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Civil Appeal No. 9344 of 2010 with C.A. Nos. 9345-9348 and 9350-9351 of 2010. Case: Association of Leasing and Financial Service Companies Vs Union of India (UOI) and Ors.. Supreme Court (India)

Judgment Cited in 4 Precedent Map Related
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Case NumberCivil Appeal No. 9344 of 2010 with C.A. Nos. 9345-9348 and 9350-9351 of 2010
JudgesS.H. Kapadia, C.J., K.S. Radhakrishnan and Swatanter Kumar, JJ.
IssueFinance Act, 1994 - Sections 65, 65(10), 65(12), 65(72), 65(105), 66, 67; Finance Act, 2001 - Sections 66, 67 and 137; Finance Act, 2004 - Section 90; Finance Act, 2007 - Section 135; Reserve Bank of India Act, 1934 - Section 45I, 45IA and 45JA; Sale of Goods Act, 1930; Constitution of India (Forty-sixth Amendment) Act, 1982; Government of ...
Citation2010 (9) UJ 4814 (SC), 2010 (20) STR 417 (SC)
Judgement DateOctober 26, 2010
CourtSupreme Court (India)

Judgment:

S.H. Kapadia, CJI.

1. Leave granted.

2. In this batch of Civil Appeals, the controversy pertains to validity of Sections 65(12) and 65(105)(zm) of the Finance Act, 1994 (as amended) insofar as the said provisions seek to levy service tax on leasing and hire purchase. The appellants contend that service tax imposed by Section 66 of the Finance Act, 1994 on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12) of the Finance Act, 1994 (as amended), insofar as it relates to financial leasing services including equipment leasing and hire purchase is beyond the legislative competence of Parliament by virtue of Article 366(29A) of the Constitution.

Facts in Civil Appeal @ SLP (C) No. 24704 of 2009

3. Appellant is an Association of leasing and financial companies. Finance Act sought to levy service tax on "banking and other financial services". Section 137 of the Finance Act, 2001 substituted Section 65 of the Finance Act, 1994 by a new Section 65 which defined "banking and other financial services". Subsequently, this definition also underwent some changes by way of Section 90 of the Finance Act, 2004 and Section 135 of the Finance Act, 2007. The relevant part of the definition as on date contained in Section 65(12) of the Finance Act, 1994 is as follows:

65. In this Chapter, unless the context otherwise requires--

(12) "banking and other financial services" means--

(a) the following services provided by a banking company or financial institution including a non-banking financial company or any other body corporate or commercial concern namely:

(i) financial leasing services including equipment leasing and hire-purchase;

4. Appellant had filed a writ petition under Article 226 of the Constitution before the High Court challenging the levy of service tax imposed by Section 65(12)(a)(i). During the pendency of the writ petition, Union of India issued a Notification ST dated 1.3.2006 exempting 90% of the amount repayable under hire-purchase/equipment leasing agreement(s) from service tax on the ground that the said 90% represented interest income earned by the service provider. According to the appellant, the concept of "service tax" was first introduced by the Finance Act, 1994 which came into force w.e.f. 1.7.1994 under Chapter V. No service tax was levied by the said Act or by its subsequent amendment till 2001. However, vide Finance Act, 2001 service tax was imposed on "banking and other financial services". Vide Section 137(a) of the Finance Act, 2001, Section 65 of the Finance Act, 1994 was replaced by a new Section 65 which defined "banking and other financial services" vide Clause (10). By virtue of the said definition under Section 65(10)(i), Parliament has sought to bring within the service tax net, transactions in the nature of financial leasing, equipment leasing and hire-purchase. By Section 65(72), the expression "taxable service" has been defined to mean any service provided to a customer, by a banking company or a financial institution including NBFC, in relation to banking and other financial services [See Section 65(72)(zm)]. Being aggrieved by the inclusion of hire-purchase and leasing services within the service tax net, the appellant herein challenged the amendment of 2001 as ultra vires the legislative competence of the Parliament. By the impugned judgment, the Madras High Court has dismissed the writ petition, hence, this civil appeal.

Submissions

5. Mr. Arvind P. Datar, learned senior counsel appearing on behalf of the appellant(s), submitted that the effect of Article 366(29A) is to treat six types of transactions as deemed sales so as to enable state legislatures to levy sales tax under Entry 54, List II; that, the Statement of Objects and Reasons to the Constitution (Forty-sixth Amendment) Act makes it clear that all six transactions could have been taxed under Entry 97, List I by Parliament. However, based on the 61st Report of the Law Commission, the Constitution has now conferred exclusive power to the States to levy sales tax by expanding Entry 54, List II by insertion of Article 366(29A). Thus, having characterized constitutionally the subject matter of hire-purchase and leasing as a sale (deemed sale), it is not open to Parliament to tax the same subject matter under Entry 97, List I. Thus, by reason of the Constitution (Forty-sixth Amendment) Act, there exist six transactions as "sales". That, inevitable corollary is that power of taxation of hire-purchase/leasing, being sales, is exclusively with the state legislatures. The purpose of the Constitution (Forty-sixth Amendment) Act was to reserve the exclusive competence to tax hire-purchase/leasing transactions with state legislatures which is clearly seen from the 61st Report of the Law Commission which recommended constitutional amendment. In this connection, learned Counsel has placed reliance on the principles laid down by this Court in Bharat Sanchar Nigam Limited v. Union of India (2006) 3 SCC 1. According to the learned Counsel, once by reason of the Constitution (Forty-sixth Amendment) Act the hire-purchase/leasing is deemed to be a sale, any attempt to levy service tax on the same transaction will amount to a colourable exercise of power. According to the learned Counsel, when sales tax is already paid for the transfer of the right to use the goods particularly when such transfer is a deemed sale under Article 366(29A), it is not open to Parliament to impose service tax on the same transaction once again. According to the learned Counsel, the impugned judgment of the High Court assumes erroneously that hire-purchase/leasing transactions include the concept of rendition of service and, thus, the impugned judgment needs to be set aside.

6. Mr. T.R. Andhyarujina, learned senior counsel appearing on behalf of one of the appellants, submitted that prior to the Constitution (Forty-sixth Amendment) Act, the Parliament had the legislative competence to levy service tax on a hire-purchase transaction or leasing transaction; except on the sale part in such transaction, which lay in the competence of the States under Entry 54, List II. In this connection, learned Counsel placed reliance on the judgment of this Court in K.L. Johar and Co. v. Deputy Commercial Tax Officer (1965) 2 SCR 112. That, by the Constitution (Forty-sixth Amendment) Act in Article 366(29A)(c) and (d), hire-purchase/leasing transactions were deemed to be sales and, consequently, the legislative competence in respect of hire part of the transaction was made over to the States. That, the Law Commission in its 61st Report stated that "the other alternative would be to transfer the entire power to the States. This will achieve a merger of the existing power of the States to tax the sale part and the new power to tax the hire part, which will enable state legislatures to provide for a tax on hire purchase price without demarcation". As a consequence of the Constitution (Forty-sixth Amendment) Act, the Parliament's competence to levy a tax on an activity relating to financial leasing services including equipment leasing and hire-purchase is constitutionally truncated by the newly conferred exclusive legislative competence of States over the deemed sales in Article 366(29A)(c) and (d). According to the appellant(s), when Section 65 of the Finance Act imposes a service tax on "value of taxable services", the value cannot include the elements of transaction of hire-purchase and leasing, which have now been transferred to the exclusive legislative competence of the States. That, although Parliament can levy service tax on the providing of services of hire-purchase and leasing of equipment if the service provider levies a charge by way of management fee, processing fee, documentation charges or administrative fees, the Parliament cannot levy a service tax in respect of the hire part in such transactions in view of the Constitution (Forty-sixth Amendment) Act and, consequently, the Parliament has no legislative competence to levy service tax on the hiring charges in the transaction. The said hiring charges are nothing but interest charges on the finance provided in hiring and leasing and hence the impugned tax cannot extend to tax the interest charged in the transactions. According to the learned Counsel, various States have been imposing sales tax/VAT on the entire transaction of hire-purchase/leasing including the component of hire charges, interest and other charges. This is done in view of the Constitution (Forty-sixth Amendment) Act. Thus, 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 Parliament on the same is beyond the competence and residuary power under Entry 97 of List I. Thus, according to the learned Counsel, levy of service tax in respect of the hire part in hire-purchase/leasing transactions is beyond the competence of the Parliament.

7. Mr. Goolam E. Vahanvati, learned Attorney General for India, submitted that the basic contention advanced on behalf of the appellant(s) is that by reason of introduction of Article 366(29A) by the Constitution (Forty-sixth Amendment) Act, the entire power of taxation in respect of hire-purchase transactions is now vested only in the States under Entry 54 of List II and that the Parliament has no power at all including the power to levy a service tax. According to the Attorney General, the said argument is based on the contents of the 61st Report of the Law Commission, particularly, in relation to the background in which Clauses (c) and (d) of Article 366(29A) were recommended. The learned Attorney General invited our attention to the historical background of Article 366(29A) and the 61st Report of the Law Commission in support of his submission that a legal fiction was sought to be inserted in Article 366 in order to give an...

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