Deconstructing the Dual Levy in State of Kerala v. Asianet Satellite Communications Ltd. by application of the Doctrine of Pith and Substance and Aspect Theory
The Court applied the Doctrine of Pith and Substance and affirmed the legislative competence of the Union and State Legislatures. The Court also applied the Aspect Theory to uphold the simultaneous levy by both Centre and State by emphasising the two different aspects arising out of the same transaction or activity by highlighting how such transaction meets the objects of the relevant entries i.e. Entry 97 of List I and Entry 62 of List II of the Seventh Schedule.
The Supreme Court of India in State of Kerala v. Asianet Satellite Communications Limited, 2025 SCC OnLine SC 1225 put a quietus to the issue of levy of dual taxation on broadcasting service providers in a group of appeals filed by various States and Direct to Home (DTH) operators from decisions of various High Courts challenging the validity of imposition of both service tax and entertainment tax on DTH Broadcasting Services.
Various State Governments imposed entertainment tax on DTH services relying on Entry 62 of List II of the Seventh Schedule of the Constitution which provides for “taxes on luxuries, including taxes on entertainments, amusements, betting and gambling” prior to the 2016 amendments to Entry 62. It is important to note that the Central Government introduced the levy of service tax on DTH Operators under the Residuary Entry (Entry 97) in List I of Seventh Schedule of the Constitution.
Contentions Before the Court:
The DTH operators contended that imposition of entertainment tax by the State Government was bad in law as service tax is being levied by the Central Government on broadcasting services and that the same will burden them with further tax. Further, Entry 62 under List II provides ‘public’ entertainment, contrary to the service provided by them to the home subscribers which is ‘private’ entertainment.
The State Governments opposed the plea of DTH operators by submitting that imposition of entertainment tax is well within the legislative competence of the State as Entry 62 of List II covers both public as well as private entertainment.
Findings of the Court
The Supreme Court considered the legislative competence of the Centre and State and while applying the “Doctrine of Pith and Substance” and “Aspect Theory” and held that levy of service tax by the Central Government and levy of entertainment tax on the same transaction or activity i.e. broadcasting is not unconstitutional, and both taxes can be levied simultaneously.
Re: Doctrine of Pith and Substance
The Court was of the view that the constitutional validity of a taxing statute is to be determined on the basis of legislative competence and the same has to be examined in the context of the Doctrine of Pith and Substance. Article 246 of the Constitution of India provides that Parliament or a State Legislature has the competence to legislate in relation to the particular field of legislation as given in the respective entries of Seventh Schedule. In case of an overlap between two entries, the Doctrine of Pith and Substance is applied to find out the true character of the entry within which the taxable event would fall.
The application of this Doctrine implied that if a piece of legislation is in Pith and Substance coming within an entry in a particular list, it is a valid legislation as the legislature has the legislative competence to enact that legislation.
Re: Legislative Scheme under Article 246 and the Lists under Seventh Schedule of the Constitution
The Court considered the Seventh Schedule and observed that the Entries in the three Lists are divided in the following categories- (a) which enable laws to be made, (b) enables imposition of tax and (c) collection of fees and stamp duties.
The Court reasoned that there cannot be any overlap on taxing powers between the Centre and State as the subjects are specified in their respective Lists.
The Court observed that the Central Government derives taxing powers on broadcasting services through entry 31 of List I which regulates broadcasting and from Entry 97 which is a residuary power for any matter not enumerated in List II or List III including any tax not mentioned in those Lists.
The Court observed that Entry 31 of List I did not regulate entertainments or amusement or luxuries, which is regulated by Entry 33 of List II empowering State to levy tax through Entry 62 of List II which provides for taxes on luxuries, including taxes on entertainments, amusements.
Re: Scope of the expression “entertainments”
It was observed that the expression “entertainments” encompasses both the categories of persons – one who derives amusement and one who caters to it, and it has to be interpreted broadly to not restrict to public places only.
The legislative competence for taxation on ‘entertainments and amusements’ are to be interpreted comprehensively and not in a restricted or narrow manner. The Court after analysing the various entries was of the view that the pith and substance of the provisions of the Acts passed by State are in the realm of taxation of entertainment/amusement as luxuries within Entry 62 of List II. It further observed that broadcasting service is regulated under Entry 31 of List 1 as a form of communication.
Re: Aspect Theory
The Court relied upon the principles of ‘Aspect Theory’ as well which was relied upon by the High Courts in some of the impugned judgements. The Court noted that ‘Aspect Theory’ is applied by the Canadian Courts to determine legislative competence of the Federal and Provincial States to enact law on a particular subject.
However, its application in India is different because the Centre and State both cannot legislate on the same subjects. The court clarified that the Doctrine of Pith and Substance is applied to determine legislative competence of a particular enactment by tracing the subject matter with the charging section, and when a challenge to its constitutionality is made. However, the Aspect Theory can be only applied to ascertain the applicability of a taxing statute vis-à-vis the activity sought to be taxed.
The Court applied the Aspect Theory by specifying that the activity carried out by the DTH operators involves two aspects although it arises out of the same transaction or activity, i.e. broadcasting. The first aspect being the activity of transmission of signals of the content to the subscribers, and the second aspect being the effect of such transmission by way of apparatus like Set-Top boxes and the viewing cards inside Set Top boxes, the purpose of which is to provide content for the purpose of entertainment, which is a luxury as per Entry 62 in List II.
After considering the aforesaid, the Court ruled that the DTH Operators are liable to pay service tax on broadcasting services under the Finance Act, 1994 (as amended) as well as entertainment tax levied by State Governments under Entry 62 of List II being a specie of luxuries and that there is no overlap either in fact or in law. This means that both entertainment tax by the State and service tax by the Union can be imposed on DTH services as they are distinct aspects of the same activity.
Conclusion
The Court applied the Doctrine of Pith and Substance and affirmed the legislative competence of the Union and State Legislatures. The Court also applied the Aspect Theory to uphold the simultaneous levy by both Centre and State by emphasising the two different aspects arising out of the same transaction or activity by highlighting how such transaction meets the objects of the relevant entries i.e. Entry 97 of List I and Entry 62 of List II of the Seventh Schedule.
The Court observed that the same transaction or activity may involve two or more taxable events in its different aspects which may enable Union and State legislatures to levy a tax on the transaction or activity. It must be borne in mind that the Court has also held that the aspects of taxation in the Lists I and II are clearly delineated and there cannot be any overlapping in law on that behalf.
Disclaimer – The article has been authored by Vanita Bhargava, Partner, Vishal Shrivastava, Principal Associate and Aman Khemka, Associate. Views expressed are personal.