Holding

The amendments in the Finance Acts of 2000 and 2003 validly removed the earlier infirmity and the service tax on transportation services is within Parliament’s residuary power, rendering the writ petitions untenable.

Summary

The petitioners, customers of goods‑transport operators and clearing‑and‑forwarding agents, challenged the constitutional validity of Sections 116 and 117 of the Finance Act 2000 and Section 158 of the Finance Act 2003 which retrospectively validated service‑tax levies that had been struck down in *Laghu Udyog Bharati* (1999). The Court examined whether the amendments removed the basis of the earlier decision and whether Parliament was competent to levy a service tax on the carriage of goods under Entry 97 of List I rather than the State’s power under Entry 56 of List II. It held that the amendments altered the definition of “assessee” and the charging provision so that the tax now falls on the user of the service, thereby displacing the earlier infirmity. The Court further held that the levy is on the service of transportation itself, not on goods or passengers, and thus falls within Parliament’s residuary power and is constitutionally valid. Consequently, the writ petitions were dismissed.

Issues considered

Whether Sections 116 and 117 of the Finance Act 2000 and Section 158 of the Finance Act 2003 displaced the basis of the Supreme Court’s decision in *Laghu Udyog Bharati*.
Whether Parliament is legislatively competent to impose service tax on services rendered by goods‑transport operators and clearing‑and‑forwarding agents under Entry 97 of List I.
Whether the retrospective validation of the tax is constitutionally permissible.

Legislation cited

Constitution of Indias. Seventh Schedule
Finance Act, 1994s. 65, s. 66, s. 68, s. 69, s. 70, s. 71, s. 72, s. 73, s. 74, s. 75, s. 76, s. 77, s. 78, s. 79, s. 94
Finance Act, 2000s. 116, s. 117
Finance Act, 2003s. 158
Service Tax (Amendment) Rules, 1998
Service Tax Rules, 1994s. Rule 2(1)(d) (xii), s. Rule 2(1)(d) (xvii)

Subjects

service taxlegislative competenceresiduary powervalidation of taxEntry 97Entry 56taxationService Tax Rulesretrospective amendmentconstitutional lawdiscrimination

Judgment

A GUJARAT AMBUJA CEMENTS LTD. AND ANR.
v.
UNION OF INDIA AND ANR.

MARCH 17, 2005

B [MRS. RUMA PAL AND ARUN KUMAR, JJ.]

Constitution of India, 1950 :

Seventh Schedule, List I, Entry 97, List JI, Entry 56-lmposition ofservice
C tax under provisions of Chapter V of Finance Act, 1994 on users of services
rendered by goods transport operators and clearing and forwarding agents-
Held, valid-Subject matter of tax is not goods or passengers but the services
of transportation itself-It is a levy distinct from the levy envisaged under
Entry 56 ofList 11---:-Chapter V ofFinance Act, 1994 was enacted with reference
D to residuary power of Parliament as defined in Entry 97 of List I-Finance
Act, 1994-ss. 65,66 and 68- Finance Act, 2000-s~. 116 and 117-Finance
Act, 2003-s.158-Service Tax Rules, 1994-Rules 2(l)(d)(xii) and (xvii).

Finance Act, 1994/Service Tax Rules, 1994 :

E ss. 65(5), 66(3) and 68(/A)/Rules 2(l)(d), (xii) and (xvii) (as amended
by ss. 116 and 117 of Finance Act, 2000 and by s. 158 of Finance Act,
2003)- 'Service tax '-On users of services rendered by transporters of goods
by roads and clearing andforwarding agefits-Held, valid-By the amendments
the statutory foundation for decision in Laghu Udyog Bharati's case has l::een
replaced a.nd the decision has ceased to be relevant for the purpose of
F construing the present provisions-Validating enactment-Finance Act,2000 -
ss. 116 and 117-Finance Act,2003-s. l 58-Constitution of India-Seventh
Schedule-List 1, Entry 97.

Imposition of service tax under the provisions of Chapter V of
Finance Act, 1994 on the users of services rendered by transporters of
G goods by road and the clearing and forwarding agents, was challenged
and, ultimately, Rules 2(l}(d), (xii) and (xvii) of Service Tax Rules, 1994
were struck down by the Supreme Court in Laghu Udyog Bharati's case*.
Consequently, by Sections 116 and 117 of Fh1ance Act, 2000 and Section
158 of Finance Act, 2003, the relevant provisions of the Finance Act, 1994
H 1ros
GUJARAT AMBUJA CEMENTS LTD. v. U.0.1. 1039
and the Service Tax Rules, 1994 were amended and the taxes earlier A
collected were retrospectively validated. The customers or clients of goods
transport operators and those of cleaing and forwarding agents filed the
present writ petitions challenging the amendments.

On the questions: (i) whether by enacting Sections 116 and 117 of
the Finance Act, 2000 and Section 158 of the Finance Act, 2003, the basis B
on which the Supreme Court had struck down Rules 2(1)(d), (xii) and (xvii)
of the Service Tax Rules, 1994 has been displaced or removed; and (ii)
whether the levy of service tax on carriage of goods by transport operators
was legislatively competent,

Dismissing the writ petitions, the Court c
HELD: 1.1. Validation of a tax declared illegal may be done only if
the grounds of illegality or invalidity are capable of being removed and
are in fact removed and the tax thus made legal. A legislature is competent
to remove infirmities retrospectively and make any imposition of tax
declared invalid, valid. Such exercise in validation must of course also be D
legislatively competent and legally sustaina.ble. [1052-E; 1053-F)

Prithvi Cotton Mills Ltd v. Broach Borough Municipality. [1970) 1 SCR
388; Indian Aluminum Co. and Ors. v. State of Kera/a, [1996) 7 SCC 637;
K. Sankaran Nair v. Devaki, [1996) 11 SCC 428; R.Krishna Bhat v. State of
Karnataka, [2001) 4 SCC 227 and N.A. Cooperative Mkg. Federation v. Union E
of India, AIR (2003) SC 1329, relied on.

1.2. As is apparent from Section 116 of the Finance Act, 2000, all
the material portions of Sections 65 and 66 of Finance Act; 1994, which
were found to be incompatible with the Service Tax Rules*, were
themselves amended so that now in the body of the Act (Finance Act, 1994) F
by virtue of the amendment to the word "assessee" in Section 65(5) and
the amendment to Section 66(3), the liability to pay the tax is not on the
person providing the taxable service but, as far as the services provided
by clearing and forwarding agents and goods transport operators are
concerned, on the person who pays for the services. As far as Section G
68(IA) is concerned, by virtue of the proviso added in 2003,.the persons
availing of the services of goods transport operators or clearing and
forwarding agents have explicitly been made liable to pay the service tax.
[1053-C-D)

*Laghu Udyog Bharati and Anr. v. Union of India and Ors., (1999]'6 H
1040 SUPREME COURT REPORTS [2005] 2 S.C.R.

A sec 418, referred to.
1.3. Rules 2(l)(d) (xii) and (xvii) of the Service Tax Rules, 1994 had
been held to be illegal in Laghu Udhyog Bharati's case only because the
charging provisions of the Act provided otherwise. Now that the charging
section itself has been amended so as to make the provisions of the Act
B and the Rules compatible, the criticism of the earlier law upheld by this
Court can no longer be availed of. There is thus no question of the Finance
Act, 2000 overruling the decision of this Court in Laghu Udhyog Bharati's
case as the law itself has been changed. The law must be taken as having
always been as is now brought about by the Finance Act, 2000. The
C statutory foundation for the decision in Laghu Udhyog Bharati has been
replaced· and the decision has thereby ceased to be relevant for the
purposes of construing the present provisions. (1053-E-G)

Ujagar Prints v. Union of India, (1989) 3 SCC 488, 517=AIR (1989)
SC 516, relied on.
D
2.1. There is a distinctic:>n between the object of tax, the incidence of
tax and the machinery for the collection of the tax. Legislative competence
is to be determined with reference to the object of the levy and not with
reference to its incidence or machinery. There is a further distinction
between the objects of taxation in our constitutional scheme. Broadly -·
E speaking the subject matter of taxation under Entry 56 of List II of the
Seventh Schedule to the Constitution of India are goods and passengers.
The phrase "carried by roads or natural water ways" carves out the kind
of goods or passengers which or who can be subjected to tax under the
Entry. Undisputedly, Chapter V of the Finance Act, 1994 was enacted with
F reference to the residuary power defined in Entry 97 of List I of the
Seventh Schedule to the Constitution. Entry 97 itself is specific in that a
matter can be brought under that entry only if it is not enumerated in
List II or List III and iii the case of a tax if it is not mentioned in either of
these lists. (1054-E-F; 1055-C-F)

G Rai Ramakrishna and Ors. v. State of Bihar, (1963) 1 SCR 897 and
Sainik Motor Jodhpur v. The State of Rajasthan, (1962) 1 SCR 517, relied
on.

International Tourist Corporation v. State of Haryana, [1981) 2 SCC
319 and Godfrey Phillips India Ltd v. State of UP. and Ors., (2005) Scale
H Page 367, referred to.
GUJARATAMBUJACEMENTSLTD. v. U.0.1. 1041

2.2. The principles for determining the constitutionality of a Statute A
may briefly be summarized thus :

(a) The substance of the impugned Act must be looked at to
determine whether it is in pith and substance within a particular entry
whatever its ancilliary effect may be. (1056-C-D)
B
Prafulla Kumar Mukerjee v. Bank of Commerce Ltd. and Ors., AIR
(1947) PC 60, 65; A.S. Krishna v. State of Madras, (1957) SCR 399; State of
Rajasthan v. G. Chawla, (1959) Supp. 1 SCR 904; Katra Education Society
v. State of UP., (1996) 3 SCR 328; D.C. Johar & Sons (P) Ltd. v. STO
Ernakulam, (1971) 27 STC 120 and Kanan Devan Hills Produce v. State of C
Kera/a, (1972) 2 SCC 218, relied on.

(b) Where the encroachment is ostensibly ancillary but in truth
beyond the competence of the enacting authority, the statute will be a
colourable piece of legislation and Constitutionally invalid. [1056-E-F]

A.S. Krishna v. State of Madras, (1957] SCR 399; A.B. Abdul Kadir v. D
State ofKera/a, [1976) 3 SCC 219, 232 and Federation of Hotel & Restaurant
v. Union of India, [1989) 3 SCC 634, relied on.

If the statute is legislatively competent, the enquiry into the motive
which persuaded Parliament or the Statt: legislature into passing the Act E
is irrelevant. [1056-F-G]

Dharam Dutt and Ors. v. Union of India and Ors., (2004) 1 SCALE
425, relied on.

(c) Apart from passing the test of legislative competency, the Act F
must be otherwise legally valid and would also have to pass the test of
constitutionality in the sense that it cannot be in violation of the provisions
of the Constitution nor can it operate extraterritorially.
(1056-G-H; 1057-AJ

Poppat Lal Shah v. State of Madras, (1953) SCR 677, relied on. G
2.3. The provisions relating to service tax in the Finance Act, 1994
make it clear under Section 64(3) that the Act applies only to taxable
services. Most of the taxable services cannot be said to be in any way
related to goods or passengers carried by road or waterways. Section 66
read with Sections 65(41)U) and (ma) Chapter V of the Finance Act 1994, H
1042 SUPREME COURT REPORTS [2005] 2 S.C.R.

A do not seek to levy tax on goods or passengers. The subject matter of tax
under those provisions of the Finance Act 1994 is not goods and passengers,
but the service of transportation itself. It is a levy distinct from the levy
envisaged under Entry 56 of List II of the Seventh Schedule to the
Constitution. It may be that both the levies are to be measured on the same
B basis, but that does not make the levy the same. (1057-A-H; 1058-A)

Federation of Hotel and Restaurant Association of India etc. v. Union
of India and Ors., (1989)- 3 SCC 634, relied on.

2.4. Since service Tax is not a levy on passengers and goods but on
the event of service in connection with the carriage of goods, it is not,
C therefore, possible to hold that the Act in pith and substance is within the
States exclusive power under Entry 56 of List II. What the Act ostensibly
seeks to tax is what it, in substance, taxes. In the circumstances, the Act
could not be termed to be a colourable piece of legislation. The Act falls
within the residuary power of Parliament under Entry 97 of List I.
I) (1058-C-E)

Tami/ Nadu Kalyana Mandapam Assn. v. Union of India, (2004) 167
EL T 3 (S.C), relied on.

2.5. The point at which the collection of the tax is to be made is a
E question of legislative convenience and part of the machinery for
realization and recovery of the tax. It will not change and does not affect
the essential nature of the tax. Subject to the legislative competence of the
taxing authority a duty can be imposed at the stage which the .authority
finds to 'be convenient and the most effective whatever stage it may be.
The Central Government is therefore legally competent to evolve a suitable
F machinery for collection of the service tax subject to the maintenance of
a rational ·connection between the tax and the person on whom it is
imposed. By Sections 116 and 117 of the Finance Act 2000, the tax is sought
to be levied from the recipients of the services. They cannot claim that
. they are not connected with the service since the service is rendered to
G them. There is thus nothing inherently illegal or unconstitutional to provide
for service tax to be paid by the availer or user. (1059-A-G; 1060-AI

In re : Central Provinces and Berar Sales ofMotor Spirit and Lubricants
Taxation Act, 1938; 1939 FCR 18; Provinces of Madras v. Boddu Paidanna,
AIR (1942) FC 33 ; Union of India v. A Sanyasi Rao, (1996) 3 SCC 465;
H R.C Jail v. Union of India, AIR (1962) SC 1281 and Rai Ramakrishna and
GUJARAT AMBUJA CEMENTS LTD. v. U.0.1. 1043

Ors. v. State of Bihar, [19631 1 SCR 897, relied on. A
Dwarka Prasadv. Dwarka Das Saraf, [197611 SCC 128; Ganga Sugar
Corporation v. State ofU.P, [198011SCC223 and Federation of Hotel and
Restaurant Association of India etc. v. Union of India and Ors., [ 198913 SCC
634, referred to.
B
2.6. Because of the inherent complexity of fiscal adjustments of
diverse elements in the field of tax, the legislature is permitted a large
discretion in the matter of classification to determine not only what should
be taxed but also the manner in which the tax may be imposed. Courts
are extremely circumspect in questioning the reasonability of such
classification. (1061-A-BI C
Ganga Sugar Corporation v. State of U.P, [1980] 1 SCC 223, relied ·
on.

Provinces of Madras v. Boddu Paidanna, AIR (1942) FC 33 and Union
of India v. A. Sanyasi Rao, (1996) 3 SCC 485, referred to. D
3. The levy of service tax on the users of the services rendered by
the goods transport operators, which was introduced with effect from 16th
November, 1997, was exempted for the period subsequent to 2nd June,
1998 in view of the notification dated 2nd June, 1998 which is still
operative. The petitioners say that the respondents had raised demands E
for service tax for periods subsequent to 2nd June, 1998. It has been
conceded by the Union of India that the amendments made in the Act
would have to be read along with the notifications so that the levy and
collection of service tax would be only in respect of services rendered by
goods transport operators between the period from 16th November, 1997
to 2nd June, 1998. Similarly there can be no tax liability on users of the F
services of the clearing and forwarding agents beyond 1.9.1999 when by
notification No. 7/99 dated 23.8.99, the levy of service tax on the services
provided by clearing and forwarding agents were exempted. (1062-C-EI

CIVIL ORJGINAL JURISDICTION : Writ Petition (C) No. 539 of G
2000.

---- Under Article 32 of the Constitution of India.
WITH
W.P. (C) Nos. 411, 431, 432, 450, 466, 467, 793, 551, 564 and 573/
2000, I, 122, 123, 209, 234, 283, 311 and 493/2001, 606/2002, 294, 584, H
,.,~

1044 SUPREME COURT REPORTS [2005] 2 S.C.R.

A 58512003, 26, 328 and 329/2004 and C.A. No. 9247 of 2003.
R.F. Nariman, K. Parasaran, Anoop G. Choudhary, AK. Ganguli, T.L.V.
Iyer, R.P. Bhatt, U.A. Rana, Ashish DhoJakia, Arvind Kumar, M.L. Patodi,
Sadeep Kharel, V. Balaji, P.N. Ramalingam, Sunil Dogra, Ms. Sayali Phatak,
Sudhir Gupta, Syed Shahid Hussain Rizvi, M. Irshad Hanif, Mrs. Divya Roy,
B Ms. Bina Gupta, Sanjay Grover, Rajesh Kumar, Mrs. June Chaudhri, Rohit
Singh, R.P. Gupta, Sushendra Kumar Chauhan, J.P. Srivastava, Bharat Sangal,
Ms. Sangeeta Panicker, R.R. Kumar, Rajeev Sharma, Harbans Lal Bajaj, Ms.
Anuj Bhushan, Ms. Suruchii Aggarwal, Praveen Kumar, Arun Nehra, Ms.
Shobha, N.K. Bajpai, Sanjiv Sen, Dilip Tandon, Tufail A.Khan,
C P.Parmeswaran, K.Swamy and B.Krishna Prasad with them for the appearing
parties.

The Judgment of the Court was delivered by

RUMA PAL, J. These writ petitions have been filed challenging the
D constitutional validity of Sections 116 and 117 of the Ffoance Act 2000 and
Section 158 of the Finance Act, 2003 by which the decision of this Court in
Laghu Udyog Bharati and Anr. v. Union of India and Ors., [1999] 6 SCC
418, striking down Rules 2(1 )(d), (xii) and (xvii) of the Service Tax Rules,
1994 (as amended in 1997) was sought to be overcome.

E The writ petitioners are the customers or clients of goods transport
operators and forwarding and clearing agents. There are three main grounds
on which they have based their challenge. They contend that the basis of the .
decision rendered in Laghu Udyog Bharati had not been removed or displaced
by the impugned sections and could not therefore overrule, replace or override
this Court's decision.' The second ground of challenge is that Parliament was
F legislatively incompetent to enact the law. It is stated that the imposition of
the impugned levy encroaches upon the State Government's power as defined
in Entry 56 of List II of the Seventh Schedule to the Constitution which
pertains to 'Taxes on goods and passengers covered by road or on inland
waterways'. The submission is that Parliament could not by resorting to the
G residuary Entry 97 of List I of the Seventh Schedule circumvent Entry 56 of
List II and in the guise of levying service tax in fact levy a tax on the
transport of goods. The constitutional validity of the imposition has also been
challenged on the ground that it operated in discriminatory manner by singling
out only the custo111ers of goods transport operators and clearing and
forwarding agents to pay tax whereas the recipients of other kinds of similar >--
H services were not subjected to such imposition. '

i
GUJARAT AMBUJACEMENTS LTD. v. U.0.1. fRUMAPAL,J.] 1045

Service tax was introduced for the first time under Chapter V of the A
Finance Act, 1994. Section 66 of the Act was the charging section and
provided for the levy of service tax at the rate of five per cent of the value
of the taxable services provided to any person by the person responsible for
collecting the service tax. In other words, the levy was on the provider of the
taxable services. "Taxable service" was defined in Section 65 to include
only three services namely any service provided to an investor by a stock B
broker, to a subscriber by the telegraph authority and to a policy holder by
an insurer carrying on general insurance business. Section 68 required every
person providing taxable service to collect the service tax at specified rates.
Section 69 of the Finance Act, 1994 provided for the registration of the
persons responsible for collecting service tax. Sub-sections (2) and (5) indicated C
that it was the provider of the service who was responsible for collecting the
tax and obliged to get registered. These Sections viz., 65, 66, 68 and 69 are
pivotal to the present issue. They were amended thrice. The remaining sections
of the 1994 Act substantially continued as originally enacted with minor
changes. Under Section 70 of the Finance Act, 1994, every person responsible
for collecting the service tax must furnish or cause to be furnished to the D
Central Excise Officer in the prescribed form and verified in the prescribed
manner, a quarterly return. Sections 71, 72, 73 and 74 deal with the filing of
returns, provisions for assessment, reopening of assessments and rectification
of mistakes of assessment orders. Section 75 provides for payment of interest
at the rate of one-half per cent for every month or part of a month by which E
the person responsible for collecting the service tax, delays in paying the tax
to the credit of the Central Government. Section 76 deals with the imposition
of penalty for failure to collect the service tax. Section 77 deals with the
penalty for failure to furnish the prescribed return. Section 78 deals with the
penalty for suppressing the value of taxable service and Section 79 for penalty
for failure to comply with notices. No other section is required to be noted F
except Section 94 of the Act which empowers the Central Government to
make rules for carrying out the provisions of Chapter V of the Act. Pursuant
to such power, the Service Tax Rules, 1994 were framed.

By the Finance Act, 1997 the first amendments to Section 65, of the
Finance Act 1994 were made inter alia, by extending the meaning of 'taxable G
service' from three services to 18 different services categorized in Section
65(41), clauses (a) to (r). We are only concerned with clauses G) and (m) of
sub-section (41) to Section 65. Clause G) made service to a client by clearing
and forwarding agents in relation to clearing and forwarding operations, a
taxable service. Similarly, service to a customer of a goods transport operator H
1046 SUPREME COURT REPORTS [2005] 2 S.C.R.

A in relation to carriage of goods by road in a goods carriage was, by clause
(m), also included within the umbrella of taxable service. The phrases "clearing
and forwarding agent" and "goods transport operator" were defined as
follows :

G) "clearing and forw,arding agent" means any person who is
B engaged in providing any service, either directly or indirectly,
connected with clearing and forwarding operations in any manner
to any other person and includes a consignment agent"
(m) "goods transport operator" means any commercial concern
engaged in the transportation of goods but does not include a
c courier agency"

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

D "66(3) With effect from the date notified under Section 84 of the
Finance Act, 1997, there shall be charged a service tax at the rate of
five per cent of the value of the taxable services referred to in sub-
clauses (g), (h), (i), U), (k), (1), (m), (n), (o), (p), (q),and (r) of clause
(41) of Section 65 which are provided to any person by the person
responsible for collecting the service tax. "
E
The 'person responsible for collecting the service tax' under this Section
was therefore the person providing the service. The phrase itself was also
defined under sub-section (28) of Section 65 to mean "a person who is
required to collect service tax under this chapter or is required to pay any
other sum of money under this Chapter and includes every person in respect
--
F of whom any proceedings under this Chapter have been taken" and 'assessee'
was defined in sub-section (5) of Section 65 as meaning "a person responsible
for collecting the service tax and includes his agent''. By the 1997 amendment
under Section 68-1 A the service tax in respect of taxable services from items
(g) to (r ) of Section 65 (41) was directed to be collected from "such person
G and in such manner as may be prescribed" and it was said that all provisions
of Chapter V "shall" apply to such person as if he is the person responsible
for collecting the service tax in ,relation to such services. However, Sub-
sections (2) and (5) of Section 69 continued to refer to the persons responsible
for collecting the service as the provider of the taxable service.

H We are told that the goods transport operators as well as the clearing
GUJARATAMBUJACEMENTSLTD. v. U.O.I.[RUMAPAL,J.] 1047
and forwarding agents went on an all India strike protesting against the A
imposition of service tax on them. Perhaps this might have precipitated an
amendment to the Service Tax Rules 1994. Rules 2(l)(d),(xii) and (xvii) of
the Service Tax Rules, 1994 were amended by imposing the tax in effect on
the customers of clearing and forwarding agents and goods transport operators.
As far as clearing and forwarding agents were concerned the relevant B
amendments to the Rules were carried out and brought into effect by two
notifications both dated 16th July 1997. As far as the levy of service tax on
customers of goods and transport operators were concerned, the amendments
were made and brought into effect with effect from 16th November, 1997.

The imposition of service tax on customers was challenged by many of C
the present petitioners in Laghu Udyog Bharati. During the pendency of writ
petitions, on 2nd June 1998 notification No. 49/98 was issued exempting
services provided by goods transport operators from the levy of service tax
altogether and by the Finance Act, 1998 all provisions in the Finance Act,
1994 including Section 65 (41) sub-clause (m) relating to the levy of service D
tax on services provided by goods transport operators were omitted with
effect from 16th October, 1998. By the Finance Act (No. 2), 1998, Section
69 was also amended. The various sub-sections including sub sections (2)
and (5) were omitted. The body of the sections now require every person
liable to pay service tax to make a~ application for registration without
indicating who was so liable. The Service Tax Rules, 1994 were consequently E
also amended by the Service Tax (Amendment) Rules, 1998 to delete the
provisions relating to service by goods transport operators.

These facts were taken into account by this Court in Laghu Udyog
Bharati but because the exemption granted on 2nd June 1998 was prospec! ive F
and no exemption had been granted with regard to the period from 16th July,
1997 to 2nd June 1998 and also because customers of clearing and forwarding
agents continued to be liable to pay service tax, the writ petitions were
disposed of on merits.

In upholding the challenge to Rule 2(1)(d), (xii) and (xvii), this Couit G
noted :

"It is clear from the reading of these provisions that according to the
Finance Act the charge of tax is on the person who is responsible for
collecting the service tax. It is he, who by virtue of the provisions of
Section 65(5) is regarded as an assessee. He is the person who provides H
1048 SUPREME COURT REPORTS [2005) 2 S.C.R.

A the service.''

It was held that in the circumstances

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

This Court construed Section 68(1-A) to hold that "Section 68(1-A)
cannot be so interpreted as to make a person an assessee even though he may
not be responsible for collecting the service tax". What the Court in effect
said was that since the charging section (Section 66) provided for the tax to
C be paid by the provider, Section 68-1 A, which was merely the section which
laid the machinery for collecting the tax, would not change the nature of the
tax.

Finally this Court said that Sections 70 and 71 clearly showed "that the
D return which has to be filed pertains to the payment which are received by
the person rendering the service in respect of the value of the taxable services.
Surely, this is a type of information which cannot, under any circumstances,
be supplied by the customer. Moreover the operative part of sub-section (1)
of Section 70 clearly stipulates that it is a person responsible for collecting
the service tax who is to furnish the return''.
E
In the circumstances it was concluded that "by rules which are framed,
the person who is receiving the services cannot be made responsible for
filing the return and paying the tax. Such a position is certainly not
contemplated by the Act''.
F Striking down the Service Tax Rules 2(l)(d) (xii) and (xvii), this Court
directed that any tax which had been paid by the customers or clients of the
clearing and forwarding agents or of the goods transporters should be refunded
within 12 weeks from their making a demand for refund. Consequently, the
present writ petitioners made applications for refund of the tax paid by them.
G In some cases, the tax was refunded. In certain cases the refund was not made
on the ground that the petitioners ,had failed to prove that the tax paid had
not been passed on to other persons. In some case as in W.P. No. 563 of2000
the customer deducted service tax from the freight charges payable to the
transporters/petitioner. After the decision in Laghu Bharati Udyog, the
H customer refupded the money to the transporter in question.
GUJARAT AMBUJA CEMENTS LTD. v. U.O.I. [RUMA PAL, J.] 1049

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

"116 Amendment ofAct 32of1994.-During the period commencing
on and from the 16th day of July, 1997 and ending with the 16th day
of October, 1998, the provisions of Chapter V of the Finance Act,
1994 shall be deemed to have had effect subject to the following B
modifications, namely : -

(a) In section 65.-

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

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

(i) his agent; or
(ii) in relation to services provided by a clearing and forwarding
agent, every person who engages a clearing and forwarding agent D
and by whom remuneration or commission (by whatever name
called) is paid for such services to the said agent; or
(iii) in relation to services provided by a goods transport operator,
every person who pays or is liable to pay the freight either himself
or through his agent for the transportation of goods by road in a E
goods carriage;
(iv) after clause (18), the following clauses had been substituted,
namely: -

'(ISA) "goods carriage" has the meaning assigned to it in clause
(14) of section 2 of the Motor Vehicles Act, 1988; F
(188) "goods transport operator" means any commercial concern
engage in the transportation of goods but does not include a courier
agency; :

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

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

(b) in section 66, for sub-section (3), the following sub-section had H
1050 SUPREME COURT REPORTS (2005] 2 S.C.R.

A been substituted namely : -

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

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

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

Section 117 of the Finance Act, 2000 seeks to retrospectively validate
D the taxes earlier collected under the Service Tax Rules which this court had
directed to be refunded. It reads : -

117. Validation of certain action taken under Service Tax Rules.-
Notwithstanding anything contained in any judgment, decree or order
of any court, tribunal or other authority, sub-clauses (xii) and (xvii)
E of clause ( d) of sub-rule (1) of rule 2 of the Service Tax Rules, 1994
as they stood immediately before the commencement of the Service
Tax (Amendment)Rules, 1998 shall be deemed to be valid and to
have always been valid as if the said sub-clauses had been in force
at all material times anJ accordingly,-

F (i) any action taken or anything done or purported to have been
taken or done a any time during the period commencing on and
from the 16th day of July, 1997 and ending with the day, the
Finance Act, 2000 receives the assent of the President shall be
deemed to be valid and always to have been valid for all purposes,
as validly and effectively taken or done;
G
(ii) any service tax refunded in pursuance of any judgment, decree or
order of any court striking down sub-clauses (xii) and (xvii) of
clause (d) of sub-rule (1) of rule 2 ofthe Service Tax Rules, 1994
before the date on which the Finance Act, 2000 receives the
assent of the President shall be recoverable within a period of
H
GUJARAT AMBUJA CEMENTS LTD. v. U.O.I. [RUMA PAL, J.] l 051
thirty days from the date on which the Finance Act 2000 receives A
the assent of the President, and in the event of non payment of
such service tax refunded within this period, in addition to the
amount of service tax recoverable, interest at the rate of twenty-
four per cent, per annum shall be payable, from the date
immediately after the expiry of the said period of thirty days, ti II 'B
the date of payment.

Explanation.-For the removal of doubts, it is hereby declared that
no act or omission on the part of any person shall be punishable as
an offence which would not have been so punishable if this section
had not come into force."
c
While the writ petitions challenging the validity of the amendments
made by the Finance Act 2000 to Chapter V of the Finance Act, 1994 were
pending, the Finance Act, 2003 was assented to by the President on 14th May
2003. By Section 158 of that Act, Sections 68(1), 71 and Section 94 of the
1994 Act were further amended. Section 158 provides :
D
"During the period commencing on and from 16th day of July, 1997
and ending with the 16th day of October 1998, the provisions of
Chapter V of Finance Act, 1994, as modified by Section 116 of the
Finance Act, 2000, shall have effect subject to the following further
modifications, namely : -

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

Provided that -

(i) in relation to services provided by a clearing and forwarding
E'
agent, every person who engages a clearing and forwarding agent
and by whom remuneration or commission (by whatever name
called) is paid for such services to the said agent for the period
commencing on and from the 16th day of July, 1997 and ending
with the 16th day of October, 1998; or G
(ii) in relation to services provid,ed by goods transport operator every
person who pays or is liable to pay the freight, either himself or
through his agent for the transportation of goods by road in good
carriage for the period commencing on and from the 16th day of
November, 1997 and ending with the 2nd day of June, 1998. H
1052 SUPREME COURT REPORTS [2005) 2 S.C.R.

A shall be deemed always to have been a person liable to pay service
tax, for such services provided to him, to the credit of the Central
Government.''

In addition, Section 71 which provides for the filing of returns was
amended to provide, with retrospective effect, for the insertion of Section
B 71A. Under the newly inserted section, the provisions of Sections 69 and 70
do not apply to a person referred to in the proviso to sub-section ( l) of
Section 68 as far as the filing of returns in respect of service tax for the
period commencing from 16th July 1997 was concerned. It seeks to provide
that ''such persons shall furnish return to the Central Excise Officer within
C six months from the day on which the Finance Bill, 2003 Teceives the assent
of the President in the prescribed manner on the basis of the self assl!ssment
of the service tax and the provisions of Section 71 shall apply accordingly".
This period was extended by this Court by order dated 17 .11.2003 for a
period of two weeks with effect from the date of the order. Section 94 as
originally enacted for the rule making power of the Central Government was
D amended to read with effect from 16th July 1997, that the Central Government
would also have the power to frame rules relating to the manner of furnishing
returns under Section 71A. '

There cannot be any doubt that the object of these sections is to nullify
the effect of this Court's decision in Laghu Udhyog Bharati by retrospectively
E amending and validating provisions held to be illegal. It is a well settled
principle that validation of a tax declared illegal may be done only if the
grounds of illegality or invalidity are capable of being removed and are in
fact removed and the tax thus made legal (vide Prithvi Cotton Mills Ltd. v.
Broach Borough Municipality: [1970] l SCR 388 Indian Aluminum Co. and
F Ors. v. State of Kera/a, [1996] 7 SCC 637, K. Sankaran Nair v. Devaki,
[1996] 11 SCC 428; R. Krishna Bhat v. State of Karnataka, [2001] 4 SCC
227 and N.A. Cooperative Mkg. Federation v. Union of India, AIR (2003)
SC 1329). As a proposition of law this cannot be and is not disputed. The
question is whether by enacting Sections 116 and 117 of the Finance Act,
2000 and Section 158 of the Finance Act 2003, the bases on which this Court
G struck down Rule 2(l)(d), (xii) and (xvii) of the Service Tax Rules, 1994 had
been displaced or removed.

As we read the decision in Laghu Udhyog Bharati, the basis was the
patent conflict between Sections 65, 66 , 68(1) and 71 of the Finance Act,
1994 as amended in 1997 on the one hand and Rules 2(1) (d) (xii) and (xvii)
H of the Service Tax Rules 1994 on the other. Each of these sections of the
GUJARAT AMBUJA CEMENTS LTD. v. U.O.l. [RUMA PAL, J.] 1053
Finance Act 1994 as amended in I 997 proceeded on the basis that the tax .A
was imposable on the person providing the service. All the other sections
regarding the liability to furnish returns, assessments, penalties etc. flowed
from that. It was because unamended Section 66 spoke of the liability to pay
tax in respect of services ''which are provided to any person by the person
responsible for collecting the service tax" and Section 65(5) defined B
"assessee" as meaning "a person responsible for collecting the service tax",
that this Court held that clauses (xii) and (xvii) of Rule 2(1) (d) of the Service
Tax Rules were illegal.

As is apparent from Section I I 6 of the Finance Act, 2000, all the
material portions of the two Sections which were found to be incompatible C
with the Service Tax Rules were themselves amended so that now in the
body of the Act by virtue of the amendment to the word "assessee" in
Section 65(5) and the amendment to Section 66(3), the liability to pay the tax
is not on the person providing the taxable service but, as far as the service
provided by clearing and forwarding agents and goods transport operators are
concerned, on the person who pays for the services. As far as Section 68(1A) D
is concerned by virtue of the proviso added in 2003, the persons availing of
the services of goods transport operators or clearing and forwarding agents
have explicitly been made liable to pay the service tax.

As we have said, Rule 2(1)(d) (xii) and (xvii) had been held to be
illegal in Laghu Udhyog Bharati only because the charging provisions of the E
Act provided otherwise. Now that the charging section itself has been amP.nded
so as to make the provisions of the Act and the Rules compatible, the criticism
of the earlier law upheld by this Court can no longer be availed of. There is
thus no question of the Finance Act, 2000 overruling the decision of this
Court in Laghu Udhyog Bharati as the law itself has been changed. A p
legislature is competent to remove infirmities retrospectively and make any
imposition of tax declared invalid, valid. This has been the uniform approach
of this Court. Such exercise in validation must of course also be legislatively
competent and legally sustainable. Those issues are considered separately.
On the first question, we hold that the law must be taken as having always
been as is now brought about by the Finance Act, 2000. The statutory G
foundation for the decision in Laghu Udhyog Bharati has been replaced and
the decision has thereby ceased to be relevant for the purposes of construing
the present provisions (vide Ujagar Prints v. Union of India)'. Therefore

I. [1989] 3 sec 488, 517 =AIR (1989) SC 516,.332.
H
1054 SUPREME COURT REPORTS [2005] 2 S.C.R.

A subject to our decision on the question of the legislative competence of
Parliament to enact the law, and assuming the amendments in 2003 to be
legal for the time being, we reject the submission of the writ petitioners that
by the amendments brought about by Sections 116 and 117 of the Finance
Act 2000, the decision in Laghu Udhyog Bharati has been legislatively
overruled.
B
The next question is whether the levy of service tax on carriage of
goods by transport operators was legislatively competent. Laghu Udhyog
Bharati did not consider the question of legislative competency. Before we
consider the scope of the impugned Act, it is necessary to detennine the
C scope of the two Legislative Entries namely Entry 97 of List I and Entry 56
of List II. It has been recognized in Godfrey Phillips (supra) that there is a
complete and careful demarcation of taxes in the Constitution and there is no
overlapping as far as the fields of taxation are concerned. This mutual
exclusivity which has been reflected in Article 246(1) means that taxing
entries must be construed so as to maintain exclusivity. Although generally
D speaking a liberal interpretation must be given to taxing entries, this would
not bring within its purview a tax on subject matter which a fair reading of
the entry does not cover. If in substance, the statute is not referable to a field
given to the State, the Court will not by any principle of interpretation allow
a statute not covered by it to intrude upon this field.
E Undisputedly, Chapter V of the Finance Tax Act, 1994 was enacted
with reference to the residuary power defined in Entry 97 of List I. But as
has been held in International Tourist Corporation v. State of Haryana,
[ 1981] 2 sec 319; "before exclusive legislative competence can be claimed
for Parliament by resort to the residuary power, the legislative incompetence
F of the State legislature must be clearly established. Entry 97 itself is specific
in that a matter can be brought under that Entry only if it is not enumerated
in List II or List III and in the case of a tax if it is not mentioned in either
of those Lists".

In that case Section 3(3) of the Punjab Passengers and Goods Taxation
G Act, 1952 was challenged by transport operators. The Act provided for the
levy of the tax on passengers and goods plying in the State of Haryana.
According to the transport operators, the State could not levy tax on passengers
and goods carried by vehicles plying entirely along the national highways.
According to them this was solely within the power of the Centre under
H Entry 23 read with 97 of List I. The submission was held to be patently
GUJARATAMBUJACEMENTSLTD. v. U.0.1. [RUMAPAL,J.] 1055

fallacious by this Court. It was held that Entry 56 of List II did not exclude A
national highways so that the passengers and goods carried on national
highways would fall directly and squarely within Entry 56 of List II. It was
said that the State played a role in the maintenance of the national highway
and there was sufficient nexus between the tax and passengers goods carried
on the national highway to justify the imposition.
B
The writ petitioners in this case have, relying on this judgment, argued
that the Act falls squarely within Entry 56 of List II and therefore could not
be referred to Entry 97 of List I. We do not agree.

There is a distinction between the object of tax, the incidence of tax
and the machinery for the collection of the tax. The distinction is important C
but is apt to be confused. Legislative competence is to be determined with
reference to the object of the levy and not with reference to its incidence or
machinery. There is a further distinction between the objects of taxation in
our constitutional scheme. The object of tax may be an article or substance
such as a tax on land and buildings under Entry 49 of List II, or a tax on D
animals and boats under Entry 58 List II or on a taxable event such as
manufacture of goods under Entry 84 of List-I, import or export of goods
under Entry 83 of List-I, entry of goods under Entry 52 of List II or sale of '•
goods under Entry 54 List II to name a few. Theoretically, of course, as we
have held in Godfrey Phillips India Ltd. v. State of U.P. and Ors.,
(2005) Scale Page 367, ultimately even a tax on goods will be on the taxal:lle E
event of ownership or possession. We need not go into this question except
to emphasise that, broadly speaking the subject matter of taxation under
Entry 56 of List II are goods and passengers. The phrase "carried by roads
or natural water ways" carves out the kind of goods or passengers which or
who can be subjected to tax under the Entry. The ambit and purport of the F
entry has been dealt with in Rai Ramakrishna and Ors. v. State of Bihar,
[ 1963] l SCR 897 where it was said in language which we cannot better :-

"Entry 56 of the Second List refers to taxes on goods and passengers
carried by road or on inland waterways. It is clear that the. State
Legislatures are authorized to levy taxes on goods and passengers by G
this entry. It is not on all goods and passengers that taxes can be
imposed under this entry; it is on goods and passengers carried by
road or on inland waterways that taxes can be imposed. The expression
"carried by road or on inland waterways" is an adjectival clause
qualifying goods and passengers, that is to say, it is goods and H
1056 SUPREME COURT REPORTS [2005] 2 S.C.R.

A passengers of the said description that have to be taxed under this
entry. Nevertheless, it is obvious that the goods as such cannot pay
taxes, and so taxes levied on goods have to be recovered from some
persons, and these persons must have an intimate or direct connection
or nexus with the goods before they can be called upon to pay the
taxes in respect of the carried goods. Similarly, passengers who are
B carried are taxed under the entry. But, usually, it would be inexpedient,
if not impossible, to recover the tax directly from the passengers and
so, it would be expedient and convenient to provide for the recovery
of the said tax from the owners of the vehicles themselves". (p. 908)

C (See also : Sainik Motor Jodhpur v. The State of Rajasthan, [1962] 1
SCR 517).

Having determined the parameters of the two legislative entries the
principles for determining the constitutionality of a Statute come into play.
These principles may briefly be summarized thus :
D (a) The substance of the impugned Act must be looked at to determine
whether it is in pith and substance within a particular entry
whatever its ancilliary effect may be. (Prafulla Kumar Mukerjee
v. Bank a/Commerce Ltd and Ors., AIR (1947) PC 60, 65; A.S.
Krishna v. State of Madras, [1957] SCR 399; State of Rajasthan
E v. G. Chawla, [1959] Supp. l SCR 904; Katra Education Society
v. State of UP., [1996] 3 SCR 328; D.C. Johar & Sons (P) Ltd.
v. STO Ernakulam, (1971) 27 STC 120 and Kanan Devan Hills
Produce v. State of Kera/a, [1972] 2 SCC 218).
(b) Where the encroachment is ostensibly ancillary but in truth beyond
F the competence of the enacting authority, the statute will be a
colourable piece of legislation and Constitutionally invalid (A.S.
Krishna v. State of Madras (supra); A.B. Abdul Kadir v. State of
Kera/a, [1976] 3 SCC 219, 232; Federation of Hotel & Restaurant
v. Union of India, (supra) at p.651). If the statute is legislatively
competent the enquiry into the motive which persuaded Parliament
G or the State legislature into passing the Act is irrelevant. (Dharam
Dutt and Ors. v. Union of India and Ors., (2004) l SCALE 425).
(c) Apart from passing the test of legislative competency, the Act
must be otherwise legally valid and would also have to pass the
test of constitutionality in the sense that it cannot be in violation
H
GUJARAT AMBUJA CEMENTS LTD. v. U.0.I. [RUMA PAL ,J.J l 057
of the provisions of the constitution nor can it operate A
extraterritorially. (See : Poppa! Lal Shah v. State of Madras,
[l 953] SCR 677).

The provisions relating to service tax in the Finance Act, 1994 make it
clear under Section 64(3) that the Act applies only to taxable services. Taxable
services has been defined, as we have already noted, in Section 65(41 ). Each B
of the clauses of that sub section refers to the different kinds of services
provided. Most of the taxable services cannot be said to be in any way related
to goods or passengers carried by road or waterways. For example, Section
65(41) (g) provides for service rendered to a client by a consulting engineer,
Section 65(4l)(k) refers to service to a client by a manpower recruitment C
agency, Section 65(41) (o) refers to service by pandal or shamiana contractors
and so on. The rate of service tax has been fixed under Section 66. Section
67 provides for valuation of taxable service for the purposes of charging tax.
The provision for valuation of service rendered by collecting and forwarding
agents has been dealt with under sub-clause (j) and service provided by
goods transport operators has been provided under clauses (I). (subsequently D
renumbered as clause (ma)). These clauses read respectively as under : -

"(j) in relation to service provided by a clearing and forwarding
agent to a client, shall be the gross amount charged by such agent
from the client for services of clearing and forwarding operations
in any manner." E
"(ma) in relation to service provided by goods transport operator
to a customer, shall be the gross amount charged by such operator
for services in relation to carrying goods by road in a goods
carriage and includes the freight charges but does not include any
insurance charges". F
As far as clause 0) is concerned it does not speak of goods or passengers,
nor to carriage of goods nor is it limited to service by road or inland waterways.
Clause (ma) shows that the valuation of the service tax includes the freight
charges, but is not limited to it.
G
It is clear therefore that Section 66 read with Section 65(41 )G) and
(ma) Chapter V of the Finance Act 1994 do not seek to levy tax on goods
or passengers. The subject matter of tax under those provisions of the Finance
Act 1994 is not goods and passengers, but the service of transportation itself.
It is a levy distinct from the levy envisaged under Entry 56. lt·may be that
both the levies are to be measured on the same basis, but that does not make H

.. '
1058 SUPREME COURT REPORTS [2005) 2 S.C.R.

A the levy the same. As was held in Federation of Hotel and Restaurant
Association of India etc. v. Union of India and Ors., (1989] 3 SCC 634 :

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

Since service Tax is not a levy on passengers and goods but on the
event of service in connection with the carriage of goods, it is not therefore
possible to hold that the Act in pith and substance is within the States exclusive
D power under Entry 56 of List II. What the Act ostensibly seeks to tax is what
it, in substance, taxes. In the circumstances, the Act could not be termed to
be a colourable piece of legislation. It is not the case of the petitioners that
the Act is referable to any other entry apart from Entry 56 of List II. Therefore
the negation of the petitioners submission perforce leads to the conclusion
that the Act falls within the residuary power of Parliament under Entry 97 of
E List 1.
.-/
\
Incidentally a similar· challenge to the legislative competence of
Parliament to levy service tax was negatived in Tamil Nadu Kalyana
Mandapam Assn. v. Union of India, (2004) 167 ELT 3 SC which was a case
where the levy of service tax was challenged by owners of Kalayan Mandapam/
F Mandap Keepers. By virtue of the 1997 amendment service provided to a
client by Mandap keepers including the services if any rendered as a caterer
was treated as a taxable service. The challenge, inter-alia, was that service
tax on Mandap keepers was colourable legislation as the said tax was not on
service but was in pith and substance only a tax on the sale of goods and/
G or a tax on land. The writ petition filed before the Madras High Court was
rejected and the constitutionality of the levy was upheld. It was then urged
before this Court by the appellants that Entries 18, 14 and 54 of List II
covered the levy in question and, therefore, resort could not be had to Entry
97 in List I of the Seventh Schedule of the Constitution. It was held by this
Court that although certain items of the service might have been referable to
H any other entry, the service element was. the "more weighty, visible and
-
GUJARATAMBUJACEMENTSLTD. v. U.0.1.[RUMAPAL,J.] 1059

'predominant". Therefore, the nature and character of the levy of the service A
tax was· distinct from a tax on the sale or hire purchase of goods and from
a tax on land.

The point at which the collection of the tax is to be made is a question
of legislative convenience and part of the machinery for realization and
rec0very of the tax. The manner of the collection has been described as "an B
accident of administration; it is not of the essence of the duty" 2• It will not
change and does not affect the essential nature of the tax. Subject to the
legislative competence of the Taxing Authority a duty can be imposed at the
stage which the authority finds to be convenient and the most effective
whatever stage it may be. The Central Government is therefore legally C
competent to evolve a suitable machinery for collection of the service tax
subject to the maintenance of a rational connection between the tax and the
person on whom it is imposed. By Sections 116 and 117 of the Finance Act
2000, the tax is sought to be levied from the recipients of the services. They
cannot claim that they are not connected with the service since the service is
rendered to them. D
In a similar fact situation under an Ordinanl:e the Central Government
was authorized to levy and collect a duty of excise on all coal and coke
dispatched from collieries. Rules framed under the Ordinance provided for
collection of the excise duty by the railway administration by means of a
surcharge on freight recoverable either from the consignor or the consignee. E
The imposition of excise duty on the consignee was challenged on the ground
that the consignee had nothing to do with the manufacture or production of
the coal. Negativing this submission this Court in R.C. Jail v. Union of India,
AIR (1962) SC 1281, 1286 said : -

''The argument confuses the incidence of taxation with the F
machinery provided for the collection thereof ".

In Rai Ramakrishna (supra) the tax under Entry 56 of List II was held
to be competently levied on the bus operators or bus owners even though the
object of levy was passengers ( which they were not) because there was a G
direct connection between the object of the tax viz., goods and passengers
and the owners of the transport carrying the goods or passengers. There is
thus nothing inherently illegal or unconstitutional to provide for service tax

2. (See: in re:- Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation
Act, 1938; 1939 FCR 18; Provinces of Madras v. Boddu Padanna. AIR(l942) FC 33 and H
Union of India v. A Sanyasi Rao, [1996) 3 SCC 465).
1060 SUPREME COURT REPORTS (2005] ? S.C.R.

A to be paid by the availer or user.

The writ petitioners have relying upon the decision in Dwarka Prasad
v. Dwarka Das Saraf, [1976] 1 SCC 128, contended that the amendment to
section 68 by the introduction of a proviso in 2003, was invalid. It is submitted
that as the body of the section did not cover the subject matter, there was no
B question of creating an exception in respect thereto by a proviso. According
to the writ petitioners, the proviso cannot expand the body by creating a
separate charge. It is submitted that by merely amending the definition of the
word "ac;sessee" it could not be understood to mean that thereby all customers
of the services in question were liable.
c The submission is misconceived for several reasons. Section 68 is a
machinery section in that it provides for the incidence of taxation and is not
the charging section which is Section 66. The amendments to Section 66
brought about in 2000 changed the point of collection of tax from the provider
of the service to 'such manner as may be prescribed'. Section 68(1A) as it
D stood in 1997 provided for the collection and recovery of service tax in
respect of the ser;ices referred in clauses (g) to (r) of Section 65(4 l), which
'
\.-

included both the services with which we are concerned, from such person '
and in such manner as may be prescribed. The 1998 Finance Act maintained
this. Now the Service Tax Rules 1994 provided for the collection and recovery
of tax from the user or payers for the services. This was the prescribed
E method. All that the proviso to Section 68(1A) did was to prescribe the
procedure for collection with reference to services of goods transport operators
and Clearing agents which services had already been expressly included under
the Finance Act 2000 into the definition of taxable service.

F The decision in Dwarka Prasad v. Dwarka Das Saraf (supra) relied
I
upon by the writ petitioner does not in any way forbid a proviso from t
supplementing the enacting clause. All that the decision says is that a proviso
~

must prima facie be read and considered in relation to the principal matter I

to which it is a proviso. It is not a separate or an independent enactment. The
introduction of the proviso to Section 68(l)(A) by the Finance Act, 2003
G does not seek in any manner seek to expand that sub-section. In fact it gives
effect to it.

The final challenge to the 2000 amendment to the Service Tax Act,
I 994 is that it operated in a discriminatory manner in that it chose the recipient
of the services to be the assessee only in the case of services rendered by
H goods transport operators and clearing and forwarding agents. We are unable
GUJARAT AMBUJA CEMENTS LTD. v. U.0.1. [RUMA PAL, J.] 1061

to accept the submission. Because of the inherent complexity of fiscal A
adjustments of diverse elements in the field of tax, the legislature is permitted
a large discretion in the matter of classification to determine not only what
should be taxed but also the manner in which the tax may be imposed. Courts .
are extremely circumspect in questioning the reasonability of such classification
but after a "judicial generosity is extended to legislative wisdom, if there is B
writ on the statute perversity, madness in the method or gross disparity,
judicial credibility may snap and the measure may meet with its funeral".
(Vide : Ganga Sugar Corporation v. State of U.P. 3)

The same judicial wariness was expressed in Federation of Hotel and
Restaurant Association of India etc. v. Union of India and Ors., [1989] 3 C
sec 634 where it was said :
"It is now well settled that though taxing laws are not outside
Article 14, however, having regard to the wide variety of diverse
economic criteria that go into the formulation of a fiscal policy
legislature enjoys a wide latitude in the matter of selection of D
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. E
If there is equality and uniformity within each group, the law
would not be discriminatory. Decisions of this Court on the matter
have permitted the legislatures to exercise an extremely wide
discretion in classifying items for tax purposes, so long as it
refrains from clear and hostile discrimination against particular F
persons or classes." (pg.659)

(Emphasis added)

In the case before us the discrimination is not, even according to the
writ petitioners, by reas9n of the subject matter of tax. It is also not the writ
petitioners' case that within the separate classes of services covered by the G
different clauses in Section 65(41 ), there is any discrimination or that the law
operates unequally within the classes. According to them the discrimination
lies in the method of collection of the tax followed. But as we have said this

3. [19so11 sec 223.
H
A
1062 SUPREME COURT REPORTS [2005] 2 S.C.R.

is not of the essence of the tax and the mere difference in the machinery
....
I

provisions between the different classes of service cannot found a cha.Henge
of discrimination 4 • If the legislature thinks that it will facilitate the collection
• of the tax due from such spedfied traders on a rationally discernible ba_sis,
there is nothing in the said legislative measure to offend Article 14 of the
B Constitution 5• It is therefore outside the judicial ken to determine w_hether the
Parliament should have specified a common mode for recovery of the tax as
a convenient administrative measure in respect of a particular class. That is
ultimately a question of policy which must be left to legislative wisdom. This
challenge also accordingly fails.

C Although the challenge to the constitutional validity and legality of the
levy of service tax is rejected, the writ petitioners have some subsidiary
complaints. They say that although the levy of service tax from the users of
the services rendered by the goods transport operators was introduced with
effect from 16th November, 1997, the levy was exempted for the period
subsequent to 2nd June, 1998 in view of the notification dated 2nd June,
D 1998 which is still operative. Yet the respondents had raised demands for
service tax for periods subsequent to 2nd June, 1998. It has been conceded
by the Union of India that the amendments made in the Act would have to
be read along with the notifications so that the levy and collection of service
tax would be only in respect of services rendered by goods transport operators
E between the period from 16th November, 1997 to 2nd June, 1998. Similarly
there can be no tax liability on users of the services of the clearing and
forwarding agents beyond 1.9.1999 when by notification No. 7/99 dated
23.8.99, the levy of service tax on the services provided by clearing and
forwarding agents were exempted. Furthermore the liability to pay interest or
\
I

F
penalty on outstanding amounts will arise only ifthe dues are not paid within
the period of two weeks from the order passed by this Court on 17th November,
-
2003. In those cases in which the tax may have been paid but not refunded
to the writ petitioners, for whatever reason, there is no question of levy of
any interest or penalty at all.

With these clarifications, the writ petitions are dismissed without any
G order as to costs.
R.P. Writ Petition Dismissed.

4. Provinces of Madras v. Boddu Paidanna, AIR (1942) PC 33.

H 5. Union of India v. A Sanyasi Rao, [1936] 3 sec 465.