Retrospective amendments to service tax

Some drastic retrospective amendments have been proposed in Finance Bill 2010 in respect of service tax. Issues arising out of the retrospective amendment are discussed in this Article.

1. Introduction

Various amendments have been proposed in Finance Bill 2010 with retrospective effect. Major among them are as follows –

The two amendments relating to Notification No. 5/2006-CE and rule 6 are very fair and are in favour of assessees. Such amendments are very rarely made with retrospective effect. Congratulations to Government for these amendments.

Provision for condonation of delay by High court is made to cover up lethargy of department in filing appeal.

Retrospective amendment to definition of renting of immovable property was highly expected and is not surprising

However, retrospective amendment to definition of ‘commercial training and coaching’ and imposition of customs duty on electricity supplied by SEZ is drastic and highly unfair.

2. Powers of Parliament to amend law with retrospective effect

There is no doubt that Parliament has plenary powers to amend any law even with retrospective effect. There is no restriction on Legislature passing law with retrospective effect - UOI v. Parameswaran Match Works - AIR 1974 SC 2349 = (1975) 1 SCC 305 * D G Gouse v. State of Kerala - AIR 1980 SC 271 = (1980) 2 SCC 410 (SC 5 member bench) * Jaora Sugar Mills v. State of MP - AIR 1966 SC 416 * ITW Signode India v. CCE 2003 (158) ELT 403 = (2004) 3 SCC 48 (SC 3 member bench).

2.1 Retrospective amendment can take away vested rights

In J K Cotton Spinning Mills v. UOI - (1988) 68 STC 421 (SC) = 32 ELT 234 = AIR 1987 SC 191 = (1987) Supp 1 SCC 350 (SC 3 member bench), UOI v. Tushar Ranjan Mohanty  1995 AIR SCW 1758 = (1994) 5 SCC 450, Rai Ramakrishna v. State of Bihar  50 ITR 71 = AIR 1963 SC 1667 = 1964(1) SCR 897 (Constitution Bench), it was held that retrospective amendment cannot take away vested rights and the amendment must be reasonable. Retrospective amendment cannot be arbitrary or discriminatory [It may be noted that arbitrary action is held as violative of Article 14 of Constitution].

In Ex Capt K C Arora v. State of Haryana (1984) 3 SCC 281 = AIR 1987 SC 1858, it was observed - 'We are concerned with today's rights and not yesterday's. A legislature cannot legislate today with reference to a situation obtained 20 years ago and ignore the march of events and the constitutional rights accrued in the course of the 20 years. That would be most arbitrary, unreasonable and a negation of history’.

However, in State of Tamilnadu v. Arooran Sugars Ltd. 1997 AIR SCW 1188 = (1997) 1 SCC 326 = AIR 1997 SC 1815 (SC 5 member Constitution Bench), it was observed (indeed very rightly) that in retrospective amendment, rights of some are bound to be affected one way or the other. If that stand is taken (that vested rights cannot be affected), then the necessary corollary shall be that legislature has no powers to legislate retrospectively. Excessive retrospectively may be violative of Article 14 of Constitution. [This judgment (indirectly) holds that vested rights can be affected. Only in special cases, Courts will hold the retrospective amendment as violative of Article 14 of Constitution.] – quoted in Virendra Singh Hooda v. State of Haryana AIR 2005 SC 137 = (2004) 12 SCC 588 = 2004 AIR SCW 6386, where it was held that vested rights can be taken away by Legislature.

2.2 Validating law can be retrospective

Some times, a provision is declared invalid by court. In such case, Parliament can amend the Act with retrospective effect making its intention clear. If an interpretation made by Court of Law is not what Parliament had in mind, Legislature can always amend the law - even with retrospective effect. The reason is simple - Legislature in effect says that ‘the interpretation placed by Court is not what we wanted to legislate while passing the law. Hence, let us clarify what we have in mind’. This is true in respect of Parliament as well as State legislature.

This is mainly to validate acts which were already under a provision of Statute which was subsequently declared invalid. The lacuna in the Statute pointed out by Court (due to which the provision in Statute is declared illegal or invalid by Court) is removed by legislature with retrospective effect. This has been held as valid exercise of powers of Parliament. - Shri Prithvi Cotton Mills v. Broach Borough Municipality AIR 1970 SC 192 = 1970 (1) SCR 388 = (1971) 79 ITR 136 = 123 ELT 3 = (1969) 2 SCC 383 (SC - 5 member constitution bench). * Hotel Balaji v. State of AP   88 STC 98 = AIR 1993 SC 1048 = 1993 AIR SCW 3 (3 member bench) - part II of the order * Polaki Motors v. State of Orissa - (1993) 88 STC 259 (SC). * Asstt. Commissioner v. Buckingham and Carnatic Co. Ltd. 75 ITR 603 (SC) = AIR 1970 SC 169 = (1969) 2 SCC 55 * Goodricke Group Ltd. v. State of WB - 1995 Supp (1) SCC 707 = 1995 AIR SCW 123 =  98 STC 32 (SC 3 member) * State of Tamilnadu v. Arooran Sugars Ltd. 1997 AIR SCW 1188 = (1997) 1 SCC 326 = AIR 1997 SC 1815 (SC 5 member Constitution bench) * A Manjula Bhashani v. MD, AP Women’s Cooperative Finance Corpn Ltd. (2009) 8 SCC 431.

In Virendra Singh Hooda v. State of Haryana AIR 2005 SC 137 = (2004) 12 SCC 588 = 2004 AIR SCW 6386, it was held as follows – (a) If legislature has the power over subject matter and competence to make a valid law, it can at any time make such a valid law and make it retrospectively so as to bind even past transactions. Validity of validating law depends upon whether the Legislature possesses the competence which it claims over the subject matter and whether in making the validation it removes the defect which the Courts had found in the existing law. (b) Legislature cannot directly overrule, reverse or override a judicial decision by a bare declaration. It cannot set aside an individual decision (c) There is distinction between encroachment on the judicial power and nullification of effect of a judicial decision (d) Vested rights can be taken away by Legislature by retrospective amendment.

In Empire Industries Ltd. v. UOI - (1987) 64 STC 42 (SC) = (1985) 3 SCC 314 = AIR 1986 SC 662 = 20 ELT 179 = 162 ITR 846 = 1985 Supp (1) SCR 292, it was observed that retrospective effect to a taxing legislation can be given. Such legislation is not per se unreasonable. Giving retrospective effect to a provision by removing the drafting mistake of legislation is not an unreasonable restriction on the right to carry on business - similar view in Ujagar Prints v. UOI - (1989) 74 STC 401 (SC) = AIR 1989 SC 516 = (1989) 3 SCC 488 = 179 ITR 317 = AIR 1989 SC 516 = 38 ELT 535 (SC 5 member bench) * RC Tobacco P Ltd. v. UOI (2005) 7 SCC 725 =  188 ELT 129 (SC).

2.3 Retrospective amendment valid even if tax not recoverable from customer

Merely the fact that a dealer is not in a position to pass on the tax burden to other does not affect the competence of Legislature to impose tax retrospectively, as it is a legislative policy - * Krishnamurthi and Co. v. State of Madras - (1973) 31 STC 190 (SC) = (1973) 2 SCR 54 = AIR 1972 SC 2455 * J K Jute Mills Co. Ltd. v. State of UP - (1961) 12 STC 429 (SC) = AIR 1961 SC 1534. similar views in S Kodar v. State of Kerala - (1974) 34 STC 73 (SC) = (1975) 1 SCR 121 = AIR 1974 SC 2272 * Tata Iron & Steel v. State of Bihar (1958) 9 STC 267 (SC) = AIR 1958 SC 452 * Premier Enterprises v. CTO 2002 AIR SCW 2739 = 121 STC 43 = (2001) 9 SCC 753 * Kanthi Enterprises v. State of Karnataka 2002 AIR SCW 3738 = 128 STC 182 (SC).

2.4 Retrospective amendment cannot be arbitrary and irrational

A law cannot be held to be unreasonable merely because it operates retrospectively. The un-reasonability must be in some other additional factors. The retrospective operation of a fiscal statute would have to be found to be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate constitutional norms. Court can strike down a taxing statute only if it is plainly discriminatory or it is confiscatory - RC Tobacco P Ltd. v. UOI (2005) 7 SCC 725 =  188 ELT 129 (SC).

In Tata Motors v. State of Maharashtra 2004 AIR SCW 3543 = (2004) 5 SCC 783 = 136 STC 1 (SC), a retrospective amendment and validation was held unreasonable and arbitrary, as it was for withdrawal of benefit only for a particular period, without giving any reason.

In Khyerbari Tea Co. Ltd. v. State of Assam - AIR 1964 SC 925 = 1964(5) SCR 975, it was held that legislature can validate a law with retrospective effect, as long as it is not confiscatory.

3 Application of the principle in case of commercial training and coaching service

Service tax was imposed on commercial training and coaching service w.e.f. 1-7-2003.

As per section 65(105)(zzc) of Finance Act, 1994, any service provided or to be provided to any person, by a commercial training or coaching center in relation to commercial training or coaching, is a ‘taxable service’.

 ‘Commercial training or coaching centre’ means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include pre-school coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force [section 65(27) of Finance Act, 1994].

Meaning of commercial - ‘Commercial’ means As per Concise Oxford Dictionary, ‘Commercial’ means ‘of, engaged in, or connected with, commerce’ or ‘having profit as a primary aim rather than artistic etc. value’.

‘Commercial activity’ must imply some investment of capital and the activity must run the risk of profit or loss relating to or connected with trade and traffic or commerce in general - Sakharam Narayan Kherdekar v. City of Nagpur Corporation AIR 1964 Bom 200.

In CIT v. Thanthi Trust (2001) 115 Taxman 126 (SC), it was held that trust can do business when income is used for the purpose of attainment of objectives of the trust.

In Secretary, Ministry of Information and Broadcasting v. Cricket Association of Bengal (1995) 2 SCC 161, it was held that an organisation like BCCI which is devoted to promotion of sports is not a ‘commercial organisation’.

‘Commercial concern’ means an organisation whose primary aim is to earn profit - Institute of Banking Personnel Selection v. CST (2007) 10 STT 489  (CESTAT).

3.1 Coaching should be with profit motive

Coaching or training should be. with profit motive.

In Ahmedabad Management Association v. CST (2009) 19 STT 1 (CESTAT), it was held that a society registered under Societies Act is not liable as it is not ‘commercial’ coaching institute.

A trust established for charitable purpose is not commercial coaching institute – Chandraprasad Desai Memorial Foundation v. CST (2009) 23 STT 78 (CESTAT).

In Great Lakes Institute of Management v. CST (2008) 12 STT 306 (CESTAT), it was prima facie held that a non-profit company incorporated under section 25 of Companies Act is not a undertaking any ‘commercial’ activity – confirmed in Great Lakes Institute of Management v. CST (2008) 12 STT 296 (CESTAT) – followed in CCE v. Karl Kubel Institute for Development Education (2009) 22 STT 513 (CESTAT SMB) * CCE v. Badruka Institute of Foreign Trade (2010) 24 STT 575 (CESTAT).

In ICFAI v. CCE (2008) 17 STT 501 (CESTAT), it has been held that a society registered under Societies Act for educational purposes, exempted under Income tax and conferring degrees recognised by Universities and Government bodies is not a commercial training or coaching centre. So long as  the institutions are registered for educational purposes, they cannot be brought within the ambit of commercial or coaching centre. – same view in Magnus Society v. CCE (2009) 18 STT 193 (CESTAT) * Centre for Development of Advanced Computing v. CCE (2009) 18 STT 361 (CESTAT) * Indian School of Business v. CCE (2009) 22 STT 189 (CESTAT).

In Administrative Staff College of India v. CCE (2009) 18 STT 78 (CESTAT) also, it was held that an Institution registered under Societies Registration Act and exempt under income tax cannot be considered as commercial concern. Where assessee is conducting various programmes for people who were already in service in a very professional manner, in all fields of administration and management, service tax is not leviable under category of ‘commercial coaching or training’.

CBE&C circular No. 86/4/1006-ST dated 1-11-2006 clarifies that IIT/IIM is not a ‘commercial concern’. This principle should apply to all educational institutes run by trusts/societies which do not distribute profits to its members.

3.2 Proposed retrospective amendment

An explanation is being added in the definition of ‘Commercial Training or Coaching Service’ [section 65 (105) (zzc)] to clarify that the term ‘commercial’ appearing in the relevant definitions, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive. This change is being given retrospective effect from 01-07-2003.

3.3 Is the retrospective amendment reasonable?

The basis issue is whether the retrospective amendment is reasonable? Is it that Legislature had different intention when the provision was made but it was interpreted differently by Tribunal/Court?

It is difficult to say that Parliament had some different intention when the word ‘commercial’ was used since the meaning of the word is well settled and was known even at the time of making the taxing provision in year 2003.

In my view, the retrospective amendment is not merely to clarify the intention of legislature but is to put a completely artificial meaning to the commonly understood understanding of the term ‘commercial’.

The view that commercial means with profit motive is being taken by Tribunal consistently at least since 2007 and obviously assessees had bona fide belief in those decisions and arranged their business affairs accordingly. If Government felt that the view does not reflect the intention of legislature, why it waited for three long years?

It will be highly unjust to burden the assessees with such heavy tax liability when they have no means now to recover the same from students. Retrospective amendment is certainly oppressive in this case.

3.4 Demand raised now will be mostly time barred

In any case, the retrospective amendment will apply only to cases pending before adjudicating or appellate authority. If no show cause notices were issued, the demands beyond period of one year will be time barred as assessee can claim bona fide belief.

In J K Cotton Spinning Mills v. UOI (1988) 68 STC 421 (SC) = 32 ELT 234 = AIR 1987 SC 191 = (1987) Supp 1 SCC 350 (SC 3 member bench), (a Central Excise Case), it was held that even if Act is amended retrospectively, demand of duty cannot be raised beyond the period specified in Statute.

No penalty if Act amended with retrospective effect – If an Act is amended with retrospective effect, penalty cannot be imposed for past period – CCE v. Rama Vision Ltd. (2006) 3 STT 53 (SC 3 member bench).

3.5 Distinction between coaching, training and education

Education is different from training or coaching. The word ‘education’ is much broader than ‘train’ or ‘coach’. ‘Train’ means train in a particular skill like computer repairs, machine operation etc. ‘Coach’ means special or personal tuition. Giving education in a particular subject is not ‘training’ or ‘coaching’.

Train - As per Concise Oxford Dictionary, ‘train’ means to teach (a person, animal, oneself etc.) a specified skill especially by practice. As per Collins English Gem Dictionary, ‘train’ means cause or grow in particular way; educate, instruct, exercise.

Coach - As per Concise Oxford Dictionary, ‘coach’ means an instructor trainer in sport, a private tutor. As per Collins English Gem Dictionary, ‘coach’ means tutor, instructor.

Educate - As per Concise Oxford Dictionary, ‘educate’ means give an intellectual, moral and social instruction to (a pupil, especially a child) as a formal and prolonged process. If followed by in or to plus infinitive, it means train or instruct for a particular purpose. ‘Education’ means the act or process of educating or being educated, systematic instruction. As per Collins English Gem Dictionary, ‘educate’ means bring up, train mentally and morally; provide schooling for.

Education - 1. the process of teaching or learning 2. the theory and practice of teaching 3. training in a particular subject [Compact Oxford Reference Dictionary].

Education denotes training of mind, in contradistinction to training in manual skills – Barry v. Hughes (1973) 1 All ER 537 (Ch D).

The expression ‘education’ occurring in various Articles of the Constitution of India means and includes education at all levels, from primary school level upto postgraduate level and includes professional education - TMA Pai Foundation v. State of Karnataka 2002 AIR SCW 4957 = AIR 2003 SC 355 = (2002) 8 SCC 481 (SC 11 member Constitution Bench).

Education is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person had received. Education is the process of training and developing the knowledge, skill, mind and character of students by formal schooling – Loka Shikshana Trust v. CIT AIR 1976 SC 10.

In ICFAI v. CCE (2008) 17 STT 501 (CESTAT), it is observed that training means imparting skill or knowledge in a particular field. To train somebody in speaking English, to train somebody in solving mathematical problems, to train somebody is basics of computer. These are all included in training. Education’ is overall development of body, mind, intellect, but training and coaching are narrow in scope – same view in Magnus Society v. CCE (2009) 18 STT 193 (CESTAT).

Education is a process, which is actually the development of human personality. Meaning of coaching is rather narrow. All institutions imparting knowledge and conducting courses at fairly high level, such as post graduate level, cannot be just termed as ‘commercial training or coaching center. It is immaterial whether the degrees offered by them are recognised by law or not  - Indian School of Business v. CCE (2009) 22 STT 189 (CESTAT).

Imparting specialised education is not coaching - CCE v. Badruka Institute of Foreign Trade (2010) 24 STT 575 (CESTAT).

Thus, if an Institute is imparting ‘education’ (and not ‘coaching’ or ‘training’) it will be outside the scope of tax net even after the proposed amendment.

4. Renting of immovable property

Service tax on renting of immovable property was imposed w.e.f. 1-6-2007.

As per section 65(105)(zzzz) of Finance Act, 1994, any service provided or to be provided; to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce is a ‘taxable service’.

The intention to tax renting itself was clear by the circulars issued after imposition of tax.

However, in Home Solution Retail India Ltd. v. UOI (2009) 20 STT 129 (Del HC DB), it was observed, ‘Service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz)’.

In short, as per Hon. Delhi High Court, service in relation to renting of immovable property’ is taxable (e.g. air conditioning of immovable property given on rent), but ‘renting of immovable property’ is not a taxable service.

There was no decision on constitutional validity of the provision by Delhi High Court.

On the basis of the judgment of Delhi High Court, many tenants had stopped paying service tax due to which landlords had come in a very difficult situation. Government lost no time in filing appeal, but decision of Supreme Court was not forthcoming.

Government made it clear its view that as per their interpretation of legislative intention, service tax is payable on renting of immovable property, by issuing Instruction No. 336/10/2009-TRU dated 15-7-2009 [23 STT 5 (St)] [It is different matter that Government got a rap from High Court on this circular in SSIPL Retail v. UOI (2010) 24 STT 57b (Del HC DB) and Government has agreed to issue revised instructions superceding earlier instructions].

Now, an amendment is proposed to provide explicitly that the activity of ‘renting’ itself is a taxable service. This change is being given retrospective effect from 1-6-2007.

Thus, it is clear that Government took action as early as possible. Really, Government had no option but to make amendment with retrospective effect. Indeed, Government cannot be faulted on this issue.

Further, the proposed amendment is not to put any artificial meaning of the definition but only to clarify the intention of Legislature. In my view, retrospective amendment is reasonable.

It is true that Delhi High court and Andhra Pradesh High Court have granted stay to the retrospective amendment. We have to see final result, but in my view, finally, the retrospective amendment is likely to be held as valid. Hence, it is advisable to pay service tax.

Demand beyond one year is time barred – If show cause notice was not issued so far, demand beyond one year will be time barred if assessee can establish bona fide belief.

5. Electricity supplied by SEZ

Customs duty @ 16% has been imposed on SEZ on electricity supplied to DTA or non-processing areas of SEZ with retrospective effect from 26-6-2009.

I am unable to find a clue as to why the date of 26-6-2009 has been chosen to make the amendment retrospective. In fact, there is no justification to impose such heavy duty even with prospective effect as in case of generation of electricity, the SEZ unit hardly has any cost advantage over DTA unit, certainly not to the extent of 16%!

Many of proposed power projects proposed in SEZ have come in jeopardy due to this decision. This can hardly be justified when India is facing serious power shortages and all efforts are needed to augment power generation capacity in India ( I wonder if someone’s personal ego is involved in this irrational decision).

6. Conclusion

My conclusions are as follows –