2010 (10) TMI 4 - SC - Service Tax

Service tax under Section 66 (Finance Act, 1994) upheld on financial leasing as tax on financing activity

Association of Leasing & Financial Service Companies Versus Union of India and others

SC upheld that the service tax under Section 66 of the Finance Act, 1994 (as amended), on financial leasing services-including equipment leasing and ... Service Tax on leasing and hire purchase transaction - legislative competence of Parliament - equipment leasing and hire-purchase - Concept and nature of service tax - Held that:- The service tax in the present case is neither on the material nor on sale. It is on the activity of financing/funding of equipment/ asset within the meaning of the words 'financial leasing services' in Section 65(12)(a)(i). Lastly, we may state that this Court has on three different occasions upheld the levy of service with reference to Entry 97 of List I in the face of challenges to the competence of the Parliament based on the entries in List II and on all the three occasions, this Court has held that the levy of service tax falls within Entry 97 of List I. The decisions are in the case of T.N. Kalayana Mandapam Association [2004 (4) TMI 1 - SUPREME COURT], Gujarat Ambuja Cements Ltd. [2005 (3) TMI 492 - SUPREME COURT] and All-India Federation of Tax Practitioners [2007 (8) TMI 1 - SUPREME COURT]. - the service tax imposed by Section 66 of the Finance Act, 1994 (as amended) on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12) of the said Act, insofar as it relates to financial leasing services including equipment leasing and hire-purchase is within the legislative competence of the Parliament under Entry 97, List I of the Seventh Schedule to the Constitution. Accordingly, the appeals are dismissed with no order as to costs. Issues Involved:1. Validity of Sections 65(12) and 65(105)(zm) of the Finance Act, 1994.2. Legislative competence of Parliament to levy service tax on financial leasing services, including equipment leasing and hire-purchase.3. Interpretation of Article 366(29A) of the Constitution.4. Concept and nature of service tax.5. Doctrine of pith and substance and rule of interpretation of legislative entries.Detailed Analysis:1. Validity of Sections 65(12) and 65(105)(zm) of the Finance Act, 1994:The appellants challenged the validity of Sections 65(12) and 65(105)(zm) of the Finance Act, 1994, which sought to levy service tax on financial leasing services, including equipment leasing and hire-purchase. They argued that this imposition was beyond the legislative competence of Parliament under Article 366(29A) of the Constitution, which characterizes certain transactions as deemed sales, thereby reserving the power to tax such transactions exclusively with the state legislatures.2. Legislative Competence of Parliament to Levy Service Tax:The appellants contended that the power to tax hire-purchase and leasing transactions, being deemed sales, lies exclusively with the state legislatures under Entry 54, List II. They argued that the Constitution (Forty-sixth Amendment) Act, 1982, which introduced Article 366(29A), was intended to reserve this power for the states. The respondents, represented by the Attorney General, argued that service tax is distinct from sales tax and that Parliament retains the power to levy service tax under Entry 97, List I.3. Interpretation of Article 366(29A) of the Constitution:The Court examined the scope of Article 366(29A), which provides an inclusive definition of 'tax on the sale or purchase of goods' and includes transactions like hire-purchase as deemed sales. The Court noted that the purpose of this amendment was to expand the tax base for sales tax and prevent revenue loss due to narrow interpretations of 'sale.' However, the Court clarified that this did not divest Parliament of its power to levy service tax on financial services.4. Concept and Nature of Service Tax:The Court reiterated that service tax is a Value Added Tax (VAT) on commercial activities, not a charge on businesses but on consumers. It is based on the principle of equivalence and is levied on the activity of service provision. The Court emphasized that service tax is distinct from sales tax, which is levied on the sale of goods. The taxable event for service tax is the rendition of service, not the sale of goods.5. Doctrine of Pith and Substance and Rule of Interpretation of Legislative Entries:Applying the doctrine of pith and substance, the Court examined whether the impugned legislation falls within the scope of 'banking and other financial services' under Entry 97, List I. The Court held that financial leasing services, including equipment leasing and hire-purchase, are long-term financing activities that fall within the ambit of banking and financial services. The Court noted that the taxable event is the service provided by the lessor (NBFC) to the lessee, and the measure of tax is the interest or finance charges earned by the lessor.Conclusion:The Court dismissed the appeals, holding that the service tax imposed by Section 66 of the Finance Act, 1994, on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12), insofar as it relates to financial leasing services, including equipment leasing and hire-purchase, is within the legislative competence of Parliament under Entry 97, List I of the Seventh Schedule to the Constitution. The Court directed the competent authority under the Finance Act, 1994, to decide the matter in accordance with the law laid down.