IN THE HIGH COURT OF KERALA AT ERNAKULAM
P.R. Ramachandra Menon, J. W.P.(C) No. 34643 of 2004 Dated this the 23rd day of December, 2011 Head Note:- Finance Act, 1994 – Sections 65, 65(94), 65(105)(w) and 67 – Security Guards - It was for the State to decide as to which agency was to be taxed and which was not to be taxed. The legislature had a discretion in levying tax on a particular class. Finance Act, 1994 – Sections 65, 65(94), 65(105)(w) and 67 – Security Guards - The role of the Security Agencies is only to act as 'agents' in the matter of collection of 'Service Tax'. The liability to pay service tax cast upon them under Section 68 of the Act, in turn could be passed on, to be satisfied by the 'Service Receivers'. For Petitioner:-
For Respondents:-
J U D G M E N T 1. The petitioners seek to declare Section 67 of Chapter V of the Finance Act 1994 (Act 32 of 1994), as amended from time to time, and other provisions and rules made and notifications issued under the Act, in so far as it includes the expenses and salary paid to the Security Guards and the statutory payments like contributions to ESI and EPF, in the 'Gross amount' charged for valuation of 'taxable service' in computing the 'service tax' payable, as ultra vires to the Constitution of India. 2. W.P.(C) No. 34643 of 2004 has been preferred by an Association representing various Security Agencies, who are alleged to be the members of the said Association. In fact, the said Association is stated as registered under the provisions of the Travancore-Cochin ( Literary, Scientific and Charitable Societies) Registration Act. The grievance is mainly with regard to the steps taken by the respondents to mulct the liability towards service tax upon the members of the Association under various heads; by way of Tax, Interest, Penalty etc, reckoning the 'Gross income' of the members, i.e. without realizing or taking into account the actual 'service aspect' rendered. Almost similar pleadings and prayers have been raised by the other petitioners as well, who are the concerned security service providers and are not the members of the Association. The petitioners contend that their undertakings actually do not have any clients at all and that the tax liability is to be fixed only with respect to the actual charges/commission realised by them in providing the security personnel to the service receivers. It is contended that, in most of the cases, the agencies who provide the security personnel to the service receivers, are getting only a meagre amount as 'Commission' and bulk of the amounts received is spent towards the salary and other statutory personnel engaged. It is also contended that in several cases, salary is being paid directly by the service receivers. 3. With regard to the challenge as to the constitutional validity of the provisions , it is stated that there is absolutely no rhyme or reason in including the said items in the 'Gross amount', as Sec. 67 only provides for valuation of the 'taxable service' and that it is violative of Article 14 and 19(1)(g) of the Constitution of India. It is stated that an element of hostile discrimination is shown towards the 'Security Agencies', unlike several other cases, where a specific provision for exemption is provided. The gist of the contention is that the salary and other statutory payments have to be segregated from the 'Gross amount' and only the balance amount is liable to be reckoned for the purpose of taxation. 4. The respondents have filed separate counter affidavits in all the cases. Some documents have also been produced in respect of the individual assessment. But in none of these cases the assessment made is under challenge and no such assessment order is sought to be set aside. Even otherwise, the assessment finalised by the concerned respondent is very much open to be challenged by availing the statutory remedy, as provided under the Act and as such, the only issue to be considered in these writ petitions is as to the validity of the statutory prescription, particularly under Section 67, providing for fixation of tax, reckoning the 'Gross amount' without segregating the 'expenditure part' from the rest. The respondents seek to establish, through the counter affidavits, that there is absolutely no merit or bonafides in the writ petitions, particularly with regard to the challenge against the constitutional validity of the statutory prescriptions. It is stated that the provision has been introduced by virtue of the power vested with the Parliament, in view of the relevant Entry under List I of the 7th Schedule. No sustainable ground is stated as projected to justify the challenge against the constitutional validity. Reliance is sought to be placed on the judicial precedents, particularly by a Division Bench of the High Court of Madras in GDA Security Private Limited Vs. Union of India, 2002(140) ELT 332 (Mad.), T.N. Kalyana Mandapam Assn. Vs. Union of India & Ors., (2004) 5 SCC 632 and also on the decision of the Constitution Bench of the Apex Court in Federation of Hotels and Restaurant Vs. Union of India, AIR 1990 SC 1637. 5. Mr. Mathai M. Paikeday, the learned Sr. Counsel appearing for the petitioner in W.P.(C) 34643 of 2004 led the arguments on behalf of the petitioners. The learned Sr. Counsel submitted that the challenge is not with regard to the inclusion of the petitioner within the 'Service Tax Net', but against fixation of the value of 'taxable service' under Section 67, reckoning the 'Gross amount', without segregating the expenses towards salary and statutory payments under the ESI/EPF, which constitute the major portion of the total figure involved. Reliance is placed on the decision rendered by a Division Bench of the Madras High Court in Advertising Club Vs. Central Board of Excise & Customs, 2001 (131) ELT 35 (Mad.) and also on some decisions rendered by the CESTAT, Bangalore and CESTAT, Delhi. The learned Senior Counsel submits that in most of the cases herein, salary is being paid directly by the service receivers and as such, there is no justification, on the part of the respondents in compelling the petitioners/service providers to pay the tax on the 'Gross amount'. The learned Sr. Counsel further submits that 'Service Tax' is 'destination based' computation of tax and it is not a charge on the business, but on the service component as discernible from the decision rendered by the Apex Court reported in (2007) 7 SCC 527 (All India Federation of Tax Practitioners and others Vs. Union of India and others) . 6. Mr. John Varghese, the learned Standing Counsel appearing for the respondents submits with reference to the question of law and the documents produced, that the liability to satisfy the Service tax is in terms of the statute and that the scope and extent of the 'Taxable Net' has been provided by the Parliament, in tune with the Policy of the Govt; which is not liable to be questioned by the petitioners. The validity of the statutory prescription has already been upheld by the Madras High Court in respect of 'Security Agencies', which stands against the petitioners. 7. Service Tax, which is an indirect tax, was introduced in India vide The Finance Act, 1994 (Act 32 of 1994), which was legislated by the Parliament under the residual entry, ie.. Entry No.97 of List 1 of Seventh Schedule of the Constitution of India. Section 65 (16)of the Act provides for 'taxable service', while Section 66 is the charging section, which provides for 'charge of service tax' by person designated as the person responsible for collecting tax for the Government. Section 67 provides for valuation of taxable services for charging service tax (which originally was 5% and amended twice by enhancing to 8 and 10% respectively). Section 68 provides for collection and recovery of service tax. In fact, the 'service tax' has to be paid for the services notified by the Government of India for the said purpose. The said tax is evidently on the service and not on the service providers. Though only a few entries were originally there under Section 65, the list was widened subsequently as per the Finance Act, 1996, 1997,1998 and so on, with nearly 125 entries as on date. 8. Security agencies were brought within the Service Tax Net for the first time, as per the Finance Act 1998, w.e.f. 16-10-98; though another class, 'Man Power Recruitment Agency' separately defined under section 65 was already brought under the net as per the Finance Act 1997 (Act No.26 of 1997).w.e.f.07.07.1997. Sec.65 (94) of the Finance Act defines the term, 'Security Agency' as follows: "'Security Agency' means any commercial concern engaged in the business of rendering service relating to security of any property, whether movable or immovable or of any person, in any manner and includes the service of investigation, detection or verification of any fact or activity whether of a personal nature or otherwise including the services of providing security personnel." Section 65 (105)(w)defines the term 'taxable service' as follows: "Any service provided to a client by a security agency in relation to the security of any property or person, by providing security personnel or otherwise and includes the provision of services of investigation, detection or verification of any fact or activity. By virtue of the very nature of the Act, the tax burden is to pass on to the beneficiary and as such the petitioners cannot be stated as aggrieved in any manner, submits the learned Central Government Counsel. So also, it is stated that there is no dispute as to the legislative competence, with regard to the enactment of Finance Act, 1994 providing for fixation of tax in respect of Security Agents reckoning the 'Gross amount'. It is asserted by the respondents, with reference to the law declared by the Apex Court and also the Madras High Court, that sustainability of the provision cannot be questioned or established with reference to the 'measure of taxation'. 9. After hearing both the sides, and also on going through the specific grounds raised in the writ petitions, this Court finds that, but for the vague challenge as to the constitutional validity of the statutory prescription, no concrete attempt has been made to establish the same. There is no case for the petitioners that the Parliament which enacted the statute does not have the legislative competence to enact the law. So also, no violation of any fundamental right is established with regard to the nature of the business that is being pursued by the petitioners. The sum and substance of the case argued before the Court is that the salary and statutory payments in respect of the engagement of security personnel are liable to be segregated for evaluating the 'taxable service' and that's all. 10. How the tax has to be realised, what should be the manner of imposition, what should be the extent of liability to be mulcted upon, who are the persons/class/individuals to be brought within the service tax net etc., are matters for the Government to decide, as a measure of policy. It is in furtherance of the said policy, that the law has been enacted by the Parliament by virtue of the power conferred upon it as per the residual entry, i.e.. Entry 97 of List I of the Seventh Schedule. The law having been enacted as above, it stands beyond the scope of challenge, with reference to the measure of taxation. It has been specifically observed by the Apex Court in T.N. Kalyana Mandapam Assn. Vs. Union of India and others, (2004) 5 SCC 632 (paragraph 46) that it is well settled that the 'measure of taxation' cannot affect the nature of taxation and therefore, the fact that service tax is levied as a percentage of the gross charges for catering, cannot alter or affect the legislative competence of the Parliament in the matter. As such, there is not much pith or substance in the vague challenge raised by the petitioners herein. 11. The correctness and sustainability of 'fixation of service tax' with reference to 'Gross income' of the Advertising Agencies in the state of Tamil Nadu, without excluding the expenditure part, while extending such benefits to some others was challenged before Madras High Court, on the plea of discrimination and violation of Article 14, besides challenging the constitutional validity of the statute. After considering the various provisions of the Statute, constitutional mandate and judicial precedents, a Division Bench of the Madras High Court, as per the decision in Advertising Club Vs. Central Board of Excise & Customs, 2001 (131) ELT 35 (Mad.) held that the challenge was unfounded and that the constitutional validity of a taxing provision was not to be decided on the basis of measure of tax, i.e., the deduction allowed. One of the learned Judges, who rendered the above decision had occasion to consider the scope of the said verdict in a subsequent case as well, while sitting in Division with another learned Judge in GDA Security Private Limited Vs. Union of India, 2002 (140) ELT 332 (Mad.) which was in respect of service tax to be satisfied by the Security Agencies. There also, the legislative competence was under challenge, referring to the fixation of liability based on the 'Gross income" without segregating the expenditure part and also on the ground of discrimination. After an exhaustive analysis of the relevant aspects, the learned Judges observed that the challenge raised was not sustainable, holding that, it was for the State to decide as to which agency was to be taxed and which was not to be taxed. The legislature had a discretion in levying tax on a particular class and such discretion has always been recognised and approved by the Apex Court. The Bench also referred to the observations of the Constitution Bench of the Supreme Court in Federation of Hotels and Restaurant Vs. Union of India, AIR 1990 SC 1637 which is extracted below: "It is now well settled that though taxing laws are not outside Art. 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. The legislature can exercise an extremely wide discretion in classifying item for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. " This Court finds that the decision rendered by the Madras High Court, as above, is on the point, as to the issue involved in these writ petitions as well. As such, this Court holds that the issue cannot but be answered in favour of the Revenue, especially on the question of law. 12. As observed by the Apex Court in T.N. Kalyana Mandapam Assn. Vs. Union of India and others, (2004)5 SCC 632 Service Tax is an indirect tax and the role of the service provider is only to have it collected on behalf of the revenue. The service provider is expected to collect it from the client. The observations of the Apex Court in this context are worthwhile to be noted, as extracted below: "Moreover, a tax cannot be struck down on the ground of lack of legislative competence by enquiring whether the definition accords what the layman's view of service is. It is well settled that in matters of taxation laws, the Court permits greater latitude to pick and choose objects and rates for taxation and gives a wide discretion with regard thereto. Therefore, a levy of service tax on a particular kind of service could not be struck down on the ground that it does not conform to a common understanding of the word "service", so long as it does not transgress any specific restriction contained in the Constitution." Viewed in the said circumstances, this Court finds that the challenge raised by the petitioners against the validity of the statute is devoid of any merit. 13. It is revealed from the materials on record, particularly the specific averments raised in the counter affidavits and documents produced in the concerned cases, that the service providers/security agencies have raised bills on the prospective customers/service receivers, also including the service tax component. Ext.R2 bill produced in W.P.(C) No. 9591 of 2005 shows realisation of service tax at the rate of 5% to be paid by the service receivers. Ext.R1 in W.P.(C) 9591/05 is the Income and Expenditure account of the said writ petitioner showing the salary and other benefits paid to the security personnel and Ext. P3 is the relevant Agreement with the Service Receiver. There is no master and servant relationship between the security personnel and the clients/Service Receivers. The respondents have specifically averred in paragraph '9' of the counter affidavit in the said case that the petitioner in the said writ petition had earlier approached this Court by filing W.P.(C) 20017 OF 2004 and 17045 of 2004 for a direction to reimburse the service tax, which they failed to collect from their clients, due to non-inclusion of such provision for realising service tax in the agreement with the clients. The aforesaid writ petitions were disposed of, directing the respondents to consider the claim of the petitioner and pass orders as specified. It is also contended that the said petitioner has preferred this writ petition(W.P.(C) 9591 of 2005) without revealing anything as to the filing of the earlier writ petitions and the turn of events. 14. The contention of the petitioners that they are virtually 'Man Power Recruiting Agents' and that their service is to be valued on the quantum of the commission they receive is wrong and unfounded. As mentioned hereinbefore, Man Power Recruiting Agency service is a separate entity which was brought within the Service Tax Net w.e.f. 07.07.1997 as per the Finance Act 1997, whereas the Security Agency Service was brought in for the first time only w.e.f. 16.10.1998, as per the Finance Act, 1998. Both the above terms have been separately defined under Section 65. In the case of the latter, the Security Agency is the 'Employer' of the security personnel deployed to cater to the requirements of the Service Receivers, for which the Service Receivers effect the payment to the Service Providers, as per the terms of the contract. The 'Master and Servant' relationship is between the Security Agency and the Security Personnel engaged and not between the Service Receivers and the Security Personnel. The service providers like the petitioners are very much authorised and entitled to pass on the liability towards salary and statutory payments to the 'Service Receivers' by raising the Bills including such amounts payable as Service Tax. As such, they cannot be stated as aggrieved in any manner with regard to the liability imposed under the Statute and they cannot be stated as a loser in this regard. The role of the Security Agencies like the petitioners is only to act as 'agents' in the matter of collection of 'Service Tax'. The liability to pay service tax cast upon them under Section 68 of the Act, in turn could be passed on, to be satisfied by the 'Service Receivers'. In the above facts and circumstances, this Court finds that there is absolutely no merit or bonafides in the challenge raised from the part of the petitioners under any head. The writ petitions fail and they are dismissed accordingly. |
