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TMI Blog2010 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons 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 (Fortysixth 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 Niga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 527]. The learned Attorney General drew our attention to the conceptual distinction between a service tax and a tax on hiring transaction. According to him, the business of banking or organizing financial services is an organized activity and service tax is imposed on that activity of financial leasing services provided by a banking company, a non-banking financial company, a body corporate engaged in the business of financial leasing, etc. That, service tax is not imposed on the hiring part of a hire-purchase transaction. According to the learned Attorney General, it is wrong to suggest that the whole "field" is covered by Entry 54 of List II as is sought to be contended on behalf of the appellant(s) because Article 366(29A), by way of a legal fiction, 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. Therefore, according to the learned Attorney General, there is no question of the impugned levy being a levy of service tax on a hire-purchase transaction. Relying on the doctrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial service" means- (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate, namely: (i) financial leasing services including equipment leasing and hire-purchase by a body corporate; (105) "taxable service" means any service provided,- (zm) to a customer, by a banking company or a financial institution including a non-banking financial company, in relation to banking and other financial services;" 10. We also quote hereinbelow Section 66 of Finance Act, 2001 which deals with charge of service tax and the relevant portion whereof reads as under: "66. Charge of service tax-(1) On and from the date of commencement of this Chapter, there shall be levied a tax (hereinafter referred to as the service tax), at the rate of five per cent. of the value of the taxable services referred to in sub-clauses (a), (b) and (d) of clause (72) of section 65 and collected in such manner as may be prescribed." 11. We also quote hereinbelow Section 67 of Finance Act, 2001 which deals with valuation of taxable services for charging service tax. The relevant portion of Section 67 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List"). (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the 'State List'). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List. 248 -Residuary powers of legislation (1) Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists." 14. We are also required to quote Entry 97 of List I, which reads as under: "97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists." 15. We quote hereinbelow Entry 54 of List II, which reads as under: "54. Taxes on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI where NBFCs conducting their business as loan companies claim themselves to be equipment leasing/hire-purchase finance companies with the intention to avail of higher borrowing limits and thus an NBFC having not less than 60% of its assets and deriving not less than 60% of its income from equipment leasing and hire-purchase activities taken together will only be eligible for being classified as equipment leasing company/hire-purchase finance company. The said notification is relied upon only to demonstrate that the classification of loan or investment companies is not only asset and income based but also that certain NBFCs undertake activities of equipment leasing and hire-purchase financing in addition to giving of loans. Under clause (a) of the said Direction, RBI has categorized NBFCs on the basis of the businesses in which they are engaged including giving of loans, hire-purchase finance and equipment leasing activities [See Taxmann's Statutory Guide to NBFCs page 224]. 18. The Institute of Chartered Accountants of India (ICAI) has also issued AS-19 "Accounting for Leases". It is mandatory in respect of financial leases executed on or after April, 2001. It inter al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown as "receivables" and not as fixed assets which further shows that equipment leasing and hire-purchase finance are financial facilities which thereby funds projects presented by the customers to banks and other financial institutions including NBFCs. Thus, the impugned tax is levied on these services as taxable services. It is not a tax on material or sale. 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 VIIth Schedule to the Constitution. 20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments. If that is the real effect of the agreement there is no contract of sale until the hirer has made the required number of payments and he remains a bailee till then. But some so-called hire-purchase agreements are in reality contracts to purchase, the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as stated above, is mandatory for NBFCs. It is a completely different regime. According to Chitty on Contract, a hire-purchase agreement is a vehicle of instalment credit. It is an agreement under which an owner lets chattels out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is bailment of goods by the owner to the hirer and the agreement by which the hirer has the option to return the goods at some time or the other [See para 36.242, 36.243]. Further, in the bailment termed "hire" the bailee receives both possession of the chattel and the right to use it in return for remuneration to be paid to the bailor [See para 32.045]. Further, under the head "equipment leasing", it is explained that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor [finance company] provides the funds, acquires the title to the equipment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services" under Section 65(12) of the said Act. "The finance lease" and "the hire-purchase finance" thus squarely come under the expression "financial leasing services" in Section 65(12) of the Finance Act, 1994 (as amended). Nature and character of service-tax 22. In All India Federation of Tax Practitioners' case (supra), this Court explained the concept of service tax and held that service tax is a Value Added Tax ('VAT' for short) which in turn is a destination based consumption tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer. That, service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs. Today with the technological advancement there is a very thin line which divides a "sale" from "service". That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was held in Gannon Dunkerley's case that in a building contract there was neither a contract to sell materials used in the construction nor did the property in the materials pass as movables. Accordingly, it was held that the provisions of the Madras General Sales Tax (Amendment) Act, 1947 defining a sale to include "a works contract" were ultra vires. It was held that the exercise of legislative power by the State legislature was an exercise to enlarge that power which would amount to amending Entry 54 of List II by an ordinary law which was impermissible because under that Entry the subject of the legislative power was tax on sale of goods. 24. The word "sale" is a nomen juris. It is thename of a consensual contract. The law with regard to chattels is embodied in the Sale of Goods Act. A contract of sale is different from an agreement to sell and unlike other contracts, operates by itself and without delivery to transfer the property in the goods sold. The word "sale" connotes both a contract and a conveyance or transfer of property. The law relating to building contracts was well-known when Gannon Dunkerley's case was decided and under that law the supply of goods a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works-contract and hire-purchase transactions. In the report it has been stated vide paras 1.6 & 1.7 at page 10 "since the expression 'sale of goods' in Entry 54 of State List has the same meaning as in Sale of Goods Act, a hire-purchase agreement is not a sale, as no property passes in such a transaction until the option to purchase is exercised and the other terms of the agreement are fulfilled. Similarly, in a building contract, which is indivisible, there is no sale of goods. It is contract of works. Similarly, a transaction between an hotelier and a resident customer is one of 'service' and is not taxable as 'sale of goods'; if there is a consolidated charge for boarding and lodging". That, Gannon Dunkerley's case is an example of composite contracts, involving supply of goods and services. It is in this background that we have considered the question whether the power to tax indivisible contracts of works should be conferred on the States. It is in the above background that the Law Commission in fact observes "Supreme Court with respect appears to have adopted an unusually restricted interpretation of the word "sale"". It is true that the word "sale" is not defined in the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission suggested that Article 366 be amended so that power to tax such contracts remains with the State Legislature as originally intended. In fact at page 20, the Commission states "before the judgment of the Supreme Court in Gannon Dunkerley's case, the word "sale" was usually regarded as including works contract and works contract was regarded as falling in Entry 54, List II and that taxes were in fact being levied and recovered by the States". Scope of Article 366(29A) 30. If one examines Article 366(29A) carefully, one finds that clause (29A) provides for an inclusive definition and has two limbs. The first limb says that the tax on sale or purchase of goods includes a tax on transactions specified in sub-clauses (a) to (f). The second limb provides that such transfer, delivery or supply of goods referred to in the first limb shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. Now, in K.L. Johar's case, this Court held that the States can tax hire-purchase transactions resulting in sale but only to the extent to which tax is levied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es" under Entry 54, List II? 31. On behalf of the appellant(s) it was submitted that the State Legislature has the exclusive competence to levy a tax on hire-purchase and financial leasing by reason of Entry 54, List II read with Article 366(29A). It was submitted that, as held by this Court in the case of Bharat Sanchar Nigam Limited (supra) [vide para 44], splitting was permissible under Article 366(29A) only in two cases indicated in sub-clauses (b) and (f) and that in no other service (including hire-purchase). 32. For answering the above, we need to keep in mind the doctrine of "pith and substance" and the rule of interpretation of legislative entries. These have to be applied to what is stated hereinabove in the earlier part of our judgment in which we have dealt with the concept of "banking and other financial services" and the nature and character of "service tax" as a tax on activities. We may reiterate that Equipment Leasing and Hire- Purchase Finance are activities of long term financing and they fall within the ambit of "banking and other financial services". As stated above, a financial lease is a lease that transfers substantially all risks and rewards incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith and substance of legislation with a view to determining to which entry they can be substantially related, a slight connection with another entry in another List notwithstanding. Therefore, to find out whether a piece of legislation falls within any entry, its true nature and character must be in respect to that particular entry. The entries must of course receive a large and liberal interpretation because the few words of the entry are intended to confer vast and plenary powers. If, however, no entry in any of the three Lists covers it, then it must be regarded as a matter not enumerated in any of the three Lists. Then it belongs exclusively to Parliament under entry 97 of the Union List as a topic of legislation." 34. We also quote hereinbelow the relevant observations in the case of M/s Ujagar Prints (II) v. Union of India [(1989) 3 SCC 488]: "Entries to the legislative lists, it must be recalled, are not sources of the legislative power but are merely topics or fields of legislation and must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The expression "with respect to" in Article 246 brings in the doctrine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subjects of legislation what does the conferment of residuary power mean? Entry 97, List I which confers residuary powers on Parliament provides "any other matter not enumerated in List II and List III including any tax not mentioned in either of those lists". The word "other" is important. It means "any subject of legislation other than the subject mentioned in Entries 1-96". Lastly, we must keep in mind a clear distinction between the subject and measure of tax. [See Goodricke Group Ltd. v. State of West Bengal, (1995) Suppl 1 SCC 707] 37. Applying the above decisions to the present case, on examination of the impugned legislation in its entirety, we are of the view that the impugned levy relates to or is with respect to the particular topic of "banking and other financial services" which includes within it one of the several enumerated services, viz., financial leasing services. These include long time financing by banks and other financial institutions (including NBFCs). These are services rendered to their customers which comes within the meaning of the expression "taxable services" as defined in Section 65(105)(zm). The taxable event under the impugned law is the ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, tax on the aspect of the "services", vendor not being relatable to any entry in the State List, would be within the legislative competence of the Parliament under Article 248 read with Entry 97 of List I of Seventh Schedule to the Constitution. 38. According to Mr. Arvind Datar and Mr. K. Parasaran, learned counsel appearing on behalf of some of the appellants, once the subject matter of hire-purchase and leasing is constitutionally characterized as a sale (deemed sale) by the Constitution (Forty-sixth Amendment) Act, the said subject matter can be taxed only under Entry 54, List II and it cannot be taxed under Entry 97, List I. According to the learned counsel, the object behind enactment of the Constitution (Forty-sixth Amendment) Act was to reserve the exclusive competence to tax hire-purchase transactions with the State Legislature and exclude the Parliament from the legislative sphere. In support of the above contentions, learned counsel placed reliance on para 44 of the judgment of this Court in the case of Bharat Sanchar Nigam Limited (supra), the relevant portion of which is quoted hereinbelow: "44. Of all the different kinds of composite transactions, the draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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. This does not however 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". The principle of law in para 88 squarely applies to the present case. As stated above, we are concerned with "financial leasing services" which are sought to be taxed under Section 65(12)(a)(i). The taxable event is indicated in Section 65(105)(zm). As stated above, the impugned provision operates qua an activity of funding/ financing of equipment/ asset under equipment leasing under which a lessee is free to select, order, take delivery and maintain the asset. The lessor (NBFC) arranges the finances. It accepts the invoice from the vendor (supplier) and pays him. Thus, the lessor (NBFC) renders financial services to its customer(s) and what is taxed under the impugned provision is the income, by way of finance/ interest charges in addition to management fees/ documentation charges, which is earned by the financier (lessor). The taxable event is the service whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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