In a recent decision, the Madras High Court had an occasion to deal with the matters of service taxation of hire purchase and lea-sing transactions of moveable goods and to determine whether such a tax was constitutionally valid. In the case of Madras Hire Purchase
Association and Others vs. Union of India and others (2009-TIOL-338-HC-MAD-ST), the issue before the court was whether such transactions involved any element of service, in order for the service tax to apply, especially in the light of the fact that such transactions were expressly made chargeable to VAT, which was a tax in relation to goods.
The petitioners argued that they were non-banking financial companies (NBFCs) and were engaged inter-alia in the business of hire purchase and leasing and that the 46th Amendment to the Constitution of India had inserted Article 366 (29A) in order to deem a set of six transactions enumerated thereunder as constituting a sale of goods and to therefore be chargeable to a sales tax, now VAT. These included the transfer of the right to use of any goods for any purpose as well as hire purchase and leasing transactions. Consequently, the State had imposed a sales tax, now VAT, on the aforesaid transactions and the entire amount paid by the hiree / lessee to the hirer / lessor by way of installments were made chargeable to the VAT. Accordingly, no service element was at all envisaged or involved in these transactions. It was also argued based on the underlying invoices as well as the related documentation that the parties to the contract did not at any time envisage any services to be provided and indeed no charges were collected towards rendition of services. Hence, the extension of the service tax to hire purchase and leasing transactions was violative of various Articles of the Constitution of India.
The appellants relied on several judgements of the Supreme Court including Bharat Sanchar Nigam Limited vs. Union of India(2006-TIOL-15-SC-CT-LB), which had held that a particular transaction could not be charged to both the goods tax and the service tax and the test for deciding whether a transaction fell within the ambit of either tax was to determine its substance i.e. its dominant nature. Reliance was also placed on another decision of the Supreme Court in Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Tax (2008-TIOL-04-SC-VAT) which had held that service tax and VAT were mutually exclusive and operated in mutual domains.
In addition to the above Supreme Court decisions, reliance was also placed on the recent decision of the Delhi High Court in Home Solution Retail India Ltd vs. Union of India (2009-TIOL-196-HC-DEL-ST), which held that there was no service element in regard to renting of immoveable property and had consequently set aside the charge of service tax on rentals pertaining to letting out of immoveable property on lease.
As opposed to the aforesaid arguments, the state relied on the decisions of the Supreme Court in Tamil Nadu Kalyana Mandapam Association vs. Union of India, (2004-TIOL-36-SC-ST) and in Gujarat Ambuja Cements Ltd. vs Union of India, (2005-TIOL-53-SC-ST) to argue that the levy of service tax on hire purchase / leasing transactions was constitutionally valid and hence the definition of banking and other financial services in service tax law as ‘financial services including equipment leasing and hire purchase’ was entirely proper and legal.
In particular, reliance was placed on the observation of the Supreme Court in the Kalyana Mandapam case (supra) that it was incorrect to argue that the transactions envisaged under Article 366 (29A) could not be charged to a service tax merely on the ground that such transactions were deemed to be sales and charged to the sales tax to the extent that there was a sale of goods, intended or otherwise, in relation to such transactions. Further, the Government had granted a deduction of 90 per cent from the installment amounts and only the balance 10 per cent was charged to the tax.
The Madras High Court took note of these contending arguments and also considered the definition of banking and other financial services as contained in the service tax provisions. It noticed that the appellants had admittedly collected service charge at 1 per cent for preparation of documentation and other incidental activities relating to hire purchase/lease transactions. At the same time, it took note of the argument that the appellants had not charged or recovered any sums towards any service charges as part of the installments for rentals, which was the principal transaction in question.
The High Court thereupon held that the hire purchase and leasing transactions admittedly included the concept of rendering of services. Consequently, the service tax that had been imposed on the transaction in question was constitutionally valid.
The Court appears to have come to this determination perhaps based on the admission of the appellants that they had collected a service charge of 1 per cent with regard to preparation of documents and other incidental activities. This admission was in relation to the aforesaid incidental activities only and was not with regard to the principal activity. Nevertheless, the Court has come to its finding, without a substantive discussion on the point. With regard to the challenge of the appellants that the service tax on hire purchase and leasing transactions was discriminatory in law, the High Court has held that there was no basis for this argument since banking companies, as opposed to the NBFC appellants, were indeed paying service tax on similar transactions of hire purchase and leasing that they were carrying out. Finally, the Court also negated the argument that such a tax restricted the freedom envisaged under Article 19 of the Constitution.
In sum, the High Court has upheld the charge of service tax on hire purchase and leasing transactions, notwithstanding that the same transactions were chargeable to the VAT. This decision in effect upholds the double taxation of the same transaction of hire purchase and leasing to both the service tax as well as the VAT. It remains to be seen whether an appeal would be preferred to the Supreme Court against this decision and what the decision of the Supreme Court would be in regard to such an appeal.
S Madhavan is leader, Indirect Tax Practice, PricewaterhouseCoopers, firstname.lastname@example.org