By TIOL News Service

CHENNAI, JULY 16, 2009: THE writ petitioners are non banking financial companies engaged in the business of hire purchase and leasing. The senior counsel Mr. Aravind P. Datar appearing for the petitioners submitted that

++ The 46th Amendment inserted Article 366 ( 29A ), of the Constitution of India, in which clauses a to f, particularly clauses c & d, which are relevant to this case, explain the ambit of the expressions of tax on the delivery of goods on hire-purchase or any system of payment by instalment and also 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 said expression is also found in the Entry 54 of List II;

++ after the said 46th Amendment, hire purchase and leasing transactions are treated as deemed sales and the State had imposed sales tax, now called as VAT, on both transactions and the entire amount paid by way of instalments are liable for sale tax;

++ service tax is leviable if any element of service is involved;

++ hire purchase/leasing are transfer of movable where there is no service element is involved. For the said contention, the senior counsel relied on the invoices raised by the members of petitioners association;

++ the petitioners are not collecting any charges for service, hence, no service tax can be leviable;

++ when the constitution under Article 366 ( 29A ) authorises levy of sales tax on hire purchase/leasing transaction and the State levied sales tax, Parliament has no authority to levy service tax;

++ introduction of Service Tax on hire purchase and leasing transaction by the Parliament is violative of Article 14 and 19 (1) (g), 265, 366 ( 29A ), Entry 54 of List II of Schedule VII of the Constitution of India.

All the other counsel appearing for the appellant/petitioners adopted the argument of the Mr. Aravind P. Datar.

The High Court considered the submission of counsel on both sides, perused the provisions of Law and referred to a large number of decisions.

The High Court noted that the appellant/petitioners are engaged in the business of hire purchase/leasing transaction. The hire purchase and leasing are more or less identical. In leasing, the lessee selects the goods with the manufacturer and thereafter, approach the financier to lend loan and after executing the agreement, the amount is paid to the dealer or manufacturer and invoice is raised in the name of the financier, however, goods are being used by the lessee on payment of instalments, and later after paying the entire instalments, the lessee exercise option to purchase the same. In hire purchase, after agreement with the hirer, the financier purchases the goods from the manufacturer or dealers in the name of the hirer, thereafter the financier name is endorsed in the documents, thereby creating a charge on it. On payment of instalments i.e., the principal and interest, the hirer become the owner of the goods after cancelling the endorsement in the documents.

The High Court observed that the clauses (c) and (d) of Article 366 (29-A) permit the State legislatures to levy sales tax on the sale and purchase of goods/on the delivery of goods on hire purchase or any system of payment by instalments/on the transfer of the right to use any goods for any purpose for cash deferred payment or other valuable consideration and widen the scope of Entry 54 of List II of Schedule VII of the Constitution of India. It is contended by the appellant/petitioners that levy of sales tax on sale comes within the exclusive domain of the State legislature, the hire purchase/leasing transactions have already suffered sales tax and service tax cannot be levied thereon as no service element is involved. Hence, the relevant provisions in the Finance Act levying inter alia service tax on leasing/hire purchase transaction is ultra vires the provisions of Article 14 and 19 (1) (g), 265, 366 ( 29A ), Entry 54 List II Schedule VII of the Constitution of India.

The Court further observed that “Service tax is evolved on account of service industry becoming a major contributor to the GDP of an economy. Union derives its authority from the residuary entry 97 of the Union list for levying tax on services. Article 268-A of the Constitution of India empowers the Union to levy tax on service. Entry 92 (c) was also introduced in the Union list for the levy of service tax.

It is trite that the true nature and character of the legislation must be determined with reference to a question of the power of the legislature. The consequences and effects of the legislation are not the same thing as the legislative subject matter.

The Hire Purchase/Leasing transactions admittedly includes the concept of rendering service. Service tax is an indirect tax and it is to be paid on all the services notified by the Government of India. Service tax is levied on service not on sale or purchase of goods. The said tax is on service and not on the service provider. Service tax is made by Parliament under Entry 92C of List I and Article 268-A, which has legislative competence to levy service tax by way of the impugned Act and Entry 54 of List II and Entry 92C of List I operate on different areas.

Hence, the plea of the appellant/petitioners that service tax relating to leasing and hire purchase transaction is contrary to Article 265 and 366 ( 29A ) of Entry 54 List II of VII Schedule of the Constitution is rejected.

The Court further observed, “A taxing statute is not per se, a restriction of the freedom under Article 19 (1) (g). The policy of a tax, in its effectuation, might, of course, bring in some hardship in some individual cases. But that is inevitable, so long as law represents a process of abstraction from the generality of cases and reflects the highest common factor. Every cause, it is said, has its martyrs. Then again, the mere excessiveness of a tax, or even the circumstance that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Article 19 (1) (g).”

In fine, the writ petitions are dismissed.

All fine, but the Constitution 88 th Amendment Act which inserted the Article 268A and Entry 92(c) has a provision

(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

Though the Amendment was enacted on 15.1.2004, the Government is yet to notify the date from which it is effective.

So.... the litigation continues.

(See 2009-TIOL-338-HC-MAD-ST in 'Service Tax')