VIA NLSIR: Best Essays of the 7th Nani Palkhivala Foundation Taxation Law Essay Competition [# 1 by Vartika Patel]

The 7th Nani Palkhivala Foundation Taxation Law Essay Competition, 2014 was organised by the National Law School of India Review (NLSIR), the flagship journal of the National Law School of India University, Bangalore.

The results of this prestigious legal essay competition were declared a few days back.

We requested NLSIR and the authors to share the prize winning entries with us so that the essays could be made available for a wider audience. They are sweet chaps and they agreed. A big shout out to all the authors and the people at NLSIR!

Here’s the essay by Vartika Patel which won the 1st prize.

‘Aspect Theory’ Justify Overlapping of Central and State taxes by Vartika Patel

‘Aspect theory’ which came in the limelight from the BSNL case was although not named but was applied years before in India  in the case of  Mithan Lal v. The State of Delhi and Anr.[1] Where the constitution bench ruled that –

It would [..] be competent to Parliament to impose tax on the supply of materials in building contracts and to impose it under the name of sales tax, as has been done by the Parliament of the Commonwealth of Australia or by the Legislatures of the American States.

The court in the present case clearly stipulated that the aspect of supply of materials will only be charged under Sales Tax, nothing more or less. There was no confusion regarding the inclusion of service provided by the contractor in the sales tax. The law regarding the aspect which has to be charged under sales tax was unambiguous.


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.[2] 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.[3]

In Federation of Hotel & Restaurant Association of India v. Union of India[4], 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 and expenditure aspect could be held to be excluded from the luxury aspect. The plea was upheld. It was observed 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 but that would not in any manner allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods.[5]


The crucial questions, while applying ‘aspect theory’ therefore, are whether the economists’ concept of such a tax qualifies and conditions the legislative power and, more importantly, whether the impugned two taxable incidents can be isolated and identified as a distinct aspect susceptible of recognition as a distinct field of tax legislation.

Apex Court held in Larsen & Toubro Ltd. v. Union of India[6] that, the cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of materials involved in the execution of the works contract only can be included in the value of the goods.

In Imagic Creative (P) Ltd. V. Commissioner of Commercial Taxes and others[7], the S.C.pointed out that payment of service tax, as also VAT, are mutually exclusive. A transaction or activity may consist of different elements providing for attracting different nature of levy.

In the case of Tata Sky Limited vs The State Of Tamil Nadu[8] Countering the submissions made by the writ petitioner that DTH service being already a subject matter of taxation under Entry 92C List I of VII Schedule to the Constitution of India, the same could not be subjected to levy under the Tamil Nadu Entertainments Tax Act, it is stated that the levy of service tax is essentially a subject matter falling under Entry 92C List I of the VII Schedule to the Constitution of India, but the mere availability of Entry 92C List I of the VII Schedule to the Constitution of India to tax the service provided through DTH, however, cannot obliterate or wipe out the levy of tax on the entertainment provided. Being two different fields, there could be no overlapping of this levy. Hence, a harmonious construction consistent with the aspect theory must be adopted.

There is no scope of confusing one for the other. Even if we assume that the concepts are intertwined, the strands can easily be separated by employing the aspect theory. The DTH system had two aspects – (1) a service aspect; and (2) an entertainment aspect. The former is taxed as a service under the service tax regime and the latter is subjected to tax as an entertainment under the said Act read with entry 62 of List II. They are two separate and distinct taxable events in respect of each of the two aspects.


In Escotel Mobile Communications Ltd. vs. Union of India and Others[9],  Court said that “while the State Legislature is competent to impose tax on “sale” by a legislation relatable to entry 54 of List II of Seventh Schedule, the tax on the aspect of “services” rendered not being relatable to any entry in the State List, would be within the legislative competence of Parliament under Article 248 read with entry 97 of List I of the Seventh Schedule to the Constitution.”


Concept of repugnancy under Article 254 relating to List III is different from repugnancy arising due to overlapping in List I and List II in which case principle of pith and substance is applied to determine legislative competence. Entries in the lists are not powers of legislation but fields of legislation. Taxation is distinct matter for legislative competence. Power to tax cannot be deduced from general entry. There is no overlapping in taxing power. Entries 82 to 92C and 97 of List I and Entries 45 to 63 of List II deal with taxes. There is no entry relating to tax in List III.[10] So there is no possibility of repugnancy.

Interpretation in case overlapping is alleged Federation of Hotel & Restaurant Assn. of India v. Union of India[11]  held that [..] 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.

Referring to a strict construction that an ordinary law is normally subjected to, the Apex Court observed that it is based upon the presumption that the Legislature intends to legislate on fields assigned to it under the respective entries in the List. Thus, when the Legislature is given power to make law, “with respect to”, the matters enunciated in the respective Lists, it is a matter to be determined in each case as to the true substance of the enactment, wherein the doctrine of pith and substance and aspect theory assume significance.[12]


In State of W.B. Vs. Kesoram Industries Ltd[13], the Apex Court pointed out that the machinery employed for assessing the tax must not be confused with the nature of tax and the amount may be measured in many ways; but the distinction between the subject matter of tax and the standard by which the tax is measured must not be lost sight of. The concepts are described as subject of tax and measure of tax. While the subject of tax is clear and well-defined, the amount of tax is capable of being measured in many ways for the purpose of quantification. The Apex Court pointed out that defining the subject of tax is a simple task, devising the method of taxation is a far more complex exercise and hence, the Legislature has to be given more flexibility in the latter field (Article 14).

Aspect theory is applied only for the purpose of quantification of tax by providing the concept of different taxable events in one transaction it is does not deal with subject of tax , so it must not be construed that it creates conditions for  overlapping of central and State taxes.


In the decision reported in State of W.B. V. Kesoram Industries Ltd. and others[14], referring to the aspect theory, the S.C. pointed out that [..] there could be no question of a conflict solely on account of two aspects of the same transaction being made a subject matter of legislation by two legislatures falling within two fields of legislation respectively available to them. So long as the essential character of the levy is not departed from within the four corners of the particular Entry, the measure of tax or the manner of levying the tax would not have any vitiating effect.

As per scheme under the Constitution, subject of tax falling in power of a particular legislature in one aspect may fall within legislative power of another in other aspect. Such overlapping is unavoidable. Same transaction may involve two or more events in different aspects. There is distinction between general subjects of legislation and taxation. The entries have to receive liberal construction.[15]

The different aspects of taxation has nothing to do with LIST 1 or LIST II which deals with subjects on which Centre and State can legislate. The conflict here is of ‘Measure of Taxation’ and not of ‘Power of Taxation’. There may be more than one taxable events and when these taxable events involves imposition of different kinds of taxes on different aspects of transaction , there may not be any confusion regarding powers of taxation.

Every tax may be levied on an object or on an event of taxation. Subject of tax is distinct from incidence of taxation.[16]


In Lefroy’s Canada’s Federal System[17] the learned Author referring to the “aspects of legislation” observes 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”.[18]

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.”

Thus existence of more than one aspect in a transaction means there is more than one point of view of legislator and if harmoniously construed both the point of views must be given importance.

LORD SIMONDS in Governor-General-in-Council v. Province of Madras[19] in the context of concepts of Duties of Excise and Tax on Sale of Goods said:

“… The two taxes, the one levied on a 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 separated 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 or workshop for the first time on the occasion of its sale…”

LORD FITZGERALD said long ago in Hodge v. The Queen[20], that the subjects which fall within section 91 in one aspect, may, under another aspect, fall under section 92.”[21]

For instance, a law providing for suspension or revocation of the right to drive a car upon a highway because the driver was drunk has the provincial aspects of control of highways as local works and of the right to drive as a civil right in the province, these things reflecting the provincial responsibility for safe and efficient circulation of traffic. The law mentioned has also the federal aspect of criminal law, reflecting the federal responsibility to forbid and punish such dangerous anti-social conduct.[22] Where does the power to suspend and revoke drivers’ licences reside, or do both parties have it? Such laws with double aspects in the logical sense are the usual and not the exceptional case.[23]

 It follows from this theory that two relatively similar rules or sets of rules may validly be found, one in legislation within exclusive Central government’s jurisdiction, and the other in legislation within exclusive State government’s jurisdiction, because they are enacted for different purposes and in different legislative contexts which give them distinct constitutional characterizations. And to fulfill both purpose of legislation application of aspect theory is must.

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.

The aspect theory is neither an exception nor even a qualification to the rule of exclusive legislative jurisdiction. Its effect must not be to create concurrent fields of jurisdiction, in which Parliament and the legislatures may legislate on the same aspect. On the contrary, the aspect theory can only be invoked when it gives effect to the rule of exclusive fields of jurisdiction. As its name indicates, it can only be applied in clear cases where the multiplicity of aspects is real and not merely nominal.

If there doesn’t exist a distinct aspect of taxable event separate from an already existing taxable event then in that case aspect theory will not be applicable and if erringly (wrongly) applied , will not justify the overlapping of state and central tax.[24]


Rationally the  field of taxation is classified both ways – how then do we determine  whether the power to impose tax is exclusively LIST I or LIST II power or is something both legislative authorities have? The basic solution here comes by decisions on the relative importance of the central features and the state features respectively of the challenged law in contrast to one another. Respecting the detailed aspects raised by the challenged law, one must ask – when does the need for a national standard by Central law outweigh the need for State autonomy and possible variety as developed by the laws of the several States, or vice versa?

The aspect theory implies that different aspects of transactions can be taxed under different statutes. The aspect doctrine legitimises the levy of more than one tax on subject matter, if incidence of each of the taxes is different and where each of the taxes is imposed under different statutes and for different reasons. For example, customs duty is levied on import of goods from outside India, excise duty is leviable on manufacture of goods, sales tax is levied on sale of goods and income tax is charged on income of an assessee. However, the aspect theory can be applied only when a tax is levied on different taxable events of the same transaction.[25]

Aspect theory though does not allow the State Legislature to entrench upon the Union List and tax services by including the cost of such service in the value of goods but at the same time does not disentitle the State to tax the sale of goods element involved in the execution of works contract in a composite contract like contract for construction of building and sale of a flat therein.[26]

As per the Aspect Theory, different aspects of the same transaction can involve more than one taxable event. There is nothing to prevent the taxation of different aspects of the same transaction as separate taxable events.[27]

In BSNL case Court also ruled out the possibility of double taxation not allowing the states to encroach upon the Union list and tax services by including the cost of such services in the value of goods. The Court equally warned the Centre for doing the opposite.[28]

Despite several case laws applied aspect theory, still there is ambiguity and chaos regarding the recognition and acceptability of the same. To avoid such ambiguity in imposition of taxes andto avoid double levy under two Central laws, or under Central and State laws, detailed

For instance it would be better if the valuation provisions themselves provide a scope for computation of value of services on actual basis, i.e., by allowing deduction of amount liable to VAT, excise duty or customs duty under the applicable State/Central laws.[29]

Aspect theory provides a better scenario by allowing the Centre and the State to tax whenever there is taxable event irrespective of the fact that that transaction is already taxed for different aspect. It allows the legislature to fulfill its object of formulation of taxing statutes and does not limit the scope of the impost of tax to Centre or State in particular transaction.

[1] [1959]1SCR445.

[2] Federation of Hotel & Restaurant Association of India v. Union of India: [1989]178ITR97(SC).

[3] Shilpa Color Lab v. CCE, Calicut – 2006 (10) TMI 35 – CESTAT, BANGALORE.

[4] [1989]178ITR97(SC).

[5] Idea Mobile Communication Ltd. Vs. C.C.E. & C., Cochin (4th August, 2011), SC: (2011-TIOL-71-SC-ST).

[6] (1993) 1 SCC 365.

 [7] (2008) 2 SCC 614 .

 [8] 2012 Madras High Court.

[9] (2002) Vol. 126 STC 475 (Kerala),

[10] M/s. Shubh Timb Steels Ltd. V/s. UOI & Anr. – 2010-TIOL-765-HC-P&H-ST.

[11] 1989 -TMI – 40104 – (SC).

[12] Tata Sky Limited vs The State Of Tamil Nadu  (19 October, 2012).

[13] (2004) 10 SCC 201.

[14] Id .

[15] Id.

[16] Id.

[17] LEFROY, A. H. F. (AUGUSTUS HENRY FRAZER), CANADA’S FEDERAL SYSTEM (1913 :University of California).

[18] Federation of Hotel & Restaurant Association of India v. Union of India [1989]178ITR97(SC).

[19] AIR 1945 PC 98 .

[20] (1883-84) 9 A.C. 117, at 130.

[21] Also see Union Colliery Co. of British Columbia v. Bryden, 1899 AC 580.

[22] Provincial Secretary of P.E.L v. Egan and A.G. of P.E.I. [1941] S.C.R. 396.

[23] W. R. Lederman, The Concurrent Operation Of Federal And Provincial Laws In Canada, Mcgill Law Journal ,Vol. 9.

[24]Dr. Sanjiv Agarwal ASPECT THEORY INTERPRETATION OF TAX , May 20, 2011 available HERE.

[25] Bharat Shemlani , Two in one blow — Lease Tax/VAT on Transfer of right to use goods vis-à-vis Service Tax on IPR and Franchise Services available HERE.

[26] Larsen & Toubro v. State of Karnataka [2008-TIOL-186-SC-CT] (L&T).

[27] Id.

[28] BSNL and Others v. Union of India (SC) (2006) 145 STC 91.[29] Vineet Sodhani & Deepshikha Sodhani , Sale v. Service, Taxmann [2012] 23 46 (Article).

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