Can Aspect Theory justify overlapping of Central and

State Taxes:
A Critical Overview

The domain of substantive law has a close-knit relationship with almost

every aspect of the human society. The principles, theories and
precedents enunciated by courts concerning aspects of human society as
expressed through the judicial decisions, are not by any means
insignificant in their import on the destiny of human-kind. In adjudicating
the conflicting claims, courts frequently reveal of the legal concepts about
the structure and basic foundation of our society, which have probably
had as great a formative influence on our social institutions as that
exerted by the non-legal specialists in the fields involved. Legal lore is rich
in concepts concerning all aspects of our society. Such concepts, however,
when involved in court decisions, may find their justification not in the
social or economic realities, but in the principles of narrower field of
jurisprudence.
A State must secure money for its maintenance. The power to make
compulsory levies on its citizens for its support is inherent and is almost
customary in the sovereignty of States. Such power is legislative and is
limited only by the Constitutional prohibitions. Legislatures pass tax laws
which, in lieu, helps the government in allocating the costs to provide for
the constituent elements of the population in whose welfare the
government is concerned. This may probably be one of the earliest
principles of levying of taxes which followed from a payment for services
received by the tax payer from his government or overlord. The payment
and services made by a vassal to his overlord for protection in the feudal
society of middle ages can be explained on such a theory. This system
broke down with the feudal society, although somewhat of a counterpart
still remains in the system as fee is charged by the governmental
agencies for special services.
Different statutes and judicial decisions have given expression to some of
the concepts of taxation and of one such is the Aspect Theory, and it is
the purpose of this essay to examine and justify the same!
To understand, the concept of taxation and to know what exactly is
taxable, plays a very pivotal role. After the Indian Independence, the
Constitution of India came into being under which certain amendments
were made by the Constitution (Sixth Amendment) Act, 1956 whereby;

a. Taxes on sales or purchase of goods in the course of inter-State

trade or commerce were brought expressly within the purview of the
legislative jurisdiction of Parliament;
b. Restrictions could be imposed on the powers of State legislatures
with respect to the levy of taxes on the sale or purchase of goods
within the State where the goods are of special importance in the
inter-State trade or commerce.
This amendment also authorised the Parliament to formulate principles for
determining when a sale or purchase takes place in the course of interState trade r commerce or in the course of export or import or outside a
State.
All of this was necessitated because India was newly independent and to
develop the countrys infrastructure, law and public order, protection of
property, public works, social engineering, etc., imposition of tax on the
individuals gathers the most revenue for such works.
Taxes in India are levied mainly by the Central and State Governments.
Apart from these, there are other taxes which are levied by the local
authorities like the Municipality. This authority to levy a tax is derived from
the Constitution of India whereby the power to levy taxes between various
agencies of the Centre and State is allocated. Article 265 of the
Constitution of India acts as a restriction and thus, states that No tax
shall be levied or collected except by the authority of law. Thus, the taxes
levied and collected by the authority is backed by an accompanying law,
passed either by the Parliament or the respective State Legislature.
Article 246 distributes legislative powers including powers of taxation
between the Central and State Legislature. The Seventh Schedule
enumerates the subject matters of taxation using these three lists:

List I entailing the areas on which only the parliament is

competent to make laws,
List II entailing the areas on which only the state legislature can
make laws, and
List III listing the areas on which both the Parliament and the State
Legislature can make laws upon concurrently.

To enable the Parliament to formulate by law, principles for determining

the modalities of levying the service tax, a new Article 268A was inserted
for service tax levy by Union Government and also its collection and
appropriation by the Union Government. As an amendment to Schedule
VII of the Constitution, in List I (Union List) after entry 92B, entry 92C was
inserted for taxes on services.
Entry 60 of List II of the Constitution of India states that taxes as
professions, trade, callings and employment. Entry 60 is a taxing entry,
and is not a general entry. Tax on professions etc., has to be read as a levy

on the professions, trade, callings, etc. Therefore, entry 60 which refers to

professions cannot be extended to include services. This is what is called
an aspect theory1

Now what is this Aspect Theory?

Any subject which is one aspect and one purpose fall within a particular
legislature may, in another aspect and for another purpose fall within
another legislative power. They might be overlapping, but that should be
in accordance with the law. Same transaction may involve two or more
taxable events in its different aspects, but the fact that there is
overlapping does not detract it from distinctiveness of aspects2.
The Supreme Court in the case of Shilpa Color Lab examined the aspect
theory in the light of the landmark decision in the State of Madras v.
Gannon Dunkerly & Co. Ltd. and held that the aspect theory would not
apply to enable value of services to be included in the sale of goods or
price of goods in the value of services. It was also held in the same case
that, the Service Tax is a levy on the service element and, therefore, any
attempt to charge service tax on cost of materials would amount to taxing
the goods, which is a subject-matter of State levy under the Sales Tax Law
or VAT Law, as the case may be.
In another case3, the levy considered was expenditure tax under Central
Law with reference to the contention that the same was in substance tax
on luxury under Entry 62 of List II. Stand of the Central Government was
that expenditure aspect was different from luxury aspect. The plea was
upheld and was observed that 26 Wherever legislative powers are
distributed between the Union and the States, situations may arise where
the two legislative fields might apparently overlap. It is the duty of the
courts, however difficult it may be, to ascertain to what degree and to
what extent, the authority to deal with matters falling within these classes
of subjects exists in each Legislature and to define, in the particular case
before them, the limits of the respective powers. It could not have been
the intention that a conflict should exist; and, in order to prevent such a
result the two provisions must be read together, and the language of one
interpreted, and, where necessary modified by that of the other.

In the case of Bharat Sanchar Nigam Ltd. v. Union of India 4, while deciding
that there can be a simultaneous levy of two or more taxes on the same
1

All India Federation of Tax Practitioners v. Union of India 2007 TMI 1556 SUPREME
COURT
2
Shilpa Color Lab v. CCE, Calicut 2006 TMI 1022 (CESTAT, BANGALORE)
3
Federation of Hotel & Restaurant Assn. of India v. Union of India 1989 TMI 40104
SUPREME COURT
4
2006 TIOL 15 SC CT LB

transaction, the Apex Court has also observed that the same transaction
may involve two or more taxable events in its different aspects! In
other words, though there can be a simultaneous levy of two different
taxes, namely, sales tax and service tax, on the same transaction, they
shall be on different components such as sales tax on the "goods"
component and service tax on the "service" component! This has been
further reinforced by the Apex Court in the same decision, wherein, it has
observed as:
This does not however allow State to entrench upon the
Union List and tax services 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 (29A), 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
SIM cards, if they are found ultimately to be goods, in the cost of
the service.

Further, in this far-reaching judgement, the Apex court, while framing

various questions has, inter-alia, also framed an interesting question as
under:
"Would the "aspect theory" be applicable to the transaction enabling the States
to levy sales tax on the same transaction in respect of which the Union
Government levies service tax?"

After addressing all the issues with finesse, the Apex Court 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.

This proposition makes it clear that, though there may be an overlapping

of levy in a single transaction, but there cannot be an overlap in the value
of such taxable events.
In the case of Gujarat Ambuja Cements Ltd. v. Union of India 5, the
Supreme Court has held that,
This mutual exclusivity which has been reflected in Article 246(1)
means that taxing entries must be construed so as to maintain
exclusivity.
5

2005 TIOL 53 SC - ST

Putting it limpidly, if in a composite transaction like Works contract, where

there is an existence of both goods as well as services, there can be a
levy of both sales tax as well as service tax but the value for the sales tax
shall be the former minus the value of the service component and vice
versa. In other words, if the value for the sales tax and service tax are
added up, they cannot exceed the total value of the transaction.
Be it the State which levies the sales tax on a composite contract as per
Art 366(29A) or the Centre which levies the service tax on such composite
contracts as per Section 67 of the Finance Act, 1994, shall always keep
the above ratio in mind, before prescribing the value for their respective
levies.
The ratio explained by the Apex Court in the BSNL case 6 as stated above
explains the aspect theory and its justification as follows:

Consequent to the 46th Amendment to the Constitution whereby an

amendment was effected to Art. 366 (29A), the State is empowered
to tax composite contracts like Works contracts, hire purchase
contacts and catering contracts.
Apart from the works contracts and catering contracts where
splitting of the service and supply has been constitutionally
permitted in Clauses (b) and (f) of Clause 29A of Art. 366, there is no
other service which has been permitted to be so split.

The test therefore for composite contracts other than those

mentioned in Article 366 (29A) continues to be - did the parties have
in mind or intend separate rights arising out of the sale of goods. If
there was no such intention then there is no sale even if the
contract could be disintegrated. The test for deciding whether a
contract falls into one category or the other is to as what is the
substance of the contract.

Goods may be a tangible property or an intangible one. It would

become goods provided it has the attributes thereof having regard
to (a) its utility; (b) capable of being bought and sold; and (c)
capable of being transmitted, transferred, delivered, stored and
possessed. If a software whether customized or non-customised
satisfies these attributes, the same would be goods.

Delivery of goods may not be simultaneous with the transfer of the

right to use. But the goods must be in existence and deliverable
when the right is sought to be transferred and therefore whether the
goods are incorporeal or corporeal, tangible or intangible, they must
be deliverable.

Bharat Sanchar Nigam Ltd. v. Union of India 2006 TIOL 15 SC CT LB

The same transaction may involve two or more taxable events in its
different aspects.

The State shall not entrench upon the Union List and tax services by
including the cost of such service in the value of the goods.
Similarly, the Centre cannot include the value of the goods, in the
cost of the service.

Thus, the principal question to be decided in these matters is the nature

of the transaction. It needs to be determined that whether it is a sale or is
it 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 of List II. If
it is a service, then the Central Government alone can levy such service
tax under Entry 97 of List I or Entry 92C of List I. And if the nature of the
transaction shares in with both the characters of sale and service, then
the moot question would be whether both legislative authorities could
levy their separate taxes together or only one of them.7
The answer to this principal question has been fairly explained with the
above citations and it stands corrected that although aspect theory
justifies the overlapping of central and state taxes and on the same
commodity, goods or services but the aspect on which the tax shall be
levied on such good, service or commodity must be different and then
only the overlap will not be unconstitutional. To solve this problem, the
Goods and Service Tax (GST) regime can be brought forward in the
taxation system whereby broad based consumption tax may be applied
on the goods and services. Implementation of subsuming the State and
Central indirect taxes in this Goods and Service Tax regime. Input credit
can be made available to goods and services across each stage. This GST
may subsume various indirect taxes like VAT, Excise and Service Tax. This
proposition of GST is mainly to bring homogeneity in the definitions and
uniformity towards the tax rule across India and this may help in ending
the anomaly that exists till date.

BHARAT SANCHAR NIGAM LTD Vs UNION OF INDIA