The Hindu Business Line : Melee in the <i>mandap</i>

SERVICE tax was first introduced in India by the Finance Act, 1994. Initially levied on a few items, the list has now grown to 58. The Government naturally feels that this a significant way to mop up revenue. Service tax is levied by the Centre and administered by the Central Board of Excise and Customs. Like any indirect tax legislation, the Service Tax Act is administered through various notifications/notices issued from time to time.

And like any fledgling legislation, the service tax law needs a settling-in period. One of the contentious issues has been the constitutional validity of service tax on mandap keepers. This matter has now been settled by the Supreme Court in the Tamil Nadu Mandap Keepers Assn vs Union of India and Others (2004 265 ITR 9).

Facts

The Association of Kalyana Mandapams challenged the validity of service tax on a writ petition before the Madras High Court. The writ was filed after representations were made to the Finance Ministry in 1997, highlighting the various problems and complications that would arise as a result of the law and notifications on the subject.

The Association requested the authorities to desist from including mandap keepers from the purview of service tax. There was no reply to the representations and, therefore, the appellant filed a writ petition before the Madras High Court in 1998. The Division Bench of the High Court dismissed the batch of writ petitions dated April 30, 2001, and held that service tax was leviable on mandap keepers. The matter then came up before the Supreme Court.

Issues

The crux of the issue lay in the definitions of mandap in Section 65 (19) of the Act and `mandap keeper' in Section 65 (20) of the Act.

The argument advanced by the petitioner was that the service tax is levied on the composite element of service rendered by the mandap keepers, which includes a part relating to sale, and effectively works out to 60 per cent of the gross amount charged by the mandap keeper from their clients, particularly when they are also providing catering service.

It was also brought to the attention of the court that the service component in the amount charged by the mandap keepers is a small percentage of the total amount and cannot be segregated. The constitution has clearly laid down that provision of food/articles for human consumption constitutes sale of goods and cannot be one of rendering service.

This was the petitioner's plank of argument, which in a nutshell meant "what constitutes a sale can never be subject to service tax."

Supreme Court decision

The Supreme Court upheld the constitutional validity of service tax on mandap keepers and held that it cannot be struck down on the ground that it does not conform to a common understanding of the word `service' so long as it does not transgress any specific restriction in the Constitution.

While this decision of the apex court settles the matter as far as the mandap keepers are concerned, it opens up new vistas of interpretation for the levy of service tax on other types of transactions, notably hire purchase transactions. The key observations of the judgment viz., the character of service tax in a transaction involving the mandap keepers is not in the nature of sale of hire purchase of goods is an observation worth exploring when the hire purchase cases come up before the various courts, including the apex court.

While the feature of overlapping of legislation is not new to the Indian taxation system, wherever such overlapping leads to patently unjust and absurd results, courts may have to intervene and render justice. When a transaction is subject to sales tax and incidental levies, such as turnover tax, additional sales tax, and so on, there appears no justification for subjecting the same to service tax.

Do hire purchase companies see light at the end of the tunnel by reading some of the observations in this judgment?

(The author is a Chennai-based chartered accountant)