# ASSOCIATION OF LEASING AND FINANCIAL SERVICE COMPANIES v. UNION OF INDIA AND ORS

- **Citation:** [2010] 13 S.C.R. 381
- **Court:** Supreme Court of India
- **Decided:** 2010-10-26
- **Case number:** Civil Appeal No. 9344 of 2010
- **Bench:** S.H. Kapadia, K.S. Panicker Radhakrishnan, Swatanter Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/association-of-leasing-and-financial-service-companies-v-union-of-india-and-ors-26432
- **Pages:** 48

## Headnote

Finance Act, 1994 (as amended):
ss. 65(12), 65(105)(zm), 66 - Non-Banking Financial
Company - Equipment leasing and hire-purchase - Service
tax imposed by s.66 on the value of taxable services referred
A
B
c
to in s.65(105)(zm) read with s.65(12), insofar as it relates to
D
financial leasing services including equipment leasing and
hire-purchase - Held: Is within the legislative competence of
the Parliament under Entry 97, List I of the Seventh Schedule
to the Constitution by virtue of Article 366 (29A) of the
Constitution -
Reserve Bank of India, 1934 -
s.451 -
Constitution of India, 1950 - Article 366(29A) - Accounting
standard AS-19 - Lease - Notification no. 114 dated 2. 1. 1998
issued by RBI ...:. Constitution (Forty-sixth Amendment) Act,
1982 - Finance Act, 2001- Service tax - Bank/Banking.
E
s.65(12) - Banking and financial services - Meaning of.
F
s.65(12) - Funding activity undertaken by the financing
party in the form of loan or equipment leasing or hire-purchase
financing, would be exigible to service tax if such activity falls
in the category of "banking and other financial services" ul G
s. 65(12) of the Act.
s. 65(12) - Equipment Leasing and Hire-Purchase
Finance - Meaning of - Held: These are activities of long
381
H
382
SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A term financing and fall within the ambit of "banking and other
financial services" - A financial lease is a lease that transfers
substantially all risks and rewards incidental to ownership -
The income which the lessor earns is by way of finance/
interest charges in addition to the management fees or
B documentation charges, etc. -
It is this income which
constitutes the measure of tax for the purposes of calculating
the value of taxable services u/s.67 of the Act.
Constitution of India, 1950:
C
Article 248; Seventh Schedule, List I, Entry 97, List II Entry
54 -
State Legislature - Competence of, to levy tax on
"financial leasing services" under Entry 54, List II - Held: State
Legislature have competence to levy sales tax on sales
provided that the necessary concomitants of a sale are
D present in the transaction and the sale is distinctly discernible
in the transaction - This would not, however, allow the ,State
to entrench upon the Union List and tax services by mcluding
the cost of such service in the value of the goods - The value
of taxable service u/s. 67 of the Finance Act, 1994 (as
E amended) is income by way of interest/finance charges
(measure of tax) which is not determinative of the character
of the levy - Thus, while State Legislature is competent to
impose tax on "sale" by legislation relatable to Entry 54 of List
II of Seventh Schedule, tax on the aspect of the "services",
F vendor not being relatable to any entry in the State List, would
be within the legislative competence of the Parliament under
Article 248 read with Entry 97 of List I of Seventh Schedule to
the Constitution - Circular F.No. B.111112001-TRU dated
9. 7. 2001 -
Notification No. 412006-Service Tax dated
G 1.3.2006 - Finance Act, 1994 (as amended) - Finance Act,
2001.
Article 246(1) - Scope of - Held: It confers exclusive
power firstly, to make laws in respect of matters specified in
Entries 1 to 96 in List 1. and, secondly, it confers the residuary
H power of making laws by Entry 97, which provides "any other
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 383
COMPANIES v. UNION OF INDIA
matter not enumerated in List II and List Ill including any tax
A
not mentioned in either of those lists" - The word "other"
means "any subject of legislation other than the subject
mentioned in Entries 1-96".
Article 366(29A) - Object of - Held: Is to tax the
composite price so that the full value of the hire-purchase
price is taxed.
Seventh Schedule, List II Entry 54 - Service tax - Held:
B
Is not a tax on material or sale - It is different and distinct
from tax on sale of goods under Entry 54 List II - Finance
C
Act, 2001- Finance Act, 1994 (as amended)- Sale of Goods
Act, 1930 - S

## Text

_Characters 0–39,835 of 96,063. This is a partial read: ask again with offset=39835 for what follows._

[2010] 13 S.C.R. 381
ASSOCIATION OF LEASING AND FINANCIAL SERVICE
COMPANIES
v.
UNION OF INDIA AND ORS.
(Civil Appeal No. 9344 of 2010)
OCTOBER 26, 2010
[S.H. KAPADIA, CJI, K.S. PANICKER
RADHAKRISHNAN AND SWATANTER KUMAR, JJ.]
Finance Act, 1994 (as amended):
ss. 65(12), 65(105)(zm), 66 - Non-Banking Financial
Company - Equipment leasing and hire-purchase - Service
tax imposed by s.66 on the value of taxable services referred
A
B
c
to in s.65(105)(zm) read with s.65(12), insofar as it relates to
D
financial leasing services including equipment leasing and
hire-purchase - Held: Is within the legislative competence of
the Parliament under Entry 97, List I of the Seventh Schedule
to the Constitution by virtue of Article 366 (29A) of the
Constitution -
Reserve Bank of India, 1934 -
s.451 -
Constitution of India, 1950 - Article 366(29A) - Accounting
standard AS-19 - Lease - Notification no. 114 dated 2. 1. 1998
issued by RBI ...:. Constitution (Forty-sixth Amendment) Act,
1982 - Finance Act, 2001- Service tax - Bank/Banking.
E
s.65(12) - Banking and financial services - Meaning of.
F
s.65(12) - Funding activity undertaken by the financing
party in the form of loan or equipment leasing or hire-purchase
financing, would be exigible to service tax if such activity falls
in the category of "banking and other financial services" ul G
s. 65(12) of the Act.
s. 65(12) - Equipment Leasing and Hire-Purchase
Finance - Meaning of - Held: These are activities of long
381
H
382
SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A term financing and fall within the ambit of "banking and other
financial services" - A financial lease is a lease that transfers
substantially all risks and rewards incidental to ownership -
The income which the lessor earns is by way of finance/
interest charges in addition to the management fees or
B documentation charges, etc. -
It is this income which
constitutes the measure of tax for the purposes of calculating
the value of taxable services u/s.67 of the Act.
Constitution of India, 1950:
C
Article 248; Seventh Schedule, List I, Entry 97, List II Entry
54 -
State Legislature - Competence of, to levy tax on
"financial leasing services" under Entry 54, List II - Held: State
Legislature have competence to levy sales tax on sales
provided that the necessary concomitants of a sale are
D present in the transaction and the sale is distinctly discernible
in the transaction - This would not, however, allow the ,State
to entrench upon the Union List and tax services by mcluding
the cost of such service in the value of the goods - The value
of taxable service u/s. 67 of the Finance Act, 1994 (as
E amended) is income by way of interest/finance charges
(measure of tax) which is not determinative of the character
of the levy - Thus, while State Legislature is competent to
impose tax on "sale" by legislation relatable to Entry 54 of List
II of Seventh Schedule, tax on the aspect of the "services",
F vendor not being relatable to any entry in the State List, would
be within the legislative competence of the Parliament under
Article 248 read with Entry 97 of List I of Seventh Schedule to
the Constitution - Circular F.No. B.111112001-TRU dated
9. 7. 2001 -
Notification No. 412006-Service Tax dated
G 1.3.2006 - Finance Act, 1994 (as amended) - Finance Act,
2001.
Article 246(1) - Scope of - Held: It confers exclusive
power firstly, to make laws in respect of matters specified in
Entries 1 to 96 in List 1. and, secondly, it confers the residuary
H power of making laws by Entry 97, which provides "any other
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 383
COMPANIES v. UNION OF INDIA
matter not enumerated in List II and List Ill including any tax
A
not mentioned in either of those lists" - The word "other"
means "any subject of legislation other than the subject
mentioned in Entries 1-96".
Article 366(29A) - Object of - Held: Is to tax the
composite price so that the full value of the hire-purchase
price is taxed.
Seventh Schedule, List II Entry 54 - Service tax - Held:
B
Is not a tax on material or sale - It is different and distinct
from tax on sale of goods under Entry 54 List II - Finance
C
Act, 2001- Finance Act, 1994 (as amended)- Sale of Goods
Act, 1930 - Service tax.
Reserve Bank of India Act, 1934: s.451 - Financing
activities - Equipment leasing and hire-purchase undertaken
0
as business by NBFCs - Held: Are financial activities
encompassed u/s. 45-l(c)(i) rendered by NBFCs to their
customers and they fall within the meaning of the words
"banking and other financial services" which is brought within
the service tax net u/s. 66 of the Finance Act, 1994 (as
E
amended) - Service tax- Finance Act, 2001.
Interpretation of statutes: Legislative entries -
Interpretation of - Held: The principle that legislative entries
must be given the widest interpretation is subject to the
exception that where the entries use legal terms, they must
F
be given their legal meaning - The word 'sale' is not defined
in the Constitution, but the words used in the three legislative
lists should receive the widest interpretation and not to the
narrow definition of the word "safe" contained in the Sale of
Goods Act for the purpose of interpreting that expression in
G
Entry 54, List II - Sale of Goods Act, 1930 - Constitution of
India, 1950.
Lease: "Finance lease" and "Operating lease" -
Distinction between.
H
384
SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A
Words and phrases: 'Sale' - Meaning of
The question which arose for consideration in the
instant appeals was whether the service tax imposed by
Section 66 of the Finance Act, 1994 (as amended) on the
8
value of taxable services referred to in Section 65(105)
(zm) read with section 65(12) of the Act in so far it related
to the financial leasing services including equipment
leasing and hire purchase was within the legislative
competence of the Parliament by virtue of Article 366 (29A)
of the Constitution.
c
Dismissing the appeals, the Court
'
HELD: 1.1. The RBI was constituted under the
Reserve Bank of India Act, 1934 inter alia to regulate the
0
country's monetary system. Chapter 111-B of the 1934 Act
deals with provisions relating to NBFCs (Non Banking
Financial Company) and financial institutions. Under
Section 45-l(a), "the business of a Non Banking Financial
Institution" is defined to mean carrying on the business
E
of a financial institution referred to in clause (c) of Section
45-1 and includes business of an NBFC. The expression
"financial institution" means any non-banking institution
which carries on as its business an activity inter a/ia of
financing, whether by way of making loans or advances
F
or otherwise. Thus, Section 45-l(c) treats financing as an
activity. Under Section 45-l(f), an NBFC is defined to mean
a financial institution or a non-banking institution which
is a company and which as a matter of business receives
deposits or which lends in any manner. Under Section
45-JA the RBI is authorized in public interest to issue
G directions to NBFCs relating to income recognition,
accounting standards, deployment of funds etc. and
such NBFCs shall be bound to follow the policy so
determined. The RBI issued notification no. 114 dated
2.1.1998 whereby the deposit taking activities of NBFCs
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 385
COMPANIES v. UNION OF INDIA
was sought to be regulated. As per the said notification,
A
an NBFC having not less than 60% of its assets and
deriving not less than 60% of its income from equipment
leasing and hire-purchase activities taken together would
only be eligible for being classified as equipment leasing
company/hire-purchase finance company. [Para 17] f406B
H; 407-A-H; 408-A]
Taxmann's Statutory Guide to NBFCs page 224 -
referred to.
1.2. The Institute of Chartered Accountants of India
C
(ICAI) also issued AS-19 "Accounting for Leases". It is
mandatory in respect of financial leases executed on or
after April, 2001. It inter alia provides for capitalization of
finance lease assets in the books of the lessee instead
of lessor. The lessor [NBFC] is required to show the
D
assets leased only as receivables in its balance sheet
instead of as fixed assets. The implication of AS-19 for
the NBFC prescribed by RBI by amendments to the 1998
Directions is that all financial leases would be accounted
like hire-purchase transactions. All these circulars and
guidelines issued by RBI are relied upon only to show
that equipment leasing and hire-purchase are activities
undertaken as business by NBFCs which are regulated
as para banking activities by the RBI under the
provisions of the 1934 Act. They are regulated not only
E
F
to protect depositors but also customers. The said
activities are financing activities encompassed under
Section 45-l(c)(i) which in turn constitutes "rendition of
services to its customer(s)" which is the taxable event
under Section 65(105)(zm) of the Finance Act, 1994 (as
G
amended). Apart from. NBFCs, even banks through their
subsidiaries with the\ approval of RBI can undertake
equipment leasing, hire-purchase business and financial
services. These are not direct lending activities. However,
RBI treats them as services or facilities. The financial
H
386 SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A facilities are extended by way of equipment leasing or
hire-purchase finance subject to approval of RBI. The
significance of the circulars and guidelines issued by the
RBI is to show that the activities undertaken by NBFCs
of equipment leasing and hire-purchase finance are
B facilities extended by NBFCs to their' customers; that,
they are financial services rendered by NBFCs to their
customers and that they fall within the meaning of the
words "banking and other financial services" which is
sought to be brought within the service tax net under
c Section 66 of the Finance Act, 1994. With the application
of AS-19, the leased assets are required to be shown as
"receivables" and not as fixed assets which further
shows that equipment leasing and hire-purchase finance
are financial facilities which thereby fund the projects
0
presented by the customers to banks and other financial
institutions including NBFCs. Thus, the impugned tax is
levied on these services as taxable services. It is not a
tax on material or sale. The taxable event is rendition of
service. The impugned tax is different~nd distinct from
tax on sale of goods under Entry 54 List II of the Vllth
E Schedule to the Constitution. [Paras 18, 19] [408-C-G; 409A-E]
Manual of NBFCs 9th Edition Page 268; Taxmann's
RBI Instructions for Banking Operations 7th Edition page 224
F - referred to.
1.3. A common method of selling goods is by means
of an agreement commonly kn9wn as a hire-purchase
agreement which is more aptly described as a hiring
G agreement coupled with an option to purchase, i.e., to
say that the owner lets out the chattel on hire and
undertakes to sell it to the hirer on his making certain
number of payments. A hire-purchase agreement
partakes of the nature of a contract of bailment with an
element of sale added to it. However, if the intention of
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE
387
COMPANIES v. UNION OF INDIA
the financing party in obtaining the hire-purchase and the
A
allied agreements is to secure the return of the loan
advanced to its customer the transaction would be merely
a financing transaction. The funding activity undertaken
by the financing party which could be in the form of loan
or equipment leasing or hire-purchase financing, would
B
be exigible to service tax if such activity falls in the
category of "banking and other financial services" under
Section 65(12) of the Finance Act, 1994 (as amended). The
financial transaction was earlier out of the tax net. In the
process, there are two different and distinct transactions, c
viz., the financing transaction and the equipment leasing/
hire-purchase transaction. The former is exigible to
service tax under Section 66 of Finance Act, 1994 (as
amended) whereas the latter would be exigible to local
sales tax/VAT. Funding or financing the transaction of 0
equipment leasing and hire-purchase covers two
different and distinct transactions. The activity of funding
or financing by NBFC who is in the business of financing
by giving loans, or equipment leasing or hire-purchase
finance falls in the category of financial services rendered
by NBFCs to their customers. It is an activity in relation
to the hire-purchase or lease transaction. Ther.e is
distinction between a "finance lease" and "operating
lease". A finance lease transfers all the risks and rewards
incidental to ownership, even though the title may or may
E
F
not be eventually transferred to the lessee. On the other
hand, an operating lease is a lease other than the finance
lease. Accounting of a "finance lease" is under AS-19,
which is mandatory for NBFCs. It is a completely different
regime. In a finance lease, it is the lessee who selects the
equipment to be supplied by the dealer or the
G
manufacturer, but the lessor [finance company] provides
the funds, acquires the title to the equipment and allows
the lessee to use it for its expected life. During the period
of the lease, the risk and rewards of ownership are
transferred to the lessee who bears the risks of loss,
H
388
SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A destruction and depreciation or malfunctioning. The
bailment which underlies finance leasing is only a device
to provide the finance company with a security interest
[its reversionary right). If the lease is terminated
prematurely, the lessor is entitled to recoup its capital
B investment [less the realizable value of the equipment at
the time] and its expected finance charges [less an
allowance to reflect the return of the capital] [Para 20)
(409-F-H; 410-A-H; 411-A-G)
C
Sale of Goods Act by Mui/a 6th Edition; Chitty on
Contract, a hire-purchase agreement - referred to.
1.4. NBFCs essentially are loan companies. They
basically conduct their business as loan companies.
They could be in addition thereto in the business of
D equipment leasing, hire purchase finance and investment.
Because NBFCs are basically loan companies, they are
required to show the assets leased as "receivables" in
their balance sheets. The activities of hire-purchase
finance/equipment leasing undertaken by NBFCs come
E under the category of "para banking". In substance, a
finance lease, unlike an operating lease, is a financial loan
(assistance/facility) by the lessor to the lessee. In the
bailment termed "hire" the bailee receives both
possession of the chattel and the right to use it in return
F for remuneration. On the other hand, equipment leasing
is long term financing which helps the borrower to raise
funds without outright payment in the first instance. Here
the "interest" element cannot be compared to
consideration for lease/hire which is in the nature of
G remuneration (consideration) for hire. Thus, financing as
an activity or business of NBFCs is different and distinct
from operating lease/hire-purchase agreements in the
classical sense. The elements of the finance lease or loan
transaction are quite different from those in equipment
leasing/hire-purchase agreements between owner
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE
389
COMPANIES v. UNION OF INDIA
(lessor) and the hirer (lessee). There are two independent
A
transactions and what the impugned tax seeks to do is
to tax the financial facilities extended to its customers by
the NBFCs under Section 66 of the 1994 Act (as amended)
as they come under "banking and other financial
services" under Section 65(12) of the said Act. "The
B
finance lease" and "the hire-purchase finance" thus
squarely come under the expression "financial leasing
services" in Section 65(12) of the Finance Act, 1994 (as
amended). [Para 21] [412-A-F]
All-India Federation of Tax Practitioners v. Union of India
(2007) 7 SCC 527; T.N. Kalayana Mandapam Association
c
v. Union of India (2004) 5 SCC 632 Gujarat Ambuja Cements
Ltd. v. Union of India (2005) 4 SCC 214; Godfrey Phillips
India Ltd. v. State of UP. (2005 (2) SCC 515; The Second D
Gift Tax Officer, Mangalore v. D.H. Hazareth AIR 1970 SC
999; Mis Ujagar Prints (II) v. Union of India (1989) 3 SCC
488; Mis. International Tourist Corporation v. State of Haryana
AIR 1981 SC 774 - relied on.
2.1. The principle that legislative entries must be given
E
the widest interpretation is subject to the exception that
where the entries use legal terms, they must be given
their legal meaning. The word "sale" is a nomen juris. It
is the nanie of a consensual contract. The law with
regard to chattels is embodied in the Sale of Goods Act.
F
A contract of sale is different from an agreement to sell
and unlike other contracts, operates by itself and without
delivery to transfer the property in the goods sold. The
word "sale" connotes both a contract and a conveyance
or transfer of property. It is true that the word "sale" is
G
not defined in the Constitution but it is well recognized
canon of construction that the words used in the three
legislative Lists should receive the widest interpretation
and not to the narrow definition of the word "sale"
contained in the Sale of Goods Act for the purpose of
H
390 SUPREME COURT REPORTS [2010) 13 (ADDL.) S.C.R.
A interpreting that expression in Entry 54, List II. [Paras 23,
24, 26) [414-8-G-H; 416-E-F]
B
Constitutional Law of India by H.M. Seervai, pp. 2437 -
referred to.
2.2. Before the Constitution (Forty-sixth Amendment)
Act, hire-purchase transa.ction could have been taxed by
Union under Entry 97, List I but as a matter of policy,
Parliament brought in Article 366 (29A) as recommended
by the Law Commission. Clause (29A) of Article 366
C provided for an inclusive :definition and has two limbs.
The first limb says that the tax on sale or purchase of
goods includes a tax on transactions specified in subclauses (a) to (f). The second limb provides that such
transfer, delivery or supply of goods referred to in the first
D limb shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply, and
purchase of those goods by the person to whom such
transfer, delivery or supply is made. In *K.L. Johar's case,
this Court held that the States can tax hire-purchase
E transactions resulting in sale but only to the extent to
which tax is levied on the sale price. This led the
Parliament to say, in the Statement of Objects and
Reasons to the Constitution (Forty-sixth Amendment)
Act, "though practically the purchaser in a hire-purchase
F transaction gets the goods on the date of entering into
the hire-purchase contract, it has been held by the
Supreme Court in *K.L. Johar's case that there is a sale
only when the purchaser exercises the option to
purchase which is at a later date and, therefore, only the
G depreciated value of the goods involved in such
transaction at the time the option is exercised becomes
assessable to sales tax which position has resulted in
avoidance of tax in various ways." Thus, the Statement
of Objects and Reasons that the concept of "deemed
sale" is brought in by the Constitution (Forty-sixth
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 391
COMPANIES v. UNION OF INDIA
Amendment) Act only in the context of imposition of sales
A
tax and that the words "transfer, delivery or supply" of
goods is referred to in the second limb of Article 366(29A)
to broaden the tax base and that as indicated in the
Report of Law Commission prior to the judgment of this
Court in **Gannon Dunkerley's case, works contract was
B
always taxed by the States as part of the word "sale" in
Entry 48/54 of List II. The object behind enactment of
Article 366(29A) is to tax the composite price so that the
full value of the hire-purchase price is taxed and to avoid
the judgment in *K.L. Johar's case whose implication was
C
to narrow the tax base resulting in seepage of sales tax
revenue. It is in that sense the concept of splitting of the
contract has to be understood. Thus, it cannot be said
that Parliament divested itself of the power to levy service
tax by enactment of the Constitution (Forty-sixth
D
Amendment) Act. Even in the Report of the Law
Commission, it was observed that "if a hire-purchase
transaction results in a sale, sales-tax is undoubtedly
leviable by the States. No doubt, it is difficult to determine
the "sale price" for the purpose of the sales tax law but
E
this has no bearing on the question of legislative
competence". Thus, reliance placed by the appellant(s)
on the expression "splitting up" in *K.L. Johar's case was
misconceived because the "splitting up" referred to in
*K.L. Johar's case was in regard to valuation and not in
regard to legislative competence. [Paras 29, 30) [417-FH; 418-C-H; 419-A-D]
**The State of Madras v. Gannon Dunkerley & Co.,
(Madras) Ltd. (1959) SCR 379 - relied on.
*K.L. Johar and Co. v. Deputy Commercial Tax Officer
(1965) 2 SCR 112 - referred to.
3.1. When one reads Entry 97 of List I with Article
246(1 ), it confers exclusive power firstly to make laws in
F
G
H
392
SUPREME COURT REPORTS [2010) 13 (ADDL.) S.C.R.
A respect of matters specified in Entries 1 to 96 in List I and,
secondly, it confers the residuary power of making laws
by Entry 97. Article 248 does not provide for any express
powers of Parliament but only for its residuary power.
Article 248 adds nothing to the power conferred by
B Article 246(1) read with Entry 97, List I. Entry 97, List I
which confers residuary powers on Parliament provides
"any other matter not enumerated in List II and List Ill
including any tax not mentioned in either of those lists".
The word "other" is important. It means "any subject of
c legislation other than the subject mentioned in Entries 196". Lastly, one must keep in mind a clear distinction
between the subject and the measure of tax. The
impugned levy relates to or is with respect to the
particular topic of "banking and other financial services"
0 which includes within it one of the several enumerated
services, viz., financial leasing services. The impugned
tax is on activity/ service rendered by the service provider
to its customer. Equipment Leasing/ Hire-Purchase
finance are long term financing activities undertaken as
their business by NBFCs. As far as the taxable value in
E case of financial leasing including equipment leasing and
hire-purchase is concerned, the amount received as
principal is not the consideration for services rendered.
Such amount is credited to the capital account of the
lessor/ hire-purchase service provider. It is the interest/
F finance charge which is treated as income or revenue
and which is credited to the revenue account. Such
interest or finance charges together with the lease
management fee/ processing fee/ documentation charges
are treated as considerations for the services rendered
G and accordingly, they constitute the value of taxable
services on which service tax is made payable. In fact,
by Notification No. 4/2006-Service Tax dated 1.3.2006, the
Government had given exemption from payment of
service tax to financial leasing services including
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 393
COMPANIES v. UNION OF INDIA [S.H. KAPADIA, CJI.]
equipment leasing and hire-purchase on that portion of A
taxable value comprising of 90% of the amount
representing as interest, i.e., the difference between the
instalment paid towards repayment of the lease amount
and the principal amount in such instalments paid. In
other words, service tax is leviable only on 10% of the B
interest portion. It was clarified in Circular F.No. B.11 /1 /
2001-TRU dated 9.7.2001 that service tax, in the case of
financial leasing including equipment leasing and hirepurchase, will be leviable only on the lease management
fees/ processing fees/ documentation charges recovered c
at the time of entering into the agreement and on the
finance/ interest charges recovered in equated monthly
instalments and not on the principal amount. Merely
because for valuation purposes inter a/ia "finance/
interest charges" are taken into account and merely D
because service tax is imposed on financial services with
reference to "hiring/ interest" charges, the impugned tax
does not cease to be service tax nor does it become tax
on hire-purchase/ leasing transactions under Article
366(29A) read with Entry 54, List II. Thus, while State E
Legislature is competent to impose tax on "sale" by
legislation relatable to Entry 54 of List II of Seventh
Schedule, tax on the aspect of the "services", vendor not
being relatable to any entry in the State List, would be
within the legislative competence of Parliament under
Article 248 read with Entry 97 of List I of the Seventh
F
Schedule. [Paras 36, 37] [422-G-H; 423-D-H; 424-A-G]
Goodricke Group Ltd. v. State of West Bengal (1995)
Suppl 1 sec 707 - relied on.
G
Bharat Sanchar Nigam Limited v. Union of India (2006)
3 sec 1 - held inapplicable.
3.2. The States have legislative competence to levy
sales tax on sales provided that the necessary
H
394
SUPREME COURT REPORTS [2010) 13 (ADDL.) S.C.R.
A
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. The impugned
B
provision operates qua an activity of funding/ financing
of equipment/ asset under equipment leasing under
which a lessee is free to select, order, take delivery and
maintain the asset. The lessor (NBFC) renders financial
services to its customers and what is taxed under the
c impugned provision is the income, by way of finance/
interest charges in addition to management fees/
documentation charges, which is earned by the financier
(lessor). The taxable event is the service which is
rendered by the finance company to its customer. The
0
value of taxable service under Section 67 is income by
way of interest/finance charges (measure of tax) which
is not determinative of the character of the levy. Thus,
Section 67 of the Finance Act, 1994 (as amended) seeks
to tax financial services rendered by the appellant(s) with
reference to the income which the appellant(s) earns by
E way of interest/ finance charges. The question of splitting
up of transactions, as contended on behalf of the
appellant(s), would not arise. Service tax imposed by
Section 66 of the Finance Act, 1994 (as amended) on the
value of taxable services referred to in Section
F
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. [Paras
G 39, 40] [426-B-H; 427-A-E; 428-A-B]
Case Law Reference:
(2006) 3 sec 1
held inapplicable
H
Para 5,
7,31, 38, 39
ASSOCIATION OF LEASING AND FINANCIAL SERVICE
395
COMPANIES v. UNION OF INDIA
(1965) 2 SCR 112
referred to
Para 6,
A
25,27, 30
c2001) 1 sec 527
relied on
Para 7
(2004) 5 sec 632
relied on
Para 7
B
c2005) 4 sec 214
relied on
Para 7
c2005 (2) sec 515
relied on
Para 22
AIR 1970 SC 999
relied on
Para 22
(1959) SCR 379
relied on
Para 23 c
(1965) 2 SCR 112
referred to
Para 25
AIR 1970 SC 999
relied on
Para 33
(1989) 3 sec 488
relied on
Para 34
D
AIR 1981 SC 774
relied on
Para 35
(1995) suppl 1 sec 101
relied on
Para 36
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
E
9344 of 2010.
From the Judgment & Order dated 09.06.2009 of the High
Court of Madras in WP No. 14905 of 2001.
WITH
F
C.A. Nos. 9345, 9346, 9347, 9348, 9350-9351 of 2010.
SLP (C) No. 10607 of 2010.
Goolam E. Vahar.vati, AG, Bishwajit Bhattacharya, ASG,
G
Arvind P. Datar, T.R. Andhyarujina, A. Raghunath, K. Swami,
Prabha Swami, U.A. Rana, Mrinal Majumdar (for Gagrat & Co.),
Satish Parasaran, A.M.P. Latha, Prabha Swami, S. Nanda
Kumar, Achin Goel, R. Satish Kumar, V.N. Raghupathy, Rajiv
Nanda, Rupesh Kumar, Mohd. Mannan, Rohit Sharma, Ajay
H
396
SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A Singh, Judy James, Mihir Chatterjee, B. Krishna Prasad, Anil
Katiyar for the apparing parties.
B
The Judgment of the Court was'delivered by
S.H. KAPADIA, CJI 1. Leave granted.
2. In this batch of Civil Appeals, the controversy pertains
to validity of Sections 65(12) and 65(105)(zm) of the Finance
Act, 1994 (as amended) insofar as the said provisions seek
to levy service tax on leasing and hire purchase. The appellants
c contend that 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) of the Finance Act, 1994
(as amended), insofar as it relates to financial leasing services
including equipment leasing and hire purchase is beyond the
0
legislative competence of Parliament by virtue of Article
366(29A) of the Constitution.
Facts in Civil Appeal @ SLP (C) No. 24704 of 2009
3. Appellant is an Association of leasing and financial
E companies. Finance Act sought to levy service tax on "banking
and other financial services". Section 137 of the Finance Act,
2001 substituted Section 65 of the Finance Act, 1994 by a new
Section 65 which defined "banking and other financial services".
Subsequently, this definition also underwent some changes by
F way of Section 90 of the Finance Act, 2004 and Section 135
of the Finance Act, 2007. The relevant part of the definition as
on date contained in Section 65(12) of the Finance Act, 1994
is as follows:
G
"65. In this Chapter, unless the context otherwise requires
(12) "banking and other financial services" means -
(a)
the following services provided by a banking
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 397
COMPANIES v. UNION OF INDIA [S.H. KAPADIA, CJI.]
company or financial institution including a nonA
banking financial company or any other body
corporate or commercial concern namely: -
(i)
financial leasing services including equipment
leasing and hire-purchase;"
B
4. Appellant had filed a writ petition under Article 226 of
the Constitution before the High Court challenging the levy of
service tax imposed by Section 65(12)(a)(i). During the
pendency of the writ petition, Union of India issued a Notification
C
ST dated 1.3.2006 exempting 90% of the amount repayable
under hire-purchase/ equipment leasing agreement(s) from
service tax on the ground that the said 90% represented interest
income earned by the service provider. According to the
appellant, the concept of "service tax" was first introduced by
the Finance Act, 1994 which came into force w.e.f. 1.7.1994
D
under Chapter V. No service tax was levied by the said Act or
by its subsequent amendment till 2001. However, vide Finance
Act, 2001 service tax was imposed on "banking and other
financial services". Vide Section 137{a) of the Finance Act,
2001, Section 65 of the Finance Act, 1994 was replaced by a
E
new Section 65 which defined "banking and other financial
. services" vide clause (10). By virtue of the said definition under
Section 65(10){i), Parliament has sought to bring within the
service tax net, transactions in the nature of financial leasing,
equipment leasing and hire-purchase. By Section 65(72), the
F
expression "taxable service" has been defined to mean any
service provided to a customer, by a banking company or a
financial institution including NBFC, in relation to banking and
other financial services [See Section 65(72)(zm)]. Being
aggrieved by the inclusion of hire-purchase and leasing
G
services within the service tax net, the appellant herein
challenged the amendment of 2001 as ultra vires the legislative
competence of the Parliament. By the impugned judgment, the
Madras High Court has dismissed the writ petition, hence, this
civil appeal.
H
398 SUPREME COURT REPORTS (2010] 13 (ADDL.) S.C.R.
A Submissions
5. Mr. Arvind P. Datar, learned senior counsel appearing
on behalf of the appellant(s), submitted that the effect of Article
366(29A) is to treat six types of transactions as deemed sales
8
so as to enable state legislatures to levy sales tax under Entry
54, List II; that, the Statement of Objects and Reasons to the
Constitution (Forty-sixth Amendment) Act makes it clear that all
six transactions could have been taxed under Entry 97, List I
by Parliament. However, based on-4he 61st Report of the Law
C Commission, the Constitution has now conferred exclusive
power to the States to levy sales tax by expanding Entry 54,
List II by insertion of Article 366(29A). Thus, having
characterized constitutionally the subject matter of hirepurchase and leasing as a sale (deemed sale), it is not open
to Parliament to tax the same subject matter under Entry 97,
D List I. Thus, by reason of the Constitution (Forty-sixth
Amendment) Act, there exist six transactions as "sales". That,
inevitable corollary is that power of taxation of hire-purchase/
leasing, being sales, is exclusively with the state legislatures.
The purpose of the Constitution (Forty-sixth Amendment) Act
E was to reserve the exclusive competence to tax hire-purchase/
leasing transactions with state legislatures which is clearly seen
from the 61 st Report of the Law Commission which
recommended constitutional amendment. In this connection,
learned counsel has placed reliance on the principles laid down
F by this Court in Bharat Sanchar Nigam Limited v. Union of
India ((2006) 3 sec 1]. According to the learned counsel, once
by reason of the Constitution (Forty-sixth Amendment) Act the
hire-purchase/ leasing is deemed to be a sale, any attempt to
levy service tax on the same transaction will amount to a
G colourable exercise of power. According to the learned counsel,
when sales tax is already paid for the transfer of the right to
use the goods particularly when such transfer is a deemed sale
under Article 366(29A), it is not open to Parliament to impose
service tax on the same transaction once again. According to
H
ASSOCIATION OF LEASING AND FINANCIAL SERVICE
399
COMPANIES v. UNION OF INDIA [S.H. KAPADIA, CJI.]
the learned counsel, the impugned judgment of the High Court
assumes erroneously that hire-purchase/ leasing transactions
include the concept of rendition of service and, thus, the
impugned judgment needs to be set aside.
6. Mr. T.R. Andhyarujina, learned senior counsel appearing
on behalf of one of the appellants, submitted that prior to the
Constitution (Forty-sixth Amendment) Act, the Parliament had
the legislative competence to levy service tax on a hirepurchase transaction or leasing transacti9n; except on the sale
part in such transaction, which lay in the competence of the
States under Entry 54, List II. In this connection, learned.counsel
placed reliance on the judgment of this Court in K.L. Johar and
Co. v. Deputy Commercial Tax Officer [(1965) 2 SCR 1'12].
That, by the Constitution (Forty-sixth Amendment) Act in Article
366(29A)(c) and (d), hire-purchase/ leasing transactions were
deemed to be sales and, consequently, the legislative
competence in respect of hire part of the transaction was made
over to the States. That, the Law Commission in its 61st Report
stated that "the other alternative would be to transfer the entire
power to the States. This will achieve a merger of the existing
power of the States to tax the sale part and the new power to
tax the hire part, which will enable state legislatures to provide
for a tax on hire purchase price without demarcation". As a
consequence of the Constitution (Forty-sixth Amendment) Act,
the Parliament's competence to levy a tax on an activity relating
to financial leasing services including equipment leasing and
hire-purchase is constitutionally truncated by the newly conferred
exclusive legislative competence of States over the deemed
sales in Article 366(29A)(c) and (d). According to the
appellant(s), when Section 65 of the Finance Act imposes a
service tax on "value of taxable services", the value cannot
include the elements of transaction of hire-purchase and
leasing, which have now been transferred to the exclusive
legislative competence of the States. That, although Parliament
can levy service tax on the providing of services of hirepurchase and leasing of equipment if the service provider levies
A
B
c
D
E
F
G
H
400
SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.
A a charge by way of management fee, processing fee,
documentation charges or administrative fees, the Parliament
cannot levy a service tax in respect of the hire part in such
transactions in view of the Constitution (Forty-sixth Amendment)
Act and, consequently, the Parliament has no legislative
8 competence to levy service tax on the hiring charges in the
transaction. The said hiring charges are nothing but interest
charges on the finance provided in hiring and leasing and
hence the impugned tax cannot extend to tax the interest
charged in the transactions. According to the learned counsel,
C various States have been imposing sales tax/ VAT on the entire
transaction of hire-purchase/ leasing including the component
of hire charges, interest and other charges. This is done in view
of the Constitution (Forty-sixth Amendment) Act. Thus, when
sales tax/ VAT is charged by the States on the entire
consideration including interest received under the hireD purchase and leasing transactions any tax by Parliament on the
same is beyond the competence and residuary pow~r under
Entry 97 of List I. Thus, according to the learned coun·sel, levy
of service tax in respect of the hire part in hire-purchase/
leasing transactions is beyond the competence of the
E Parliament.
7. Mr. Goolam E. Vahanvati, learned Attorney General for
India, submitted that the basic contention advanced on behalf
of the appellant(s) is that by reason of introduction of Article
F 366(29A) by the Constitution (Forty-sixth Amendment) Act, the
entire power of taxation in respect of hire-purchase transactions
is now vested only in the States under Entry 54 of List II and
that the Parliament has no power at all including the power to
levy a service tax. According to the Attorney General, the said
G argument is based on the contents of the 61st Report of the
Law Commission, particularly, in relation to the background in
which clauses (c) and (d) of Article 366(29A) were
recommended. The learned Attorney General invited our
attention to the historical background of Article 366(29A) and
H the 61 st Report of the Law Commission in support of his
..
ASSOCIATION OF LEASING AND FINANCIAL SERVICE 401
COMPANIES v. UNION OF INDIA [S.H. KAPADIA, CJI.]
submission that a legal fiction was sought to be inserted in
A
Article 366 in order to give an artificial extension to the
definition of sale so as to include the power to levy sales tax
even on the hiring part, and this is all that Articl.e 366(29A)
intended to do. From that, according to learned Attorney
General, one cannot infer that Parliament has divested itself of
B
the power to levy service tax. According to learned Attorney
General, the question of service tax was not even present in
the mind of Parliament when the Constitution (Forty-sixth
Amendment) Act was enacted and, therefore, reliance on the
61st Report of the Law Commission was completely C
misconceived. According to learned Attorney General, the
reliance placed on Para 44 of the Bharat Sanchar Nigam
Limited (supra) by the appellant(s) is completely misconceived
because that judgment read in entirety recognizes the power
of Union of India to levy service tax. The learned Attorney
D
General placed heavy reliance on the judgment of this Court in
All-India Federation of Tax Practitioners v. Union of India
((2007) 7 SCC 527]. The learned Attorney General drew our
attention to the conceptual distinction between a service tax
and a tax on hiring transaction.