State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

p. 2376

10.8.1 This Court went into the different meanings of ‘entertainment’ to arrive at a conclusion that it has been used in a very wide sense to include within its ambit, entertainment of any kind including one which may be purely educative. It rejected the contention of the petitioner therein that video games do not fall into the definition as no admission fee was charged from the viewers. It held that (at p.817), “…when a number of people without any admission fee enter a hall for entertainment and enjoy the games it becomes a public show and the hall where the video is played becomes a public hall and· amounts therefore to a public exhibition which is squarely covered by the first limb (exhibitional) of the definition of entertainment in Sub-section 3 extracted above.” (emphasis supplied)

10.8.2 Finally, the Court affirmed the views of the Allahabad High Court in Gopal Krishna Agarwal vs. State of Uttar Pradesh, (1982) All. L.J. 607 which held that entertainment tax was leviable on video games. It approved the High Court’s reasoning that, “With the advance of civilization ·and scientific developments new forms of entertainment have come into existence. Video Games are probably the latest additions to the means of entertainment. These games require skill and precision as so many other games do. They are a source of amusement and enjoyment to those who participate in the games. Others who stand by and watch also derive some pleasure and amusement though not to the same degree. Admission to the premises where the Video Machines are installed

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

may be free but payment is admittedly made if one wants to play the game. The money charged for use of the Video Machine is an admission to entertainment and the payment made by the person who uses the Machine is the payment for admission. In any case it is a payment for admission.” Section 3 of the 1937 Act, i.e. the charging section imposed tax on all payment for admission to any entertainment (entertainment tax). The question was, whether or not the aforesaid show would fall within the four corners of the expression “entertainment” which was defined to include any exhibitional, performance, amusement, game or sport to which persons are admitted for payment under the said statute. Having regard to the aforesaid definition and bearing in mind the varying definitions of the expression entertainment, it was observed that Section 2(3) of the said Act required certain tests to be applied in order to ascertain whether the activity fell within the aforesaid section. It was in the context of the definition of the expression entertainment in the Act under consideration therein that this Court laid down the test. Ultimately, this Court observed that the video show in the instant case was exigible to tax under Section 3 of the Act considered therein and the Writ Petitions filed were dismissed. This decision pertains to the period prior to the ushering of television in the country. 10.8.3 On a reading of this judgment, it becomes clear that the interpretation of the word ‘entertainments’ includes newer forms of entertainment such as video games, while at the same time it viewed entertainment to have a public character. 10.9 Let us now consider Purvi Communication. In this case, the respondent therein was carrying on business as a multi-system operator (MSO) and engaged in receiving and providing TV

p. 2378

signals to individual cable operators of various localities. Communication signals known as TV signals broadcasted by various satellite channels were received and distributed to sub-cable operators. The process involved in the business consisted of establishment of the state-of-the-art control rooms and spreading the cable networks. The said network signals were being given to various sub-cable operators with whom the respondents had franchise agreement. According to the respondents therein, the object of the MSOs was to capture signals from various satellites and to put all of them in proper format/frequencies so that all those signals can travel together in cables without encroaching upon and interfering with other signals for the reception and distribution by the so-called cable operators. The signals are transmitted through the satellites by the various broadcasters from their earth up-linking stations in various parts of the world. Respondent No.1 therein entered into franchise agreement with the individual cable operator of various localities and on the basis of the said agreement, it transmitted the said signals to the said individual sub-cable operators against a price. The individual sub-cable operators on the basis of the monthly subscription provided the said TV signals to the individual subscribers of the locality. 10.9.1 The State of West Bengal sought to impose a tax on MSOs engaged in receiving and providing television signals to individual cable operators of various localities by amending the West Bengal Entertainment-cum-Amusement Tax Act, 1982 (“the 1982 Act”). Some of the relevant definitions under the Act were with regard to the expressions “cable operators”, “sub-cable operators”, “cable service”, “cable television network”, “subscriber” and “gross receipt”. The said Act was amended in 1998 by omitting sub-section (4) of Section 4A and inserting a new sub-section (4a) which provided that, “(4a) Where any owner, or any person for the time being in possession, of any electrical, electronic or mechanical device,

p. 2379

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

is a cable operator and receives through such device the signal of any performance, film or any other programme telecast, and thereafter such owner or person, against payment received or receivable,- i. exhibits such performance, film or programme through cable television network directly to customers, or ii. transmits such signal to a sub- cable operator, who in turn provides cable service for exhibition of such performance, film or programme to the customers, such owner or person shall be liable to pay tax from the month in which he exhibits such performance, film or programme or transmits such signal to a sub-cable operator on the basis of his monthly gross receipt at such rate, not exceeding twenty five per centum of the monthly gross receipt, as may be specified by the State Government by notification published in the Official Gazette.” 10.9.2 Aggrieved by the imposition of entertainment tax and the demand notices issued, the respondents therein challenged the vires of the 1998 Amendment made to the 1982 Act as well as the demand notices before the Taxation Tribunal and being aggrieved by its decision approached the High Court under Article 226 of the Constitution. 10.9.3 It was contended on behalf of the sub-cable operators that they were not providing any entertainment within the meaning of Entry 62 – List II as providing the cable link up to the viewers was the only role. That the sub-cable operator was merely transmitting the signals received by the cable operator which were in the form of audio-video signal. Per contra, the State of West Bengal in the said case submitted that

p. 2380

the cable operators were engaged in receiving and providing TV signals to individual sub-cable operators of various localities and such cable operators on their part transmit the signals to their respective subscribers, who are the actual consumers who get the benefit of the entertainment from the signals. That the signals received by the sub-cable operators are utilized for providing information and entertainment to their customers. That respondent No.1 before this Court was a cable operator and the MSOs like the respondent company were not only providing the input to the localized cable operators in their business of providing cable TV connections and transmission or programme through cables but the MSOs were also concerned with value added services like internet, telephone and transmission of data. It was argued that the respondent therein did not carry on any activity which constituted entertainment or amusement. That the MSOs were different from sub-cable operators. It was contended that a cable operator in a locality who is actually providing the entertainment to his subscribers may be liable to pay tax but those who function at an intermediary stage cannot be held liable to pay the said tax. 10.9.4 It was further submitted that the taxable event, namely, the act or activity of entertainment must have a direct and proximate connection with the assessee on which it falls and must itself constitute entertainment. That unless an activity in question qualifies as entertainment itself, the taxable event of entertainment cannot arise. If the activity in question is not the taxable event (entertainment), the levy cannot be sustained. 10.9.5 The High Court of Calcutta allowed the writ petition filed by the MSO and declared section 4A(4a) of the 1982 Act as ultra vires the Constitution. 10.9.6 On appeal by the State, the MSO submitted that they merely capture signals from various satellites and put all of them in proper format/frequencies

p. 2381

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

for the reception and distribution by the sub-cable operators. However, the Court allowed the appeal by the State. While considering Section 4-A (4-a) of the State Act, it was observed that the purpose of the said provision was to levy and collection of the tax from any person who provides cable service directly to consumers or transmits to a sub-cable operators through a cable television network and otherwise controls or is responsible for the management and operation of a cable television network and such person has been defined as cable operator being a taxable person exclusively for the purpose of levy and collection of entertainment tax. Only when a cable operator so defined receives through any electrical, electronic and mechanical device, the signal of any performance, film or any other programme telecast and provides cable service directly to consumers or transmits signals to a sub-cable operator through a cable television network and otherwise controls or is responsible for the management and operation of cable television network, he would be liable. Therefore, a cable operator is the source of entertainment to the individual subscribers because, it is he who receives the signal of performance, film, and any programme which is transmitted or given to a large number of sub-cable operators (although they call them as cable operator). The viewers enjoy, or are entertained by such performance, film, or programme because of receiving and transmitting video or audio-visual signals through coaxial cable or any other device by the respondents. No entertainment can be presented to the viewers unless a cable operator transmits the video and audio signals to a sub-cable operator for instantaneous presentation of any performance, film or any programme on their TV screen. The sub-cable operators are mere franchisees who receive signals for transmission to the viewers only on payment of a price promised or paid in terms of agreements entered by and between them. Therefore, the respondents as a cable operator have direct and proximate nexus

p. 2382

with the entertainment provided by them through their cable television network and as such, they are the taxable person in respect of their gross receipts in relation to any month for providing entertainments to the individual viewers. This Court observed that the respondents therein as cable operators for the purpose of levy and collection of tax had direct and close nexus with the entertainments made available to the viewer through their cable television network. The performance, film or programmes shown to the viewers through the cable television network come within the meaning of entertainments and therefore within the legislative competence of the State Legislature under Entry 62 - List II to make law for the levy and collection of tax on such entertainments. This Court further observed in paragraphs 38 and 39 is as under: “38. A tax under Entry 62 of List II of the Seventh Schedule to the Constitution may be imposed not only on the person spending on entertainment but also on the act of a person entertaining, or the subject of entertainment. It is well settled by this Court that such tax may be levied on the person offering or providing entertainment or the person enjoying it. The respondents are admittedly engaged in the business of receiving broadcast signals and then instantaneously sending or transmitting such visual or audio-visual signals by coaxial cable, to subscribers’ homes through their various franchisees. It has been made possible for the individual subscribers to choose the desired channels on their individual TV sets because of cable television technology of the respondents and of sending the visual or audio-visual signals to sub-cable operators, and instantly retransmitting such signals to individual

p. 2383

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

subscribers for entertaining them through their franchisees. The respondents’ act is, no doubt, an act of offering entertainment to the subscribers and/or viewers. The respondent is very much directly and closely involved in the act of offering or providing entertainment to subscribers who are on his record. For the fact of offering or providing entertainment to the subscribers and/or viewers, the respondents receive charges, which are realised or collected by their franchisee from the ultimate subscribers. Their franchisee, called as sub-cable operator under the said 1982 Act having no independent role to offer or provide entertainments to the subscribers inasmuch as franchisees have to depend entirely on the respondents’ communication network and this communication network of the respondents consists of receiving and sending visual images and audio and other information for preparation of the subscribers and/or viewers; without the communication network service of the respondents, no entertainments can be offered or provided to the subscribers and/or viewers.

39. In the tax matters, the State Legislature is free, if it has legislative competence, to choose the persons from whom the tax levied on entertainments is to be collected. In other words, what are taxed are the entertainments, which is very much within the ambit of Entry 62 of List II of the Seventh Schedule. It is the respondents who as cable operator for the purpose of the said 1982 Act are engaged in the business of providing or offering entertainments which include showing of

p. 2384

films, various serials, cricket matches and dramatic performances to the subscribers, and the tax is imposed on the act of offering such entertainments in this way to such subscribers and/or viewers. The entire communication network service is built up and controlled by the respondents. Whatever amount is received or receivable by the respondent in respect of providing such entertainments is taxable under sub- section (4-a) of Section 4-A of the said 1982 Act which has a direct and sufficient nexus with the entertainments.” 10.9.7 It is thus clear that the cable operator, respondent No. 1 is the exhibitor in this case and also the provider of the entertainment to the customer. Hence, he alone can be asked to pay the tax on the entertainment that has resulted from this exhibition. This provision, therefore, does not cross the bounds of Entry 62 - List II and is intra vires. Providing a cable link up to the viewers’ end is the only role of sub-cable operator. It is, therefore, inconceivable that despite putting forth the ready entertainment in the form of signal on the cable line, the cable operator cannot be said to be providing the entertainment within the meaning of Entry 62 - List II. So long as the State Act remains within the ambit of Entry 62 - List II and is not offending the provisions of Article 286 of the Constitution or the laws made thereunder, the State Act’s validity is beyond question. 10.9.8 This Court further observed that in the said case, respondent No.1 therein sends visual images and audio signals for presentation to the individual subscribers in their homes through their feeder line i.e. coaxial cable or any other device used for transmitting audio and visual signals in terms of clause (2) of the said agreement. The franchisee has access to the signals provided by respondent No.1. Therefore, it cannot be disputed that the price or prices received

p. 2385

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

or receivable by respondent No.1 is the amount received or receivable by him for transmitting the signal for exhibition of any performance, film or any other programme telecast and the aggregate of such prices or amounts is the gross receipt of respondent No.1 in relation to any month or part thereof. 10.9.9 It was observed with reference to Western India Theatres that existence of means or providing entertainment would be sufficient to support a law imposing tax thereon and that the means of providing entertainment provides the nexus between the taxing power and the subject of tax. It was further observed that if one is looking at the means of providing entertainment, both the cable operator and the sub- cable operator play equally significant role in providing such means of entertainment, namely, transmission of signals received from the satellites. In one sense the cable operator plays a more pivotal role than the sub-cable operator since the signals are received by him through his devices and transmitted while a sub-cable operator makes provision for continued instantaneous transmission of the signals. 10.9.10 It was further observed that the impugned legislation was in pith and substance not relating to broadcasting but one relating to entertainment within the scope and ambit of Entry 62 – List II. Accordingly, the appeals filed by the State of West Bengal were allowed by setting aside the judgment of the Calcutta High Court. 10.9.11 On a perusal of the judgment in Purvi Communication, it can be observed that there was no specific question raised as to, whether, the act of transmission by MSO has a ‘public colour’ to it. In fact, the Court was never required to go into such a question, for the impugned provision, i.e. section 4A(4a) of the 1982 Act, did not require such a ‘public colour’ to the activities of MSO. 10.10 There are other substantial differences between Geeta Enterprises and Purvi Communication as the table below

p. 2386

enumerates due to which Geeta Enterprises and Purvi Communication cannot be compared.

Geeta Enterprises Purvi Communication Impugned Provision Definition of ‘entertainment’ Amended section 4A(4a) of the under section 2(3) of the 1937 1982 Act (West Bengal Act) Act (UP Act) Activity subject to taxation Video game operated on Transmission of signals by payment, in a parlour whose MSOs of any performance, admission is free to public film or any other programme telecast. Date of Enactment of the provision impugned therein 1937 1998 Discussion on Entry 62 - List II No Yes

10.11 It was submitted by Sri Venugopal, learned Senior Counsel that the interpretation of the word ‘entertainments’ in Entry 62 - List II is restricted to ‘public entertainments’ and this Court was not right in Purvi Communication to hold that the impugned provision therein was constitutionally valid without determining whether that provision fell within the restricted interpretation of ‘entertainments’.

10.12 We do not agree with this limited interpretation of the word ‘entertainments’. We hold in line with the principle that words in entries must be given a broad, liberal and expansive interpretation. As discussed above, the impugned activity of transmission in Purvi Communication would still fall under its ambit.

10.13 It is true that in the earlier times, many people did not have access to personal devices through which they could be entertained. The entertainments, therefore, were mostly restricted to those performed or displayed in public. With developments in technology, it has become possible for such entertainments to be experienced / enjoyed directly at

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

home. In other words, what has changed is the manner in which entertainments are accessed or consumed. Nowadays, entertainment is available on a cell/mobile phone in our hands. The forum or platform for entertainment as well as the manner of perception has changed, namely, from direct/ live viewing to digital viewing but the content is essentially the same, of course, with varieties of programmes, having regard to the target viewers/audience of such entertainment, etc. That, however, does not change the fact that such entertainment is curated and transmitted for the benefit of the public at large. Therefore, interpreting the activity taxed in Purvi Communication in this manner, we hold that television viewing via DTH would still fall within the ambit of “public entertainments”.

10.14 We also take note that the question of interpretation of ‘entertainments’ in Geeta Enterprises pertained to the interpretation of the 1937 Act and not Entry 62 – List II as it appears in the Constitution. The judgment in Geeta Enterprises can never be a binding precedent for the question raised before this Court in Purvi Communication. Therefore, whereas the scope of interpretation for Geeta Enterprises was limited to interpretation of a provision in a statute we would be remiss to hold Purvi Communication as per incuriam for its failure to take note of Geeta Enterprises. Therefore, we find no reason to doubt the correctness of Purvi Communication.

“Aspect Theory” or Aspect Doctrine: A Discussion

11. In Canada, the distribution of legislative powers is provided in Sections 91 and 92 of its Constitution Act, 1867, dividing entries between the Federal Government (under section 91) and the Provincial Government (under section 92). The ‘Aspect’ theory, also known as the ‘double aspect doctrine’, is a tool of constitutional interpretation used in Canada to resolve issues which arise when both the Federal and the Provincial Governments have the right to legislate on a subject matter. 11.1 Lord Haldane, in Union Colliery Co. of British Columbia vs. Bryden, 1899 AC 580 at 587, commented on the ‘aspect theory’ as follows:

p. 2388

“It is remarkable the way this Board has reconciled the provisions of section 91 and section 92, by recognizing that the subjects which fall within section 91 in one aspect, may, under another aspect, fall under section 92.” 11.2 The Constitution Bench of this Court, in Federation of Hotel & Restaurant Association of India, explained this theory by quoting from the book ‘Canada’s Federal System’ by AHF Lefroy. The Bench noted as under: “14. In Lefroy’s ‘Canada’s Federal System’ the learned author referring to the “aspects of legislation” under Sections 91 and 92 of the Canadian Constitution i.e., British North America Act 1867 observed that “one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of Legislative Power is that subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. Learned author says: “ ..... that by ‘aspect’ must be understood the aspect or point of view of the legislator in legislating the object, purpose, and scope of the legislation that the word is used subjectively of the legislator, rather than objectively of the matter legislated upon.” (emphasis supplied)

Criticism of its Use in Indian Context: 11.3 Some scholars have criticised the transposition of the Canadian ‘aspect theory’ to Indian jurisprudence on the ground that the framework of distribution of legislative competence in Canada is different from that in India and hence, that theory which is used in Canada cannot be transposed to Indian contexts. 11.4 To substantiate this proposition, it is relevant to note that, firstly, the aspect theory in Canada is used to resolve conflicts

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

in legitimacy to legislate on all subject matters, rather than restricting its use only to entries concerning taxation. In India, the doctrine of pith and substance is predominantly used to resolve conflicts when two entries in different Lists of the Seventh Schedule to the Constitution conflict with each other. As already noted, the doctrine of pith and substance means that “if an enactment substantially falls within the powers expressly conferred by the Constitution upon the legislature which enacted it, it cannot be held to be invalid merely because it incidentally encroaches upon matters assigned to another legislature” [Goodyear India Ltd. vs. State of Haryana, (1990) 2 SCC 71, para 71]. 11.5 Secondly, as regards taxation in Canada, it appears that Section 91(3) of the Constitution Act, 1867 therein empowers their Parliament to legislate on “the raising of Money by any Mode or System of Taxation” whereas, under section 92(2), the Provinces therein are empowered to legislate only on “Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes”. This means that the Parliament therein has greater legislative competence to impose a wide range of taxes, but the Provinces therein are restricted to impose only direct taxes. Therefore, the scope for the use of ‘Aspect theory’ in taxation matters is limited in Canada. This distribution of taxation powers in Canada is markedly different from that in India. Under our Constitution, the subject matters of taxation available to Parliament are enumerated in Entries 82 to 97 - List I and those available to the State legislatures are in Entries 45 to 63 - List II. There is no taxation entry in List III or the Concurrent List. 11.6 There are also alternate propositions as regards this theory. For e.g., Sri Karthik Sundaram, in the book ‘Tax, Constitution and the Supreme Court’ (OakBridge Publishing Pvt. Ltd. 2024, p.112), argues that “the ‘aspect theory’ can, in some cases, be viewed as an exception to the doctrine of ‘pith and substance’”. Contrarily, Sri V Niranjan, K.C. in Chapter 26 titled ‘Legislative Competence’ in the Oxford Handbook of the Indian Constitution, argues that there is no distinction between the doctrine of pith and substance and the aspect theory in the Indian context.

p. 2390

11.7 Despite the above observations, on a perusal of the cases in India which have referred to this theory, it would be evident that the use of ‘aspect theory’ in the Indian jurisprudence differs from its usage in Canada and that it is home-grown and innovated to suit the Indian context particularly in matters relating to taxation. In other words, while we may have borrowed the theory from Canada, its application in the Indian context has been within the context of the framework of the Indian Constitution. The theory is applied so as to save a provision of taxation rather than to a situation where a legislature’s competence to tax is determined. In other words, the aspect doctrine is applied to ascertain whether a legislature can tax on a particular aspect of a transaction/activity rather than on competence of a legislature vis-à-vis the scope of entries in List I or List II. 11.8 To elaborate, it is necessary to revisit some significant judgments which have dealt with the concept of ‘Aspect theory’ and some judgments that have laid down principles for interpretation of entries governing taxation in the Seventh Schedule to the Constitution.

Usage of Aspect Theory in the Indian Context: 11.9 In International Tourist Corporation vs. State of Haryana, (1981) 2 SCR 364, the vires of Section 3(3) of the Haryana Passengers and Goods Taxation Act, 1952 insofar as it permitted the levy of tax on passengers and goods carried by their carriages plying entirely along the National Highways was questioned. The appellants therein argued that the Parliament had the exclusive jurisdiction under Entry 23 read with Entry 97 - List I to legislate in respect of National Highways, including levy of taxes on goods and passengers carried on National Highways. This Court, however, noted that Entry 97-List I itself is specific in that, in case of a tax, a matter can be brought under that entry only if it is not mentioned in either of List I or List II. This Court further opined that a regulatory and compensatory tax should be upheld if there exists a “specific, identifiable object behind the levy and a nexus between the subject and the object of levy”. Having found this nexus, it upheld the imposition of tax under the impugned section.

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

11.10 Thereafter, in Federation of Hotel & Restaurant Association of India, the Constitution Bench of this Court had to decide the constitutional validity of the Expenditure Tax Act, 1987 (Central Act 35 of 1987) which envisaged a tax at 10 per cent ad valorem on “chargeable expenditure” incurred in the class of hotels wherein “room charges” for any unit of residential accommodation were Rs. 400 per day or more per individual. The Union sought to sustain the legislative competence to enact the impugned law under Article 248 read with Entry 97 - List I. 11.10.1 One argument of the appellants therein relevant to this case was that the law was, in pith and substance, really one imposing a tax on luxuries or on the price paid for the sale of goods. It is relevant to note here that a tax on luxuries is an exclusive subject matter of States under Entry 62 - List II. The other contention was that the particular impost under the impugned law, having regards to its nature and incidence, is really not an “expenditure tax” at all as it does not accord with the economists’ notion of such a tax. The question therefore was whether the economists’ concept of such a tax qualifies and conditions the legislative power and whether “expenditure” laid out on what may be assumed to be “luxuries” or on the purchase of goods admits of being isolated and identified as a distinct aspect susceptible of recognition as being distinct field of tax legislation. 11.10.2 This Court referred to the ‘Aspect theory’ used in Canada by quoting Lefroy’s ‘Canada’s Federal System’ who opined that “one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of legislative power is that subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. “… that by ‘aspect’ must be understood the aspect or point of view of the legislator in legislating the object, purpose and scope

p. 2392

of the legislation that the word is used subjectively of the legislator, rather than objectively of the matter legislated upon.” This Court further opined that, “Indeed, the law ‘with respect to’ a subject might incidentally ‘affect’ another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects.” (emphasis supplied)

11.10.3 Reference was made to Lord Simonds in Governor General in Council vs. Province of Madras, (1945) FCR 179: AIR 1945 PC 98 in the context of concepts of Duties of Excise and Tax on Sale of Goods in the following words: “… The two taxes, the one levied on manufacturer in respect of his goods, the other on a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory of workshop for the first time on the occasion of its sale. …” 11.10.4 Referring to the “aspect” doctrine stated in Laskin’s “Canadian Constitutional Law”, the Constitution Bench further noted that the “aspect” doctrine bears some

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

resemblances to those noted above but, unlike them, deals not with what the “matter” is but with what it “comes within” … In this regard it was observed as under: “It is trite that the true nature and character of the legislation must be determined with reference to a question of the power of the legislature. The consequences and effect of the legislation are not the same thing as the legislative subject matter. It is the true nature and character of the legislation and not its ultimate economic results that matters.” (emphasis supplied)

11.10.5 In other words, this Court held that the subject matter of a tax is different from the measure of its levy and that the measure of a tax does not determine its essential character or of the competence of the legislature. The Court therefore accepted the submission of the learned Attorney General and held that the distinct ‘aspect’, namely, the ‘expenditure’ aspect of the transaction fell within the subject-matter of the Union and that it had the legislative competence to impose a tax. 11.11 The Constitution Bench of this Court had to again decide on similar facts in Elel Hotels & Investments Ltd. vs. Union of India, (1989) 3 SCC 698 (“Elel Hotels & Investments”). In this case, the Hotel Receipts Tax Act, 1980 imposed a special tax of 15% on the gross receipts of certain hotels, where the room charges for residential accommodation provided to any person during the previous year was Rs.75 or more per day per individual. The petitioners therein argued that the reliance on Entry 82 – List I in support of the tax was wholly misconceived and the tax in pith and substance was an impost under Entry 62 – List II reserved to the States. The respondents however submitted that the word ‘income’ in Entry 82 – List I should not be read in a narrow and pedantic sense, but must be given

p. 2394

its widest amplitude. The Court agreed with the respondents therein and opined that, “The cardinal rule of interpretation is that the entries in the legislative lists are not to be read in a narrow or restricted sense and that each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it…In construing the words in a constitutional document conferring legislative power the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude.” (emphasis supplied)

11.11.1 While this Court herein did not explicitly use the ‘aspect doctrine’, it is implied from its reasoning that by interpreting the word ‘income’ liberally, the impugned legislation had an aspect of ‘income’ and hence the Union had the legislative competence to impose tax on the subject-matter. 11.12 In State of West Bengal vs. Kesoram Industries Ltd., (2004) 10 SCC 201, the Constitution Bench of this Court summarised the principles as regards interpretation of taxation entries in List I and List II. While it did not explicitly refer to the ‘aspect theory’, it opined on different aspects of a transaction as follows: “141. As held in Goodricke Group Ltd. [1995 Supp (1) SCC 707] which we have held as correctly decided, this Court has noted the principle of law well established by several decisions that the measure of tax is not determinative of its essential character. The same transaction may involve two or more taxable events in its different aspects. Merely because the aspects overlap, such overlapping does not detract from the distinctiveness of the aspects. In our opinion, there is no question of conflict solely on account of two aspects of the same transaction being utilised by two legislatures for two levies both of which may be taxes or fees or

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

one of which may be a tax and the other a fee falling within two fields of legislation respectively available to the two.” (emphasis supplied)

11.13 In All India Federation of Tax Practitioners, the Court was concerned with the constitutional validity of the levy of service tax on Chartered Accountants, Cost Accountant and Architects by Finance Act, 1994 and Finance (No. 2) Act, 1998, and the legislative competence of Parliament to impose service tax under Entry 97 - List I, in view of Entry 60 - List II which is also a taxation entry and mentions, “Taxes on professions, trades, callings and employments” and Article 276 of the Constitution. This Court held that Entry 60 – List II which refers to ‘professions’ cannot be extended to include services and opined, “this is what is called as an Aspect Theory”. But it said no more on the theory. However, from its reasoning that Entry 60 - List II concerns a tax on the status and cannot be read to include every activity undertaken or service rendered by a chartered accountant/cost accountant/ architect, this Court suggested that the activity in question i.e. service rendered by such professionals did not have an aspect that can be covered by Entry 60 - List II which was only regarding being a part of a particular profession. It was further observed that a tax cannot be levied under the Finance Act, 1994 and its amendments without service being provided whereas a professional tax under Entry 60 - List II is a tax on his status. It is the tax on the status as a Cost Accountant or a Chartered Accountant. As long as a person or a firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of Entry 60 - List II which is a taxing entry. Therefore, Entry 60 contemplates tax on professions, as such. 11.13.1 Referring to Western India Theatres Ltd. it was observed that Entry 50 of the Provincial List of the Government of India Act, 1935 contemplated a tax

p. 2396

on entertainment or amusement as objects on which a tax was to be imposed and therefore it was not possible to differentiate between the entertainment provider and the entertainment receiver. 11.13.2 It was also highlighted that the importance of the judgment in Western India Theatres Ltd. was in the fact that it made a distinction between tax imposed for the privilege of carrying on any trade or calling on one hand and a tax on every show, that is to say on every incidence of the exercise of the particular trade or calling. It was held that if there was no show, there was no tax. It was held that the impugned tax on entertainment levied by the Cantonment Board was a tax on the act of entertainment resulting in a show and, therefore, the impugned law imposing tax on entertainment fell under Entry 50 of the Provincial List in Schedule VII to the Government of India Act, 1935 and not under Entry 46 of the Provincial List (similar to Entry 60 - List II). Therefore, it was held that Bombay legislature had power to enact the law imposing tax on entertainment which had nothing to do with the law imposing tax on the privilege of carrying on any profession, trade or calling under Entry 46 (similar to Entry 60 - List II in the present case). Therefore, this Court had clarified the dichotomy between tax on privilege of carrying on any trade or calling on one hand and the tax on the activity which an entertainer undertakes on each occasion. The tax on privilege to practise the profession, therefore, falls under Entry 60 - List II. It is quite different from tax on services. Keeping in mind the aforestated dichotomy, it is clear that tax on service does not fall under Entry 60 - List II. Therefore, Parliament has absolute jurisdiction and legislative competence to enact the law imposing tax on services under Entry 97 - List I. 11.14 In Union of India vs. Mohit Minerals Pvt. Ltd., (2018) 13 SCR 139 (“Mohit Minerals Pvt. Ltd.”), this Court explicitly held that, “the principle is well settled that two taxes/imposts which are separate and distinct imposts and on two different

p. 2397

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

aspects of a transaction are permissible as “in law there is no overlapping”.” In this case the bone of contention between the parties was whether an Indian importer can be subject to the levy of Integrated Goods and Service Tax (“IGST”) on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis. The notifications impugned in the said case whether amounted to leading to double taxation was considered. 11.14.1 The contention of the respondents therein was that the transaction between the foreign exporter and the respondents was already subject to IGST under Section 5 of the IGST Act read with Section 3(7) and 3(8) of the Customs Tariffs Act as “supply of goods”, and an additional levy of IGST on imported goods, that is on the supply of transportation service, by designating the importer as the recipient could amount to double taxation. The transaction involved three parties, namely the foreign exporter, the Indian importer and the shipping line. The first leg of the transaction involved a CIF contract, wherein the foreign exporter sells the goods to the Indian importer and the cost of insurance and freight are the responsibility of the foreign exporter. In other words, the foreign exporter is liable to ensure that the goods reach their place of destination and the Indian importer pays the transaction value to the exporter. The second leg of the transaction involved an agreement between the foreign exporter and the shipping line (whether foreign or Indian) for providing services for transport of goods to the destination i.e., in the territory of India. The appellant- Union of India contended that the contract between the foreign exporter and the foreign shipping line – of which the Indian importer is not a party – cannot be deemed to be a part of “composite supply” within the meaning of Section 2(30) of the Central Goods and Service Tax Act (“CGST Act”). It was contended that while the first leg of the transaction, between the foreign exporter and Indian importer, is (according

p. 2398

to the submission) a composite supply, the second leg is an independent transaction. In this regard, the Union of India relied on the decision of this Court in State of Andhra Pradesh vs. Mc Dowell & Co, (1996) 3 SCR 721 (“Mc Dowell”) to contend that a single element can constitute a levy and a part of the value for another transaction. Further the Union Government urged that the levy is on different aspects of the transaction. 11.14.2 This contention was not acceded to by this Court. It was ultimately held that the impugned levy imposed on the “service” aspect of the transaction is in violation of the principle of “composite supply” enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the “composite supply”, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the “supply of service” by the shipping line would be in violation of Section 8 of the CGST Act. Hence the appeal filed by the Union of India was dismissed. 11.15 The judgment of this Court in Bharat Sanchar Nigam Limited appears to have approached the application of ‘aspect theory’ differently. The principal issue which arose therein was, whether, the nature of transaction by which mobile phone connections (through SIM cards) are enjoyed is a sale or a service or both. If it is a sale then the States are legislatively competent to levy sales tax on the transaction under Entry 54 – List II but if it is a service, then the Parliament alone can levy service tax under Entry 97 – List I but if the nature of the transaction partakes of the character of both sale and service, then the moot question would be whether both legislative authorities could levy their separate taxes together or only one of them. The contention of the appellants therein was that the transaction in question was merely a service and therefore only the Union had the competence to levy tax thereon. However, the respondents States argued that the transaction was a deemed sale under Article 366(29A)(d) of

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

the Constitution read with the charging sections in their various sales tax enactments and therefore they were competent to levy sales tax on the transactions. 11.15.1 The impugned judgments therein had held that there was a sale of SIM cards by the service providers to the subscribers and that it is factually and legally distinct from the activity of giving connection or activation of SIM cards. However, this Court held that the expression ‘goods’ do not include electromagnetic waves or radio frequencies for the purpose of Article 366(29A)(d) and that the goods in telecommunication are limited to the handsets supplied by the service provider. 11.15.2 This Court clarified that what a SIM card represents is ultimately a question of fact. That in determining such an issue, the Assessing Authorities had to keep in mind the principle that if the SIM card was not sold by the assessee to the subscribers but was merely part of the services rendered by the service providers, then a SIM card could not be charged separately to sales tax. However, if the parties intended that the SIM card would be a separate object of sale, only then it would be open to the Sales Tax Authorities to levy sales tax thereon. Therefore, the Court held that, as far as SIM cards were concerned, the issue was left for determination by the Assessing Authorities. 11.15.3 Further, this Court noted that the State would have had the power to separate the agreement to sell from the agreement to render service and impose tax on the sale, only if the transaction in truth represents two distinct and separate contracts and is discernible as such. It held that the test for composite contracts, other than those mentioned in Article 366(29A), would be the intention of the parties and if there was no intention of sale of goods, then the State cannot impose a sales tax even if the contract could be disintegrated. Furthermore, the Court held that it would be possible for the State to tax the sale element

p. 2400

provided there is a discernible sale and only to the extent relatable to such sale. 11.15.4 As regards the ‘aspect theory’, this Court noted that the High Court in the impugned judgment therein could not have used the theory to “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” and that the ‘aspect theory’ merely deals with legislative competence. It further noted, observing on the judgment of this Court in Federation of Hotel & Restaurant Association of India that: “subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is overlapping does not detract from the distinctiveness of the aspects”. 11.15.5 It further held that no one denies the legislative competence of 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. After narrating the Constitutional history which led to the amendment of Article 366 by insertion of clause (29-A) by the Forty Sixth Amendment to the Constitution, it was observed that of all the different kind of composite transactions, the draftsman of the Forty Sixth Amendment chose three specific situations namely, a works contract, a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has

p. 2401

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

been constitutionally permitted in sub clause (b and f) of Clause (29-A) of Article 366, there is no other service which has been permitted to be so split. It was further observed that if there is an instrument of contract which may be composite in form in any case, other than the exceptions in Article 366 (29- A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sale from the agreement to render service and impose tax on the sale. The test therefore for the composite contract other than those mentioned in Article 366 (29-A) continues to be: did the parties have in mind or intend separate right arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or other is to ask what is the substance of the contract. In other words, the court termed it ‘the dominant nature test’. 11.15.6 It was further observed that what a SIM Card represents is ultimately a question of fact. It was also observed that the States have the power to levy sales tax on sales provided 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 any service 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. For the same reason the Centre cannot include the value of the SIM Card, if they are found ultimately to be goods, in the cost of the service. 11.15.7 Therefore, this Court did not apply the aspect theory in the aforesaid judgment because it did not find an aspect of sale in the activity of mobile phone

p. 2402

connections. It was observed that the aspect theory would not apply to 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. 11.15.8 In the aforesaid case, reference was made to Gujarat Ambuja Cements Ltd. vs. Union of India, (2005) 4 SCC 214. In this case, the writ petitions were filed challenging the constitutional validity of Sections 116 and 117 of the Finance Act, 2000 and Section 158 of the Finance Act, 2003 by which the decision of this Court in Laghu Udhyog Bharti vs. Union of India, (1999) 6 SCC 418 (“Laghu Udhyog Bharti”) striking down Rules 2 (1)(d)(xii) and (xvii) of the Service Tax Rules, 1994 (as amended in 1997) was sought to be overcome. The writ petitioners were the customers or the clients of goods transport operator and of forwarding and clearing agents. One of the contentions raised was that the Parliament was not competent to levy the service tax as it encroached upon the States Government power as defined in Entry 56 – List II which pertains to “taxes on goods and passengers carried by road or an inland waterways”. That Parliament could not by resorting to the residuary Entry 97 – List I circumvent Entry 56 – List II and in the guise of levying service tax in fact, levy a tax on transport of goods. The imposition of service tax on the customers was challenged by many of the writ petitioners in Laghu Udhyog Bharti but in the later case the legislative competency to levy service tax on carriage of goods by transport operators was not considered. It was contended that the subject fell under Entry 56 – List II and therefore could not come within Entry 23 read with Entry 97 – List I. This contention was not accepted. In paragraph 27 of this judgment, it was observed that there is a distinction between the object of tax, the incidence of tax and the machinery for the collection of the tax. The distinction is important but is apt to be confused. Legislative competence is to

p. 2403

State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

p. 2404

not of the essence of the duty”. It will not change and does not affect the essential nature of the tax. Subject to the legislative competence of the taxing authority, a duty can be imposed at the stage which the authority finds to be convenient and the most effective, whatever stage it may be. The Central Government is therefore legally competent to evolve a suitable machinery for collection of the service tax subject to the maintenance of a rational connection between the tax and the person on whom it is imposed. By Sections 116 and 117 of the Finance Act, 2000, the tax is sought to be levied on the recipients of the service. They cannot claim that they are not connected with the service since the service is rendered to them. It was observed that if in substance, the statute is not referrable 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. 11.16 It is relevant at this juncture to discuss the judgment of this Court in Imagic Creative. In that case, the appellant-company was an advertising agency which used to create original concept and design advertising material, brochures, annual reports etc. for its clients. It used to file its returns for service tax under Finance Act, 1994 and also for sales tax under Karnataka Sales Tax Act, 1957. There was no express contract between the appellant and their clients. But their purchase order and invoice showed three categorical divisions; i) the amount of service tax on the specific design and production; ii) the amount of sales tax on the specified item on the first sale; and iii) when certain items are outsourced, the tax payable on resale of the said goods in terms of section 6(4) of the Karnataka Sales Tax Act, 1957. The assessing authority concerned, however, held that the entire activity undertaken by the appellant therein was a comprehensive contract and hence the entire sale value including the creation of concept and design, formed part of the value of sale and was accordingly liable to tax. The said order was confirmed by Tribunal as well as High Court. 11.16.1 The question before this Court was, whether, the charges collect towards the services for the evaluation

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

of the proto-type conceptual design (that is creation of concept), on which service tax has been paid under the Finance Act, 1994 as amended from time to time are liable to tax under Karnataka Value Added Tax Act, 2003. This Court allowed the appeal filed by the appellant therein. It held that payments of service tax as also Value Added Tax are mutually exclusive and therefore, they should be held to be applicable having regard to their respective parameters. It noted that a distinction must be borne in mind between an indivisible contract and a composite contract and that if in a contract, an element to provide service is contained, the purport and object for which the Constitution was amended so as to insert Article 366(29A) must be kept in mind. 11.16.2 It was observed that the appellant in the said case (Imagic Creative) admittedly was a service provider and therefore was assessable to a service tax under the Finance Act, 1994 which is a Parliamentary statute. That while interpreting a taxing statute under Article 246 of the Constitution read with Seventh Schedule thereof, the Court may have to take recourse to various theories including “aspect theory”, as was noticed by this Court in Federation of Hotels and Restaurant Association of India. It was further observed that where a Parliamentary and State Act come up for consideration, an endeavour has to be made to see that provisions of both the Acts are made applicable. That payment of service tax and also VAT are mutually exclusive, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided.

p. 2406

Aspect Theory: Its Extent and Scope in India: 11.17 On a perusal of the significant judgments of this Court which have used or referred to ‘aspect theory’, two observations can be made at the outset: first, it is discerned that Courts in India have not used ‘aspect theory’ in the manner that is applicable in Canada; and second, there appears to be a lack of clarity as to its conceptual contours. For e.g., there is no clarity on i) the instances when ‘aspect theory’ needs to be applied; or ii) whether ‘aspect theory’ has any relevance in determining the legislative competence of the Union or a State in enacting a tax legislation. The judgment in Bharat Sanchar Nigam Limited opines that aspect theory is ‘merely concerned with legislative competence’, whereas the judgment in Imagic Creative expressly suggested that in the matter of interpretation of a taxing statute, in the context of the Seventh Schedule of the Constitution, the Court may have to take recourse to various theories including the “aspect theory” as was noticed by this Court in Federation of Hotels and Restaurants Association of India. Amidst this uncertain jurisprudence, several impugned judgments in the present cases have referred to the ‘aspect theory’ to uphold the validity of several State legislations imposing entertainment tax. It therefore becomes necessary to examine the conceptual contours of this theory. 11.18 To appreciate the extent and the context of the use of ‘aspect theory’ in India, it would be instructive to reiterate some well- established principles of interpretation of taxation entries. Some of the relevant principles are reiterated as follows: i. In interpreting expressions in the Legislative Lists of the Seventh Schedule of the Constitution, a wide meaning should be given to the entries. ii. In the scheme of the Lists in the Seventh Schedule, there exists a clear distinction between the general subjects of legislation and heads of taxation. They are separately enumerated. iii. As the fields of taxation are to be found clearly enumerated in Lists I and II, there can be no overlapping in law. There may be overlapping in fact, but there can be no overlapping in law.

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

iv. In the first instance, the pith and substance or true nature and character of the legislation must be determined with reference to the legislative subject matter and the charging section; v. The measure of tax is not a true test of the nature of tax; vi. The same transaction may involve two or more taxable events in its different aspects. Merely because the aspects overlap, such overlapping does not detract from the distinctiveness of the aspects. 11.19 Having noted few established principles of interpretation of taxation entries, there are three specifics that must be kept in mind while discussing this theory. The first is the taxation entries provided for in List I and List II; the second is the legislation which seeks to impose a tax on a subject-matter; and the third is the activity on which tax is sought to be imposed by the legislative enactment. 11.20 We observe that based on a reading of the cases discussed earlier and the provisions of the Constitution, especially Chapter I of Part XI of the Constitution which deals with legislative relations between the Union and the States and distribution of legislative powers, that the legislative competence is determined by applying the doctrine of pith and substance which governs the relation between the entries provided in the three Lists of the Seventh Schedule while considering the vires of a legislation impugned on the basis of the principle of legislative competence. The aspect theory has no relevance in determining the constitutionality of any provision on the ground of legislative competence. Rather, aspect theory concerns the relation between the legislation which seeks to impose a tax on a subject-matter and the activity sought to be taxed. In other words, the constitutional validity of a taxing statute on the grounds of legislative competence has to be examined in the context of the doctrine of pith and substance as envisaged under Article 246 of the Constitution of India to ascertain whether a particular legislature i.e., Parliament or a State Legislature, as the case may be, has the competence to legislate in relation to the particular field of legislation while interpreting the field of legislation as epitomised in the

p. 2408

respective entries in the three Lists. A broad perspective of the entries must be envisaged. Once the contours of the entry under which a legislation is made is ascertained, the next step is to study the legislation in question in order to ascertain whether it is covered or falls within the contours of an entry. If it does fall within the contours of a particular entry in a particular List, then that particular legislature which has enacted it would have the legislative competence to enact such a legislation. If it incidentally touches upon an entry in another List, it does not render it invalid. That means that so long as a piece of legislation is in pith and substance coming within an entry in a particular List, it would be valid as the legislature which has enacted, has the legislative competence to do so. 11.21 The aspect theory has really no role to play as regards determining legislative competence of a particular legislation, since the Constitution does not envisage such a test. However, in the Indian context, the ‘aspect theory’ is relevant to determine the applicability of a taxing statute on the activity sought to be taxed i.e., whether the statute covers a transaction/activity which falls within a specific taxation entry either in List I or in List II. An activity may have multiple aspects on which different legislatures can impose a tax falling within its legislative competence. In such a situation, the courts would save the tax from a challenge on the basis of the aspect theory by discerning which aspect of the activity falls within the subject matter of tax under a legislation relatable to a particular entry of a List in the Seventh Schedule. Such a determination of the aspects which are present in an activity is a factual inquiry. Thus, an activity could be taxed by two different legislatures on the basis of the entries in the respective Lists without there being a clash and within their legislative competence. However, the aspect of the activity which is being taxed must be relatable to the legislation under a specific entry of a particular List so as to be within legislative competence of a particular legislature. 11.22 This is in contrast to the applicability of this theory in Canada, where this theory is used therein to determine legislative competence of a federal or provincial legislature to enact a particular law. The reason why we observe that the aspect theory has no relevance in determining the constitutional

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

validity of a legislation is that such a ground is not prescribed anywhere in the Constitution. This Court in Mc Dowell held that the power of the Parliament or, for that matter, the State legislature, to legislate can be struck down by Courts on two grounds and two grounds alone, viz., (i) lack of legislative competence; and (ii) violation of any of the fundamental rights guaranteed in Part-III of the Constitution or any other constitutional provision. This Court was categorical in noting that there was no third ground. Similarly, in Anjum Kadari vs. Union of India, 2024 INSC 831, this Court had to decide whether a statute can be struck down for violation of basic structure of the Constitution, and based on a survey of prior judgments, held as follows: “55. From the above discussion, it can be concluded that a statute can be struck down only for the violation of Part III or any other provision of the Constitution or for being without legislative competence. The constitutional validity of a statute cannot be challenged for the violation of the basic structure of the Constitution. The reason is that concepts such as democracy, federalism, and secularism are undefined concepts. Allowing courts to strike down legislation for violation of such concepts will introduce an element of uncertainty in our constitutional adjudication. Recently, this Court has accepted that a challenge to the constitutional validity of a statute for violation of the basic structure is a technical aspect because the infraction has to be traced to the express provisions of the Constitution. Hence, in a challenge to the validity of a statute for violation of the principle of secularism, it must be shown that the statute violates provisions of the Constitution pertaining to secularism.” (emphasis supplied)

11.23 We have already discussed earlier in this judgment that in case of an apparent overlapping between two entries, the doctrine of pith and substance is applied to find out the true character of the enactment and the entry within which it would

p. 2410

fall. This doctrine is not a judicial innovation, but is derived from the phrase ‘subject to’ and ‘with respect to’ in Article 246 of the Constitution of India. However, such a derivation cannot be made vis-à-vis ‘aspect theory’ from any provision of the Constitution of India. Therefore, as far as determining the constitutional validity of a taxing statute is concerned, when it is challenged on the ground of legislative competence, it is the doctrine of pith and substance that would be applicable, rather than the aspect theory. 11.24 Thus, in our view, the aspect theory, in the Indian context, comes into play at the level of determining the applicability of a taxing statute on the activity sought to be taxed. Invariably, an activity conducted by an assessee which is sought to be taxed by a legislation, may have different aspects. The aspect theory is used to determine if, in fact, there are different aspects within the activity sought to be taxed and whether, the taxable event which forms the basis of the levy in a legislative enactment corresponds to any aspect in the activity sought to be taxed. 11.25 It would be illustrative to consider the facts of the case in Bharat Sanchar Nigam Limited to explain the application of this theory. In that case, the principal question to be decided was the nature of the transaction by which mobile phone connections were enjoyed. On the one hand, the petitioners therein contented that they were merely licensees under Section 4 of the Telegraph Act, 1885 and that they provided ‘telecommunication services’ as provided under section 2(k) of the Telecom Regulatory Authority of India Act, 1997. That service tax was imposed on them under the Finance Act, 1994 on the basis of the tariff realised from the subscribers. They further contended that in providing such service there were in fact no ‘sales’ effected by the service providers and that the SIM card was merely an identification device for granting access and was a means to access services. On the other hand, the States contented that the transaction was a deemed sale under Article 366 (29A)(d) of the Constitution read with the charging sections in their various sales tax enactments and therefore they were competent to levy sales tax on the transactions.

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

11.26 This Court, inter alia, clarified that electromagnetic waves or radio frequencies are not goods, and therefore, there cannot be a ‘sale’ of such waves or frequencies. It held that a telephone service is nothing but a service. That there was no sale element apart from the obvious one relating to the handset, if any. However, as regards SIM card, it observed that “what a SIM card represents is ultimately a question of fact as has been correctly submitted by the States”. It held that if the parties intended that the SIM card would be a separate object of sale, only then it would be open to the Sales Tax Authorities to levy sales tax thereon. Therefore, as far as SIM cards were concerned, the Court left the issue for determination by the Assessing Authorities. 11.27 If we proceed to understand the above facts from the perspective of aspect theory enunciated above, it would be clear that the question in essence in Bharat Sanchar Nigam Limited was whether there was an aspect of sale in the activity of the petitioners therein and consequently, whether the States could validly impose sales tax thereon. This is nothing but a question of the applicability of the various state enactments on the activity in question, rather than a question of the validity of the enactment. The Court ultimately held that electromagnetic waves were not ‘goods’. However, it left the issue of SIM cards to the determination of Assessing Authorities. This meant that, on a case-to-case basis, the Assessing Authorities had to determine whether there was an aspect of sale in the activity they sought to bring to tax, by examining whether the parties intended that the SIM card was a separate object of sale. In other words, the Assessing Authorities had to make a factual enquiry as to whether there was an aspect of sale in the activity they sought to tax under the relevant sales tax legislation. If there was an aspect of sale, then sales tax was leviable but if it was purely service then sales tax could not be levied. But what would be the position if an activity has an aspect of sale as well as service? Applying the said analogy to the instant case, the question is, what is the consequence if an activity has an entertainment aspect as well as a service aspect/element.

p. 2412

Application of Aspect Theory to the Case at hand: 11.28 To determine whether there are different aspects to the activity conducted by the assessees herein which is sought to be taxed by the Union under the Finance Act, 1994 (as amended in different years) as a service tax and by the States under different State legislations as entertainment tax, it is first necessary to examine the taxable events which form the basis of levy of the legislative enactments impugned herein. Thereafter, the modus operandi of the activity undertaken by the assessees herein needs to be understood. Thereafter, a factual determination as to, whether, the taxable event which forms the basis of the levy under the Central and the State enactments corresponds to different aspects of the activity under consideration must be undertaken.

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

the case may be, irrespective of where the location of the broadcasting agency is. In the year 2002, Section 65 (90) (zk) was amended whereby the “broadcasting agency” could provide service by its representative in India or any agent appointed in India or by any person appointed to act on his behalf in any manner. This is irrespective of whether encryption of the signals of beaming thereof through satellite might have taken place outside India or not. 12.3 The definition of “broadcasting” read with “broadcasting agency or organization” was amended in the year 2003, wherein it said that a “broadcasting agency” or organization means any agency or organization engaged in providing service in relation to broadcasting in any manner irrespective of its location and includes inter alia a representative in India or any agent appointed in India engaged in the activity of selling of time slots for broadcasting of any programme or obtaining sponsorships for programme or collecting the broadcasting charges on behalf of the said agency or organisation. 12.4 In the year 2005, the Finance Act, 1994 was again amended to define “broadcasting” to include a broadcasting agency or an organization collecting the broadcasting charges for transmission of electromagnetic waves through space or through cables, direct to home signals or by any other means to cable operator including multisystem operator or any other person on behalf of the said agency or an organization through any representative or agent appointed in India. Thus, service tax was levied on direct to home (DTH) broadcasting services.

Modus Operandi of the Assessees and their aspects:

13. As regards the business of the assessees herein, they are DTH broadcasting service providers licensed by the Central Government in terms of the provisions of Section 4 of the Indian Telegraph Act, 1885 and Section 5 of the Indian Wireless Telegraphy Act, 1933. Their modus operandi is that they set up a hub which enables them to downlink signals from the satellites of various broadcasters of TV channels (Star, BBC, etc.), then they uplink those signals to their own Ku Band (such as INSAT 4CR satellite) designated transponders for transmission of the signals in Ku band. These signals are received by

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the dish antennae which are installed at the subscribers’ premises. Since these signals are in encrypted form they are decrypted by the Set-Top Boxes and the viewing cards inside these boxes enable subscribers to view the various TV channels on their TV sets. Invariably, the set-top boxes are installed without any consideration and remain the property of the assessees. 13.1 If we closely examine the modus operandi of the activity undertaken by the assessees, it would be evident that their activity involves at least two aspects: the first, is the act of relaying the signals from the satellites of various broadcasters of TV channels, and the second, is the object of such relaying of the signals, which is the effect of the content delivered to the subscriber. This effect is nothing but the entertainment of the subscribers. In other words, the activity of the assessees involves at least two aspects which correspond to the subject- matter of the levy under the Central Finance Act, 1994, namely, broadcasting service and the respective State enactments as providing entertainment to the subscribers. 13.2 It is the contention of the assessees that their activity merely involves the relaying of the signals and they are in no way related to the content that these signals carry and are not concerned with providing entertainment. However, as held in Purvi Communication, no entertainment can be presented to the viewers unless the broadcaster transmits the signals for instantaneous presentation of any performance, film or any programme on their T.V. screen. The second aspect here concerns not the kind of content of the signals, rather it is the effect of the decryption of the signals by the Set-Top Boxes and the viewing cards inside these boxes provided by the assessees. Without the apparatus provided for by the assessees to decrypt the signals, the subscriber would not be able to watch the content that is transmitted, the content being for the purpose of entertainment. In other words, the State enactments are concerned about broadcasting for the purpose of entertainment. It makes an assumption that whatever be the content, the very act of presentation of any performance, film or any programme on the T.V. screen leads to entertainment which is reckoned to be a luxury. Therefore, the assessees as DTH operators have direct and proximate nexus with Entry

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

62 – List II. The entertainment provided by them through their modus operandi is a luxury within the meaning of that entry. 13.3 Although, the case at hand is different from Purvi Communication in two respects; however, in our view, these differences are immaterial and only support the view that the observations in Purvi Communication are squarely applicable to the modus operandi of the assessees and the second aspect herein. Firstly, in the present case, the mode of transmission is through DTH broadcasting services and not transmission via cable. Secondly, the present is a case of direct transmission by the assessees to the customers and not through a hierarchical network of cable operators. In our view, both these differences do not detract from the view of this Court in Purvi Communication that the activity of providing and receiving broadcast signals and then relaying them ahead is ‘no doubt, an act of offering entertainment to the subscribers and/or viewers’ and, consequently, the State legislatures are competent to enact laws under Entry 62 – List II imposing taxes on entertainment. The first difference noted above merely speaks to the difference in medium of transmission and does not deviate from the essential nature of the activity, as discussed in Purvi Communication. The second differentiation, again, only makes clearer the proximity of the assessees herein with the act of entertainment. In some manner, it is fair to suggest that the defence of lack of remoteness to the act of entertainment taken by the cable- operators in Purvi Communication is, in fact, not available to the assessees herein and therefore they are not on a better footing, at least on this limited question. 13.4 Furthermore, with reference to our semantical survey of ‘entertainments’ above, the assessees are clearly engaged in ‘work in connection with, or for the purposes of, any cinema, exhibition or entertainment.’ Juxtaposing our view with the observations of this Court in Purvi Communication, we also find that the activity of the assessees is an ‘action of providing or being provided with amusement or enjoyment’. 13.5 The first aspect discussed above correlates with the imposing of service tax by the Parliament, and the second aspect correlates

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with the imposition of entertainment tax by the States, through their respective enactments. Thus, the activity of entertainment falls within the scope and ambit of Entry 62 – List II as being a specie of luxury. The service of broadcasting rendered falls under Entry 97-List I. Therefore, both the taxes, one, by the State Legislature and the other, by the Parliament are leviable on the activity of the assessees herein. This is because by rendering the service of broadcasting, the assesses are entertaining the subscribers within the meaning of Entry 62-List II. There may be an overlapping, in fact, inasmuch as different aspects of the same activity is being taxed under two different legislations by two different legislatures. But, there is no overlapping in law. This is because the activity of broadcasting is a service and liable to service tax imposed by the Parliament (Entry 97 – List I) and the activity of entertainment is a subject falling under Entry 62-List II and therefore, the assessees herein are liable to pay entertainment tax as well. Hence, the State Legislatures as well as the Parliament, both have the legislative competence to levy entertainment tax as well as service tax respectively on the activity carried out by the assessees herein.

Allahabad High Court’s Ruling on retrospective operation of the Amendment:

14. Another question which arises in relation to the Impugned Judgment dated 27.07.2012 of the Allahabad High Court is whether notices issued before the Amendments of 2009 came in force could demand entertainment tax for the period before express provisions in respect of DTH services were inserted in the U.P. Entertainment and Betting Tax Act, 1979 (‘the 1979 Act’). In other words, whether the amendments were merely clarificatory in nature and entertainment tax on DTH services could be levied retrospectively? A brief legislative history of the 1979 Act is relevant for our consideration: i. The Act was promulgated in 1979. Sub-clause (a) to Section 2 defined ‘admission to entertainment’ to include admission to any place in which entertainment is held. Sub-clause (g) to Section 2 defined ‘entertainment’. Section 2(l) defined ‘payment for admission’. On a conjoint reading, Section 2(g) read with Section 2(a) defined the scope of entertainment chargeable to tax under Section 3 of the Act.

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ii. In 1995, to bring cable services within the scope of the Act, the State Legislature vide U.P. Act No. 28 of 1995 amended the 1979 Act by defining ‘cable services’ and ‘cable television network’ and inserting Section 4C, a separate charging section for levying entertainment tax on cable services. Sub-section (2) of Section 4C provided that the tax payable under this section shall be paid, collected and realized in such manner as may be prescribed. Therefore, the collection machinery was prescribed within the section itself. iii. In 2001, the State Legislature by way of U.P. Act No. 15 of 2001 amended the 1979 Act again by inserting the definition of ‘cable operator’. iv. Pertinently, the U.P. Ordinance No. 4. Of 2009 dated 16.06.2009 amended several provisions of the 1979 Act to provide for imposition of entertainment tax on DTH services. Sub-clause (a) was amended to broaden ‘admission to entertainment’ to include entertainment provided by means of cable television network or DTH. After sub-clause (f) to Section 2, sub-clause (f-1) was inserted defining ‘Direct-to-Home service’ to effectively expand the scope of the charging section to include direct to home services. The definition of ‘payment for admission’ in Section 2(l) was expanded by inserting sub-clause (vi) and sub-clause (vii) which included ‘contribution or subscription or installation and connection charges or any other charges’ collected for television exhibition though cable television network or for the purpose of DTH service. The State Legislature passed the bill by which the Ordinance was promulgated into the Act which was notified on 27th August 2009 and came into force w.e.f. on 16th June 2009. v. On September 4th, 2009, a Notification No. 1672/XI-Ka.Ni.-6- 2009-M.(92)-2009 was issued under the Act notifying the rates of entertainment tax. For DTH Services, Item No. 5 provided a levy of 25 per cent out of each aggregate payment. 14.1 We may note that we are concerned only with the period prior to 16.06.2009 i.e. the day prior to coming into force of the express provisions for DTH services inserted in the 1979 Act. 14.2 The impugned judgment took note of the view of Patna High Court in Sky Vision T.V vs. State of Bihar, 1995 (2) BJLR

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845 which had held that the imposition of entertainment tax on cable operators was liable to be set aside in the absence of specific charging section and relevant specific entry for cable services. Impugned Judgment also noted the judgment of the Uttarakhand High Court in Dish TV India Ltd. vs. State of Uttarakhand, W.P. (M/S) No. 2562/2007 wherein the learned Single Judge allowed a batch of writ petitions preferred by service providers by holding that in absence of any specific provision in the 1979 Act – the State of Uttarakhand had adopted the 1979 Act - no entertainment tax can be levied on DTH services. The Uttarakhand High Court also negatived the argument that merely because express provisions to tax cable services were present on the statute book they could be broadly read to tax DTH Services. The learned Single Judge had, despite holding in favour of the service providers, observed that it was open to the legislature to introduce appropriate amendments. Aggrieved, an appeal was preferred by the State of Uttarakhand before the Division Bench in, inter alia, Special Appeal No. 21/2009 which was also dismissed on the ground that DTH services were not covered under the Act. Aggrieved by the decision of the Division Bench, the State had preferred SLP(C) No. 14605/2009 which was dismissed in limine by this Court vide order dated 16.07.2009. 14.3 On the other hand, the Impugned Judgment cited with approval the judgment of Madhya Pradesh High Court at Jabalpur in Tata Sky Ltd. vs. State of M.P., W.P. No.10148/2009 which had upheld the levy of entertainment tax on DTH services even for the period when no specific provision was present in the Madhya Pradesh Entertainments Duty and Advertisements Tax Act, 1936 (‘M.P. 1936 Act’) for levy of entertainment tax on DTH services. Some sections of the M.P. 1936 Act are relevant to extract herein. Section 2(b) defined “entertainment” as: “’Entertainment’ includes any exhibition, performance, amusement, game or sport to which persons are admitted for payment.” 14.4 Section 2(d) defined “payment for admission”. At the time of consideration by the Madhya Pradesh High Court, Section 2(d) read as under :

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

“2(d). ‘Payment for admission’ includes— (i) any payment for seats or other accommodation in any form in a place of entertainment ; (ii) any payment for a programme or synopsis of an entertainment ; (iii) any payment made for the loan or use of any instrument or contrivance which enables a person to get a normal or better view or hearing or enjoyment of the entertainment, which without the aid of such instrument or contrivance, such person would not get; (iv) any payment made by a person by way of contribution or subscription or installation and connection charges or any other charges, by whatever name called, for providing access to any entertainment, whether for a specific period or on a continuous basis; (v) any payment, by whatever name called for any purpose whatever, connected with an entertainment, which a person is required to make in any form as a condition of attending, or continuing to attend the entertainment, either in addition to the payment, if any, for admission to the entertainment or without any such payment for admission; (vi) any payment, made by a person, who having been admitted to one part of the place of entertainment is subsequently admitted to another part thereof, for admission to which a payment involving tax or more tax is required; Explanation I.—Any subscription raised or donation collected in connection with an entertainment in any form shall be deemed to be payment for admission. Explanation II.—Where entertainment is provided as part of any service by any person, whether forming an integral part of such service or otherwise the charges received by such person for providing the service shall be deemed to include charges for providing entertainment or access to entertainment also.”

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14.5 Section 4 provided the machinery for effectuating the charge. Pertinent for our interest is that Section 3-B, which was inserted in the M.P. 1936 Act with effect from 01.04.2000, dealt with cable operators. Sub-section (1) of Section 3-B dealt with entertainment duty payable by cable operator and it made a cable operator, providing access to entertainments through cable service to subscribers of such service, not being owner or occupants of rooms of hotel or lodging house, liable to pay duty at the rate of twenty rupees per month per subscriber in urban and cantonment areas. 14.6 The High Court, after surveying observations of this Court on the scope of ‘entertainment’, held that even in the absence of a specific section the inclusive definition of “entertainment” under section 2(b) would subsume the “entertainments” provided by DTH services and tax on DTH services can, therefore, be realised from the service provider the said expression in any case used in a plural sense under the Constitution. 14.7 Significantly, the aforesaid judgment of the Madhya Pradesh High Court was overruled by this Court in Tata Sky Ltd. vs. State of M.P., (2013) 4 SCC 656 (“Tata Sky v. M.P.”) holding that DTH services are not covered by the provisions of Section 3 read with Sections 2(a), 2(b) and 2(d) of the M.P. 1936 Act. It was noted that the history of legislative amendments showed that the M.P. Act of 1936 was inadequate to bring shows by video cassette recorder or video cassette and player and cable T.V. operations within the tax net, and hence specific sections were brought in. It was also noted by this Court that the collection machinery for levy of entertainment tax on cable TV operations was in-built and provided within the respective provisions of Section 3-B and lay not within Section 4, which provided the general collection machinery. Holding that as the M.P. Act of 1936 was concerned only with place-related entertainment, DTH services could not be brought within the tax net. 14.8 Coming back to the impugned judgment, it was argued before the Allahabad High Court that DTH services were not covered under the U.P. Entertainment and Betting Tax Act, 1979 prior to the 2009 amendments, and this was apparent from the fact

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State of Kerala & Another v. Asianet Satellite Communications Ltd. & Others

that the State had to bring in specific amendments to levy entertainment tax on DTH services as well as to prescribe a charging machinery for such a levy, which was earlier absent. Additionally, it was argued that there is no taxation by implication and therefore the express provisions for levy of entertainment tax on cable operators in the 1979 Act cannot be given a reading so broad to also include DTH services. Summarily, it was argued that substantial amendments were brought in the Act which cannot be given retrospective effect. However, this argument was negatived by the High Court by observing that inclusion of the words ‘Direct-to-Home service’ in Section 2(f-1) and Section 2(l)(vi) and (vii) was only by way of clarification to include DTH services. 14.9 According to the High Court, Section 3 i.e. the charging section made it clear that the tax is on entertainment and when viewed broadly, the emphasis of the Act was on entertainment and not the means through which such entertainment was being provided to the subscriber. Furthermore, the High Court did not accept the contention of the writ petitioners therein that there is a difference between cable services and DTH services. Reliance was placed on the judgment of this Court in Purvi Communication to observe that the tax is not on the vehicle for transporting the contents and the method, but is on the entertainment itself. Noting that as modern technologies develop ‘it will not be necessary for the Act to be amended again to impose entertainment tax on such entertainments’ as the principal activity will continue to remain entertainment and not the method by which the entertainment is provided, the High Court held that entertainment tax on DTH service is liable to be paid both for pre-amended period as well as after the amendments discussed above. 14.10 Useful to note is that both the learned Single Judge and the Division Bench of the Uttarakhand High Court had concluded that the State could not treat DTH service providers on par with cable operators for levy of entertainment tax due to the stark technological differences between the two. It stands to reason that these technological differences also manifest into the specificity and operations of these services. Similar

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provision for taxing cable operations was also present in the M.P. Act of 1936. 14.11 As the Impugned Judgment was pronounced on 27.07.2012 and the judgment of this Court was pronounced on 16.04.2013, the High Court did not have the benefit of this Court’s opinion in Tata Sky v. M.P. Even otherwise, in our view, there needs to be a specific inclusion of DTH services within the ambit of entertainment in the charging provision of the relevant taxing statute. In the absence of specificity, the lacuna of a missing taxable event persists insofar as bringing DTH services within the taxing net is concerned. It is trite law that no vagueness can be permitted in taxing statutes neither can a tax be levied by implication. Precisely this lacuna was sought to be filled by way of substantial amendments brought in by Amending Act of 2009. Furthermore, when the charging Section 4C levied entertainment tax on a ‘cable television network’ providing cable service, the statutory definitions of ‘cable service; and ‘cable television network’ could not be so broadly read to include DTH services. Inserted in 1995, Section 2(ee), in essence, defined cable service to mean the ‘transmission by cables of programmes’ and Section 2(eee), in essence, defined ‘cable television network’ to mean a system designed to provide ‘cable service for reception by multiple subscribers;’. In our view, to countenance reading in DTH service in the aforesaid carefully incised definitions would be to militate against the literal meaning of words. We need not reiterate that the activity of the DTH service does not involve transmission by cables of programmes. For these reasons, we are of the view that the State of U.P. cannot take strength from the unamended 1979 Act to levy entertainment tax for any period before the amendments came in force. Consequently, the conclusion of the Allahabad High Court that the entertainment tax on DTH service is thus liable to be paid both for pre-amended period as well as after the amendment is not correct. The amendments made cannot be construed to be a clarification to include the DTH service as a new technology and method within the purview of the Act. Hence, in the above context and to the limited extent, the appeal filed against the judgment of the Allahabad High Court is allowed.

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