LEVYING OF SERVICE TAX ON HIRE PURCHASE/LEASING TRANSACTION IS NOT VIOLATIVE OF THE CONSTITUTION

[Mr. M. GOVINDARAJAN]

            The Finance Act, 2001 brought 'banking and other financial services' provided by a banking company or financial institution including a non banking financial company under the net of service tax with effect from 16.07.2001. Section 65 (12) of the Finance Act, 1994 defines 'Banking and other financial services'. The definition includes financial leasing services including equipment leasing and hire purchase. For this purpose 'financial leasing' means a lease transaction where-

> Contract for lease is entered into between two parties for leasing of a specific asset;

> Such contract is for use and occupation of the asset by the lessee;

> The lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and

> The lease is entitled to own or has the option to own, the asset at the end of the lease period after making the lease payment.

Service tax is leviable on the value of financial leasing services including services provided for leasing or hire purchase of motor vehicles, machinery and equipment of other goods. 'Lease' has the similar meaning of 'letting, renting and hiring'.

            The CBEC letter (F.No.334/1/2003-TRU, dated 28.02.2003, states that International Accounting Standards Committee defines 'financial leasing' as lease that transfers substantially all the risks and rewards incidental to ownership of an asset, title may or may not eventually be transferred. Financial lease is a way of purchasing an asset with the help of the loan and the lessee uses the asset. Risks and rewards incidental to ownership of an asset is also with the lessee.

            In a lease or hire purchase agreement, the service provider, at the time of entering into the agreement, collect a charge called lease management fee or processing fee or documentation charges or by any other name, which is usually a percentage of the transaction values. The lease rental or the hire purchase amount is recovered in equated monthly installments over the period of lease or hire purchase as indicated in the agreement through post dated cheques and no separate bills are raised for monthly recovery.

            In 'Kusalava Finance Ltd., V. Commissioner of Central Excise & Service Tax' - [2008 -TMI - 3812 - CESTAT, BANGALORE] held that hire purchase finance is different from the purchase since in the financing arrangement, the ownership in the goods remains with the hirer and not with the organization which finances the purchases. Thus the activity of hire purchase finance is not chargeable to service tax as the activity of hire purchase.

            A Division Bench of Madras High Court recently held that levy of service tax on hire purchase/leasing transactions was not violative of Article 14 and 19(1)(g) of the Constitution of India (Source - Business Line, dated 18.6.2009).

            In this case the Madras Hire Purchase Association and other similar bodies filed writ petitions before High Court contending that the levy of service tax on sale came within the exclusive domain of the legislature. Hire Purchasing/leasing transactions had already suffered service and service tax could not be levied thereon as no service element was involved.   Therefore the provisions in Finance Act, 1994 levying service tax on such transaction, were ultra vires above Articles of the Constitution.

            The High Court, vide their order dated 23.4.2003 of a Single Judge ruled that a taxing statute was not per se, a restriction of the freedom under Article 19(1)(g). Writ appeals were field against the decision. The appellants reiterated their stand in appeal also. The Revenue contended that service tax on financial leasing services/Hire Purchase was not a tax on sale of goods, but it was a tax on services rendered in relation to said transaction and Parliament had legislative competence to levy service tax under the impugned Act. The Revenue further submitted that all banking companies which were carrying on similar hire purchase/leasing businesses were paying service tax without any protest.

            The Bench held that the policy of a tax in its effectuation might of course bring some in some hardship in some individual cases. But that was inevitable, so long as the law represented a process of abstraction from the generality of cases.  The Court rules that a mere excessiveness of a tax or even the circumstance that its imposition might tend towards the diminution of earning of profits of the person of incidence did not constitute violation of the rights under Article 19(1) (g).

            The Bench further held that hire purchase/leasing admittedly included the concept of rendering services. Service tax was an indirect tax and it was to be paid on all services notified by Government under Entry 92C of List I and Article 268-A service tax was made by Parliament.  Hence the plea of the appellants/petitioners that service tax was contrary to the constitution was rejected. It was well settled that though taxing laws were not outside Article 14 legislature enjoyed a wide latitude in the matter of selection of persons, events etc., for taxation.

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

> 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 VII Schedule to the Constitution of India;

> After the 46th amendment to the Constitution introducing clauses 29A(c) and (d) to Article 366 States are authorized to provide for sales tax among other things on hire purchase and leasing transactions;

> All states including the State of Kerala, introduced provisions in the respective sales tax Acts authorizing levy of sales tax on hire purchase and leasing transactions;

> Discrimination under Article 14 of the Constitution of India and violation of Article 19(1) (g) of the Constitution of India.

After hearing both parties, the High 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 provisions authorizing sales tax does not stand in the way of Parliament levying service tax on taxable service charges received in respect of hire purchase transactions covered by clauses (c) and (d) of Article 366 (29A) of the Constitution of India, the court uphold the authority of Parliament to authorize levy of service tax on banking and other financial services including equipment leasing and hire purchase. 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. The Court 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.