Constitutional validity of the Parliament to levy Service Tax on financial leasing services including equipment leasing and hire-purchase

Association of Leasing & Financial Service Companies Vs. Union of India and others (Supreme Court), CIVIL APPEAL NO. 9344 OF 2010 (Arising out of S.L.P. (C) No. 23149 of 2009), Dated- October 26, 2010

Contentions of the Appellant

The Appellant put forth the following contentions:

• The Constitution has conferred exclusive power to the States to levy Sales Tax by expanding Entry 54, List II by insertion of Article 366(29A). Thus, it is not open to the Parliament to tax the hire-purchase and leasing transactions under Entry 97 of List I.

• The Madras High Court erroneously assumed that hire-purchase/ leasing transactions include rendition of service and thus, the impugned judgment needs to be set aside.

• When sales tax! VAT is charged by the States on the entire consideration including interest received under the hire-purchase and leasing transactions, any tax by the Parliament on the same is beyond the competence and residuary power under Entry 97 of List I.

• The levy of Service Tax in respect of the hire part in hire-purchase! leasing transactions is beyond the competence of the Parliament.

Contentions of the Respondents

The contentions of the respondents were as follows:

• There is a conceptual distinction between a Service Tax and a tax on hiring transaction. Service Tax is not imposed on the hiring part of a hire-purchase transaction.

• Article 366(29A) deems a tax on the delivery of goods on hire purchase to be a ‘sale’. To interpret this fiction to mean that even a tax on financial leasing services is a tax on delivery of goods amounts to creating a fiction within a fiction which is impermissible in law.

• Imposition of Service Tax on financial leasing services including equipment leasing and hire purchase does not by virtue of the doctrine of pith and substance fall within the scope of Entry 54 of List II as extended by Article 366(29A).

• Leasing and hire-purchase activities undertaken as business by Non Banking Financial Companies are regulated as para-banking activities by the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934. The said activities are financing activities which constitute ‘rendition of services to its customers’ which is the taxable event under Section 65(105)(zm) of the Finance Act, 1994 (as amended).

• The taxable event is rendition of service. Hence, the impugned tax is different and distinct from tax on sale of goods under Entry 54 List II of the Seventh Schedule to the Constitution.

• The finance lease and the hire-purchase finance fall under the expression ‘financial leasing services’ in Section 65(12) of the Finance Act, 1994 (as amended).

• The impugned levy is within the legislative competence of the Parliament with reference to Entry 97 of List I of Seventh Schedule of the Constitution and thus, the same is constitutionally valid.

Observations of the Supreme Court

The following observations were made by the Supreme Court.

• Service Tax is a tax on an activity whereas Sales Tax is a tax on sale of a thing or goods. The taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale.

• It cannot be said that Parliament divested itself of the power to levy Service Tax vide enactment of the Constitution (Forty-sixth Amendment) Act.

• The lessor arranges the finances. It accepts the invoice from the vendor and pays him. Thus, the lessor renders financial services to its customers. What is taxed is the income by way of finance! interest charges in addition to management fees! documentation charges which constitute the value of taxable services on which Service Tax is made payable.

Conclusion

The appeals were dismissed holding that Service Tax imposed by Section 66 of the Finance Act, 1994 (as amended) on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12) of the said Act, insofar as it relates to financial leasing services including equipment leasing and hire-purchase is within the legislative competence of the Parliament under Entry 97 of List I of the Seventh Schedule to the Constitution.