholding the challenge to Rule 2(1)(d), (xii) and (xvii),  this Court noted:  

"It is clear from the reading of these provisions  that according to the Finance Act  the   charge  of tax is on the person who is responsible for  collecting the service tax.  It is he, who by  virtue of the provisions of Section 65(5) is  regarded as an assessee.  He is the person  who provides the service."  It was held that in the circumstances

    "\005 the definitions contained in Rule 2(d)  (xii) and (xvii), which seek to make the  customers or the clients as the assessee, are  clearly in conflict with Section 65 and 66 of the  Act."

This Court construed Section 68(1-A) to hold that      "Section 68(1-A) cannot be so interpreted as to make a person  an assessee even though he may not be responsible for  collecting the service tax". What the Court in effect said was  that since the charging section (Section 66) provided for the tax  to be paid by the provider, Section 68-1A, which was merely the  section which laid the machinery for collecting the tax, would  not change the nature of the tax.          Finally this Court said that Sections 70 and 71 clearly  showed "that the return which has to be filed pertains to the  payment which are received by the person rendering the  service in respect of the value of the taxable services. Surely,  this is a type of information which cannot, under any  circumstances, be supplied by the customer.  Moreover the  operative part of sub-section (1) of Section 70 clearly stipulates  that it is a person responsible for collecting the service tax who  is to furnish the return".          In the circumstances it was concluded that  "by rules  which are framed, the person who is receiving the services  cannot be made responsible for filing the return and paying the  tax.  Such a position is certainly not contemplated by the Act".           Striking down the Service Tax Rules 2(1)(d) (xii) and (xvii),  this Court directed that any tax which had been paid by the  customers or clients of the clearing and forwarding agents or of  the goods transporters should be refunded within 12 weeks from  their making a demand for refund.  Consequently, the present  writ petitioners made applications for refund of the tax paid by  them.  In some cases, the tax was refunded.  In certain cases the  refund was not made on the ground that the petitioners had failed  to prove that the tax paid had not been passed on to other  persons.   In some case as in W.P. No. 563 of 2000 the customer  deducted service tax from the freight charges payable to the  transporters/petitioner.  After the decision in Laghu Bharati  Udyog,  the customer refunded the money to the transporter in

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question.                  At this stage on 12th May 2000, the Finance Act 2000  sought to amend Finance Act of 1994 in the manner indicated  in Section 116:

"116 Amendment of Act 32 of 1994.\027During  the period commencing on and from the 16th  day of July, 1997 and ending with the 16th day  of October, 1998, the provisions of Chapter V  of the Finance Act, 1994 shall be deemed to  have had effect subject to the following  modifications, namely:-

(a)  In section 65.--  

(1)  for clause (6), the following clause had  been substituted namely:-

     (6) "assessee" means a person liable for  collecting the service tax and includes\027

(i)     his agent; or

(ii)    in relation to services provided by a  clearing and forwarding agent, every  person who engages a clearing and  forwarding agent and by whom   remuneration  or   commission    (by  whatever name called) is paid for  such services to the said agent; or

(iii)   in relation to services provided by a  goods transport operator, every  person who pays or is liable to pay  the freight either himself or through  his agent for the transportation of  goods by road in a goods carriage;

(ii)        after clause (18), the following  clauses had been substituted,  namely:-

’(18A)  "goods carriage" has the meaning  assigned to it in clause (14) of section 2 of the  Motor Vehicles Act, 1988;

(18B)   "goods transport operator" means any  commercial concern engage in the  transportation of goods but does not include a  courier agency; :

(iii)  in clause (48), after sub-clause (m), the  following sub-clause had been inserted  namely:-

"(ma) to a customer, by a goods transport  operator in relation to carriage of goods by  road in a goods carriage;

(b)  in section 66, for sub-section (3), the  following sub-section had been substituted  namely:-

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"(3)  On and from the 16th day of July, 1997,  there shall be levied a tax at the rate of five  per cent, of the value of taxable services  referred to in sub-clauses (g), (h), (i),(j),(k) (l),  (m), (ma), (n) and (o) of clause (48) of section  65 and collected in such manner as may be  prescribed,";

(c )  in section 67, after clause (k), the  following clause had been inserted, namely:-

"(ka) in relation to service provided by goods  transport operator to a customer, shall be the  gross amount charged by such operator for  services in relation to carrying goods by road  in goods carriage and includes the freight  charges but does not include any insurance  charges;".

Section 117 of the Finance Act, 2000 seeks to  retrospectively validate the taxes earlier collected under the  Service Tax Rules which this court had directed to be refunded. It  reads:- 117. Validation of certain action taken  under Service Tax Rules.--  Notwithstanding   anything contained in any judgment, decree or  order of any court, tribunal or other authority,  sub-clauses (xii) and (xvii) of clause (d) of  sub-rule (1) of rule 2 of the Service Tax Rules,  1994 as they stood immediately before the  commencement of the Service Tax  (Amendment)Rules, 1998 shall be deemed to  be valid and to have always been valid as if  the said sub-clauses had been in force at all  material times and accordingly,-

(i)     any action taken or anything done or  purported to have been taken or  done a any time during the period  commencing on and from the 16th  day of July, 1997 and ending with the  day, the Finance Act, 2000 receives  the assent of the President shall be  deemed to be valid and always to  have been valid for all purposes, as  validly and effectively taken or done; (ii)    any service tax refunded in  pursuance of any judgment, decree  or order of any court striking down  sub-clauses (xii) and (xvii) of clause  (d) of sub-rule (1) of rule 2 of the  Service Tax Rules, 1994 before the  date on which the Finance Act, 2000  receives the assent of the President  shall be recoverable within a period  of thirty days from the date on which  the Finance Act 2000 receives the  assent of the President, and in the  event of non payment of such service  tax refunded within this period, in  addition to the amount of service tax  recoverable, interest at the rate of  twenty-four per cent, per annum shall

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be payable, from the date  immediately after the expiry of the  said period of thirty days, till the date  of payment.

Explanation.\027For the removal of doubts, it  is hereby declared that no act or omission on  the part of any person shall be punishable as  an offence which would not have been so  punishable if this section had not come into  force."

                  While   the  writ  petitions  challenging the validity of  the amendments  made  by  the Finance Act  2000 to Chapter V  of the Finance Act, 1994 were  pending, the Finance Act, 2003  was assented to by the President on 14th May 2003.  By Section  158 of that Act, Sections 68(1), 71 and Section 94 of the 1994  Act were further amended.  Section 158 provides: "During the period commencing on and from  16th day of July, 1997 and ending with the 16th  day of October 1998, the provisions of  Chapter V of Finance Act, 1994, as modified  by Section 116 of the Finance Act, 2000, shall  have effect subject to the following further  modifications, namely: -

(a)     in section 68, in sub-section (I), the  following proviso shall be inserted at the  end and shall be deemed to have been  inserted on and from the 16th day of July,  1997, namely, : -

 Provided that \026

(i)     in relation to services provided by a  clearing and forwarding agent, every  person who engages a clearing and  forwarding agent and by whom  remuneration or commission (by  whatever name called) is paid for such  services to the said agent for the period  commencing on and from the 16th day of  July, 1997 and ending with the 16th day  of October, 1998; or  

(ii)    in relation to services provided by goods  transport operator every person who  pays or is liable to pay the freight, either  himself or through his agent for the  transportation of goods by road in good  carriage for the period commencing on  and from the 16th day of November, 1997  and ending with the 2nd day of June,  1998. shall be deemed always to have been a person  liable to pay service tax, for such services provided  to him, to the credit of the Central Government."

       In addition, Section 71 which provides for the filing of  returns was amended to provide, with retrospective effect, for the  insertion of Section 71A.    Under the newly inserted section, the  provisions of Sections 69 and 70 do not apply to a person  referred to in the proviso to sub-section (1) of Section 68 as far  as the filing of returns in respect of service tax for the period  commencing from 16th July 1997 was concerned.  It seeks to

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provide that "such persons shall furnish return to the Central  Excise Officer within six months from the day on which the  Finance Bill, 2003 receives the assent of the President in the  prescribed manner on the basis of the self assessment of the  service tax and the provisions of Section 71 shall apply  accordingly". This period was extended by this Court by order  dated 17.11.2003 for a period of two weeks with effect from the  date of the order.       Section 94 as originally enacted for the rule  making power of the Central Government was amended to read  with effect from 16th July 1997, that the Central Government  would also have the power to frame rules relating to the manner  of furnishing returns under Section 71A.  There cannot be any doubt that the object of these sections  is to nullify the effect of this Court’s decision in Laghu Udhyog  Bharati  by retrospectively amending and validating provisions  held to be illegal.  It is a well settled principle that validation of a  tax declared illegal may be done only if the grounds of illegality or  invalidity are capable of being removed and are in fact removed  and the tax thus made legal (vide Prithvi Cotton Mills Ltd. vs.  Broach Borough Municipality : 1970 1 SCR 388 Indian  Aluminum Co. & Ors Vs. State of Kerala (1996) 7 SCC 637, K.  Sankaran Nair V. Devaki (1996) 11 SCC 428; R.Krishna Bhat  v. State of Karnataka (2001) 4 SCC 227; N.A. Cooperative  Mkg. Federation v. Union of India AIR 2003 SC 1329).  As a  proposition of law this cannot be and is not disputed. The  question is whether by enacting Sections 116 and 117 of the  Finance Act, 2000 and Section 158 of the Finance Act 2003,  the  bases on  which this Court struck down Rule 2(1)(d), (xii) and  (xvii) of the Service Tax Rules, 1994 had been displaced or  removed. As we read the decision in Laghu Udhyog Bharati, the  basis was the patent conflict between Sections 65, 66 , 68(1)  and 71 of the Finance Act, 1994 as amended in 1997 on the  one hand and Rules 2(1) (d) (xii) and (xvii) of the Service Tax  Rules 1994 on the other.  Each of these sections of the Finance  Act 1994 as amended in 1997 proceeded on the basis that the  tax was imposable on the person providing the service. All the  other sections regarding the liability to furnish returns,  assessments, penalties etc. flowed from that. It was because  unamended Section 66 spoke of the liability to pay tax in  respect of services "which are provided to any person  by the  person responsible for collecting the service tax"  and Section  65(5) defined "assessee" as meaning "a person responsible for  collecting the service tax", that this Court held that clauses (xii)  and (xvii) of Rule 2(1) (d) of the Service Tax Rules were illegal. As is apparent from Section 116 of the Finance Act, 2000,  all the material portions of the two Sections which were found to  be incompatible with the Service Tax Rules were themselves  amended so that now in the body of the Act by virtue of the  amendment  to the word "assessee" in Section 65(5) and the  amendment to Section 66(3), the liability to pay the tax is not on  the person providing the taxable service but, as far as the  service provided by clearing and forwarding agents and goods  transport operators are concerned, on the person who pays for  the services.  As far as Section 68(1A) is concerned by virtue of  the proviso added in 2003, the persons availing of the services  of goods transport operators or clearing and forwarding agents  have explicitly been made liable to pay the service tax.  As we have said, Rule 2(1)(d) (xii) and (xvii) had been  held to be illegal in Laghu Udhyog Bharati  only because the  charging provisions of the Act provided otherwise.  Now that the  charging section itself has been amended so as to make the  provisions of the Act and the Rules compatible, the criticism of  the earlier law upheld by this Court can no longer be availed of.  There is thus no question of the Finance Act, 2000 overruling

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the decision of this Court in Laghu Udhyog Bharati as the law  itself has been changed.  A legislature is competent to remove  infirmities retrospectively and make any imposition of tax  declared invalid, valid.  This has been the uniform approach of  this Court. Such exercise in validation must of course also be  legislatively competent and legally sustainable.  Those issues   are considered separately.  On the first question, we hold that  the law must be taken as having always been as is now brought  about by the Finance Act, 2000. The statutory foundation for  the decision in Laghu Udhyog Bharati has been replaced and  the decision has thereby ceased to be relevant for the purposes  of construing the present provisions (vide Ujagar Prints vs.  Union of India) . Therefore subject to our decision on the  question of the legislative competence of Parliament to enact  the law, and assuming the amendments in 2003 to be legal for  the time being, we reject the submission of the writ petitioners  that by the amendments brought about  by Sections 116 and  117 of the Finance Act 2000, the decision in Laghu Udhyog  Bharati has been legislatively overruled.         The next question is whether the levy of service tax on  carriage of goods by transport operators was legislatively  competent. Laghu Udhyog Bharati did not consider the  question of legislative competency.  Before we consider the  scope of the impugned Act, it is necessary to determine the  scope of the two Legislative Entries namely Entry 97 of List I and  Entry 56 of List II. It has been recognized in Godfrey Phillips  (supra) that there is a complete and careful demarcation of taxes  in the Constitution and there is no overlapping as far as the fields  of taxation are concerned. This mutual exclusivity which has  been reflected in Article 246(1) means that taxing entries must be  construed so as to maintain exclusivity.  Although generally  speaking a liberal interpretation must be given to taxing entries,  this would not bring within its purview a tax on  subject matter  which a fair reading of the entry does not cover.  If in substance,  the statute is not referable to a field given to the State, the Court  will not by any principle of interpretation allow a statute not  covered by it to intrude upon this field. Undisputedly, Chapter V of the Finance Tax Act, 1994 was  enacted with reference to the residuary power defined in Entry 97  of List I.  But as has been held in International Tourist  Corporation vs. State of Haryana (1981) 2 SCC 319;        "before exclusive legislative competence can be claimed for  Parliament by resort to the residuary power, the legislative  incompetence of the State legislature must be clearly  established.  Entry 97 itself is specific in that a matter can be  brought under that Entry only if it is not enumerated in List II or  List III and in the case of a tax if it is not mentioned in either of  those  Lists".  In that case Section 3(3) of the Punjab Passengers and  Goods Taxation Act, 1952 was challenged by transport  operators.  The Act provided for the levy of the tax on  passengers and goods plying in the State of Haryana. According  to the transport operators, the State could not levy tax on  passengers and goods carried by vehicles plying entirely along  the national highways.  According to them this was solely within  the power of the Centre under Entry 23 read with 97 of List I.   The submission was held to be patently fallacious by this Court.  It was held that Entry 56 of List II did not exclude national  highways so that the passengers and goods carried on national  highways would fall directly and squarely within Entry 56 of List  II.  It was said that the State played a role in the maintenance of  the national highway and there was sufficient nexus between the  tax and passengers goods carried on the national highway to  justify the imposition. The writ petitioners in this case have, relying on this

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judgment, argued that the Act falls squarely within Entry 56 of  List II and therefore could not be referred to Entry 97 of List I. We  do not agree. There is a distinction between the object of tax, the  incidence of tax and the machinery for the collection of the tax.  The distinction is important but is apt to be confused.  Legislative  competence is to be determined with reference to the object of  the levy and not with reference to its incidence or machinery.   There is a further distinction between the objects of taxation  in  our constitutional scheme.  The object of tax may be an article or  substance such as a tax on land and buildings under Entry 49 of  List II, or a tax on animals and boats under Entry 58 List II or on  a taxable event  such as manufacture of goods under Entry  84  of List-I,  import or export of goods under Entry 83 of List-I, entry  of goods under Entry 52 of List II or sale of goods under Entry 54  List II to name a few.  Theoretically, of course, as we have held  in Godfrey Phillips India Ltd. Vs. State of U.P. & Ors. 2005  Scale Page 367,  ultimately even a tax on goods will be on the  taxable event of ownership or possession.  We need not go into  this question except to emphasise that, broadly speaking the  subject matter of taxation under Entry 56 of List II are goods and  passengers. The phrase "carried by roads or natural water ways"  carves out the kind of goods or passengers which or who can be  subjected to tax under the Entry.  The ambit and purport of the  entry has been dealt with in Rai Ramakrishna & Ors. Vs. State  of Bihar 1963(1) SCR 897 where it was said in language which  we cannot better:- "Entry 56 of the Second List refers to taxes  on goods and passengers carried by road or  on inland waterways.  It is clear that the  State Legislatures are authorized to levy  taxes on goods and passengers by this  entry.  It is not on all goods and passengers  that taxes can be imposed under this entry;  it is on goods and passengers carried by  road or on inland waterways that taxes can  be imposed.  The expression "carried by  road or on inland waterways" is an adjectival  clause qualifying goods and passengers,  that is to say, it is goods and passengers of  the said description that have to be taxed  under this entry.  Nevertheless, it is obvious  that the goods as such cannot pay taxes,  and so taxes levied on goods have to be  recovered from some persons, and these  persons must have an intimate or direct  connection or nexus with the goods before  they can be called upon to pay the taxes in  respect of the carried goods.  Similarly,  passengers who are carried are taxed under  the entry.  But, usually, it would be  inexpedient, if not impossible, to recover the  tax directly from the passengers and so, it  would be expedient and convenient to  provide for the recovery of the said tax from  the owners of the vehicles themselves".  (p.908)

(See also: Sainik Motor Jodhpur Vs. The State of   Rajasthan 1962(1) SCR 517).  Having determined the parameters of the two legislative  entries the principles for determining the constitutionality of  a  Statute come into play.  These principles  may briefly be  summarized thus: a)      The substance of the impugned Act must be looked at to

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determine whether it is in pith and substance within a  particular entry whatever its ancilliary effect may be.  (Prafulla Kumar Mukerjee vs. Bank of Commerce Ltd. &  Ors. AIR 1947 PC 60,65; A.S. Krishna Vs. State of  Madras  1957 SCR 399; State of Rajasthan v. G. Chawla  1959 Supp. (1) SCR 904; Katra Education Society v.  State of U.P. 1996 (3) SCR 328; D.C. Johar & Sons (P)  Ltd. v. STO Ernakulam 1971 (27) STC 120; Kanan  Devan Hills Produce v. State of Kerala (1972) 2 SCC  218). b)      Where the encroachment is ostensibly ancillary but in  truth beyond the competence of the enacting  authority, the statute will be a colourable piece of  legislation and Constitutionally invalid (A.S. Krishna  v. State of madras (supra); A.B. Abdul Kadir v.  State of Kerala (1976) 3 SCC 219, 232; Federation  of Hotel & Restaurant v. Union of India (supra at  p.651). If the statute is legislatively competent the  enquiry into the  motive which persuaded Parliament  or the State legislature into passing the Act is  irrelevant. (Dharam Dutt & Ors. v. Union of India &  Ors. 2004(1) SCALE 425). c)      Apart from passing the test of legislative competency,  the Act must be otherwise legally valid and would  also have to pass the test of constitutionality in the  sense that it cannot be in violation of the provisions of  the constitution nor can it operate extraterritorially.   (See: Poppat Lal Shah v. State of Madras 1953   SCR 677).              The provisions relating to service tax in the Finance  Act, 1994 make it clear under Section 64(3) that the Act  applies only to taxable services.  Taxable services  has been  defined, as we have already noted, in Section 65(41).  Each of  the clauses of that sub section refers to the different kinds of  services provided.  Most of  the taxable services cannot be  said to be in any way related to goods or passengers carried  by road or waterways.  For example, Section 65(41) (g)  provides for service rendered to a client by a consulting  engineer, Section 65(41)(k) refers to service to a client by a  manpower recruitment agency,  Section 65(41) (o) refers to  service by pandal or shamiana contractors and so on.  The  rate of service tax has been fixed under Section 66.  Section  67 provides for valuation of taxable service for the purposes of  charging tax. The provision for valuation of service rendered  by collecting and forwarding agents has been dealt with   under sub-clause (j) and service  provided by goods transport  operators has been provided under clauses (l). (subsequently  renumbered as clause (ma)). These clauses read respectively  as under:-     "(j) in relation to service provided by a  clearing and forwarding agent to a client,  shall be the gross amount charged by such  agent from the client for services of clearing  and forwarding operations in any manner."  

"(ma) in relation to service provided by  goods transport operator to a customer, shall  be the gross amount charged by such  operator for services in relation to carrying  goods by road in a goods carriage and  includes the freight charges but does not  include any insurance charges".

       As far as clause (j) is concerned it does not speak of goods

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or passengers, nor to carriage of goods nor is it limited to service  by road or inland waterways.  Clause (ma) shows that the  valuation of the service tax includes the freight charges, but is  not limited to it.              It is clear therefore that Section 66 read with Section  65(41)(j) and (ma) Chapter V of the Finance Act 1994 do not  seek to levy tax on goods or passengers. The subject matter of  tax under those provisions of the Finance Act 1994 is not goods  and passengers, but the service of transportation itself.  It is a  levy distinct from the levy envisaged under Entry 56. It may be  that both the levies are to be measured on the same basis, but  that does not make the levy the same. As was held in  Federation of Hotel and Restaurant Association of India  etc.   v. Union of India & Ors., (1989) 3 SCC 634:

"..subjects which in one aspect and for one  purpose fall within the power of a particular   legislature may in another aspect and for  another purpose fall within another legislative  power\005\005\005.  Indeed, the law ’with respect to’  a subject might incidentally ’affect’ another  subject in some way; but that is not the same  thing as  the law being on the latter subject.   There might be overlapping; but the  overlapping must be in law.  The same  transaction may involve two or more taxable  events in its different aspects.  But the fact  that there is an overlapping does not detract  from the distinctiveness of the aspects."  (pg.652-653)

Since service Tax is not a levy on passengers and goods  but on the event of service in connection with the carriage of  goods, it is not therefore possible to hold that the Act in pith and  substance is within the States exclusive power under Entry 56 of  List II.  What  the Act ostensibly seeks to tax is what it, in  substance, taxes.  In the circumstances, the Act could not be  termed to be a colourable piece of legislation.  It is not the case  of the petitioners that the Act is referable to any other entry apart  from Entry 56 of List II.  Therefore the negation of the petitioners  submission perforce leads to the conclusion that the Act falls  within the residuary power of Parliament under Entry 97 of List I.  Incidentally a similar challenge to the legislative  competence of Parliament to levy service tax was negatived in  Tamil Nadu Kalyana Mandapam Assn. V. Union of India 2004  (167) ELT 3 (S.C) which was a case where the levy  of service  tax was challenged by owners of Kalayan Mandapam/ Mandap  Keepers.  By virtue of the 1997 amendment service provided to a  client by  Mandap keepers including the services if any rendered  as a caterer was  treated as a taxable service.  The challenge,  inter-alia, was that service tax on Mandap keepers was  colourable legislation as the said tax was not on service but was  in pith and substance only a tax on the sale of goods and/or a tax  on land.  The writ petition filed before the Madras High Court   was rejected and the constitutionality of the levy was upheld.  It  was then urged before this Court by the appellants that Entries  18, 14 and 54 of List II covered the levy in question and,  therefore, resort could not be had to Entry 97 in List I of the  Seventh Schedule of the Constitution.  It was held by this Court  that although certain items of the service might have been  referable to any other entry, the service element was the "more  weighty, visible and predominant".  Therefore, the nature and  character of the levy of the service tax was distinct from a tax on  the sale or hire  purchase of goods and from a tax on land.  The point at which the collection of the tax is to be made is

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a question of legislative convenience and part of the machinery  for realization and recovery of the tax. The manner of the  collection has been described as  "an accident of administration;  it is not of the essence of the duty" .   It will not change and does  not affect the essential nature of the tax. Subject to the legislative  competence of the Taxing Authority a duty can be imposed at the  stage which the authority finds to be convenient and the most  effective whatever stage it may be.  The  Central Government is  therefore legally competent to evolve a suitable machinery for  collection  of the service tax subject to the maintenance of a   rational connection between the tax and the person on whom it is  imposed. By Sections 116 and 117 of the Finance Act 2000, the  tax is sought to be levied from the recipients of the services.  They cannot claim that they are not connected with the service  since the service is rendered to them.     In a similar fact situation under an Ordinance the Central  Government was authorized to levy and collect a duty of excise  on all coal and coke dispatched from collieries.  Rules framed  under the Ordinance provided for collection of the excise duty by  the railway administration by means of a surcharge on freight  recoverable either from the consignor or the consignee. The  imposition of excise duty on the consignee was challenged on  the ground that the consignee had nothing to do with the  manufacture or production of the coal.  Negativing this  submission this Court in  R.C. Jall V. Union of India AIR 1962  SC 1281, 1286 said:-  "The argument confuses the incidence of  taxation with the machinery provided for the  collection thereof ".  

In Rai Ramakrishna (supra) the tax under Entry 56 of List  II was held to be competently levied on the bus operators or bus  owners even though the object of levy was passengers ( which  they were not) because there was a direct connection between  the object of the tax viz., goods and passengers and the owners  of the transport carrying the goods or passengers.  There is thus  nothing inherently illegal or unconstitutional to provide for service  tax to be paid by the availer or user.                The  writ petitioners have relying upon the decision in   Dwarka Prasad v. Dwarka Das Saraf 1976 (1) SCC 128,  contended that the amendment to section 68 by the introduction  of a proviso in 2003, was invalid.  It is submitted that as the body  of the section did not cover the subject matter, there was no  question of creating an exception in respect thereto by a proviso.   According to the writ petitioners, the proviso cannot expand the  body by creating a separate charge. It is submitted that by  merely amending the definition of the word "assessee" it could  not be understood to mean that thereby all customers of the  services in question were liable.         The submission is misconceived for several reasons.   Section 68 is a machinery section in that it provides for the  incidence of taxation and is not the charging section which is  Section 66.  The amendments to Section 66 brought about in  2000 changed the point of collection of tax from the provider of  the service to ’such manner as may be prescribed’.  Section  68(1A) as it stood in 1997 provided for the collection and  recovery of service tax in respect of the services referred in  clauses (g) to (r) of Section 65(41), which included both the  services with which we are concerned, from such person and in  such manner as may be prescribed.  The 1998 Finance Act  maintained this.  Now the Service Tax Rules 1994 provided for  the collection and recovery of tax from the user or payers for the  services.  This was the prescribed method.  All that the proviso to  Section 68(1A) did was to prescribe the procedure for collection  with reference to services of goods transport operators and

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clearing agents which services had already been expressly  included under the Finance Act 2000 into the definition of taxable  service.    The decision in Dwarka Prasad vs. Dwarka Das Saraf  (supra) relied upon by the writ petitioner does not in any way  forbid a proviso from supplementing the enacting clause.  All that  the decision says is that a proviso must prima facie be read and  considered in relation to the principal matter to which it is a  proviso. It is not a separate or an independent enactment.  The  introduction of the proviso to Section 68(1)(A) by the Finance  Act, 2003 does not seek in any manner seek to expand that sub- section.  In fact it gives effect to it.  The final challenge to the 2000 amendment to the Service  Tax Act, 1994 is that it operated in a discriminatory manner in  that it chose the recipient of the services to be the assessee only  in the case of services rendered by goods transport operators  and clearing and forwarding agents.  We are unable to accept  the submission. Because of the inherent complexity  of fiscal  adjustments of diverse elements in the field of tax, the legislature  is permitted a large discretion in the matter of classification to  determine not only what should be taxed but also the manner in  which the tax may be imposed.  Courts are extremely  circumspect in questioning the reasonability of such classification  but after a "judicial generosity is extended to legislative wisdom,   if there is writ on the statute perversity, madness in the method  or  gross disparity, judicial credibility may snap and the measure  may meet with its funeral". (Vide: Ganga Sugar Corporation vs.  State of U.P. )          The same judicial wariness was expressed in Federation of  Hotel and Restaurant Association of India  etc.  v. Union of  India & Ors., (1989) 3 SCC 634 where it was said:

"It is now well settled that though taxing   laws are not outside Article 14, however,  having regard to the wide variety of diverse  economic criteria that go into the formulation  of a fiscal policy  legislature enjoys a wide  latitude in the matter of selection of persons,  subject matter, events etc., for taxation.  The  tests of the vice of discrimination in a taxing  law are, accordingly, less rigorous. In  examining the allegations of a hostile,  discriminatory treatment what is looked into  is not its phraseology, but the real effect of  its provisions.  A legislature does not, as an  old saying goes, have to tax everything in  order to be able to tax something.  If there is  equality and uniformity within each group,  the law would not be discriminatory.   Decisions of this Court on the matter have  permitted the legislatures to exercise an  extremely wide discretion in classifying items  for tax purposes, so long as it refrains from  clear and hostile discrimination against  particular persons or classes." (pg.659)                                        (Emphasis added)

       In the case before us the discrimination is not, even  according to the writ petitioners, by reason of the subject  matter of tax.  It is also not the writ petitioners’ case that  within the separate classes of services covered by the  different clauses in Section 65(41), there is any  discrimination or that the law  operates unequally within the  classes. According to them the discrimination lies in the  method of collection of the tax followed. But as we have said

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this is not of the essence of the tax and the mere difference  in the machinery provisions between the different classes of  service cannot found a challenge of discrimination . If the  legislature thinks that it will facilitate the collection of the tax  due from such specified traders on a rationally discernible  basis, there is nothing in the said legislative measure to  offend Article 14 of the Constitution .  It is therefore outside  the judicial ken to determine whether the Parliament should  have specified a common mode for recovery of the tax as a  convenient administrative measure in respect of a particular  class.  That is ultimately a question of policy which must be  left to  legislative wisdom.  This challenge also accordingly  fails. Although the challenge to the constitutional validity and  legality  of the levy of service tax is rejected, the writ petitioners  have some subsidiary complaints.  They say that although the  levy of service tax from the users of the services rendered by the  goods transport operators was introduced with effect from         16th November, 1997, the levy was exempted for the period  subsequent to 2nd June, 1998 in view of the notification dated     2nd June, 1998 which is still operative.  Yet the respondents had  raised demands for service tax for periods subsequent to 2nd  June, 1998.  It has been conceded  by the Union of India that the  amendments made in the Act would have to be read along with   the notifications so that the levy and collection of service tax  would be only in respect of services rendered by goods transport  operators between the period from 16th November, 1997 to       2nd June, 1998.  Similarly there can be no tax liability on users  of  the services of the clearing and forwarding agents beyond  1.9.1999 when by notification No. 7/99 dated 23.8.99, the levy of  service tax on the services provided by clearing and forwarding  agents were exempted. Furthermore the liability to pay interest or  penalty on outstanding amounts will arise only if the dues are not  paid within the  period of two weeks from the order passed by  this Court on 17th November, 2003. In those cases in which the  tax may have been paid but not refunded to the writ petitioners,  for whatever reason, there is no question of levy of any interest  or penalty at all. With these clarifications, the writ petitions are dismissed  without any order as to costs.