Arval India Pvt Ltd @Hash Commissioner Of GST And Central Excise

Cavil of M/s Arval India Pvt Ltd, in this appeal of theirs against order-in-original no.127-129/Vr/Comm/2018-19 dated 18th October 2018, is that the

Commissioner, GST & Central Excise, Mumbai East, in keeping with previous adjudication orders, had failed to appreciate the constitutionally

demarcated exclusion of the authority of the Union that precluded statutory enactment of tax on transactions of sale â€" including the enumeration in

Article 366 (29A) incorporated by Constitution (Forty-sixth Amendment) Act, 1982 - while confirming the demands of Rs.10,74,01,476,

Rs.11,25,71,787 and Rs.13,41,24,047 respectively proposed the separate notices for each succeeding year commencing from 1st April 2013. It is

common ground that the impugned order concluding these notices, issued under section 73(1A) of Finance Act, 1994 for the respective periods, were

consequent to show cause notice issued under section 73(1) of Finance Act, 1994 for the period from 1st April 2008 to 30th September 2012 seeking

to tax transactions under section 65(105)(o) of Finance Act, 1994 as ‘rent-acab scheme operator’ till 30th June 2012 and for the period

thereafter under the broadened definition of service, including those hitherto taxed, in section 65B(44) of Finance Act, 1994 and that the Tribunal had

set aside the demand, confirmed in adjudication of original show cause notice, along with another for the period from 1st July 2012 to 31st March

2013, in Arval India Pvt Ltd v. Principal Commissioner of Service Taxâ€"IV [2020-TIOL-1316-CESTAT-MUM].

We have heard Learned Senior Counsel appearing for the appellant who contended that the issue was no longer res integra in view of the decision

in their own appeal against the demand for the earlier period. Learned Authorised Representative, while conceding that the order, confirming amounts

in periodical statements issued under authority of section 73(1A) of Finance Act, 1994, now impugned before us was no different from the earlier one

that did not find favour with the Tribunal, went on to submit that the adjudicating authority had rendered clear findings on the coverage of the

impugned transactions within the definition of ‘service’ in Finance Act, 1994.

It is not in dispute that the tax liability confirmed in the impugned order were demanded in statements issued, under section 73(1A) of Finance Act,

1994, by reference to facts, and evidence, elaborated in the first show cause notice for the period from 1st April 2008 to 30th September 2012 which

straddles the service enumerated in section 65(105)(o) of Finance Act, 1994 and the successor ‘negative list’ regime. The disputed tax in the

present appeal pertains to leviability in the ‘negative list’ regime as provider of service relating to lease of motor vehicles and on the entire

consideration received as rentals from customers.

The fitment for taxability under Finance Act, 1994, ignoring the scheme of distribution of exclusive tax jurisdictions in the lists of the Seventh

Schedule of the Constitution, within the definitions therein was considered by the Tribunal in re Arval India Pvt Ltd that decided the appeal against the

demands for the earlier periods with the core of the dispute determined thus

‘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 (29A) 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 ‘renta-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.

and, drawing upon the judgement of the Hon’ble Supreme Court on the constitutional constraints in taxing that part of ‘works contract’

transaction deemed to be sale, elaborated that

‘11. In re Larsen & Toubro Ltd, though the dispute pertains to ‘works 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 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 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.â€​

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.â€​ (at paras 88 and 89)

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: -

“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.â€​ (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.†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.â€​

(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.

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).â€​

(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 get it corrected. This is a typical case where a taxing statute does not provide any machinery of

assessment.â€​

(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.â€​ (at paras 15-21)’

to hold that the jurisdiction enabled by articulation of legislative intent specifically to tax ‘service component’ - not deemed as ‘sale’ - in

‘works contract’ could not be appropriated by applying a non-specific description in Finance Act, 1994 to transactions that were taxed entirely

as ‘sale’, with the finding that

‘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 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.

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.’

In view of the facts and circumstances in the present dispute and the decision of the Tribunal supra, we set aside the impugned order and allow the

appeal.

(Pronounced in open court)