Introduction
The Constitution of India governs the distribution and division of legislative powers and limitations of the Union and the State Legislatures by enumerating the subjects on which laws can be enacted by them, by way of Articles 245 and 246 therein, which is the principle of Indian federalism, albeit not in a classical notion, and is one of the basic features of the Constitution.
With respect to powers of taxation as well, the powers of the States and Union are clearly demarcated under Article 246 of the Constitution read with 7th Schedule to the Constitution, in which List I and List IIenlist various subject matters under which Parliament and the State legislatures can respectively levy taxes. Despite such demarcation of the legislative powers, there are instances where a legislation dealing with a subject in one list, incidentally touches upon a subject in another list, in which case, the doctrine of pith and substance is employed to determine its true character and examine the legislative competence.
Issues before Supreme Court
In a recent case,[1] Hon’ble Supreme Court, while disposing of a batch of appeals by the Revenue and the assesses, considered the constitutional validity of simultaneous/dual levy of entertainment tax levied under the respective State Acts (under Entry 62 of List II)[2] and the service tax levied under the Finance Act, 1994 (under residuary entry (Entry 97) of List I)[3] on the activity of broadcasting.
The assesses were the Direct-to-Home operators (“DTH Operators”) and had challenged the validity of Section 65(105) (zk) read with Section 65(15) of Finance Act, 1994 which imposed service tax on the broadcasting activity provided by DTH operators to its subscribers, with an alternative prayer to declare that the activity of broadcasting does not constitute entertainment and any legislation by the States on the said activity lacks legislative competence. Some of the assesses had also challenged the provisions of State enactments levying entertainment tax contending that the entire activity is one single operation and hence, only service tax can be levied.
Before the Supreme Court, the assesses primarily contended that the activity of broadcasting, in pith and substance, is a subject matter of Parliamentary enactment as Entry 31 of List I refers to broadcasting and other forms of communication and States do not have legislative competence to tax the same. Once an activity is liable to service tax under the Union List, the very same activity cannot be taxed under any other entry in the State List, without identifying the taxable event in clear terms.[4] Further, juxtaposition of the term ‘entertainments’ beside ‘amusements, betting and gambling’ in Entry 62 of State List signifies that the intent is to levy tax on establishments providing entertainment activities. Even assuming that the aspect theory is held to be applicable, the State enactments are taxing the service portion itself as entire value is being taxed, without any machinery provisions or measure of tax for computing the value attributable to the entertainment, which is impermissible.[5]
The States, on the other hand, contended that broadcasting here is merely a means to deriving of entertainment and thus, the States are well within their power to levy tax as the activity being taxed has a direct and proximate nexus with the provision of entertainment and mere fact of levy of service tax would not denude the States of its power to tax. If a tax being levied is on distinct aspects of one single transaction, the powers of the Parliament and the State Legislatures would continue to apply in their respective fields without any overlap. Responding to the argument that Entry 31 of the Union List refers to broadcasting, it was pointed out that regulatory entry cannot be construed as covering the facets of taxation and both are distinct.[6] Taxation is considered as a distinct subject for the purposes of legislative competence and mere power to legislate does not carry with it the power to tax, as there cannot be any power to tax by implication.
Observations by the Court
Unconvinced with the submissions of the assesses, the Supreme Court upheld the simultaneous levy of service tax by the Parliament and entertainment tax by the State legislatures, thus, paving the way for recovery of pending dues along with consequential action. On interpretation of legislative entries, the Supreme Court reiterated the established principle that the Lists in 7th Schedule should not be viewed in a narrow or myopic manner but have to be given widest interpretation,[7] especially when a provision is assailed and attempt must be made to harmonize or reconcile them. In case of apparent overlapping, which is absent in the present case, doctrine of pith and substance is to be applied to find out true character and mere fact that a legislation incidentally touches upon the subject matter forming part of another list would not make it invalid
The Supreme Court emphasized the distinction in the application of aspect theory in Canada vis-à-vis India, and noted that in Indian context, the aspect theory is resorted to for saving a provision of taxation rather than determining the legislative competence. It is relevant to determine the applicability of a taxing statute on the activity it seeks to tax, which is a factual enquiry and there will not be any clash if that aspect is relatable to the legislation under a specific entry.
Negating the contention of the assesses that they are only relaying signals and are not concerned with entertainment as entertainment cannot happen without transmission of signals,[8] the Court held that simultaneous levy of service tax and entertainment tax would be permissible, as there is no overlapping and activity in the present case involves two aspects, viz. relaying of signals from satellites of broadcasters by DTH operators (leviable to service tax under broadcasting) and object of such relaying which is delivering of content to the subscribers resulting in their entertainment, which, with the advancement of technology can be provided or received by several modes. Discussing the scope of ‘luxury’, the Court noted it is anything which conduces enjoyment over and above the necessities of life and is intrinsically capable of fostering a sense of luxury and the person consuming the same experiences gratification.
Implications
There is no ambiguity on the proposition that different aspects of a transaction can be taxed through separate provisions by the Parliament and State Legislatures.[9] However, there is certain lack of clarity as to whether both the levies can be computed on the same value, which was one of the issues before the Supreme Court and appears to have not been dealt with despite specific submissions by the assesses.
The Constitution bench of the Supreme Court has held the that a single price can be the basis for two simultaneous levies.[10] It has also been held in several judgments that it is the levy and not the measure of tax which defines the nature of the tax.[11] In other words, the measure adopted for determining the value is not to be confused with the nature of tax, though there must be some nexus. Although the measure may be a relevant consideration, it is not a conclusive factor, and it is improper to take recourse to measure for defining the character of levy.[12] A broader standard of reference may be adopted for determining the measure of levy and any standard which maintains a nexus with the essential character of the levy would be regarded as a valid basis for assessing its measure. [13]
Quite distinct from the above line of reasoning, a three-judge bench of Supreme Court[14] has held that the State Legislature cannot entrench upon the Union List and tax services by including the cost of such service in the value of the goods and vice-versa, and the aspect theory does not permit double taxation of the same amount or value. In other words, aspect theory does not enable the value of the services to be included in the sale of goods or the price of goods in the value of the service. Relying upon the judgment in BSNL (Supra), it was held by the Supreme Court that the value of the goods which can constitute the measure for the levy has to be the value of goods at the time of incorporation of the goods in works contract even though the property passes after incorporation of goods.[15]
Given that the States were primarily relying on the aspect theory to justify the levy of entertainment tax, it could also be argued that the service aspect of the transaction cannot be included for determining the value on which entertainment tax is to be levied. The arguments by the assesses on this point have not been addressed by the Supreme Court. This crucial aspect of the aspect theory needs to be examined and thus, another leg of the battle remains to be fought by the assesses and it is far from over, as the valuation issues remain in limbo.
Pertinently, with the introduction of GST, majority of taxes levied by the States such as VAT, Luxury Tax, Entry Tax, taxes on betting and gambling etc. were subsumed into GST. However, taxes on entertainments have not been subsumed, and instead of States, it is nowthe local bodies which are empowered to levy the same.[16] This also may lead to a regulatory conundrum for the taxpayers given the broad view endorsed by the Supreme Court on the scope of term ‘entertainments’, especially when the value which could be the basis for the levy remains ambiguous.
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[1] State of Kerala & Anr. Vs. Asianet Satellite Communications Ltd. & Ors., 2025 INSC 757.
[2] Entry 62, List II, prior to its amendment by Constitution (One Hundred and First Amendment) Act, 2016 read as- “Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling”.
[3] Entry 97, List I reads as-Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.
[4] Govind Saran Ganga Saran vs. CST, 1985 Supp SCC 205.
[5] Commissioner of Income tax vs. BC Srinivasa Shetty-(1981) 2 SCC 460.
[6] State of Karnataka vs. State of Meghalaya, 2023(4) SCC 416.
[7] Navinchandra Mafatlal vs. CIT, Bombay, (1954) 3 SCC 623.
[8] State of West Bengal vs. Purvi Communication Pvt. Ltd.(2005) 3 SCC 711
[9] Federation of Hotel and Restaurant Association vs. Union of India, 1989 (3) SCC 634; AIFTP vs. Union of India, 2007(7) SCC 527.
[10] McDowell and Company Ltd. v. Commercial Tax Officer 1985 (3) SCC 230
[11] CCE, Indore vs. Grasim Industries Ltd., 2018(360) ETL 769 (SC); Tamil Nadu Kalyana Mandapam Association vs. Union of India, 2006(3) STR 260 (SC);
[12] RR Engineering Co. vs. ZIla Parishad Bareily & Anr.-(1980) 3 SCR 1
[13] UOI vs. Bombay Tyre International Ltd., 1983 (14) ELT 1896 (SC)
[14] Bharat Sanchar Nigam Ltd. vs. Union of India 2006 (3) SCC 1
[15] L&T Ltd. vs. State of Karnataka, 2014(34) STR 481(SC)
[16] Post 2016 amendment, Entry 62 of List II reads as-“Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council.”