2008 (12) TMI 148 - HC - Service Tax

Parliament's Power to Levy Service Tax on Banking Services Upheld

Kerala Non-Banking Finance Companies Welfare Association Versus Union of India

The court upheld the constitutional validity of Parliament's authority to levy service tax on banking and financial services, including equipment leasing ... Constitutional validity of service tax on equipment leasing and hire purchase activity – the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. applies inasmuch 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. - 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, Parliament is competent to levy service tax on banking and other financial services including equipment leasing and hire-purchase - The provisions are not discriminatory and violative of Articles 14 and 19(1)(g) of the Constitution of India since banking companies in the Public Sector are also liable to pay service tax on financial leasing service including equipment leasing and hire-purchase. Notification no. 4/2006 excludes the value of sale or deemed sale by way of exemption. Issues:Constitutional validity of section 137 of the Finance Act, 2001 introducing service tax on banking and financial services including equipment leasing and hire-purchase.Challenging Parliament's authority to legislate on hire-purchase and leasing transactions.Allegations of discrimination under Article 14 and violation of Article 19(1)(g) of the Constitution.Analysis:Issue 1: Constitutional Validity of Service Tax on Leasing and Hire-Purchase TransactionsThe petitioners argued that Parliament lacked authority to levy service tax on hire-purchase and leasing transactions, citing Entry 54 of List II of VIIth Schedule to the Constitution. However, respondents contended that the Supreme Court upheld Parliament's legislative competence under Entry 97 to List I and subsequent amendments. The exemption on 90% of charges neutralized the tax impact, with the remaining 10% subjected to tax. The court held that the constitutional provisions on sales tax did not preclude Parliament from levying service tax on such transactions, as the service charges were distinct from sales tax liabilities.Issue 2: Parliament's Authority to Levy Service Tax on Banking ServicesThe petitioners argued that the constitutional provisions and state legislation on sales tax authorized by Article 366(29A) did not allow Parliament to impose service tax on hire-purchase and leasing transactions. The court disagreed, stating that the transactions involved both sale of goods and services, with service charges distinct from sales tax liabilities. The court upheld Parliament's authority to levy service tax on banking and financial services, including equipment leasing and hire-purchase.Issue 3: Allegations of Discrimination and Violation of Fundamental RightsPetitioners claimed the impugned provisions were discriminatory and violated Articles 14 and 19(1)(g) of the Constitution. The court found no substance in this claim, noting that the legislation applied uniformly to all engaged in banking and financial services, including public sector entities. As the petitioners did not demonstrate specific discrimination or unreasonable restrictions on their fundamental rights, the court rejected these allegations.In conclusion, the court dismissed the Writ Petition, upholding the constitutional validity of Parliament's authority to levy service tax on banking and financial services, including equipment leasing and hire-purchase transactions. The court found no grounds for challenging the legislation based on lack of legislative competence, discrimination, or violation of fundamental rights.