- Bookmark
- Share
- CaseIQ
Addition Advertising v. Union Of India
Factual and Procedural Background
The petitioner, an advertising agency, challenged the constitutional validity (vires) of sections 65(16)(d) and 66(2) of Chapter V of the Finance Act, 1994, as amended, which impose a service tax on advertising services. The petitioner contended that these provisions violated Articles 14, 19(1)(a), and 265 of the Constitution of India. The challenge arose following the imposition of a 5% service tax on the gross amount charged by advertising agencies for their services.
Legal Issues Presented
- Whether the imposition of service tax on advertising services violates the fundamental right to freedom of speech and expression under Article 19(1)(a) of the Constitution.
- Whether the classification between commercial and non-commercial advertising for taxation purposes is arbitrary and violative of Article 14.
- Whether the Parliament has legislative competence to impose service tax on advertising services, given the entries in the Union and State Lists under the Seventh Schedule of the Constitution.
- Whether the service tax on advertising services amounts to an impermissible tax on the calling or profession of advertising agencies under Entry 60 of the State List.
Arguments of the Parties
Petitioner's Arguments
- The petitioner argued that advertising service is an exercise of the fundamental right to freedom of speech and expression, and therefore, the tax imposed violates Article 19(1)(a) of the Constitution.
- It was contended that the classification between commercial and non-commercial advertising is vague and arbitrary, violating Article 14.
- The petitioner claimed lack of legislative competence by Parliament to levy the service tax, asserting that the tax is either a sales tax (Entry 54, State List) or a tax on profession/calling (Entry 60, State List), both outside Parliament’s domain.
- It was also argued that the tax is effectively on the calling of advertising agencies, which is impermissible under constitutional provisions.
- The petitioner further contended that the State List Entry 55, which pertains to tax on advertisements, excludes parliamentary competence to tax advertising services.
Respondent's Arguments
- The respondent distinguished between the freedom of speech and expression and the imposition of a tax on a commercial activity related to expression, relying on Supreme Court precedents that uphold taxation of press and related industries without violating Article 19(1)(a).
- It was argued that the rate of tax (5%) is reasonable, non-excessive, and within the legislature’s discretion, thus not violative of constitutional protections.
- The classification between commercial and non-commercial advertising was defended as rational, well-recognized, and judicially accepted, hence not arbitrary or vague.
- The respondent clarified that the tax is on the service rendered by advertising agencies, not on the profession or calling itself, and that without rendering service, no tax is payable.
- It was further contended that the tax is not on the advertisement per se but on the advertising services, which is a distinct subject, thus falling within Parliament’s legislative competence.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Express Newspaper v. Union of India, AIR 1958 SC 578 | Freedom of speech and expression; taxation of press; limits on pre-censorship and restrictions on editorial freedom. | The Court relied on this precedent to establish that while freedom of speech is fundamental, the press is not immune from ordinary taxation; tax on advertising services is not a pre-censorship or restriction but a general tax. |
| Indian Express Newspaper v. Union of India, AIR 1986 SC 515 | Taxation of newspaper industry; distinction between tax on freedom of expression and tax on trade or business. | The Court applied this ruling to reject the argument that taxation of advertising services violates freedom of expression, affirming that tax can be levied on business activities related to expression without infringing constitutional rights. |
| Western India Theatres Ltd. v. Cantonment Board, Poona, AIR 1959 SC 582 | Differentiation between tax on privilege of carrying on a trade and tax on instances of trade activity. | The Court used this to clarify that the service tax is on the actual service rendered, not on the profession or calling itself, thus falling outside the ambit of state list Entry 60. |
Court's Reasoning and Analysis
The Court analyzed the constitutional challenge by first distinguishing between the fundamental right to freedom of speech and expression and the imposition of a tax on commercial services related to expression. It held that while freedom of expression is protected, it does not grant immunity from ordinary taxation. The Court emphasized that the tax rate of 5% is modest and within legislative discretion, not warranting judicial interference unless it is expropriatory.
Regarding Article 14, the Court found the classification between commercial and non-commercial advertising rational and consistent with judicial precedents, rejecting claims of vagueness or arbitrariness.
On legislative competence, the Court reasoned that the service tax is imposed on the rendering of advertising services, not on the sale or purchase of goods (Entry 54, State List) nor on the profession or calling of advertising agencies (Entry 60, State List). The Court highlighted that tax liability arises only upon actual service delivery, distinguishing it from a tax on the calling itself.
The Court also rejected the argument that State Entry 55 on tax on advertisements excludes Parliament’s competence, clarifying that the tax is on the service rendered, not on the advertisement as such.
Accordingly, the Court found no merit in any of the constitutional contentions and dismissed the petition.
Holding and Implications
The petition challenging the constitutional validity of sections 65(16)(d) and 66(2) of the Finance Act, 1994, imposing service tax on advertising services, is dismissed.
The direct effect of this decision is the upholding of the service tax provisions as constitutionally valid, allowing continued levy of service tax on advertising agencies. The Court did not set any new precedent beyond affirming existing principles on taxation vis-à-vis freedom of expression and legislative competence.
R.A.Mehta:-
(1). The petitioner, an advertising agency challenges the vires of the provisions of secs. 65 (16) (d) and 66 (2) of chapter v of finance act, 1994 as amended. By these provisions, a service tax is imposed on advertising service. The challenge is based upon art. 14, 19 (1) (a) and 265 of the constitution of india.
(2). S. 65 (16) (d) defines "taxable service" to mean. Any service provided to a client by an advertising agency in relation to advertisements in any manner. Section 66 is the charging section which provides that there shall be charged a service tax at the rate of 5% of the value of the taxable service. Section 67 provides for valuation of taxable service for charging the service tax and clause (d) provides that in relation to service provided by an advertising agency to a client, the gross amount charged by such agency from the client shall be for services in relation to the advertising.
(3). It is submitted that advertising service is a skill of expression and there is a fundamental right to freedom of speech and expression guaranteed by art. 19 (1) of the constitution and, therefore, the tax on this freedom of speech and expression is violative of art. 19 (1) of the constitution of india.
(4). Reliance is placed on the judgment of the supreme court in the case of express newspaper v. Union of india, air 1958 sc 578. In para 142, the supreme court has summarised the principles relating to the freedom of speech and expression and observed in para 143 that no measure can be enacted which would have the effect of imposing a pre - censorship, curtailing the circulation or restricting the choice of employment or unemployment in the editorial force and such a measure would certainly tend to infringe the freedom of speech and expression and would, therefore, be liable to be struck down as unconstitutional. However, in para 144, the supreme court has clearly held that the press is not immune from the ordinary forms of taxation for support of the government nor from the application of general laws relating to industrial relations. Therefore, merely because there is a tax on press or any activity of speech or expression, it does not necessarily become violative of freedom of expression. Similarly, in the case of indian express newspaper v. Union of india, air 1986 sc 515, it has been held that the newspaper industry has not been granted exemption from taxation in express terms, and negativing the argument based on art. 19 (a) of the constitution, the supreme court held that merely because the government has power to levy taxes, the freedom of press would not be totally lost. The supreme court observed that while there can be no tax on the freedom of expression, tax can be levied on profession, occupation, trade, industry or business and hence the tax was leviable on newspaper industries also. It is only when tax measure stifles the freedom of expression, it invites interference of the court. It is, thus, clear and well settled that a tax on activity which may be of expression, it not immune from tax.
(5). In the present case, the rate of tax is 5% of the gross amount charged by the advertising agency from the client for services in relation to advertising. This cannot be said to be in any manner unreasonable. In fact, it is on the lower side, and as such could hardly be a subject - matter for the court to decide unless it assumes exproprietory proportion. The rate of tax depends on many socio - economic parameters and value judgments of which the legislature is the best judge. The court has very little scope to interfere on the rate of tax. Therefore, there is no merit in the contention of violation of art. 19 (1) of the constitution.
(6). There is no merit in the contention that there is a vague and arbitrary classification of commercial and non - commercial advertising and, therefore, it is violative of art. 14 of the constitution. Commercial and non - commercial are wellknown concepts and have been judicially interpreted and recognised under many legislations and cannot be said to be either vague or arbitrary. It is a rational classification. If the legislature does not want to tax or wants to tax less the noncommercial advertisements, it cannot be said to be in any manner irrational.
(7). In indian express case (supra) , the supreme court has upheld the classification of small, medium and big newspapers for levy of customs duty on newspapers as it was held to be rational.
(8). Lastly, it is contended that there is lack of legislative competence in the parliament for imposing service tax on advertising agencies and it is contended that it is a tax in the nature of sales tax or it is a tax on the calling of advertising agency. Entry 54 of state list is taxes on the sale or purchase of goods other than newspapers subject to provision of entry 92 - a of list i. Entry 92 - a is inter - state sales tax. The present tax on advertising services cannot be by any stretch of imagination be brought into entry "sale or purchase of goods". It is also contended that this tax is a tax on advertising service - a profession or calling and would fall under state list entry 60, i. E. , taxes on professions, trades, callings and employments. This is not a tax on any profession, trade, calling or employment, but is in respect of the service rendered. If there is no service, there is no tax.
(9). In the case of western india theatres limited v. Cantonment board, poona, air 1959 sc 582, it was held that the entertainment tax is not imposed for the privilege of carrying on any trade or calling, but it is a tax imposed on every show, that is to say, on every instance of the exercise of the particular trade, calling or employment and if there is no show there is no tax. A lawyer has to pay a tax or fee to take out a licence irrespective of whether or not he actually practises. That tax is a tax for having the privilege of practising if and when a person taking out a licence chooses to do so. In the present case, what is taxed is not the calling but the service rendered. If there is service, there is tax. Therefore, it is not a tax on the calling and, therefore, it is not covered by entry 60 of the state list.
(10). In the affidavit - in - reply, the distinction between the subject of tax and measure of tax is pointed out. The subject of tax is not calling of advertising service, but actual rendering of service and the measure of tax as well as charging provision of tax is based on the gross amount paid for service.
(11). It is also contended in the petition that the state entry 55 "tax on advertisement" would also exclude the parliamentary competence. Here also, the petitioner is not right because the tax is not on advertisement, but is on the services rendered with reference to the advertisement and there is a clear distinction between the advertisement and the advertising services. As a result of the advertising services rendered, it results in an advertisement which can be published and republished and copied. In view of the aforesaid discussion, we do not find any merit in any of the contentions. Hence, the petition is dismissed. Notice discharged.
Alert