By S Madhavan
In a recent decision, in the case of Association of Leasing and Financial Companies Vs. Union of India and Others (2010-VIL-17-SC-LB-ST), the full bench of the Supreme Court had occasion to deal with the constitutional validity of the levy of service tax on financial leasing transactions including hire purchase and equipment leasing of goods. The issue before the Apex Court was whether hire purchase and leasing transactions involved any element of service, in order for the service tax to apply, especially where such transactions were explicitly chargeable to the VAT, being a tax in relation to goods. Thus, the question was again whether there could be a charge of both the goods and the services tax on the same transaction, thereby resulting in double taxation.
The appellants argued that they were engaged in the business of hire purchase and leasing and that the 46th Amendment to the Constitution of India had inserted Article 366(29A) to deem a set of six transactions enumerated therein as constituting a sale of goods. These six transactions included the transfer of the right to use of any goods for any purpose as well as hire purchase transactions. Consequently, the State had imposed a sales tax, now VAT, on these transactions and the entire amount paid to the hirer/ lessor by way of installments was made chargeable to VAT. It was further argued that once the subject matter of hire-purchase and leasing was constitutionally characterised as a deemed sale the transactions could only be taxed by the State under Entry 54 of List II of the seventh schedule of the Constitution and such transactions could not be taxed by the Central Government under Entry 97 of List I of the same schedule.
Relying on the Report of the Law Commission, which preceded the 46th amendment referred to above, the appellants also submitted that the object behind the aforesaid amendment was to reserve the exclusive competence to tax hire-purchase and leasing transactions with the State legislatures and exclude Parliament therefrom. Consequently, the service tax on leasing and hire purchase transactions was unconstitutional.
As opposed to this, it was urged, on behalf of the Union of India, that it was incorrect to argue that by extending the definition of sale under Article 366(29A) to include leasing and hire purchase transactions, the Union Government had divested itself of the power to levy service tax on such transactions. It was argued that the levy of service tax was not in existence at the time when the 46th amendment to the Constitution was enacted, in 1982. Thereafter, reliance was placed on the decisions of the Supreme Court in Tamil Nadu Kalayana Mandapam Association Vs. Union of India (2004-TIOL-36-SC-ST), Gujarat Ambuja Cements Ltd. Vs. Union of India (2005-TIOL-53-SC-ST) and All-India Federation of Tax Practitioners Vs. Union of India [(2007) 7 SCC 527] to argue that the levy of service tax was held to be constitutionally valid, in somewhat similar circumstances and despite similar arguments made by the appellants.
The Government relied upon the doctrine of pith and substance to argue that service tax could be imposed on financial leasing services. It was canvassed that imposition of service tax on financial leasing did not, in pith and substance, result in the imposition of service tax on a deemed sale as defined under Article 366(29A), read with the relevant entries in the Constitution.
The Supreme Court took note of these arguments and came to the conclusion that the taxable service category "banking and other financial services", under service tax, included within it hire purchase and leasing transactions. These were services rendered to their customers by banks, NBFCs, etc. The taxable event under the relevant law was the rendition of service. The impugned tax was not at all a tax on either materials or sale. Consequently, the service tax that had been imposed on the transactions in question was constitutionally valid. The Court came to this determination by carefully examining the several relevant provisions of the Constitution viz. article 246(1), article 248 and entry 97 of List I. The Court held that article 246(1) conferred upon the Central Government not only exclusive powers to make laws in respect of entries 1-96 of List I but also residuary powers, through entry 97, on any other matter not enumerated in List II and List III, including any tax not mentioned in either of these lists. Further, the Court analyzed the expression â€˜taxable serviceâ€™, â€˜value of taxable serviceâ€™ and others in the service tax law to hold that the interest or finance charges, together with the lease management fee/processing fee/documentation charges, were to be treated as consideration for the services rendered and accordingly these charges constituted the value of taxable services on which service tax was payable.
The taxable event was the service rendered by the hire purchase or leasing company to its customers and the service tax applied only on such service and not on the deemed sale transaction of hire purchase or lease. Therefore, the Centre undoubtedly had legislative competence to charge the tax on the above service. Further, the Supreme Court distinguished this matter from the famous BSNL judgement by holding that legislative competence was not the issue before the apex Court in the BSNL case and the primary question involved there was whether mobile phone connections constituted a sale or service or both. It accordingly approvingly quoted the following para occurring in the BSNL judgement:
"No one denies the legislative competence of the States 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."
It held the above principle was not violated in the case in point. It thus interpreted the BSNL case in this very significant way and consequently differentiated it from the present case.
In sum, the Supreme Court has upheld the charge of service tax on hire purchase and leasing transactions, if forming part of â€˜financial leasing servicesâ€™ under service tax law, notwithstanding that the same transactions were chargeable to the VAT. There was no double taxation of one transaction to two taxes in this instance, as per the Supreme Court, even though both taxes were chargeable on the same base. It also noted that the service tax was, in fact, chargeable only on 10% of the finance or leasing charge.
It is hoped that the proposed Goods and Services Tax (GST) regime would redress this vexatious problem of potential and real double taxation currently being faced by the banking and financial industry, which has been further accentuated, as a result of the above decision.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers firstname.lastname@example.org
Supported by Rahul Renavikar and Abhishek A Rastogi