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CASE NO.: Appeal (civil)  5832 of 2007

PETITIONER: M/s. Kerala State Electricity Board

RESPONDENT: Commr. of Central Excise,Thiruvananthapuram

DATE OF JUDGMENT: 12/12/2007

BENCH: S.B. SINHA & HARJIT SINGH BEDI

JUDGMENT: J U D G M E N T (Arising out of SLP (C) NO.3724 of 2007)

S.B. Sinha, J.

                Leave granted.

1.      A limited notice was issued to the effect as to whether the appellant\026 Kerala State Electricity Board, the service recipient, within the meaning of  provisions of Finance Act, 1994, levying service tax, is liable to pay any  interest on the amount of tax due to the respondent.   2.      The question involved in this appeal arises out of a judgment and  order dated 25.7.2006 passed by a Division Bench of the High Court of  Kerala at Ernakulam whereby the appeal filed by the respondent herein from  the judgment and order of the Customs Excise & Service Tax Appellate  Tribunal, Circuit Bench at Cochin in Final Order No.477 of 2005, Appeal  No.ST/36/2004 was allowed.  3.      The basic fact of the matter is not in dispute.  Appellant herein entered  into an agreement with M/s. SNC Lavlin Inc. Montreal, Canada (Foreign  company) in relation to various projects for obtaining consultancy services  from them.           The relevant clauses of the said agreement are as under :-  \02316.1 \026 SNC Lavaline and all its expatriate  personnel shall be responsible for timely and  prompt filing of all returns, estimates, accounts,  information and details complete and accurate in  all respects as may be required under the  applicable laws/regulations in India before the  appropriate authorities in India.  In case SNC  Lavaline or any of its expatriate personnel do not  comply with the above tax requirements, which  results in any penalty, interest or additional  liability, the same shall be borne by SNC Lavaline.

16.2 \026 SNC Lavaline shall provide KSE Board the  relevant orders/notices of demand, invoices,  appellate orders and other relevant information as  the proof of the actual tax liability to be borne by  KSE Board, sufficiently in advance to enable  KSEB to take appropriate action in this  connection.

16.3 \026 SNC Lavaline and its expatriate personnel,  if required by KSEB, shall contest appeals against  any assessment/demand of an appropriate authority  before such authority at the request of and cost  expenses of KSEB\024.

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4.       Despite the said contractual commitments, the appellant failed and/or  neglected to pay service tax on behalf of foreign company.  It, on the other  hand, raised a dispute that having regard to the purported statutory  obligations of the service provider as contained in the Act and the Rules  framed, it was not liable to pay any service tax. 5.      By reason of the impugned judgment, the Division Bench of the  Kerala High Court construing the provisions of the Act in the light of the  terms of the contract entered into by and between the appellant and the  foreign company opined that the liability in that regard was on the appellant  and not on the foreign company.   6.      Mr. T.L.V. Iyer, learned senior counsel, in support of this appeal, inter  alia, urged that the liability to pay interest and penalty being statutory one,  the service provider was responsible therefor and not the service recipient.  7.      Mr. R.G. Padia, learned senior counsel appearing on behalf of the  respondent, on the other hand, would support the impugned judgment.   8.      The period for which the service tax was due is August 1998 to  September 2002.  Under the agreement, indisputably, the appellant was  responsible to make payment of the service tax on behalf of the foreign  company. 9.      Section 65 of the Finance Act, 1994 provides for levy of service tax  on the services specified therein.  Section 66 of the Act provides that the rate  of tax shall be twelve per cent of the value of taxable services specified  therein and collected in such manner as may be prescribed.  Section 68 of  the Act puts the burden of payment of tax on the service provider.         Sections 68(2), 69(1), 71 and relevant parts of Sections 73 and 75 of  the Finance Act, 1994 which are material for the purposes of this case, read  as under : \02368.(2) Notwithstanding anything contained in  sub-section (1), in respect of any taxable service  notified by the Central Government in the Official  Gazette, the service tax thereon shall be paid by  such person and in such manner as may be  prescribed at the rate specified in section 66 and all  the provisions of this Chapter shall apply to such  person as if he is the person liable for paying the  service tax in relation to such service.

69. Registration.--(1) Every person liable to pay  the service tax under this Chapter or the rules  made thereunder shall, within such time and in  such manner and in such form as may be  prescribed, make an application for registration to  the  Superintendent of Central Excise.

71. Verification of tax assessed by the assessee,  etc.\027 (1) The Superintendent of Central Excise may, on  the basis of information contained in the return  filed by the assessee under section 70, verify the  correctness of the tax assessed by the assessee on  the services provided. (2) The Superintendent of Central Excise may  require the assessee to produce any accounts,  documents or other evidence as he may deem  necessary for such verification as and when  required. (3) If on verification under sub-section (2), the  Superintendent of Central Excise is of the opinion  that service tax on any service provided has  escaped assessment or has been under-assessed, he  may refer the matter to the Assistant  Commissioner of Central Excise or, as the case  may be, the Deputy Commissioner of Central  Excise, who may pass such order of assessment as

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he thinks fit.

73. Recovery of Service Tax Not Levied or Paid  or Short lived or Short-paid or Erroneously  Refunded.

(1) Where any service tax has not been levied or  paid or has been short-levied or short-paid or  erroneously refunded, the Central Excise Officer  may, within one year from the relevant date, serve  notice on the person chargeable with the service  tax which has not been levied or paid or which has  been short-levied or short-paid or the person to  whom such tax refund has erroneously been made,  requiring him to show cause why he should not  pay the amount specified in the notice:

XXX                         XXX                 XXX

(1A) Where any service tax has not been levied or  paid or has been short-levied or short-paid or  erroneously refunded, by reason of fraud, collusion  or any wilful mis-statement or suppression of facts,  or contravention of any of the provisions of this  Chapter or the rules made thereunder, with intent  to evade payment of service tax, by such person or  his agent, to whom a notice is served under the  proviso to sub-section (1) by the Central Excise  Officer, such person or agent may pay service tax  in full or in part as may be accepted by him, and  the interest payable thereon under section 75 and  penalty equal to twenty-five per cent. of the  service tax specified in the notice or the service tax  so accepted by such person within thirty days of  the receipt of the notice.;

75. Interest on delayed payment of service tax Every person, liable to pay the tax in accordance  with the provisions of section 68 or rules made  thereunder, who fails to credit the tax or any part  thereof to the account of the Central Government  within the period prescribed, shall pay simple  interest at such rate not below ten per cent and not  exceeding thirty-six per cent. per annum, as is for  the time being fixed by the Central Government,  by notification in the Official Gazette, for the  period by which such crediting of the tax or any  part thereof is delayed.\024

10.     The Central Government in exercise of its power conferred upon it by  sub-section (1) of Section 69 of the Finance Act, 1994 made Service Tax  Rules, 1994 for the purpose of assessment and collection of service tax.   Service tax was imposed on Consultancy Engineering Services w.e.f.  07.07.1997 by a Notification No.23 of 1997 dated 02.07.1997.  Consulting  Engineer as defined in Section 65(31) of the Finance Act, 1994 is a  professionally qualified or any body corporate or any other firm but that  directly or indirectly render any advice, consultancy or technical assistance  in any manner to a client in one or more disciplines of engineering. 11.      Clause (g) of  sub-section 105 of Section 65 of the Finance Act, 1994,  as amended, provides for the definition of taxable services rendered by a  consulting engineer to mean \021any service provided to a client by consulting  engineer in relation to advice, consultancy or technical service in any  manner to client in one or more disciplines of engineering\022.   12.     Sub-rule (1) of Rule 6 of Service Tax Rules, as applicable at the

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relevant time, stipulated that in case of a person who was from outside India  and did not have any office in India, the service tax due on the service  rendered by him should be paid by such person or on his behalf by any other  person authorized by him should submit to the Commissioner of Central  Excise in whose jurisdiction the taxable services have been rendered by him  a return containing specific details with necessary enclosures.  Such returns  along with a demand draft have to be submitted within a period of 30 days  from the date of raising the bill on the client for the taxable services  rendered. 13.     We may furthermore notice that in terms of the proviso appended to  sub-rule (1) of Rule 6 of Service Tax Rules, it is provided that in case of a  person who was a non-resident or was from outside India and who did not  have any office in India, the service tax due on the service rendered by him  should be paid by such person or on his behalf by another person authorized  by him who should submit to the Commissioner of Central Excise in whose  jurisdiction the taxable services had been rendered, a return containing  specific details with necessary enclosures. 14.     The High Court has arrived at a finding of fact that the foreign  company did not have any office in India.  It is not in dispute that the terms  of the agreement entered into by and between the appellant and foreign  company at all material time, show that the responsibility of meeting the  service tax liability was on the service recipient and despite the amendment  of Rule 6 (1) w.e.f. 16.8.2002 agreement still held good as the service  recipient being the appellant had taken up the responsibility of meeting the  liability of the foreign company. 15.     Clause 16.1 of the contract obligated the foreign company responsible  only for filing of returns, estimates, accounts, information and details  complete and accurate in all respects as may be required by any law or  regulation.  Only in the event the foreign company did not comply with the  said requirements resulting in imposition of any penalty, interest or  additional liability, the same shall be borne by it.  Clause 16.1 did not cast  any obligation upon the foreign company to make the payment of tax; the  same is being the liability of the appellant.   16.     Submissions of Mr. Iyer that the payment of interest was the statutory  liability of the service provider must be considered in the aforementioned  context.  If Appellant itself was liable for payment of tax, it was also liable  for payment of statutory interest thereupon, if the same had not been  deposited within the time stipulated by the statute.  The liability to pay tax  was not on the foreign company.  Only on default on the part of the  appellant the interest was leviable.  Appellant was clearly liable therefor.  In  other words, the liability being that of the appellant, it must accept the  liability of payment of interest leviable thereupon in terms of statute  occasioned by the breach on its part to deposit the amount of tax within the  prescribed time. 17.     Proviso appended to Rule 6 which has been inserted w.e.f. 28.2.1999  cast a liability upon a person authorized by the foreign company to do it in  that behalf.  The details were to be furnished by a person who was  authorized.  Clause (2) of the proviso provides for submission of the demand  draft within 30 days from the date of raising the bill.  Appellant being the  person authorized to make payment of the service tax, Section 75 would  come into operation in the event of its failure to do so.    18.        We may further notice that it was the appellant who  had provided  space and accommodation to the personnel of M/s SNC Lavalin in their  office premises and borne expenditure related thereto.  The service provider  did not have any independent office. 19.     We may at this juncture notice the decisions cited by Mr. Iyer.  In  Laghu Udyog Bharati and Anr. v. Union of India and Ors. [(1999) 6 SCC  418] this Court held that keeping in view the statutory scheme as they  existed in the amended rules providing for payment of tax on the service  recipient was illegal.  The said provision, however, were amended with  retrospective effect.  Challenge of the constitutional validity of the said  amendment, came up for consideration in Gujarat Ambuja Cements Ltd. and  Anr. v. Union of India and Anr. [(2005) 4 SCC 214] wherein a Division  Bench categorically held that the basis of reconsideration of the decisions in  Laghu Udyog Bharati\022s case was taken away stating:  

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\02322. As we have said, Rules 2(1)(d)(xii) and (xvii)  had been held to be illegal in Laghu Udyog  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 the  decision of this Court in Laghu Udyog 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  Udyog Bharati has been replaced and the decision  has thereby ceased to be relevant for the purposes  of construing the present provisions [vide Ujagar  Prints (II) v. 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 Udyog Bharati has been  legislatively overruled.    23. The next question is whether the levy of  service tax on carriage of goods by transport  operators was legislatively competent. Laghu  Udyog 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 recognised in Godfrey Phillips 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.    24. Undisputedly, Chapter V of the Finance 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 Corpn. v. State  of Haryana : (SCC pp. 325-26, para 6-A)  \023Before exclusive legislative competence can be  claimed for Parliament by resort to the residuary

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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.\024  

25. 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 Entry 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 and goods carried on the national  highway to justify the imposition.    26. The writ petitioners in this case have, relying  on this 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.   

27. 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. v. State of U.P.  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 \023carried by roads or natural  waterways\024 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 Ramkrishna v. State of  Bihar where it was said in language which we  cannot better: (SCR p. 908)  \023Entry 56 of the Second List refers to taxes on  goods and passengers carried by road or on inland

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waterways. It is clear that the State Legislatures  are authorised 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 \021carried by road or on inland  waterways\022 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.\024  (See also Sainik Motors v. State of Rajasthan)  34. The point at which the collection of the tax is  to be made is a question of legislative convenience  and part of the machinery for realisation and  recovery of the tax. The manner of the collection  has been described as \023an accident of  administration; it is not of the essence of the duty\024.  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 on the  recipients of the services. They cannot claim that  they are not connected with the service since the  service is rendered to them.    35. In a similar fact situation under an Ordinance  the Central Government was authorised 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 at p. 1286 said :  \023The argument confuses the incidence of  taxation with the machinery provided for the  collection thereof.\024  36. In Rai Ramkrishna 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

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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.    37. The writ petitioners have relying upon the  decision in Dwarka Prasad v. Dwarka Das Saraf   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 \023assessee\024 it  could not be understood to mean that thereby all  customers of the services in question were liable.    38. 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 \023such manner as may be  prescribed\024. Section 68(1-A) as it stood in 1997  provided for the collection and recovery of service  tax in respect of the services referred in sub- 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 users or  payers for the services. This was the prescribed  method. All that the proviso to Section 68(1-A) did  was to prescribe the procedure for collection with  reference to services of goods transport operators  and clearing agents which services had already  been expressly included under the Finance Act,  2000 in the definition of taxable service.\024

20.     Reliance placed by Mr. Iyer on Commissioner of Central Excise,  Meerut \026 II v. L.H. Sugar Factories Ltd. and Ors. [(2005) 13 SCC 245] is  also not of much assistance as the decision was rendered in relation to the  provisions of Income Tax Act holding that the said Act also must be  construed having regard to the charging provision. 21.     We, therefore, are of the opinion that no case has been made out for  interference with the impugned judgment. 22.     The appeal is dismissed with costs.  Counsel\022s fee assessed at  Rs.25,000/- (Rupees twenty five thousand only).