ARVAL INDIA PVT LTD v. COMMR.SERVICE TAX IV MUMBAI

3

agreement. The consideration, to be paid at regular intervals specified in the lease agreement, is sought to be brought within the authority to levy service tax under Finance Act, 1994. The impugned order has upheld the taxability while discarding the proposal to invoke the extended period beyond eighteen months computed backwards from the relevant date, which is under challenge by the assessee-appellant. There is no dispute that the tax liability on 'fleet management' has been discharged as provider of 'management, maintenance or repair service' and on commission received from insurance companies as provider of 'business auxiliary services' while, claiming the transaction to be 'deemed sale', the 'lease rental' was not offered up as consideration for rendering taxable service. A portion of the confirmed demand pertains to the period prior to 'negative list' regime of taxation of services. Revenue challenges the discarding of tax liability for the extended period proposed in the show cause notice as well as the grant of abatement of sixty percent available under notification no.1/2006-ST dated 1^stMarch 2006.

3. The levy of service tax on 'rent-a-cab' was subject to detailed examination by the Hon'ble High Court of Gujarat in Commissioner of Service Tax v. Vijay Travels [2014 (36) STR 513 (Guj)] and we do not need to look elsewhere for a more authoritative exposition. By incorporation of section 65(105)(o) in Finance Act, 1994 with effect from 16^thJuly 1997, the

4

'service provided or to be provided to any person by a rent-a- cab scheme operator in relation to the renting of a cab' was taxable and the two key expressions deployed therein, viz., 'rent- a-cab scheme operator' was defined as

'(91)… means any person engaged in the business of renting of cabs'

and 'cab' as

'(20)… means-

(i) a motorcab, or

(ii) a maxicab, or

(iii) any motor vehicle constructed or adapted to carry more than 12 passengers, excluding the driver, for hire or reward…'

in section 65 of Finance Act, 1994. The definition has evolved over the time that the activity was brought within the tax net. Initially, it was intended to subject the business of renting motor cabs to persons desiring to drive such cabs for their own use, and including a driver should the hirer so desire, as per licensing by 'state transport authorities' under the eponymous scheme that infused a regulatory framework for motor cabs so handed over for use other than as common public transport. By amending the definition in section 65 of Finance Act, 1994, from time to time, variations in usage by recipients of service that supplemented or supplanted purchase of such vehicles for self-use were brought within the ambit of taxation.

4. The original object of the levy was the use of motor cabs by

5

persons other than owners but distinguishable from patronage of taximeter cabs. The objective, thus, was not merely garnering of revenues from a new source but also to ensure that tourist taxi operations were not targets of a discriminatory levy. The two services that were thereby brought within the net fulfilled similar customer demands in the market space. Though the appellation was not varied, subsequent amendments extended the scope of tax to cover all users of every kind of automobile for carriage of persons without the right of ownership. In other words, the substitution of ownership by usage, that was restricted only by certain minimal limitations to distinguish from the former, was no longer an activity beyond the pale of tax.

5. In the impugned order, the adjudicating authority has held that, though lease was 'deemed sale' and subject to levy under 'sales tax' or 'value-added tax', the same transaction could be subject to central tax and that the 'gross amount' received would be the taxable value leading to the demands within the normal period of limitation. It is but natural that, in the system of mutually exclusive distribution of taxing powers, an assessee, burdened with having to contribute to tax revenues through the deeming fiction of 'sale' and attempted to be brought within another levy on the very same activity, would seek exclusion from one or the other. According to the adjudicating authority, even in the circumstance of the activity being subject to tax on sale, the imposition of central tax has found judicial approval and, thereafter, the tax procedure laid down

6

in Finance Act, 1994 follows as surely as night does after day.

6. At first blush, such a proposition does not appear to be unattractive. However, it is moot if the incorporation of 'rent-a-cab' service, even in its expanded scope, was intended to cover operating leases such as those entered into by M/s Arval India Pvt Ltd with customers. Relying upon the 'five test' ascertainment laid down by the Hon'ble Supreme Court in Bharat Sanchar Nigam Ltd v. Union of India [(2006) 3 SCC 1 (SC)], in the context of Article 366 (29A) of the Constitution of India, it is contended by Learned Senior Counsel for the assessee that the activity, having been subjected to tax as sale, is not liable to be subjected to tax again as service. Harping on their alienation, for all practical purposes, from the leased vehicle, it is contended that, by no stretch, can this transaction be 'rent-a-cab' but is transfer of the right to use which is the essence of 'deemed sale' excluded from the purview of tax by the Central Government. It was pointed out that the decision in re Vijay Travels arose on a dispute pertaining to provision of vehicles-their own and those of others- under contract to the Gujarat Secondary Education Board by the respondent therein in which it was claimed that 'hiring' could not be brought under the ambit of the tax on 'renting'.

7. On the other hand, Learned Authorized Representative canvassed the proposition that different aspects of a transaction could be the object of different levies without infringing upon constitutionally

7

demarcated jurisdictions. Learned Authorized Representative placed reliance on the decision of the Hon'ble Supreme Court in Association of Leasing & Financial Services Companies v. Union of India [2010

(20) STR 417 (SC)] and in Idea Mobile Communication Ltd v. Commissioner of Central Excise & Customs, Cochin [2011 (23) STR (SC)]. We shall advert to these presently. Further reliance is placed on the decision of the Tribunal in Carzonrent (India) Pvt Ltd v. Commissioner of Service Tax, Delhi-I [2017 (50) STR 172 (Tri-Del)] on an identical issue of 'lease rentals' not having been offered for tax along with the issue of leviability of tax on 'fleet management charges' on which the assessee before us has discharged tax liability. We take note that, in this decision, the Tribunal attached premium to the detailed consideration of the attributes of sale, as expounded in Bharat Sanchar Nigam Ltd v. Union of India [2006 (2) STR 161 (SC)], in the order of the original authority thus

'13.…… We note that the principle laid down by the Hon'ble Supreme Court in BSNL (supra) will guide while determining the actual nature of transaction between the parties. We are satisfied that the impugned order examined the issue to arrive at the conclusion that the appellant are liable to service tax in respect of the services rendered by them under the category of "rent-a- services".'

and, as it appears to be an approval of the logical weaponry deployed in the order impugned on the facts that were mapped out, we are unable to concede that the facts in the dispute before us are identical in terms of the control retained by the assessee herein over the leased vehicles.

8

In a dispute over competing claims of fitment in either of the two lists in the Seventh Schedule in the Constitution of India, prudence may well dictate that an adjudicating pronouncement be evaluated, even in exercise of appellate jurisdiction, within the statute of such jurisdiction. The taxing statute of the Union and of the several states may, if at all converging, find resolution only in the constitutional courts in appellate, or writ, jurisdictions. That, however, need not constrain us from examining the scope of the levy itself in the light of a model that finds general commercial acceptance. The approving mark in correctness of findings does not have to be at the cost of propriety in levying the tax.

8. With the pronouncement of the decision of the Hon'ble Supreme Court in State Of Madras v. Gannon Dunkerley & Co., (Madras) Ltd. [1959 SCR 379], and the consequential developments, the incorporation of Article 366(29A) was a constitutional necessity to enable certain transactions, hitherto untaxed, to be liable under the existing levy on 'sale of goods' assigned to state governments in List II of the Seventh Schedule in the Constitution of India. That did not, for a long time to come, pose any problem of conflict of jurisdiction, even though disputes did arise on the extent of consideration that was to be taxed, as the empowerment of levy assigned to the Union was on an entirely different taxable event. The introduction of tax on services did, upon expansion of the entries, provide room for such conflict. More so,

9

after 'works contract' was included in section 65(105)(zzzza) of Finance Act, 1994 by consolidation of certain, hitherto separately described, activities within the scope of the new and separate levy. The Hon'ble Supreme Court, in Commissioner of Central Excise & Customs, Kerala v. Larsen & Toubro Ltd [2015 (39) STR 913 (SC)], having been called upon to decide on the extent and scope of these specific enumerations within the compass of demarcation envisaged by the Seventh Schedule in the Constitution of India, dwelt upon the evolution of the several taxes and the decisions, compartmentalized as these were, pertaining to empowerment of the Union and the states before holding that the concatenation of the several entries prior to 1^st June 2007 and the tax on 'works contract service' thereafter was mutually exclusive for lending authority to taxation of 'composite contracts' only after the new enumeration and that previously existing taxable entries, irrespective of inclusion within the taxable service in section 65(105)(zzzza) of Finance Act 1994 were intended only for services simpliciter.

9. Such an exposition was warranted as several decisions, pronounced till then, limited the tax on 'sale' to value of materials transferred; the alternative, 'service' component, was held to be outside the scope of that levy. It was, therefore, held that 'composite contracts', conforming to the Explanation in section 65(105)(zzzza) of Finance Act, 1994 alone could be taxed, to the extent of 'service' component,

10

under the legislative powers of the Union. The decisions cited by Learned Authorized Representative are found to fall in such category.

10. The primary issue agitated before the Hon'ble Supreme Court in re Association of Leasing & Financial Service Companies was the legislative competence of Parliament to enact provisions for taxing certain activities under section 65(105)(zm) of Finance Act, 1994 in the face of exclusion legislated by Article 366 (29 A) of the Constitution of India and, having drawn the essential difference between the two activities by several parameters, such incorporation was upheld by reference to the residuary powers of legislation. The present dispute does not challenge the incorporation of 'rent-a-cab service' in section 65(105) of Finance Act, 1994; per contra, it questions the empowerment vested in the adjudicating authority to expand the scope of the taxable service by encroaching on taxing power vested in the several states by parliamentary enactment. The issue in re Idea Mobile Communication Ltd pertains to the measure adopted for levy of tax under Finance Act, 1994 when tax authorities, empowered under legislative sanction authorized by List II of the Seventh Schedule in the Constitution of India, conceded its lack of jurisdiction to tax any part of such value. In that specific context, it was held that erroneous payment under a state levy would not absolve liability to service tax. Such are not the facts in the present dispute.

11. In re Larsen & Toubro Ltd, though the dispute pertains to 'works

11

contracts', certain principles arising from constitutional limitations have been enunciated. It has been held that

'15. A reading of this judgment, on which counsel for the assessees heavily relied, would go to show that the separation of the value of goods contained in the execution of a works contract will have to be determined by working from the value of the entire works contract and deducting therefrom charges towards labour and services. Such deductions are stated by the Constitution Bench to be eight in number. What is important in particular is the deductions which are to be made under sub- paras (f), (g) and (h). Under each of these paras, a bifurcation has to be made by the charging Section itself so that the cost of establishment of the contractor is bifurcated into what is relatable to supply of labour and services. Similarly, all other expenses have also to be bifurcated insofar as they are relatable to supply of labour and services, and the same goes for the profit that is earned by the contractor. These deductions are ordinarily to be made from the contractor's accounts. However, if it is found that contractors have not maintained proper accounts, or their accounts are found to be not worthy of credence, it is left to the legislature to prescribe a formula on the basis of a fixed percentage of the value of the entire works contract as relatable to the labour and service element of it. This judgment, therefore, clearly and unmistakably holds that unless the splitting of an indivisible works contract is done taking into account the eight heads of deduction, the charge to tax that would be made would otherwise contain, apart from other things, the entire cost of establishment, other expenses, and profit earned by the contractor and would transgress into forbidden territory namely into such portion of such cost, expenses and profit as would be attributable in the works contract to the transfer of property in goods in such contract. This being the case, we feel that the learned counsel for the

12

assessees are on firm ground when they state that the service tax charging section itself must lay down with specificity that the levy of service tax can only be on works contracts, and the measure of tax can only be on that portion of works contracts which contain a service element which is to be derived from the gross amount charged for the works contract less the value of property in goods transferred in the execution of the works contract. This not having been done by the Finance Act, 1994, it is clear that any charge to tax under the five heads in Section 65(105) noticed above would only be of service contracts simpliciter and not composite indivisible works contracts.' and laying particular emphasis on

'16. At this stage, it is important to note the scheme of taxation under our Constitution. In the lists contained in the 7th Schedule to the Constitution, taxation entries are to be found only in lists I and II. This is for the reason that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There is no concurrent power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited exclusive field, it is liable to be struck down. In the present case, the dichotomy is between sales tax leviable by the States and service tax leviable by the Centre. When it comes to composite indivisible works contracts, such contracts can be taxed by Parliament as well as State legislatures. Parliament can only tax the service element contained in these contracts, and the States can only tax the transfer of property in goods element contained in these contracts. Thus, it becomes very important to segregate the two elements completely for if some element of transfer of property in goods remains when a service tax is levied, the said levy would be found to be constitutionally infirm. This position is

13

well reflected in Bharat Sanchar Nigam Limited v. Union of India, (2006) 3 SCC 1 = 2006 (2) STR 161 (S.C.), as follows:-

"No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of India [(1993) 1 SCC 364]: (SCC p. 395, para 47): -

"The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods." For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. v. Union of India [(2005) 4 SCC 214], SCC at p. 228, para 23: -

"This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field." (at paras 88 and 89)

17. We find that the assessees are correct in their submission that a works contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such, and has to be taxed separately as such. In Gannon Dunkerley, 1959 SCR 379, this Court recognized works contracts as a separate species of contract as follows: -

14

"To avoid misconception, it must be stated that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts of the respondents have been held by the learned Judges of the Court below to be. The several forms which such kinds of contracts can assume are set out in Hudson on Building Contracts, at p.

165. It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell, from the agreement to do work and render service and to impose a tax thereon cannot be questioned, and will stand untouched by the present judgment." (at page 427)'

before going on to hold that

'35. The aforesaid finding is in fact contrary to a long line of decisions which have held that where there is no machinery for assessment, the law being vague, it would [not] be open to the assessing authority to arbitrarily assess to tax the subject. Various judgments of this Court have been referred to in the following passages from Heinz India (P) Ltd. v. State of U.P., (2012) 5 SCC 443. This Court said :-

"This Court has in a long line of decisions rendered from time to time, emphasised the importance of machinery provisions for assessment of taxes and fees recoverable under a taxing statute. In one of the earlier decisions on the subject a Constitution Bench of this Court in K.T. Moopil Nair v. State of Kerala [AIR 1961 SC 552] examined the constitutional validity of the Travancore-Cochin Land Tax Act (15 of 1955). While recognising what is now well-settled principle of law that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in Article 14, this Court found that the enactment in question was violative of Article 14 of the Constitution for inequality was writ large on the Act and inherent in the very provisions under the taxing section thereof. Having said so, this Court also noticed that the Act was silent as to the machinery and the procedure to be followed in making the assessment. It was left to the executive to evolve the requisite machinery and procedure thereby making the whole thing, from beginning to end, purely administrative in character completely ignoring the legal position that the assessment of a tax on person or property is a quasi judicial exercise."

15

Speaking for the majority Sinha, C.J. said: (K.T. Moopil case [AIR 1961 SC 552], AIR p. 559, para 9)

"9. … Ordinarily, a taxing statute lays down a regular machinery for making assessment of the tax proposed to be imposed by the statute. It lays down detailed procedure as to notice to the proposed assessee to make a return in respect of property proposed to be taxed, prescribes the authority and the procedure for hearing any objections to the liability for taxation or as to the extent of the tax proposed to be levied, and finally, as to the right to challenge the regularity of assessment made, by recourse to proceedings in a higher civil court. The Act merely declares the competence of the Government to make a provisional assessment, and by virtue of Section 3 of the Madras Revenue Recovery Act, 1864, the landholders may be liable to pay the tax. The Act being silent as to the machinery and procedure to be followed in making the assessment leaves it to the Executive to evolve the requisite machinery and procedure. The whole thing, from beginning to end, is treated as of a purely administrative character, completely ignoring the legal position that the assessment of a tax on person or property is at least of a quasi judicial character." (emphasis supplied) In Rai Ramkrishna v. State of Bihar [AIR 1963 SC 1667] this Court was examining the constitutional validity of the Bihar Taxation on Passengers and Goods (Carried by Public Service Motor Vehicles) Act, 1961. Reiterating the view taken in K.T. Moopil Nair [AIR 1961 SC 552] this Court held that a statute is not beyond the pale of limitations prescribed by Articles 14 and 19 of the Constitution and that the test of reasonableness prescribed by Article 304(b) is justiciable. However, in cases where the statute was completely discriminatory or provides no procedural machinery for assessment and levy of tax or where it was confiscatory, the Court would be justified in striking it down as unconstitutional. In such cases the character of the material provisions of the impugned statute may be such as may justify the Court taking the view that in substance the taxing statute is a cloak adopted by the legislature for achieving its confiscatory purpose.

16

In Jagannath Baksh Singh v. State of U.P. [AIR 1962 SC 1563] this Court was examining the constitutional validity of the U.P. Large Land Holdings Tax Act (31 of 1957). Dealing with the argument that the Act did not make a specific provision about the machinery for assessment or recovery of tax, this Court held: (AIR pp. 1570-71, para 17)

"17. … if a taxing statute makes no specific provision about the machinery to recover tax and the procedure to make the assessment of the tax and leaves it entirely to the executive to devise such machinery as it thinks fit and to prescribe such procedure as appears to it to be fair, an occasion may arise for the courts to consider whether the failure to provide for a machinery and to prescribe a procedure does not tend to make the imposition of the tax an unreasonable restriction within the meaning of Article 19(5). An imposition of tax which in the absence of a prescribed machinery and the prescribed procedure would partake of the character of a purely administrative affair can, in a proper sense, be challenged as contravening Article 19(1)(f)." (emphasis supplied)

In State of A.P. v. Nalla Raja Reddy [AIR 1967 SC 1458] this Court was examining the constitutional validity of the Andhra Pradesh Land Revenue (Additional Assessment) and Cess Revision Act, 1962 (22 of 1962) as amended by the Amendment Act (23 of 1962). Noticing the absence of machinery provisions in the impugned enactments this Court observed: (AIR p. 1468, para 22)

"22. … if Section 6 is put aside, there is absolutely no provision in the Act prescribing the mode of assessment. Sections 3 and 4 are charging sections and they say in effect that a person will have to pay an additional assessment per acre in respect of both dry and wet lands. They do not lay down how the assessment should be levied. No notice has been prescribed, no opportunity is given to the person to question the assessment on his land. There is no procedure for him to agitate the correctness of the classification made by placing his land in a particular class with reference to ayacut, acreage or even taram. The Act does not even nominate the appropriate officer to make the assessment to deal with questions arising in respect of assessments and does not prescribe the procedure for assessment. The whole thing is left in a nebulous form. Briefly stated under the Act there is no procedure for assessment and however grievous the blunder made there is no way for the aggrieved party to

17

get it corrected. This is a typical case where a taxing statute does not provide any machinery of assessment." (emphasis supplied)

The appeals filed by the State against the judgment of the High Court striking down the enactment were on the above basis dismissed.

Reference may also be made to Vishnu Dayal Mahendra Pal

v. State of U.P. [(1974) 2 SCC 306] and D.G. Gose and Co. (Agents) (P) Ltd. v. State of Kerala [(1980) 2 SCC 410] where this Court held that sufficient guidance was available from the Preamble and other provisions of the Act. The members of the committee owe a duty to be conversant with the same and discharge their functions in accordance with the provisions of the Act and the Rules and that in cases where the machinery for determining annual value has been provided in the Act and the rules of the local authority, there is no reason or necessity of providing the same or similar provisions in the other Act or Rules.

There is no gainsaying that a total absence of machinery provisions for assessment/recovery of the tax levied under an enactment, which has the effect of making the entire process of assessment and recovery of tax and adjudication of disputes relating thereto administrative in character, is open to challenge before a writ court in appropriate proceedings. Whether or not the enactment levying the tax makes a machinery provision either by itself or in terms of the Rules that may be framed under it is, however, a matter that would have to be examined in each case." (at paras 15-21)'

12. Impliedly, neither did the taxing powers vested in the Union extend either to 'sale' or 'deemed sale' nor did all of the several 'deemed sales' incorporated in the constitutional amendment include some component that was not 'deemed sale' outside the pale of taxation in List II in the Constitution of India. The impugned order has erred in presuming so. In 'works contracts', there is an aspect that is beyond the taxing powers of the states which could, under Parliamentary sanction, be taxed by the Union. In both 'sales' and 'services', the taxable event is determined by the existence of 'buyer/recipient' and 'seller/provider' with the conclusion of the contractual obligation as the definitive event

18

to be taxed. In the absence of concurrent jurisdiction, the vivisection of such enumerations in Article 366 (29A) of the Constitution of India alone can confer the authority under List I of the Seventh Schedule in the Constitution of India.

13. Agreements/contracts of 'lease' are, acknowledgedly, taxable as 'deemed sale'; it is not the case of Revenue that any portion of the consideration for 'lease' is not 'deemed sale'. As the entire rental is subject to tax as 'deemed sale', there is no scope for any portion thereof to be leviable to tax by the Union and, thereby, under Finance Act,

1994.

14. In the above circumstances, and in the light of discharge of tax liability under Finance Act, 1994 on some of the consideration earned by the assessee, the scope for subjecting 'lease rental' to tax, as proposed in the show cause notice, cannot sustain in the absence of a valid machinery provision recognized in the taxing statute. Accordingly, the impugned orders are set aside and appeal of assessee allowed while appeal of Revenue stands dismissed. (Order pronounced in the open court on 13/03/2020)

(C J Mathew) Member (Technical) (Dr. Suvendu Kumar Pati) Member (Judicial)

*/as