Kerala HC upholds the constitutional validity of levy of Service tax on admission and access to entertainment event & amusement facilities

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1 3 May 2016 EY Tax Alert Kerala HC upholds the constitutional validity of levy of Service tax on admission and access to entertainment event & amusement facilities Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert gives an update on the recent decision 1 of the Kerala High Court ( HC ). The issue before the HC was whether deletion of the entry admission and access to entertainment event and amusement facilities from the negative list of services and consequent imposition of service tax on such activity could be considered to result in the Union Parliament trenching upon the exclusive field assigned to the State (under Entry 62 List II of the seventh schedule of the Constitution of India). Kerala HC held that: The facility for the provider is not amusement, but it is a service offered for a fee. The carrying on of an amusement park is an activity undertaken for another, the admittance to which is regulated by fees. It partakes two distinct and different aspects. The power to tax their distinct aspects is with the Union Parliament and the State Legislature respectively. There is no conflict between the two entries (Entry 97 of List I and Entry 62 of List II), which are fields of legislation. The two aspects taxed by the respective legislatures are the 'service' and the 'amusement'. The tax, imposed by the Union Parliament, in pith and substance, is on the service offered by the petitioners. Accordingly, Kerala HC has upheld the constitutional validity of levy of Service tax on admission and access to entertainment event & amusement facilities TIOL-856-HC-KER-ST

2 Background Petitioners are corporate bodies carrying on amusement parks, which come within the ambit of amusement and entertainment as contained in Entry 62 of List II of the seventh schedule of the Constitution of India. Entry 62 of List II (i.e State List) deals with taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. Charging section 3 of Kerala Local Authorities Entertainments Tax Act, 1961 ( State Act ) provides for levy and rate of tax levied on the price for admission to any entertainment. Section 3B of the State Act provides the measure for levy of annual entertainment tax based on the investment, area in which such park is situated and at the rates fixed by the local authority. Section 66D of The Finance Act, 1994 ( Act ) lists down services on which Service tax is not leviable. Admission to entertainment events or access to amusement facilities was included in negative list of services under section 66D(j) w.e.f 1 July However, the above clause was deleted from 1 June 2015 and thus, admission to entertainment events or access to amusement facilities was made liable to Service tax. Aggrieved by the levy of Service tax on the admission and access to such amusement parks, petitioners filed a writ petition contending that such a levy encroaches upon the State s power to levy entertainment tax. trenching upon the exclusive field assigned to the State (under Entry 62 of List II of the seventh schedule of the Constitution of India). Petitioner s contentions Petitioners contended that resort to residuary entry (Entry 97 of Union List) can be taken only when it is found that the object of tax is not available in any of the other entries in List II and List III. Local bodies are taxing the petitioners on the basis of Entry 62. Thus, there can be no service element, since what the petitioners offer is amusement and entertainment and what the recipients get is also amusement and entertainment. This is clearly covered under Entry 62 and nothing remains to be taxed by the Union since no service is offered. There is no activity carried on inside the premises of the petitioners other than the persons admitted, regaling themselves in various activities which tend to amuse and entertain those individuals. Petitioner relied on Division Bench decision in the case of UOI vs. Kerala Bar Hotels Association 2 wherein Kerala HC held that levy of Service tax on services provided by air conditioner restaurants, hotels, guest house, etc. in relation to providing of accommodation is unconstitutional. Amusements being covered under Entry 62 of List II, no power can be traced to the residuary power, to tax the very same activity. Respondent s contentions Accordingly, the issue before the HC was whether removal of admission and access to entertainment event and amusement facilities from the negative list of services and consequent imposition of service tax on such activity would result in the Union Parliament CBEC sought dismissal of writ petitions on the ground of application of aspect theory and there being two distinguishable aspects involved, which are liable to be taxed by the Union Parliament and the State (1) ILR Kerala 267

3 The respondent contended that there is no overlapping of power and the trenching, if at all, is incidental, which does not take away the power of the Union Government. High Court ruling HC observed that definition of service is all encompassing bringing within it, any activity carried out by a person for another for consideration. The method of inclusion of taxable services has been done away with and the charging section 66B has been introduced. Section 66B provides a uniform levy on all services other than those specified in the negative list (provided under section 66D). Admission and entrance to entertainment and amusement facilities are now omitted from section 66D. The fact that admission to entertainment events and access to amusement facilities are included in the negative list itself is a pointer that the same partakes a service and the Parliament initially exempted it from the levy. The exclusion of such activity from the negative list empowers the Union Parliament to tax the said services. The issue to be decided is whether the activity can only be taxed by the State for reason of the entire activity being subsumed in the definition of amusement leaving nothing else to be taxed by the Union. There is definitely an element of service in providing a facility, which would result in enjoyment of an activity capable of being termed as an amusement or entertainment. The facility for the provider is not amusement, but it is a service offered for a fee. The carrying on of an amusement park is an activity carried out for another, the admittance to which park is regulated by fees. It partakes two distinct and different aspects. The power to tax, which, is respectively on the Union Parliament and the State Legislature and the Union Parliament has the legislative competence to tax the aspect of service in an amusement park. The measure of tax may at times provide an indication as to the nature of tax but it can never determine it. In this regard, HC relied upon the judicial precedent in the case of State of WB vs. Kesoram Industries Ltd 3 wherein it was concluded that any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy. It also relied on various other caselaws 4 wherein it was held that identical measure does not detract from the fact that the levies were separate imposts. Amusements are covered by Entry 62 of List II and the aspect of service involved, when the facilities for amusement is offered for a price cannot be ignored. Entry 62 of List II covers amusements as an object of taxation while Entry 97 of List I seeks to levy tax on provision of services. Negative list does not refer to amusement but tax on admission on entry of such events, understanding the power to levy service tax on such facilities offered by one to another for a consideration. The Union Parliament has provided for tax on admission to the parks, making it clear that the levy is only when the service is availed of. The service provided is the object of taxation and it is imposed on the admission fee which is a permissible measure of tax. The incidence of which is (10) SCC FCR (2) SCC 410

4 at the time when a person pays the admission fee to enter the park. There is no conflict between the two entries, which are fields of legislation. The two aspects taxed by the respective legislatures are the 'service' and the 'amusement'. The tax, imposed by the Union Parliament, in pith and substance, is on the service offered by the petitioners. There is no trenching of the Union Parliament on the power conferred on the State, in fact or in law, since the respective legislatures tax two different aspects. Comments The controversy related to the application of the aspect theory for determining the vires of the Union and the State Governments continues.

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