Holding

Parliament has exclusive legislative competence to levy service tax on the services of chartered accountants, cost accountants and architects under Entry 97 of List I (now reinforced by Article 268A and Entry 92C), and Entry 60 of List II does not encompass such tax.

Summary

The All India Federation of Tax Practitioners challenged the levy of service tax on chartered accountants, cost accountants and architects under the Finance Acts of 1994 and 1998, arguing that such tax fell within State List Entry 60 (taxes on professions) and was barred by Article 276. The Supreme Court examined the constitutional scheme of the Seventh Schedule, distinguishing taxing entries from general entries, and applied the doctrine of pith and substance. It held that service tax is a tax on services, a residuary power of Parliament under Entry 97 of List I, and that Entry 60 of List II pertains only to taxes on the status of a profession, not on the services rendered. The Court further noted that the Constitution (Eighty‑eighth Amendment) Act, 2003, which inserted Article 268A and Entry 92C, reinforces Parliament’s competence. Consequently, the appeal was dismissed, confirming the validity of the service tax levy.

Issues considered

Whether Parliament has legislative competence to levy service tax on chartered accountants, cost accountants and architects under Entry 97 of List I of the Seventh Schedule.
Whether Entry 60 of List II (taxes on professions, trades, callings and employments) precludes Parliament from imposing service tax on such professionals.
Whether Article 276, which protects State taxes on professions, applies to the service tax in question.
Whether service tax is a tax on services distinct from a professional tax on the status of a practitioner.
Whether the Constitution (Eighty‑eighth Amendment) Act, 2003 (Article 268A and Entry 92C) validates the levy.

Legislation cited

Central Excise Act, 1944
Constitution (Eighty‑eighth Amendment) Act, 2003
Constitution of Indias. Article 246, s. Article 265, s. Article 268A, s. Article 269, s. Article 276
Finance Act, 1994
Finance (No.2) Act, 1998

Subjects

service taxlegislative competenceUnion ListState ListArticle 246Article 276professional taxpith and substanceconstitutional amendmenttaxationchartered accountantsarchitects

Judgment

-+

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

AUGUST 21, 2007

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] B

Constitution of India, 1950-Articles 246(/), 276, 268A and Schedule
VII List I Entries 92 C and 97 and List II Entry 60-Service Tax-Levy of-
On Chartered Accountants, Cost Accountants and Architects-By Central C
legislation-Legislative competence of Parliament to levy the tax in view of
Entry 60 of State List of Seventh Schedule-Held: Parliament has legislative
competence to levy the Service Tax under Entry 97 of Union List of Seventh
Schedule-Entry 60 of State List of Seventh Schedule refers to 'professions'
which will not include services~onstitution (Eighty-eighth Amendment)
Act, 2003-Finance Act, 1994-Finance Act, 1998. D
Interpretation of Constitution-Interpretation of Legislative heads-
He/d: While interpreting such heads, the court has to go by schematic
interpretation of the three lists of the Seventh Schedule and not by dictionary
meaning of the words.
E
Doctrines/Principles:

Doctrine of Pith and Substance-Applicability of

Principle of equivalence-Application of
F
Tax/Taxation:

Service Tax and Professional Tax-Distinction between.

Tax on profession and tax on income-Distinction between.

Words and Phrases-'Services; 'Service Tax; 'Taxable service'-Meaning G
of

The question for consideration in the present appeal was regarding
constitutional status of the levy of service tax on Chartered Accountants, Cost
147 H
+
148 SUPREME COURT REPORTS (2007] 9 S.C.R.

A Accountant and Architects by Finance Act, 1994 and Finance (No. 2) Act,
1998, and the legislative competence of Parliament to impose service tax under
1
Article 246 (1) r/w Entry 97 of List I of Seventh Schedule, in view of Entry 60
· of List Ilof Seventh Schedule.

Dismissing the appe\ctl, the Court
B
HELD: 1. Parliament has legislative competence to levy service tax by
way of Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered
·accountants, cost accountants and architects. The above position now stands
fortified by the Constitution (Eighty-eighth Amendment) Act, 2003 which has
inserted Article 268A and Entry 92C which clearly indicates that Entry 60
C of List II and Entry 92C of List I operate in different spheres. However, there
is no challenge to the Constitutional validity of the said Constitution (Eighty-
eighth. Amendment) Act, 2003 before this Court.
(Para 41) (175-G, H; 176-AI

·Godfrey Phillips India Ltd. and Anr. v. State of U.P. and Ors., (2005) 2
D SCC 515 and International Tourist Corporation and Ors. v. State ofHaryana
and Ors., (1981) 2 SCC 318, relied on.

Sodan Singh and Ors. v. New Delhi Municipal Committee and Ors.,
(1989) 4 SCC.155; Tamil Nadu Kalyana Mandapam Assn. v. Union of India
and Ors., (2004) 5 SCC 632; Gujarat Ambuja Cements Ltd and Anr. v. Union
E of India and Anr., (2005) 4 SCC 214; Bharat Sanchar Nigam Ltd. and Anr. v.
Union of India and Ors., (2006) 3 SCC 1 and R.R. Engineering Co. v. Zita
Parishad, Bareilly and Anr., (1980) 3 SCC 330, distinguished.

2. The source of the concept of service tax lies in economics. It is an
economic concept. It has evolved on account of Service Industry becoming a
F major contributor to the GDP of an economy, particularly knowledge-based
economy. With the enactment of Finance Act, 1994, the Central Government
derived its authority from the residuary Entry 97 of the Union List of Seventh
Schedule to the Constitution of India for levying tax on seriices. The legal
backup was further provided by the introduction of Article 268A in the
G Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which
stated that taxes on services shall be charged by the Central Government and
appropriated between the Union Government and the States. Simultaneously,
a new Entry 92C was also introduced in the Union List for the levy of service
tax. As an economic concept, there is no distinction between the consumption
. of goods and consumption of services as both satisfy human needs. It is this
H economic concept based on the legal principle of equivalence which now stands
+
ALL INDIA FEDERATION OF TAX PRACTITIONERS "· U.O.l. 149
incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) A
Act, 2003. Further, it is important to note, that "service tax" is a value added
tax which in turn is a general tax which applies to all commercial activities
involving production of goods and provision of services. Moreover, VAT is a
consumption tax as it is borne by the client. (Para 171 [161-A, DI ·

Moti laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad, B
(1995) 76 E.L.T.241 (SC), referred to.

3. Finance Act is passed every year to fix the rate of tax. This is the
primary object for enacting the Finance Act. But it does not mean that a new
distinct charge cannot be introduced by the Finance Act. This is, however, C
subject to the Finance Act complying with the Constitutional limitations.
Additional tax revenue can be collected either by increasing the rate or by
levy of a fresh charge. All levies through the medium of the Finance Act may
either enhance the rate or levy a fresh charge. The Finance Act can also make
an extensive modification in an Act. (Para 21) (163-D, E)
D
The Madurai District Central Co-operative Bank Ltd v. The Third
Income Tax Officer, Madurai, AIR (1975) SC 2016, relied on.

4.1. Though it is correct that legislative Entries in the Seventh Schedule
are legislative heads/fields and, therefore, they should be given widest
interpretation. However,_,there are two groups of entries in each of the three E
Lists in the Seventh Schedule. In List I, Entries 1 to 81 refer to several matters
over which Parliament has authority to legislate. But Entries 82 to 92
enumerate the taxes which could be imposed by a law of Plrliament. An
examination of these two groups of entries shows that while the main subject
of legislation finds place in the first group, a tax in relation thereto is F
separately mentioned in the second group. List II, Entries 1 to 44 form one
group mentioning the "subjects" on which States could legislate. Entries 45
to 63 in that List form another group, and they deal in with taxes. Taxation is
not intended to be compromised in the main subject in which an exten, d
construction can be given as that test cannot be applied to taxation. Taxing
entries are distinct entries. This distinction between the two groups of entries G
is also manifest in the language of Article 248 clauses (1) and (2) as also in
the language of Entry 97 in List I of the Seventh Schedule to the Constitution.
(Paras 25 and 26) (164-F, G; 165-C, DJ

MP. V. Sundararamier and Co. v. The State ofAndhra Pradesh and Anr., H
AIR (1958) SC 468; Southern Pharmaceuticals and Chemicals v. State of
+
150 SUPREME COURT REPORTS [2007] 9 S.C.R.

A Kera/a, (1981) 4 SCC 391 and State of Bihar and Ors. v. Shree Baidyanath
Ayurved Bhawan (P) Ltd and Ors., (2005) 2 SCC 762, relied on.

4.2. Entry 60 of List II of VII Schedule mentions "Taxes on professions,
trades, callings and employments". Entry 60 is a taxing entry. It is not a
general entry. Therefore, tax on professions etc. has fo be read as a levy on
B professions, trades, callings etc., as such. Therefore, Entry 60 which refers
to professions cannot be extended to include services. This is what is called
as an Aspect Theory. "Professions" will not include services. Parliament had
absolute jurisdiction and legislative competence to levy tax on services. While
interpreting the legislative heads under List II, the Court has to go by
C schematic interpretation of the three Lists in the Seventh Schedule to the
Constitution and not by dictionary meaning of the words 'profession' or
'professional' as was sought to be argued on behalf of the appellants otherwise
the distinction between general entries and taxing entries under the three
Lists would stand obliterated. The words "in relation to" and the words "with
respect to" are no doubt words of wide amplitude but one has to keep in mind
D the context in which they are used. (Para 28( (166-F, G, H; 167-A]

5. Entry 60 List II of VII Schedule refers to taxes on professions etc.. It
is the tax on the individual person/firm or company. It is the tax on the status.
A chartered accountant or a cost accountant obtains a licence or a privilege
E from the competent Body to practise. On that privilege as such the State is
competent to levy a tax under Entry 60. However, Entry 60 is not a general
entry. It cannot be read to include every activity undertaken by a chartered
accountant/cost accountant/architect for consideration. Service tax is a tax
on each activity undertaken by a chartered accountant/cost accountant or an
architect. The activity undertaken by the chartered accountant or cost
F accountant is similar to saleable or marketable commodities produced by the
assessee and cleared by the assessee for home consumption under the Central
Excise Act. For each contract, tax is levied under the Finance Acts, 1994 and
1998. Tax cannot be levied under that Act without service being provided
whereas a professional tax under Entry 60 is a tax on his status. It is the tax
G on the status of a cost accountant or a chartered accountant. As long as a
person/firm remains in the profession, he/it has to pay professional tax. That
tax has nothing to do with the commercial activities which he undertakes for
his client: Even if the chartered accountant has no work throughout the
accounting year, still he has to pay professional tax. He has to pay the tax till .
he remains in the profession. This is the ambit and scope of Entry 60 List II
· H which is a taxing entry. Therefore, Entry 60 contemplates tax on professions,
ALL INDIA FEDERATION OF TAX PRACTITIONERS v. U.0.1. 151
as such. (Para 29) (167-C, G] A
Western India Theatres Ltd. v. Cantonment Board, AIR (1959) SC 582,
relied on.

6.1. The States' pow~r to tax professions etc. is founded on Entry 60 of
List II and the purpose of Article 276 is not to amend that power but to provide B
that such tax on professions, trades etc. shall not be invalidated on the ground
that it relates to a tax on income. Once the State seeks to exercise its power
under Entry 60 List II, it has to comply with the provisions of Article 276.
Where, however, the exercise of power by the State overlaps with its power
under some other Entry, then the limitation under Article 276(2) shall have C
no relevance. Thus, Article 276 will not apply to levy of tax on "circumstances
and property" which is referable to Entry 49 and Entry 60 of List II and
amongst other Items to Entry 58, taxes on cinematograph shows, taxes on
entry of goods. Article 276 enables the State Legislature to make laws for
imposition of taxes on profession, for the benefit of the State, Municipality,
District Board etc. by stating that such law shall not be invalid on the ground D
that it relates to a tax on income. (Para 32) (170-C, D, E)

6.2. Constitutional law is about concepts and principles. Some of these
principles have evolved out of judicial decisions. The entries dealing with
taxation are distinct entries vis-a-vis the general entries. It is for this reason
that the doctrine of pith and substance has an important role to play while E
deciding the scope of each of the entries in the three Lists in the Seventh
Schedule to the Constitution. This doctrine of pith and substance flows from
the words in Article 246(1), namely, "with respect to" any of the matters
enumerated in List I". The bottom line of the said doctrine is to look at the
legislation as a whole and if it has a substantial connection with the Entry, F
the matter may be taken to be legislation on the topic. That is why due
weightage should be given to the words "with respect to" in Article 246 as it
brings in the doctrine of "pith and substance" for understanding the scope of
legislative powers. Competence to legislate flows from Articles 245, 246 and
the other Articles in Part XI. A legislation like Finance Act can be supported
on the basis ofa number of Entries. (Para 3311170-H; 171-A, CJ G
6.3. For deciding the true character and nature of a particular levy, with
reference to the legislative competence, the court has to look into the pith
and substance of the legislation. The powers of Parliament and State
Legislatures are subject to Constitutional limitations. Tax laws are governed
by Part XII and Part XIII. Article 265 takes in Article 245 when it says that H
152 SUPREME COURT REPORTS [2007] 9 S.C.R.

A the tax shall be levied by the authority of law. Various entries in the Seventh
Schedule show that the power to levy tax is treated as a distinct matter for the
purpose of legislative competence. This is the underlying principle to
differentiate between the two Groups of entries, namely, general entries and
taxing entries. Taxes on services is a different subject as compared to taxes
B on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry
92C/97 of List I operate in different spheres. (Para 33} (171-D, E, F)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7128of2001.

From the final Judgment and Order dated 22.02.2001 of the High Court
C of Judicature at Bombay in Writ Petition No. 142of1999.

Shyam Divan, P.H. Parekh, E.R. Kumar, Ranjeeta Rohatgi, Vasuman
Khandelwal, Arjun Garg, Iksha Rai and Subhranshu (for Mis. P.H. Parekh &
Co.) for the Appellants.

V. Shekhar, Shalini Kumar and B. Krishna Prasad for the Respondents.

The Judgment of the Court were delivered by _

KAPADIA, J. I. This is an appeal filed by All India Federation of Tax
Practitioners against the Division Bench judgment of the Bombay High Court
dated 22.2.200.1 in Writ PetitiOn No. 142/99 upholding the legislative
E competence of Parliament to levy service tax vide Finance Act, 1994 and
Finance Act, 1998. According to the impugned judgment, service tax falls in
Entry 97, List I -of the Seventh Schedule to the Constitution.

2. The question which arises for determination in this civil appeal
F concerns the constitutional status of the levy of service tax and the legislative
competence of Parliament to impose service tax under Article246(1} read with
Entry 97 of List I of the Seventh Schedule· to the Constitution. The issue
arising in this appeal questions the competence of Parliament to ·tevy service
tax on practising chartered accountants and architects having regard to Entry
60 List II of the Seventh Schedule to the Constitution and Article 276 of the
G Constitution.
.)-
Background Facts

3. On 1.6.1998 Finance Bill, 1998 was introduced in Parliament. Clause
119 of the Notes sought to substitute Sections 65, 66 and 68 and amend
H Section 67 of the Finance Act, 1994 relating to service tax so as to levy a tax
ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. [KAPADIA,J.] 153
on services rendered by a practising chartered accountant, cost accountant A
and architect to a client in professional capacity at the rate of five per cent
of the amount charged to the client. On 3.6.1998, Bombay Chartered
Accountants Association made a representation to the Central Government
objecting to the aforestated Bill. On 1.8.1998 the Finance Bill was however
passed and the Finance (No. 2) Act, 1998 received the assent of the President B
of India. The Act came into force with effect from l.4.1998. On 7. l 0.1998,
Union of India issued Notification No. 57/98 inter alia exempting taxable
services other than accounting and auditing. On 16. l 0.1998, Union of India
issued another Notification No. 59/98 inter alia reducing the scope of the
exemption. On 20.1.1999, Writ Petition No. 142/99 was filed by the Federation
in the Bombay High Court challenging the validity of the levy of service tax. C
By the impugned judgment dated 22.2.2001 the Bombay High Court rejected
the writ petition and upheld the legislative competence of Parliament to levy
service tax.

Reason for Imposition of Service Tax
D
4. Service tax is an indirect tax levied on certain services provided by
.- certain categories of persons including companies, association, firms, body
of individuals etc .. Service se~tor contributes about 64% to the GDP. "Services"
constitute heterogeneous spectrum of economic activities. Today services
cover wide range of activities such as management, banking, insurance,
hospitality, consultancy, communication, administration, entertainment, research E
and development activities forming part of retailing sector. Service sector is
today occupying the centre stage of the Indian economy. It has become an
Industry by itself. In the contemporary world, development of service sector
has become synonymous with the advancement of the economy. Economics
hold the view that there is no distinction between the consumption of goods p
and consumption of services as both satisfy the human needs.

5. In late seventies, Government oflndia initiated an exercise to explore
alternative revenue sources due to resource constraints. The primary sources
of revenue are direct and indirect taxes. Central excise duty is a tax on the
goods produced in India whereas customs duty is the tax on imports. The G
word "goods" has to be understood in contradistinction to the word "services".
Customs and excise duty constitute two major sources of indirect taxes in
India. Both are consumption specific in the sense that they do not constitute
a charge on the business but on the client. However, by 1994, Government
of India found revenue receipts from customs and excise on the decline due H
154 SUPREME COURT REPORTS [2007) 9 S.C.R.

A to W.T.O. commitments and due to rationalization of duties on commodities.
Therefore, in the year 1994-95, the then Union Finance Minister introduced
the new concept of "service tax" by imposing tax on services of telephones,
non-life insurance and stock-brokers. That list has increased since then.
Knowledge economy has made "services" an important revenue-earner.

B 6. At this stage, we may refer to the concept of "Value Added Tax"
(VAT), which is a general tax that applies, in principle, to ~II commercial
activities involving production of goods and provision of services. VAT is
a consumption tax as it is borne by the consumer.

7. In the light of what is stated above, it is clear that Service Tax is a
C VAT which in turn is destination based consumption tax in the sense that it
is on commercial activities and is not a charge on the business but on the
consumer and it would, logically, be leviable only on services provided within
the country. Service tax is a value added tax.

D 8. As stated above, service tax is VAT. Just as excise duty is a tax on ·
value addition on goods, service tax is on value additioin by rendition of
services. Therefore, for our understanding, broadly "services" fall into two
categories, namely, property based services and performance based services.
Property based services cover service providers such as architects, interior
designers, real estate agents, construction services, mandapwalas etc ..
E Performance based services are services provided by service providers like
stock-brokers, practising chartered accountants, practising cost accountants,
security agencies, tour operators, event managers, travel agents etc ..

9. Government of India in order to tap new areas of taxation and to
identify the hidden one appointed Tax Reforms Committee under the
F Chairmanship of Dr. Chelliah in August, 1991. The recommendations made by
the Committee were accepted and the Service Tax was introduced in the
Budget for 1994-95 through the-Finance Act, 1994. Under the said enactment,
Service Tax is the tax on notified services provided or to be provided. After
its introduction, the constitutional validity of the services taxed by the Central
G Government was challenged before the Constitution Bench of .this Court
which took the view that the Central Government derived its authority from
Entry' 97 of List I of the Seventh Schedule to the Constitution for levying tax
on services provided.

10. To provide necessary legal backup, the Government introduced a
H new Article 268A in the Constitution in the year 2003 by Constitution (Eighty-
ALL INDIA FEDERATION OFTAX PRACTfflONERS v. U.0.1. [KAPADIA,J.) 155
A
eighth Amendment) Act, 2003, which provides that taxes on services shall be
charged by Union of India and shall be appropriated by Union of India and
the States. A new Entry 92C was also introduced in the Union List for the
levy of taxes on services. Section 65( 16) of the Finance Act, 1994 provided
for definition of "taxable service" to mean any service provided by stock-
broker, telegraph authority, and by insurer. Section 67 provided for valuation B
of taxable service based on gross receipts. In cases where value of taxable
service could not be decided then the cost of providing the service constituted
the basis of the assessable value of taxable service.

11. At this stage, we may state that the above discussion shows that
what was the economic concept, namely, that there is no distinction between C
consumption of goods and consumption of services is translated into a legal
principle of taxation by the aforestated Finance Acts of 1994 and 1998.

Scheme of the Finance Act, 1994 and Finance Act, 1998

12. Chapter V of the Finance Act, 1994 referred to Service Tax. It defined D
"assessee" to mean a person responsible for collecting the service tax. Under
the Act, "service tax" was defined to mean tax chargeable under Chapter V.
Under the Act, "taxable service" was defined to mean any service provided
by a stock-broker to an investor in connection with the sale or purchase of
securities listed on a recognized stock exchange; services rendered to a E
subscriber by the telegraph authority; and services rendered by an insurer to
a policy holder. Under the Act, it was clarified that words and expressions not
defined in Chapter V but used therein shall bear the same meaning as given
in the Central Excise Act, 1944. Section 66 stated that service tax shall be
levied at the rate of five per cent of the value of taxable services provided
to any person by the service provider who was responsible for collecting the F
service tax. It was similar to Section 3 of Central Excise Act, 1944. Section 67
dealt with valuation of taxable services. Section 68 dealt with collection and
.recovery of.service tax. Section 71 dealt with assessment. Section 72 dealt
with best judgment assessment. Section 73 dealt with value of taxable services
escaping assessment. Section 83 inter alia stated that Section 9C, 90, 11 B G
etc. of the Central Excise Act shall apply also to collection and recovery of
service tax. Further, it may be stated that the administration of service tax is
given to the authorities under the Central Excise Act.

13. Broadly, to the same effect, is the Finance Act of 1998. The said Act
has increased the list of notified services so as to include advertising agencies, H
156 SUPREME COURT REPORTS [2007] 9 S.C.R.

A travel agencies, architects, caterers, clearing and forwarding agents, credit
rating agencies, customs house agents, practising chartered accountants,
practising cost accountants, real estate agents, security agencies etc .. We are
concerned in this case with the services provided by architects, chartered
accountants and cost accountants covered by the Finance Act, 1998.

B Relevant Provisions of the Constitution of India

14. The relevant provisions of the Constitution of India are as follows:

"Article 246. Subject-matter of laws made by Parliament and by the
Legislatures of States.-(1) Notwithstanding anything in clauses (2)
C and (3), Parliament has exclusive power to make laws with respect to
any of the matters enumerated in List I in the Seventh Schedule (in
this Constitution referred to as the "Union List".

D Article 265. Taxes not to be imposed save by authority oflaw.-No tax
shall be levied or collected except by authority of law.

Article 268A. Service tax levied by Union and collected and
appropriated by the Union and the States.-(l) Taxes on services
E shall be levied by the Government of India and such tax shall be ·
collected and appropriated by the Government of India and the States
in the manner provided in clause (2).

(2) The proceeds in any financial year of any such tax levied in
accordance with the provisions of clause (I) shall be-
F
(a) collected by the Government of India and the States;

(b) appropriated by the Government of India and the States,

in accordance with such principles of collection and appropriation as
G may be formulated by Parliament by law.

Article 269. Taxes levied and collected by the Union but assigned
to the States.-( I) Taxes on the sales or purchase of goods and taxes
on the consignment of goods shall be levied and collected by the
Government of India but shall be assigned and shall be deemed to
H have been assigned to the States on or after the I st day of April, 1996
ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. (KAPADIA,J.] 157
in the manner provided in clause (2). A
Explanation.-For the purposes of this clause,-

(a) the expression "taxes on the sale or purchase of goods" shall
mean taxes on sale or purchase of goods other than ne•vspapers,
where such sale or purchase takes place in the course of inter- B
State trade or commerce;
(b) the expression "taxes on the consignment of goods" shall mean
taxes on the consignment of goods (whether the consignment is
to the person making it or to any other person), where such
consignmen t takes place in the course of inter-State trade or
1
C
commerce.

(2) The net proceeds in any financial year of any such tax, except in
so far as those proceeds represent proceeds attributable to Union
territories, shall not form part of the Consolidated Fund of India, but .
shall be assigned to the States within which that tax is leviable in that D
year, and shall be distributed among those States in accordance with
such principles of distribution as may be formulated by Parliament by
law.
(3) Parliament may by law formulate principles for determining when
a sal.e or purchase of, or consignment of, goods takes place in the E
course of inter-State trade or commerce.

Article 276. Taxes on professions, trades, callings and emp/oyments.-
-~ (1) Notwithstanding anything in article 246, no law of the Legislature
of a State relating to taxes for the benefit of the State or of a municipality, F
district" board, local board or other local authority therein in respect
of professions, trades, callings or employments shall be invalid on the
.ground that it relates to a tax on income.

(2) The total amount payable in respect of any one person to the State
or to any one municipality, district board, local board or other local G
authority in the State by way of taxes on professions, trades, callings
and employments shall not exceed two thousand and five hundred
rupees per annum.

(3) The power of the Legislature of a State to make laws as aforesaid H
-:{

158 SUPREME COURT REPORTS (2007) 9 S.C.R.

A with respect to taxes on professions, trades, callings and employments
shall not.be construed as limiting in any way the power of Parliament
to make laws with respect to truces on income accruing from or arising
out of professions, trades, callings and employments."

Entry No. 92C o~ List I of the Seventh Schedule to the Constitution
B is as follows:

"92C. Taxes on services."
)
Entry Nos. 53, 60 and 62 of List II of the Seventh Schedule to the
Constitution are as follows:
c "53. Taxes on the consumption or sale of electricity."

"60. Taxes on professions, trades, callings and employments."

D
"62. Taxes on luxuries, including truces on entertainments, amusements,
betting and gambling."

Entry 38 of List III of the Seventh Schedule to the Constitution is as
follows:
E
"38. Electricity."

Arguments:

15. The basic argument advanced on behalf of the appellant-Federation
F before us was on Entry 60 of List II of the Seventh Schedule reproduced
above. The said Entry refers to taxes on professions, trades callings and
employments. The argument advanced by Shri Shyam Divan, learned counsel
on behalf of the appellant, was that every entry in the Lists in the Seventh
Schedule represents a field of legislation. Therefore, it should be read in a
broad sense. The appellant did not dispute before us the proposition that the
G service tax was a tax on service and that it was not a tax on the service
providers. The basic contention of the appellant was that the State Legislature
alone has an absolute jurisdiction and legislative competence to levy service
true. It was submitted that service tax was a tax on profession. It was submitted
that service true fell within the ambit of Entry 60 of List II. It was submitted
H that the word profession in the said Entry was not limited by any restriction/
ALLINDIAFEDERATIONOFTAXPRACTJTJONERSv. U.0.1. [KAPADIA,J.] 159
qualification and, therefore, it must be read with the widest possible sense. A
It was submitted that the word "profession" has been defined in Black's Law
dictionary to mean a vocation requiring advance education and training. It
was submitted that the word "profession" has been defined in the E~glish
dictionary by Collins to mean an "occupation" requiring special training in the
liberal arts or sciences, especially one of the three learned professions, law, B
theology, or medicine. lt was .contended on behalf of the appellants that there
was no difference between tax on profession and tax on services. According
to the learned counsel, the word 'profession' in Entry 60 List U was synonymous
with the word 'service' and, therefore, tax on profession would include tax on
service, which tax could be levied only by the State Legislature. lt was
submitted that there cannot be a profession without service. It was submitted C
that service rendered by a chartered accountant/cost accountant to his client
is the service rendered as a professional. lt was urged on behalf of the
appellant that it was not the case of the appellant that services cannot be
taxed. The only argument advanced on behalf of the appellant was that the
tax on profession was the State Entry and, therefore, Entry 97 of List I cannot
be invoked and that Parliament had no legislative competence to levy service D
tax. It was submitted that under the Finance Acts, taxability was limited to
rendition of professional services and, therefore, tax on profes:;ion under
Entry 60 of List II would include tax on service. In short, according to the
learned counsel, the word 'profession' in Entry 60 of List II was nothing but
service and, therefore, levy of service tax came within the competence of State E
Legislature alone. Placing reliance on Article 276(1), learned counsel on behalf
of the appellants submitted that the words used in Article 276(1), namely, no
law of the State Legislature relating to taxes in respect of professions, callings
etc. were words of widest amplitudes· and, therefore, the word "profession"
would cover every aspect connected with it; that the word "service" was not
an aspect of the word "profession" it was in fact synonymous to each other; F .
that they were inseparable and, therefore, tax on services could be levied only
by State Legislature. Learned counsel urged that the expression "relating to"
and the expression "in respect or• are the two expressions which have linkage
to levy of taxes on profession, calling etc. and to the words profession; trade,
calling etc. in Article 276(1) and, therefore, ifthe aforestated two expressions G
are read in their proper context, they indiCate the intentioa of the Constitution
framers in incorporating taxes on profession under a separate Legislative
Head. According to the learned counsel, therefore, this Court must give a
wide interpretation to the words taxes on professions, trades, callings etc.
Learned counsel submitted that the words in respect of professions, trades,
callings etc. in Article 276(1) indicate amplitude and the wide field open to the H
160 SUPREME COURT REPORTS [2007) 9 S.C.R.

A State Legislature to make laws imposing taxes on professions, trades, callings
etc .. It was urged that the above two expressions, namely, 'relating to' and 'in
respect of ' are known in law· as words of widest amplitude and if the
significance of the said two expressions is kept in mind, then it becomes clear
that the Constitution framers intended the State Legislature alone to be
B competent to impose taxes on professions, trades, callings and employments
and that they did not intend to give such a power to Parliament. Learned
counsel submi~ed that if due weightage is given to the aforestated two
expressions then the word 'profession' .in Article 276(1) and Entry 60 of List ,'
II would cover every aspect of the concept of professions, trades, callings
and employments. It was submitted that profession cannot exist .without
C service as service is the core of profession. Learned counsel submitted that
if the above two expressions in Article 276(1) are given due weightage then
there would be no difference between the words "profession" and "service";
that these two words would be interchangeable and if used interchangeably,
it is clear that the State Legislature alone has the absolute competence to levy
tax on s~rvices as there was no difference between the two words, namely,
D "service" and "profession". Reliance was also placed on Article 276(3) in
support of the contention that the Constitution itself had made a dichotomy
between taxes on professions, trades, callings and employments on one hand
and taxes on inc.omes arising out of professions, trades, callings and
employments on the other and that the said dichotomy between tax on·
E profession (service) vis-a-vis the tax on income arising out of professions,
trades, callings etc. itself indicates that a separate field is demarcated for
Parliament to enact laws imposing tax on incomes arising out of professions
and, at the same time, the State Legislature alone shall have the competence
to impose tax on professions, trades, callings etc.

F 16. Shri V. Shekhar, learned senior c~unsel for the Department, placing
reliance on judgments impugned of various High Courts, submitted that •·
"service tax" was a tax on activities undertaken for consideration; that it was
a tax on services and not. on the service-provider; that the tax on profession
was essentially a tax on the professional and, therefore, Parliament had the
G legislative competence to levy service tax under Entry 97 of List I. It was
further submitted that with the Constitution (Eighty-eighth Amendment) Act,
2003 by whic~ Entry 92C is inserted, the controversy is closed and, therefore,
there is no question of going behind the said entry which has accepted the .:Y.
validity of the impugned judgments by Constitutional Amendments.·

H Findings:

'
ALL INDIA FEDERATION OF TAX PRACTITIONERS v. U.0.1. [KAPADIA, J.) 161
(i) Meaning of "Service Tax": A
17. As stated above, the source of the concept of service tax lies in
economics. It is an economic concept. It has evolved on account of Service
Industry becoming a major contributor to the GDP of an economy, particularly
knowledge-based economy. With the enactment of Finance Act, 1994, the
Central Government derived its authority from the residuary Entry 97 of the B
Union List for levying tax on services. The legal backup wa.s further provided
by the introduction of Article 268A in the Constitution vide Constitution
(Eighty-eighth Amendment) Act, 2003 which stated that taxes on services
shall be charged by the Central Government and appropriated between the
Union Government and the States. Simultaneously, a new Entry 92C was also C
introduced in the Union List for the levy of service tax. As stated above, as
an economic concept, there is no distinction between the consumption of
goods and consumption of services as both satisfy human needs. It is this
economic concept based on the legal principle of equivalence which now
stands incorporated in the Constitution vide Constitution (Eighty-eighth
Amendment) Act, 2003. Further, it is important to note, that "service tax" is D
a value added tax which in tum is a general tax which applies to all commercial
activities involving production of goods and provision of services. Moreover,
VAT· is a consumption tax as it is borne by the client.

18. In Moti Laminates Pvt. Ltd. v. Collector of Central Excise,
Ahmedabad(1995) (76) E.L.T.24l(SC) we get a clue of an important principle, E
namely, "principle of equivalence". In that judgment, this Court was required
to explain the words "excisable goods" and "produce<.. vr manufactured". It
1
was held )y this Court that the expression "excisable goods" has been
defined in Section 2 of the Central Excise Act, 1944 to mean goods specified
in the Schedule. It was held that the object for having a schedule in the Act F
was to fix rates under different entries including residuary entry. At this stage,
we may say that the object of the Finance Act is also to fix rates of duty under
different entries. However, the question which arose before this Court in Moti
Laminates (supra) was the meaning of the word "goods" in Central Excise
Act, 1944. This Court noticed that Section 3 of the 1944 Act levied duty on
all excisable goods mentioned in the schedule provided they are produced G
and manufactured, therefore, this Court laid down the test that where goods
are specified in the schedule they are excisable goods but whether such
goods can be subjected to duty would depend on whether they were produced
or manufactured by the assessee. This Court further explained that the
expression "produced or manufactured" would mean that the goods produced H
162 SUPREME COURT REPORTS (2007] 9 S.C.R.

A must.satisfy the test of saleability/marketability. The reason being that the
duty under the 1944 Act is on manufacture/production but the manufacture/
prod.uction is intended for taking such goods to. the market for sale. It was
observed that the· obvious reason for levying excise duty linked with
production or manufacture is that the goods so produced must be a distinct
B commodity known in the market. We quote hereiribelow para 7 of the· said
judgment, which is as follows:

"The duty of excise being on production and manufacture which
means bringing out a new commodity, it is implicit that such goods >
must be .useable, moveable, saleable and marketable. The duty is on
manufacture or production but the production or manufacture is carried
on for taking such goods to the market for sale. The obvious rationale
for levying excise duty linking it with production or manufacture is
that the goods so produced must be a distinct commodity known as
such in common parlance or tC> the commercial community for purposes
of buying and selling. Since the solution that was produced could not
D be use~ as such without any further processing or application of heat
or pressure, it could not be considered as goods on which any excise
duty could be levied.''

· Therefore, even if an item is manufactured or produced, it will not fall in the
concept of goods till the test of marketability is satisfied. In the case of Moti
E Laminates (supra) the 'solution' was an intermediate product produced in the
course of manufacture of laminated sheets. It had a short shelf life. It was not
marketable, therefore, this Court took the view that the solution was not
"goods" and, therefore, not dutiable.

F 19. The importance of the above judgment of this Court is twofold.
Firstly, applying the principle of equivalence, there is no difference between
production or manufacture of saleable goods and production of marketable/
saleable services in the form of an activity undertaken by the service provider
for· consideration, which correspondingly stands consumed by the service
receiver. It is this p~inciple o( equivalence which is in-built into the concept
G of service "tax, which has received legal support in the form of Finance Act,
1994 . To gi~e an illustration, an Event Manager (professional) undertitkes an
activity, namely, oforganizing shows, He belongs to the profession of Event
Manager. A~ long as he is in the business or calling or profession of an Event
Manager, he is liable to pay the tax on profession, calling or trade under Entry
60 of List II. However, that.tax under Entry 60 of List II will not cover his
H
')-.
/

ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. [KAPADIA,J.] 163
activity of organizing shows for consideration which provide entertainment A
to the connoisseurs. For each show he plans and creates based on his skill,
experience and training. In each show he undertakes an activity which is
commercial and which he places before his audience for its consumption. The
tax on service is levfod for each show. This situation is very similar to a
situation wbere goods are manufacture or produced with the intention of
being cleared for home consumption under the Central Excise Act, 1944. This B
is how the principle of equivalence equates consumption of goods with
consumption of· services as both satisfy the human needs. In the case of
Internet Service Provider, service tax is leviable for on-line inform<ttion and
database provided by web sites. But no service tax is leviable on E-commerce
as there is no Database Access. C
20. On the basis of the above discussion, it is clear th.at service tax is
· VAT which in tum is both a general tax as well as destination based
consumption tax leviable on services provided within the country. ·

(ii) Object of enacting the Finance Act: D
21. Finance Act is passed every year to fix the rate of tax. This is the
primary object for enacting the Finance Act. But it does not mean that a new
distinct charge cannot be introduced by the Finance Act. For example, what
is not "income" under the Income Tax Act ("IT Act") can be made income
by the Finance Act. This is, however, subject to the Finance Act complying E
with the Constitutional limitations. Additional tax revenue can be collected
either by increasing the rate or by levy of a fresh charge. All levies through
the medium of the Finance Act may either enhance the rate or levy a fresh
charge. The Finance Act can also_ make an extensive modification in an Act.
"'.
22. In the case of The Madurai District Central Co-operative Bank Ltd. F
v. The Third Income Tax Officer, Madurai reported in AIR (1975) SC 2016 this
Court held that the IT Act, 1961 and the annual Finance Acts are enacted by
Parliament in exercise of the power conferred by Article 246( 1) read with Entry
82 of List I. It was further held that though it was unconventional for
Parliament to amend the taxing statute by incorporating the amending provision G
in an Act of a different'pith and substance, such course would not be
unconstitutional. It was held that though the IT Act, 1961 was a permanent
Act while Finance Acts are passed every year to prescribe the rates at which
the tax has been charged under the IT Act, 1961 still it would not mean that
a new and distinct charge cannot .be introduced under the Finance Act.
Therefore, what is not income under the IT Act, 196 l can be made "income" H
164 SUPREME COURT REPORTS (2007) 9 S.C.R.

A by a Finance Act. Similarly an exemption granted by the IT Act can be
withdrawn by the Finance Act. Similarly, subject to Constitutional limitations,
a~ditional tax revenue could be collected by enhancement of the rate of tax
or by the levy of a fresh charge vide the Finance Act. Parliament, through the
medium of Finance Act, may do what the amendment to the IT Act, 1961 by
a separate Amendment Act, can do. It was further held that, the Finance Acts,
B though annual Acts, ate not necessarily te"lporary Acts as they may contain
provisions of a general character which are of permanent operation. Thus,
Parliament is competent to introduce a charging provision in a Finance Act.
In the said judgment, it had been further held that. even an additional charge
(surcharge) can be levied by Finance Act for the purposes of the Union ..
c 23. The aforestated judgment was in the context .of the IT Act, 1961.
However, the ratio of that judgment would apply equally to the Finance Acts
enacted annuaily for enhancement of the rate of excise duty by levy of a fresh
charge under that Act. Applying the testlaid down in. the aforestated judgment
of this Court, we hold that a new charge by way of service tax or tax on
P service came to be levied statutorily by the said Finance Act, 1994, which has
subsequently attained Constitutional status by virtue of the Constitution
(Eighty-eighth Amendment) Act, 2003.

(iii) Interpretation of Taxing Entries in the Seventh Schedule to the
Constitution:
E
24. Constitutional law, like taxing law, essentially concerns concepts and
principles.

25. In the present case, it has been vehemently urged on behalf of the
appellant that legislative Entries in·the Seventlt Schedule are legislative heads/
F fields and, therefore, they should be given widest interpretation. Th~re is no
dispute regarding the said proposition. However, there are two groups of
entries in each of the three Lists in the Seventh Schedule. In List I, Entries
I to 81 refer to sever.al matters over which P¥lianient has authority to legislate.
But Entries 82 to 92 enumerates the taxes which could be imposed by a law
G of Parliament. An examination of these two groups of entries shows that while
the main subject of legislation finds place in the first group, a tax in relation
thereto is separately mentioned in the second group. For example, Entry ~2
in List I refers to "Railways" whereas Entry 89 refers to "Terminal taxes on
goods or passengers; carried by railway". If Entry 22 is construed as involving
taxes to be imposed, then Entry 89 would be superfluous. Similarly, Entry 41
H of List I refers to "Trade and commerce with foreign countries; import and ·
ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. [KAPADIA,J.] 165

~. export across customs frontiers", however, Entry 83 refers to "Duties of A
customs including export duties". If Entry 41 of List I, which refers to trade
and commerce with foreign countries and which refers to import and export,
is to be interpreted as including duties of customs under that Entry, then
Entry 83 would be rendered superfluous. Similarly, Entries 43 and 44 of List
I relate to incorporation, regulation and winding up of corporations whereas B
Entry 85 provides for "Corporation tax". If Entries 43 and 44 are to cover taxes
then Entry 85 would be rendered superfluous.

26. Turning to List II, Entries 1 to 44 form one group mentioning the
"subjects" on which States could legislate. Entries 45 to 63 in that List form
another group, and they deal in with taxes. At the relevant time, Entry 18 C
referred to "Lands" whereas Entry 45 referred to "Land Revenue". If land
revenue was to fall under Entry 18 then Entry 45 would be rendered superfluous.
The above analysis is not exhaustive. However, the above analysis shows
that taxation is not intended to be compromised in the main subject in which
an extended construction can be given as that test cannot be applied to
taxation. Taxing entries are distinct entries. This distinction between the D
abovementioned two groups of entries is also manifest in the language of
Article 248 clauses (1) and (2) as also in the language of Entry 97 in List I
of the Seventh Schedule to the Constitution. [See MP. V. Sundararamier &
Co. v. The State of Andhra Pradesh and Anr., AIR (1958) SC 468 para 51]

27. The above distinction between the group of general entries and the E
group of taxing entries to the Lists in the Seventh Schedule has also been
highlighted in the case of Southern Pharmaceuticals & Chemicals v. State
of Kera la reported in [ 1981] 4 SCC 391 in which this Court took the view that
enactment of the Medicinal Act, 1955 by Parliament under Entry 84 List I does
not prevent the State Legislature from making a law under Entry 8 List II as F
Entry 8 was a general entry whereas Entry 84 List I was a taxing entry. This
distinction has been brought to light in another judgment of this Court to
which one of us, Kapadia, J., was a party in the case of State of Bihar and
ors. v. Shree Baidyanath Ayurved Bhawan (P) Ltd. and Ors. reported in
[2005] 2 sec 762 (para 28), which is quoted hereinbelow:
G
"28. Before concluding, we may point out that in the case of Southern
Pharmaceuticals & Chemicals, Trichur and Ors. v. State of Kera/a
and Ors., [1981] 4 SCC 391 this Court has taken the view, which we
have taken hereinabove. In that case, this Court held, that, by enactment
of Medicinal Act, 1955 by Parliament under Entry 84 List-I of the H
166 SUPREME COURT REPORTS (2007) 9 S.C.R.

A Seventh Schedule of the Constitution or by the framing of rules by
the Central Government thereunder for recovery of excise duty on
manufacture of medicinal and toilet preparations containing alcohol,
a State Legislature is not prevented from making a Jaw under Entry 8
List II with respect to intoxicating liquor or a Jaw under Entry 51 List
II levying excise duties on alcoholic liquors for human consumption.
B In that case it was held that the Abkari Act of Kerala is relatable to
the State's power to make a law under Entry 8 and Entry 51 List II of
the Seventh Schedule to the Constitution. There is a difference
between the word "on" and the expression "with respect to". When >
we refer to levy on excise duty under Entry 84 List I, we emphasize
c the word "on". On the other hand, when we refer to Entry 8 List II,
which is a general entry, relating to "intoxicating liquor", we refer to
a wider activity. The words "in respect of or the words "with respect
to" used in the aforestated judgment in the context of Entry 8 List II
bring out the above difference. Entry 8 List-II is an entry on general
subject unlike Entry 84 List-II which deals with taxation. Keeping in
D mind the difference between the two, we hold thatthe State Jaw under
Entry 8 List-II covers a wider field of use, consumption, possession,
diversion etc. vis-a-vis Entry 84 List I, which deals with .duty on
manufacture of medicinal preparation, as such. This difference is lost
sight of by the High Court in the impugned judgment."
E (emphasis supplied)

28. Applying the above tests laid down in the aforestated judgments to
the facts of the present case, we find that Entry 60 of List_ II, mentions "Taxes
on professions, trades, callings and employments". Entry 60 is a taxing entry.
F It is not a general entry. Therefore, we hold that tax on professions etc. has
to be read as a levy on professions, trades, callings etc., as such. Therefore,
Entry 60 which refers to professions cannot be extended to include services.
This is what is called as an Aspect Theory. If the argument of the appellants
is accepted, then there would be no difference between interpretation of a
general entry and interpretation of a taxing entry in List I and List II of the
G Seventh Schedule to the Constitution. Therefore, "professions" will not include
services under Entry 60. For the above reasons, we hold that Parliament had
absolute Jurisdiction and legislative competence to levy tax on services.
While interpreting the legislative heads under List II, we have to go by
schematic interpretation of the three Lists in the Seventh Schedule to the
H Constitution and· not by dictionary meaning of the words 'profession' or
'r-
'
ALL INDIA FEDERATION OFTAXPRACTllIONERS11. U.0.1. [KAPADIA, J.] 167
'professional' as was sought to be argued on behalf of the appellants otherwise A
....
the distinction between general entries and taxing entries under the three
Lists would stand obliterated. The words "in relation to" and the words "with
respect to" are no doubt words of wide amplitude but one has to keep in mind
the context in which they are used.

(iv) Meaning of the words Taxes 'on' professions: B
29. As stated above, Entry 60 List II refers to taxes on professions etc ..
It is the tax on the individual person/firm or company. It is the tax on the
status. A chartered accountant or a cost accountant obtains a licence or a
privilege from the competent Body to practise. On that privilege as such the C
State is competent to levy a tax under Entry 60. However, as stated above,
Entry 60 is not a general entry. It cannot be read to include every activity
undertaken by a chartered accountant/cost accountant/architect for
consideration. Service tax is a tax on each activity undertaken by a chartered
accountant/cost accountant or an architect. The cost accountant/chartered
accountant/architect charges his client for advice or for auditing of accounts. D
Similarly, a cost accountant charges his client for advice as well as doing the
work of costing. For each transaction or contract, the chartered accountant/
cost accountant renders professional based services. The activity undertaken·
by the chartered accountant or the cost accountant or an architect has two
aspects. From the point of view of the chartered accountant/cost accountant
it is an activity undertaken by him based on his performance and skill. But E
from the point of view of his client, the chartered accountant/cost accountant
is his service-provider. It is a tax on "services". The activity undertaken by
the chartered accountant or cost accountant is similar to a saleable or
marketable commodities produced by the assessee and cleared by the assessee
for home consumption under the Central Excise Act. For each contract, tax p
is levied Ul}~er the Finance Acts, 1994 and 1998. Tax cannot be levied under
that A~t without service being provided whereas a professional tax under
Entry 60 is a tax on his status. It is the tax on the status of a cost accountant
or a chartered accountant. As long as a person/firm remains in the profession,
he/it has to pay professional tax. That tax has nothing to do with the
commercial activities which he undertakes for his client. Even if the chartered G
accountant has no work throughout the accounting year, still he has to pay
professional tax. He has to pay the. tax till he remains in the profession. This
is the ambit and scope of Entry 60 List !l which is a taxing entry. Therefore,
Entry 60 contemplates tax on professions, as such. Entry 60 List II refers to
"Tax on employments". In one case, the question arose whether Parliament H
168 SUPREME COURT REPORTS [2007] 9 S.C.R.

A was entitled to impose income tax on pension under Entry 82 of List I. The
controversy was that "pension" is a retiral benefit. It was argued that pension
was an incident of "employment" and, therefore, Parliament had no legislative
competence to impose income tax under Entry 82 of List I and that the State
Legislature alone had absolute jurisdiction to make a law imposing tax on
B pension. This argument was rejected on the ground that Entry 60 of List II
refers to "Tax on employments", as such. So long as a person is in the
einployment, he does not earn pension. He earns pension only on retirement.
On retirement, he ceases to be in the employment, therefore, on retirement the
).
receipt of pension constitutes "income" in the hands of the pensioner and,
therefore, Parliament had legislative competence to enact Income Tax Act,
C 1961 under which pension was taxable as income. This example demonstrates
the meaning of the word "Taxes on professions, callings, trades and
employments". It also indicates two aspects of the same item, namely, pension.
One aspect falls in the category of "employment", the other falls in the
category of "income". Therefore, there is no merit in the contention advanced
on behalf of the appellant that the widest possible interpretation should be
D given to the word "profession" in Entry 60 List II. We have to keep in mind
while interpreting the Entries in the three Lists the distinction between the
general entry and the taxing entry ..

30. In the case of Western India Theatres Ltd. v. Cantonment Board,
E reported in AIR (1959) SC 582 the appellant was a public limited company. It
was a lessee of two cinema Houses. It was an exhibitor of cinematograph
films. A notice was issued to the appellant by the Cantonment Board under
Section 60 of the Cantonments Act, 1924 imposing tax on entertainments. The
said levy was challenged on the ground that under Section 100 of the
Government of India Act, 1935 ("GOI Act, 1935") read _with Entry 50 in
F Schedule VII, the Provincial Legislature had power to make law with respect
to "Taxes on luxuries, including taxes on entertainments, amusements, betting
and gambling". It was urged on behalf of the appellant that Entry 50 was not
applicable since Entry 50 contemplated enactment of a law imposing taxes on
persons who receive or enjoy the entertainments/amusements and, therefore,
G the said entry did not authorize imposition of tax on assessees/persons who
provide entertainments or amusements. According to the appellant, Western
India Theatres were entertainment providers; that they were not entertainment
receivers; that they simply carried on their profession, trade or calling and,
therefore, Entry 50 was not applicable. It was further urged that entertainment-
providers fell under Entry 46, which Entry is similar to Entry 60 of List II in
H the present case and which referred taxes on professions, trades, callings and
ALL INDIA FEDERATION OFTAX PRACTITIONERS v. U.0.1. [KAPADIA, J.] 169

employments. This argument advanced on behalf of the appellant was rejectPd A
by this Court. It was held that Entry 50 contemplated a tax on entertainment
and amusement as objects on which a tax is to be imposed and, therefore, it
was not possible to differentiate between the entertainment-provider and the
entertainment-receiver. It was held that entertainment was trade or calling of
Western India Theaters and, therefore, the tax imposed on entc ;ainment
under the Cantonment Act came within Entry 50 of the Provincial List. The B
importance of this judgment lies in the fact that this judgment makes a
distinction between tax imposed for the privilege of carrying on any trade or
calling on one hand and a tax on every show that is to say on every incidence
of the exercise of the particular trade or calling. It was held that if there was
no show, there was no tax. It was further observed that a lawyer has to pay C
tax to take out a licence irrespective of whether he actually practices or not.
That tax is a tax for the privilege of having the right to exercises the profession
if and when the person taking out the license chooses to do so. It was held
that the impugned tax on entertainment levied by the Cantonment Board was
a tax on the act of entertainment resulting in a show and, therefore, the
impugned law imposing tax on entertainment fell under Entry 50 of the D
Prov.incial List in· Schedule VII to the GOI Act, 1935 and not under Entry-46
(similar to Entry 60 of List II). Therefore, it was held that Bombay Legislature
had power to enact the law imposing tax on entertainment which had nothing
to do with the law imposing tax on the privilege of carrying on any profession,
trade or calling under Entry 46. (similar to Entry 60 of List II in the present E
case.) Therefore, this Court has clarified the dichotomy between tax on privilege
of carrying on any trade or calling on one hand and the tax on the activity
which an entertainer undertakes on each occasions. The tax on privilege to
practice the profession, therefore, falls under Entry 60, List II. It is quite
different from tax on services. Keeping in mind the aforestated dichotomy, it
is clear that tax· on service does not fall under Entry 60 List I!. Therefore, F
Parliament has absolute jurisdiction and legislative competence to enact the
law imposing tax on services under Entry 97 List I of the Seventh Schedule
to the Constitution.

(v) Significance of Article 276:
G
31. Learned counsel for the appellants in support of his argument that
the words 'professions' and 'services' are synonymous for the purposes of
deciding the question of legislative competence of the State Legislature under
Entry 60 List II, placed heavy reliance on Article 276, which has been quoted
hereinabove.
H
170 SUPREME COURT REPORTS (2007] 9 S.C.R.

A 32. Article 276 corresponds to Section 142A of the GOI Act, 1935.
I
However, under a large number of laws enacted before the 1935 Act came into
force, power was conferred on local Governments and local authorities to
impose taxes on certain activities which broadly came under the Heads "Taxes
on proft ions, trades etc." on one hand and "Taxes on income" on the other
B hand. This resulted in the enactment of Section l 42A by British Parliament,
which saved the power conferred by pre-existing laws to impose tax on
professions, callings etc. but limited the amount payable to a specified amount.
At that time, it was Rs. 50.00, which was the tax payable on profession. That
was in 1935. Article 276 was, therefore, preceded by Section l42A of the GOI
Act, 1935. The limit has been subsequently enhanced. The States' power to.
C tax professions etc. is founded on Entry 60 of List II and the purpose of
Article 276 is not to amend that power but to provide that such tax on
professions, trades etc. shall not be invalidated on the ground that it relates
to a tax on income. Once the State seeks to exercises its power under Entry
60 List II, it has to comply with the provisions of Article 276. Where, however,
the exercise of power by the State overlaps with its power under some other
D Entry, then the limitation under Article 276(2) shall have no relevance. Thus,
Article 276 will not apply to levy of tax on "circumstances and property''
which is referable to Entry 49 and Entry 60 of List II and amongst other Items
to Entry 58, taxes on cinematograph shows, taxes on entry of goods. A tax
on profession can be imposed if a person carries out a profession whereas
E a tax on income can be imposed only if there is income. Therefore, a tax on
profession is irrespective of the question of income. Article 276 enables the
State Legislature to make laws for imposition of taxes on profession, for the
benefit of the State, Municipality, District Board etc. by stating that ~uch law
shall not be invalid on the ground that it relates to a tax on income. There
is a distinction between a tax on professions, trades, callings artd employments
F and a tax on income arising out of such professions, trades etc .. In the fonner
case, it will have to be paid by any person practising that trade, profession
etc., whether he derives any income from it or not. This is where the above
example of pensioner becomes relevant. A pensioner does not carry out any
profession, trade, business or calling. A tax on profession is not a tax on
G employment. At the time, the tax is levied, the pensioner is not in employment,
but he receives an amount of pension that receipt constitutes his income
though it might be for past services from an employment.

33. As stated above, every Entry in the Lists has to be given a schematic
interpretation. As stated above, Constitutional law is about concepts and
H principles. Some of these principles have evolved out of judicial decisions.
ALLINDIAFEDERATIONOFTAXPRACTITIONERSv. U.0.1. [KAPADIA,J.] 171
The said test is also applicable to taxation laws. That is the reason why the A
Entries in the Lists have been divided into two Groups, one dealing with
general subjects and other dealing with taxation. The entries dealing with
taxation are distinct entries vis-a-vis the general entries. It is for this reason
that the doctrine of pith and substance has an important role to play while
deciding the scope of each of the entries in the three Lists in the Seventh
Schedule to the Constitution. This doctrine of pith and substance flows from B
the words in Article 246(1), quoted above, namely, "with respect to any of the
matters enumerated in List I". The bottom line of the said doctrine is to look
at the legislation as a whole and if it has a substantial connection with the
Entry, the matter may be taken to be legislation on the topic. That is why due
weightage should be given to the words "with respect to" in Article 246 as C
it brings in the doctrine of "pith and substance" for understanding the scope
of legislative powers. Competence to legislate flows from Articles 245, 246 and
the other Articles in Part XI. A legislation like Finance Act can be supported
on the basis of a number of Entries. In the present case, we are concerned
with the Constitutional status of the levy, namely, service tax. The nomenclature
of a levy is not conclusive for deciding its true character and nature. For D
deciding the true character and nature of a particular levy, with reference to
the legislative competence, the court has to look into the pith and subst<l-!1ce
of the legislation. The powers of Parliament and State Legislatures are subject
to Constitutional limitations. Tax laws are governed by Part XII and Part XIII.
Article 265 takes in Article 245 when it says that the tax shall be levied by E
the.authority of law. To repeat, various entries in the Seventh Schedule show
that the power to levy tax is treated as a distinct matter for the purpose of
legislative competence. This is the underlying principle to differentiate between
the two Groups of entries, namely, general entries and taxing entries. We are
of the view that taxes on services is a different subject as compared to taxes
on professions, trades, callings etc. Therefore, Entry 60 of List II and Entry F
92C/97 of List I operate in different spheres.

(vi) Discussions of Judgments cited on behalf of the appellants:

34. In the case of Godfrey Phillips India .Ltd. and Anr. v. State of U.P.
and Ors. reported in [2005] 2 SCC 515 the assessees/appellants, who were G
either manufacturers, dealers or sellers of tobacco, had challenged the levy
of luxury tax on tobacco and tobacco products by treating them as "luxuries"
within the meaning of the word in Entry 62 of List II of the Seventh Schedule
to the Constitution of India. Uttar Pradesh Tax on Luxuries Act, 1995 and
certain other State enactments imposed luxury tax on tobacco by treating it H
-{.

172 SUPREME COURT REPORTS [2007] 9 S.C.R.

A as "luxury" within the meaning of the word in Entry 62 of List II. It was held ...,..,
by the Constitution Bench of this Court that the word "luxuries" in Entry 62,
List II refers to activities of enjoyment, indulgence or pleasure and since none
of the impugned enactments had sought to tax any activity and since the
impugned enactments sought to tax "goods" as luxuries it was held that the
B said U.P. Tax on Luxuries Act, 1995, Andhra Pradesh Tax on Luxuries Act,
1987 and West Bengal Luxury Tax Act, 1994 were beyond the legislative
competence of the State Legislatm:e. In this connection, it was observed, vide
para 57, by the Constitution Bench of this Court that a tax on a thing or goods
can only be with reference to a taxable event but there is a distinction
between such a tax and a tax on the taxable event. In the first case, the
.c subject-matter of tax is the goods and the taxable event is within the incidence
of the tax on the goods. In the second case, the taxable event is the subject-
matter of tax itself. In our view, para 57 supports the reasoning given by us
hereinabove. As stated above, service tax is a value added tax. Value addition
is on account of the activity like planning, consultation, advising etc .. It is
an activity, which provides value addition as in the case of manufacturer of
D goods, which attracts service tax. In the present case, tax falls on the activity
. which is the subject-matter of service tax. In other words, we are substituting
the word "service" in place. of "goods" by applying the principle of equivalence.
Under the Act, the Taxable Event is each exercise .undertaken by the service- .
provider in giving advice on tax planning, auditing, costing etc .. It -is the said .
E principle of equivalence which equates "service tax" to the Central Excise
Duty, one taxes the provision of services and other production of goods. See
para 2. I 4 of the recommendations made by Tax Reforms Committee headed by
Dr. Chelliah which has stated that from the economic point of view, there is
little difference between the taxation of commodities and taxation of services.

F 35. In the case of International Tourist Corporation and Ors. v. State
of Haryana and Ors., reported in [1981] 2 SCC 318 the appellants were
transport operators. The State of Haryana levied a tax on passengers and
goods under the Haryana Passengers and Goods Taxation Act, 1952. The
appellants questioned the vires of Section 3(3) insofar as the levy of tax on
G passengers and goods carrying by their vehicles plying along the National
Highway. It was urged on behalf of the appellants that there was nothing in
the Constitution to prevent Parliament from combining its power to legislate
with respect to any matters enumerated in Entries l to 96 of List I with its --;.
power to legislate under Entry 97 of List I and, if so, then the power to
legislate with respect to tax on passengers and goods carried on National
H Highway was within the exclusive legislative competence of Parliament and,
ALL INDIA FEDERATION OF TAX PRACTITIONERS v. U.0.1. [KAPADIA, J.) 173
therefore, Section 3(3) of Haryana Passengers and Goods Taxation Act, 1952 A
was beyond the legislative competence of the State Legislature. This argument
was rejected by the Division Bench of this Court, which took the view that
before exclusive legislativ~ competence can be claimed for Parliament by
resort to Entry 97 List I, the legislative competence of the State Legislature
must be established. Entry 97 itself was specific. In that, a matter can be B
brought under that Entry only if it is not enumerated in Lists II or III, and
in the case of a tax, if it is not mentioned in either of those Lists. We do not
dispute the above proposition. That proposition is well settled. This Court is
concerned with the application of the said principle in this case. In the present
matter, as stated hereinabove, the State Legislature is empowered to levy tax
on professions, trades, callings etc., as such and, therefore, the word "services" c
cannot be read as synonymous to the word "profession" in entry 60. Therefore,
tax on services do not fall under Entry 60 List II. That, service tax would fall
under Entry 92C/Entry 97 of List I.

36. In the case of Sodan Singh and Ors. v. New Delhi Municipal D
Committee and ors. reported in [1989] 4 SCC 155 the appellants claimed a right
to engage in trading business on the pavements of Delhi city. In that context,
it was held by the Constitution bench of this Court that, the guarantee under
Article 19(1 )(g) extends to practise any profession, or to carry on any
occupation, trade or business. In that case, the word "profession" had been
defined to mean an occupation carried on by virtue of specialized qualifications, E
personal qualifications, training or skill. We do not find any relevance of this
judgment to the present case. As stated above, we are concerned with
interpretation of legislative heads under the three Lists in the Seventh Schedule
to the Constitution. As stated above, we have to go by the schematic
interpretation of those entries. Moreover, we are concerned with a distinct F
taxing entries and not general entries. Hence, the judgment in the case of
Sodan Singh (supra) has no application to the present case.

37. In the case of Tamil Nadu Kalyana Mandapam Assn. v. Union of
- India and Ors..reported in [2004] 5 SCC 632 the Division Bench of this Court
held that service tax is an indirect tax and is to be paid on all the services G
notified by the Government of India. It has been further held that the said tax
is on "service" and not on the service-provider. In paragraph 58 it has been
observed that under Article 246(1) of the Constitution, Parliament has exclusive
powers to make laws with respect to any of the matters enumerated in List
I in the Seventh Schedule to the Constitution. As per Article 246(3), the State
Government has exclusive powers to make laws with respect to matters H
174 SUPREME COURT REPORTS (2007] 9 S.C.R.

A enumerated in List II (State List). In the said judgment, it has been held that
service tax is made by Parliament under Entry 97 of List I. In our view,
therefore, the point in issue in the present case is squarely covered .by the
judgment of this Court in the case of Tamil Nadu Kalyana Mandapam
(supra). Of course, in the present case, we are not concerned with the services
rendered by a Mandap-keeper, who perfonns what is called as property based
B services. In this case, we are concerned with perfonnance based services.
However, both the categories fall within the ambit of the word. 'services'.

38. In the case of Gujarat Ambuja Cements ltd. and Anr. v. Union of
India and anr. reported in [2005] 4 SCC 214 it was held that service tax is not
C a tax on goods or on passengers but it was on the transportation itself and,
therefore, it falls under residuary power of Parliament under Entry 97 of the
Seventh Schedule to the Constitution. It was further held that service tax is
0

not a levy on passengers or goods but on the event of service in connection
with the carriage of goods and, therefore, it was not possible to hold that the
Act was in pith and substance within the State's exclusive powers under
D Entry 56 of List II. It was held that service tax came within Entry 97 of List
I. In the present case, as stated above, we are concerned with Entry 60 of !--ist
II. As stated above, service tax is on perfonnance based services itself. It is
on professional advice, tax planning, auditing, costing etc .. On. each of the
exercise undertaken tax becomes payable. Therefore, the above judgmel\t has
E no application.

39. In the case of Bharat Sanchar Nigam ltd and Anr. v. Union of
India and Ors., reported in [2006] 3 SCC I the question which arose for
determination before this Court was whether a telephone service (mobile or
fixed) would attract liability to service tax. It was held that in order to attract
p the liability under the service tax there has to exist what is called as "goods".
Since goods in question consisted of electromagnetic waves or radio
frequencies, which carries voice, messages or other data, a telephone service
was nothing but a service. We are not concerned with such a controversy
in the present case. In the present case, we are concerned with the legislative
competence of Parliament to legislate in respect of service tax under Entry 97I
G 92C of List I. In the present case, we are concerned with the;period covered
by the Finance Acts of 1994 and I 998 .. However, learned counsel for the
appellants has relied upon para 82 of the said judgment in the .case of Bharat
Sanchar Nigam Ltd (supra) in which it is observed that the residuary powers
of Parliament under Entry 97 of List I cannot swamp away the legislative
H Entries in the State List. Entry 54, List II read with Article 366(29-A), therefore,
ALL INDIA FEDERATION OFTAX PRACTITIONERS v. U.0.1. [KAPADIA, J .] 17 5
cannot be whittle down by referring to the residuary provision. As stated A
above, we are concerned with the application of the above principles. In the
·present ·case, as stated above, we are concerned with the €onstitutional
status of the levy. As stated above, we have to examine the nature of the levy.
We have done so and we have come to the conclusio_n that the word profession
in Entry 60 List II cannot be made synonymous with the word service and, B
therefore, service tax would fall under the residuary Entry 97 read with E;ntry
92C after 2003. This position is also made clear by Article 268A, inserted by
the Constitution (Eighty-eighth Amendment) Act, 2003.

40. Lastly, in our view, the judgment of this Court in the case of R.R.
Engineering Co. v. Zila Parishad, Barei/Jy and Anr. reported in [1980] 3 SCC C
330 has no application to the facts of the present case. In that case this Court
observed that there was a basic distinction between a tax on "income" and
a tax on "circumstances and property". If there is no income, there can be no
income tax. In contrast, in the case of a tax on "circumstances and property"
there can be a tax on the total tum-over of the· assessee· from his trade or
calling or on his having an interest in the property. It was held that whereas D
Entry 49 ofList II relates to taxes on lands and buildings, Entry 60 relates to
taxes on professions and, therefore;the true nature of the tax in that case was
not a tax on income but it was a tax referable to Entry 49 and Entry 60 of List
II. It was held that the impugned tax was a composite tax, one of its components
being the "circumstance", namely, the financial position of the assessee. It E
may be clarified that in the case of R.R. Engineering Co. (supra) the validity
of the levy was under challenge and that levy constituted what is called a
composite tax. We do not s~ _any relevance of the judgment in the case of
R.R. Engineering Co. (supra) to the facts of the present case. In the present ·
case, we are not ccmcemed with a composite tax. Hence, the judgment ofthis
Court in the case of R.R. Engineering Co. (supra) has no relevance to the F
facts of the present case.

Conclusion:

41. For the above reasons, we find no merit in Civil Appeal No. 7128.
of2001 filed by All India Federation of Tax Practitioners and Ors .. We hold G
that Parliament has legislative competence to levy service tax by way of
impugned Finance Acts of 1994 and 1998 under Entry 97 of List I on chattered
accountants, cost accountants and architects. We further hold that the above
position now stands fortified by the Constitution (Eighty-eighth Amendment)
Act, 2003 which has inserted Article 268A and Entry 92C which clearly H
176 SUPREME COURT REPORTS [2007) 9 S.C.R.

A indicates that Entry 60 of List II and Entry 92C of List I operate in different
spheres. However, we make i.t clear that before us there is no challenge to the
Constitutional validity of the said Constitution (Eighty-eighth Amendment)
Act, 2003.

42. Accordingly, the civil appeal is dismissed with no order as to costs.
B
K.K.T.· Appeal dismissed.

-+