Constitutional Validity of Service Tax on equipment leasing and hire purchase activity

In Kerala Non-Banking Finance Companies Welfare Association Versus Union of India [2009 -TMI - 33852 - KERALA HIGH COURT] the issue of constitutional validity of service tax on leasing and hire purchase activity has been raised before the High Court on the following grounds:

1. Parliament has no authority to legislate on hire-purchase and leasing transactions which are subjects left for levy of sales tax by the States under Entry 54 of List II of VIIth Schedule to the Constitution of India.
2. After the 46th Amendment to the Constitution introducing clauses 29A(c) and (d) to Article 366, States are authorised to provide for sales tax among other things on hire-purchase and leasing transactions.
3. All States including the State of Kerala, introduced provisions in the respective Sales Tax Acts authorising levy of sales tax on hire-purchase and leasing transactions.
4. Discrimination under Article 14 of the Constitution and violation of Article 19(l)(g) of the Constitution.

High Court considered the following judgments on the issue of constitutional validity under service tax:

Tamil Nadu Kalyana Mandapam Association v. Union of India [2005 -TMI - 135 - SUPREME COURT OF INDIA]

C.K. Jidheesh v. Union of India [2006 -TMI - 288 - Supreme Court]

Gujarat Ambuja Cements Ltd v. Union of India [2005 -TMI - 225 - SUPREME COURT]

Bharat Sanchar Nigam Ltd v. Union of India [2006 -TMI - 309 - Supreme court]

After considering various decisions, high court found that:

-         Petitioner are only engaged in banking and financial services and are not dealers in goods.

-         Admittedly, hire purchase is for vehicles and vehicles for this purpose are purchased from manufacturers/dealers after agreement between the Financier and the Hirer under which price in part or full is advanced by the Financier as a loan under agreement between them.

-         In fact the vehicle is purchased in the name of the Hirer and in the certificate of registration obtained under the Motor Vehicles Act, hire purchase/hypothecation in favour of the Financier is endorsed.

-         In other words, besides collateral security, if any, obtained by the Financier, loan advanced is secured by creating a charge on the vehicle which is through endorsement of hypothecation in favour of the Financier in the RC book of the vehicle.

-         Even though there used to be the practice of Financier purchasing the vehicle in their name and then giving the vehicle on hire to the Hirer with option to him to purchase the vehicle on payment of full instalments of loan including interest, the said practice is no longer prevalent after sales tax became payable on supply of vehicle under hire-purchase agreement.

-         Besides interest, details of charges collected for services rendered by the Financier from the Hirer are not made clear to the Court.

-         However, petitioners do not deny the collection of charges under various heads including interest under hire-purchase agreement.

-         It is not known whether after exclusion of 90 per cent of the charges [exemption under notification no. 4/2006 ST] received the balance will be only charges for services rendered in the transaction. We do not think, in the absence of details we should consider this question.

-         Obviously and admittedly petitioners are rendering services and service charges are also collected along with interest on loan advanced.

-         In fact, hire-purchase agreement between the Financier and the Hirer of the vehicle does not affect sales tax liability.

-          Hire-purchase arrangement after the change introduced in Sales Tax Act involves purchase of vehicle by Hirer from the manufacturer or dealer with the fund partly or fully raised as loan from the Financier under agreement between them.

Accordingly it court held that:

There is no conflict between the levy of sales tax on the sale or deemed sale of vehicle and the service tax payable on services rendered by the Financier under the hire-purchase agreement.

So much so the constitutional provision referred above authorising sales tax does not stand in the way of Parliament levying service tax on taxable service charges received in respect of hire-purchase transactions by the Financiers. Since interest is excluded through notification, the incidence of service tax does not fall on interest on loan advanced.

Since incidence of service tax is not on sale of goods or deemed sale of goods pertaining to leasing and hire-purchase transactions covered by clauses (c) and (d) of Article 366(29A) of the Constitution of India, we uphold the authority of Parliament to authorise levy of service tax on banking and other financial services including equipment leasing and hire-purchase.

Here again the decision of the Supreme Court in Bharat Sanchar Nigam Ltd v. Union of India [2006 -TMI - 309 - Supreme court] applies inasmuch as levy of sales tax is possible on sale of goods involved in the transaction while service tax can be levied on the service charges received in the transaction.

The next ground raised by the petitioners is that the impugned provisions are discriminatory and violative of Articles 14 and 19(1)(g) of the Constitution of India. We do not find any substance in this ground because the legislation applies to all engaged in banking and other financial services and is not confined to members of the first petitioner-association.

For full text of judgment visit:

Kerala Non-Banking Finance Companies Welfare Association Versus Union of India [2009 -TMI - 33852 - KERALA HIGH COURT]