KERALA NON-BANKING FINANCE COMPANIES WELFARE ASSOCIATION v. UNION OF INDIA

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE HARUN-UL-RASHID WEDNESDAY, THE 17TH DECEMBER 2008 / 26TH AGRAHAYANA 1930 OP.No. 31710 of 2001(Y) ----------------------- PETITIONERS: - ------------------- 1. KERALA NON-BANKING FINANCE COMPANIES WELFARE ASSOCIATION 39/3586, M.G.ROAD, RAVIPURAM, COCHIN-682 016 REP. BY ITS HON. SECRETARY, P.P.ZIBI JOSE. 2. MANAPPURAM GENERAL FINANCE AND LEASING LTD., BROTHERS COMPLEX, THRISSUR-680 001 REP. BY ITS CHAIRMAN AND MANAGING DIRECTOR, V.P.NANDAKUMAR. 3. INVEST CHITS & GENERAL FINANCE (P) LTD., INVEST COMPLEX, OORAKAM POST, THRISSUR-680 562, REP. BY ITS MANAGING DIRECTOR, I.K.SIVANANDAN. BY ADV. SRI.R.RAMADAS RESPONDENTS: --------------------- 1. UNION OF INDIA, REP. BY THE SECRETARY, MINISTRY OF FINANCE, DEPARTMENT OF REVENUE, GOVERNMENT OF INDIA, NORTH BLOCK, NEW DELHI-110 001. 2. COMMISSIONER OF CENTRAL EXCISE, SERVICE TAX CELL, KOCHI. 3. COMMISSIONER OF CENTRAL EXCISE, SERVICE TAX CELL, KOZHIKODE. - ADV.SRI.M.RAVINDRAN, ADDL. SOLICITOR GENERAL OF INDIA,CHENNAI ADV. SRI.JOHN VARGHESE, SC,CEN.BOARD OF EXCISE THIS ORIGINAL PETITION HAVING BEEN FINALLY HEARD ON 17/12/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ORDER ON CMP NO.51710/2001 IN O.P. NO.31710/2001 DISMISSED: 17.12.2008 SD/-(C.N.RAMACHANDRAN NAIR, JUDGE.) SD/-(HARUN-UL-RASHID, JUDGE.) APPENDIX PETITIONERS' EXHIBITS: P1: TRUE COPY OF RELEVANT PORTION OF SECTION 137 OF THE FINANCE ACT 2001. P2: TRUE COPY OF INTERIM ORDER IN WRIT MISCELLANEOUS PETITIONS NOS.23080 AND 23082 OF 2001 IN W.P. NOS.15559 AND 15560 OF 2001. TRUE COPY PA TO JUDGE C .N. RAMACHANDRAN NAIR & HARUN-UL-RASHID, JJ. -------------------------------------------- O.P. No. 31710 OF 2001 -------------------------------------------- Dated this the 17th day of December, 2008 ## JUDGMENT ## **Ramachandran Nair,J.** The first petitioner, an association of non-banking financial companies, and petitioners 2 and 3 it's members, have filed this Writ Petition challenging the constitutional validity of Section 137 of the Finance Act, 2001 by which service tax is introduced on "banking and other financial services" which includes "equipment leasing and hire purchase". The provisions providing for service tax on equipment leasing and hire purchase transactions are introduced by amending the Finance Act, 1994. The relevant definition clauses introduced therein are extracted hereunder for easy reference. "S.65(12) "banking and other financial services" means -- (a) the following services provided by a banking company or a financial institution including a nonbanking financial company or any other body corporate or commercial concern namely:- (i) financial leasing services including equipment 2 leasing and hire-purchase; Explanation: For the purposes of this item, "financial leasing" means a lease transaction where- (i) contract for lease is entered into between two parties for leasing of a specific asset; (ii) such contract is for use and occupation of the asset by the lessee; (iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and (iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment; ................" "S.65(14) "body corporate" has the meaning assigned to it in clause(7) of section 2 of the Companies Act, 1956." "S.65(105) "taxable service" means any service provided or to be provided,-- ................ (zm) to any person, by a banking company or a financial institution including a non-banking financial company, or any other body corporate or commercial concern, in relation to banking and other financial services. ............." 2. Along with introduction of the above definition clauses, the charging section namely, Section 66 of the Finance Act, 1994 was also amended to cover tax on value of taxable services referred to in 3 clause (zm) of Section 65(105) above. 3. According to the first petitioner, by virtue of the above amendment, it's members including petitioners 2 and 3 are liable to pay service tax in respect of their leasing and hire purchase transactions. Respondents have contended that even though service tax is payable on the value of taxable service pertaining to leasing and hire purchase transactions, Government of India has vide Notification No.4/2006-ST dated 1.3.2006 granted exemption on 90% representing interest income earned by the service provider. Therefore, according to respondents, while considering the constitutional validity, this court should consider that the incidence of service tax falls only on 10% of the receipts. Since the writ petition was filed soon after the introduction of the impugned provisions and stay was also granted, petitioners 2 and 3 or any other member of the first petitioner-association has not received any assessment determining service tax liability on their leasing or hire purchase arrangements. Therefore, the exact service tax liability on any transaction is not on record. However, on the constitutional validity raised by the petitioners, we have heard heard Senior counsel Sri. Aravind P Dattar, appearing for the petitioners, and Addl. Solicitor 4 General of India from Chennai, Sri. M. Ravindran, appearing along with Sri. John Varghese on behalf of respondents. 4. The first ground raised by the petitioners to challenge the impugned provisions is that 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. According to petitioners, after the 46[th] 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. They have also pointed out that, as a follow up measure, 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. Besides allegation of want of legislative competence for the Parliament to introduce service tax on hire purchase and leasing transactions, petitioners are also challenging the provisions on the ground of discrimination under Ar. 14 of the Constitution and violation of Article 19(1)(g) of the Constitution. Counsel for the respondents on the other hand contended that the Honourable Supreme Court has upheld the legislative competence of 5 Parliament to levy service tax under the residuary entry 97to List I of VIIth Schedule to the Constitution in the decisions in TAMIL NADU KALYANA MANDAPAM ASSOCIATION V. UNION OF INDIA (2004) 167 ELT 3 (S.C.), C.K.JIDHEESH V. UNION OF INDIA (2006 (1) STR 3 (S.C.) and GUJARAT AMBUJA CEMENTS V. UNION OF INDIA (2005(4) SCC 214) and thereafter through Constitutional amendments Entry 92C to list I of VIIth Schedule and Article 268A are introduced expressly giving authority to the Parliament to legislate on service tax. Respondents further contended that validity of legislation and the grievance of the petitioners should be considered with reference to the notification above referred by which rigour of the levy is neutralised by granting exemption on 90% of the charges received in the hire purchase and leasing transactions, thereby completely excluding interest on loans from service tax. Petitioners have relied on the decisions of the Supreme Court in DAMODARSWAMY NAIDU & BROS. V. STATE OF TAMIL NADU, (2000) 1 SCC 521, GANON DUNKERLEY V. UNION OF INDIA, (1993) 1 SCC 364, 393 and several other decisions and both sides relied on the decision of the Supreme Court in BSNL v. Union of India, (2006) 3 SCC 1 whereunder the Supreme Court has 6 considered in detail the scope of levy of sales tax on works contract, catering , telephone services, etc. 5. The contention raised by the petitioners that Constitution authorises levy of sales tax on hire purchase transactions and on leasing of goods, and based on the same there is State legislation authorising it, is correct. For easy reference relevant provisions of the Constitution are extracted hereunder: "Art. 366 (29A) "tax on the sale or purchase of goods" includes---- ..................... ..................... (c) a tax on the delivery of goods on hire purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. ........................." The question now to be considered is whether the above constitutional provisions and the follow up State legislation take away the authority of Parliament to levy service tax on taxable service 7 charges on hire purchase and leasing transactions. Petitioners 2 and 3 and other members of the first 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 Financiar 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 8 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% of the charges 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. However, we do not think the petitioners' argument that by authorising levy of sales tax on supply of goods under hire purchase arrangement through the above constitutional provisions, Parliament has forfeited it's right to levy service tax on the same transaction, is tenable. The Supreme Court in the BSNL's case above referred considered the scope of transactions involving supply of goods as well as rendering of services. Petitioners cannot deny or dispute that hire purchase agreement involves only sale of goods and no service is rendered by them. 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, whether it is payable at the point of sale of vehicle from the manufacturer or 9 dealer to the Financier or to the Hirer or whether it is payable on delivery by the Financier to the Hirer under the Hire purchase agreement. 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. Even if Financier retains ownership under the hire purchase agreement, still sales tax is payable on delivery of vehicle. Therefore 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. 6. The transaction of leasing of goods between the Financier and the Hirer is almost similar to the hire purchase agreement . In the case of leasing of goods, machinery or other articles required for the lessee are identified by them and in fact they fix terms of 10 purchase with the manufacturers/dealers. Thereafter they approach the Financier who advances loan under lease agreement executed between the Financier and the Lessee. After finance is arranged, supplier raises invoice on the Financier and delivers the goods. . While the Financier continues to be the owner of the goods, the Lessee enjoys the right to use goods and as and when instalments of loan and other charges are paid, Lessee either becomes owner or has option to purchase the goods by paying balance price. Here again, if the purchase of leased article has suffered tax under sales tax laws of the State, then no further sales tax is payable on lease charges. On the other hand, if goods are not purchased in the State where leasing is done, then sales tax is payable on lease charges. However, this does not mean that incidence of sales tax falls on the entire charges collected by Financier which includes service charges and repayment of loan amount with interest. Petitioners do not deny that they are not collecting anything other than instalments of loan and interest thereon and that they are not collecting any charges for the services rendered in the leasing arrangement. Here again the decision of the Supreme Court in BSNL's case applies in as much as levy of sales tax is possible on sale of goods involved in the 11 transaction while service tax can be levied on the service charges received in the transaction. We do not think the provisions pertaining to levy of service tax on hire purchase or lease transactions is in anyway different from the service tax authorised for the large number of transactions under the Finance Act 1994, the Constitutional validity of which are upheld by the Supreme Court in the decisions abovereferred. 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. 7. 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. In fact, banking companies in the Public Sector are also liable to pay service tax on financial leasing service including equipment leasing and hire 12 purchase. Since petitioners have not established the parties engaged in same business who are left out and how they are discriminated, we reject this contention. Similarly provisions on service tax do not take away or create any unreasonable restriction on the fundamental rights of members of the first petitionerassociation including petitioners 2 and 3 to carry on business. Therefore, the allegation of violation of Article 19(1)(g) also does not merit consideration. Consequently we dismiss the Writ Petition. (C.N.RAMACHANDRAN NAIR) Judge. (HARUN-UL-RASHID) Judge. kk