Service Tax levy on equipment leasing and hire purchases upheld.
Facts:
The appellant, an association of non-banking financial companies have filed writ petition challenging the constitutional validity of section 137 of the Finance Act, 2001 by which Service Tax was introduced on “banking and other financial services” which includes ‘equipment leasing and hire-purchase’. It was contended that the Parliament has no authority to legislate on hire- purchase and leasing transactions since the State has such powers in this regard under Entry 54 of List II of seventh Schedule to the Constitution of India. After the 46th Constitutional Amendment and as per Article 366 29A (c) & (d), States were authorised to levy sales tax on hire-purchase and leasing transactions.
The transaction of leasing goods between the financier and the Hirer is almost similar to the hire purchase agreement. In case of leasing of goods, machinery/ other articles required by the lessee are identified and the purchase terms with the manufacturers/dealers are finalised. Thereafter, lessee approaches financier who advances the loan under the lease agreement executed. After finance is arranged, supplier raises invoice on the Financier and delivers the goods. While the financer continues to be the owner of the goods, lessee enjoys the right to use the goods and as and when installments of loan and other charges are paid, lessee either becomes owner or has option to purchase the goods by paying balance price.
Appellants have not denied that they were not collecting anything other than installments of loan and interest thereon and they were not collecting any charges for services rendered in the leasing arrangement. It was argued that the decision of the Supreme Court in BSNL’s case would be applicable in as much as levy of sales tax is possible on sale of goods involved in the transaction while service tax can be levied on the service charges received in the transaction.
Held:
The High Court after observing that a Hire purchase was for the vehicles and vehicles for this purpose were purchased from manufacturers/dealers after agreement between the Financers and price in part or full was advanced by the financier as a loan under agreement. Further, the vehicle was purchased in the name of the hirer and in the certificate of registration under the Motor Vehicles Act, hire purchase/hypothecation in favour of the financier was endorsed. Besides Appellants collected charges under various heads including interest etc. under hire purchase agreement.
Appellants could not deny or dispute that hire purchase agreement involves only sale of goods and no service was rendered by them. Admittedly they rendered services and service charges were also collected along with interest on loan advanced. In fact, hire purchase agreement between the financier and the hirer of the vehicle did not affect sales tax liability, whether it was payable at the point of sale of vehicle from the manufacturer or dealer to the financier or to the hirer or whether it was payable on delivery by the financier to the hirer under the Hire purchase agreement etc.
It was further observed that even if financier retained ownership under the hire purchase agreement, still sales tax was payable on delivery of vehicle. Therefore it was held that there was no conflict between the levy of sales tax on the sale/deemed sale of vehicle and the service tax payable on services rendered by the financier under the hire purchase agreement. Since interest was excluded through Notification, the incidence of service tax does not fall on interest on loan advanced.
Accordingly, the incidence of service tax was held to be not on sale/deemed sale of goods pertaining to leasing and hire purchase transactions covered by the said Article 366(29A) (c) and (d), the levy was upheld.
