2010 Supreme(SC) 1034

2010 (7) Supreme 738
SUPREME COURT OF INDIA
S. H. Kapadia, CJI., K.S. Radhakrishnan and Swatanter Kumar, JJ.
Association of Leasing & Financial Service Companies - Appellant (s)
versus
Union of India and others - Respondent(s)
Civil Appeal No.9344 of 2010
(Arising out of S.L.P. (C) No.23149 of 2009)
with
Civil Appeal No.9345 of 2010 (arising out of S.L.P. (C) No.23805 of 2009)
Civil Appeal No.9346 of 2010 (arising out of S.L.P. (C) No.24704 of 2009)
Civil Appeal No.9347 of 2010 (arising out of S.L.P. (C) No.11672 of 2009)
Civil Appeal No.9348 of 2010 (arising out of S.L.P. (C) No.23161 of 2009))
Civil Appeal Nos.9350-9351 of 2010 (arising out of S.L.P. (C) Nos.27989- 27990 of 2009
Decided on : 26-10-2010

IMPORTANT POINTS
Parliament has legislative competence to enact section 66 of the Finance Act, 1994.
Challenge to validity o section 66 could not be made without exhausting statutory remedy.

Headnote:(a) Finance Act, 1994 – Section 65(10) read with Section 65(72)(zm) – An NBFC which as a matter of business receives deposits or which lends in any manner comes within the purview of Financial institution. (Para 17)

        (b) Finance Act, 1994 – Section 66 – Equipment leasing and hire-purchase finance are facilities extended by NBFCs to their customers – These are financial services and that they fall within the meaning of the words “banking and other financial services” – Brought within the service tax net under Section 66. (Para 19)

        (c) Finance Act, 1994 – Section 65(12) – 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 the financing party in obtaining the hire-purchase and the allied agreements is to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction – Such Financial activity would be exigible to tax if falling under “banking and other financial services”. (Para 20)

        (d) Finance Act, 1994 – Section 66 – The financing transaction and the equipment leasing/hire-purchase transaction are two distinct activities – Former is exigible to service tax under Section 66 whereas the latter would be exigible to local sales tax/VAT – Service tax is a tax on activity whereas sales tax is a tax on sale of a thing or goods. (Paras 20 and 22)

        (e) Words and Phrases – Finance ease and Operating lease – Distinction elaborated. (Paras 20 ad 21)

        (f) Finance Act, 1994 – Section 65(12) – “The finance lease” and “the hire-purchase finance” squarely come under the expression “financial leasing services”. (Para 21)

        (g) Finance Act, 1994 – Section 65(105)(zm) – Service tax is a Value Added Tax which in turn is a destination based consumption tax – It is levied on commercial activities and it is not a charge on the business but on the consumer – The taxable event is each exercise/ activity undertaken by the service provider and each time service tax gets attracted (Para 22)

        (2007) 7 SCC 527; (2005 (2) SCC 515 – Relied upon

        (h) Interpretation of statutes – 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 be given their legal meaning. (Para 23)

        (1959) SCR 379 – Relied upon

        (i) Constitution of India – Entry 54 of List II – It is not open to the State Legislature to extend its taxing power by defining the words “sale of goods” to transactions which did not constitute “sale of goods” within the Sale of Goods Act, 1930 – It would amount to amending the entry relating to that power in the Constitution by an ordinary law, which is not permissible – Matter would be different if the Parliament enacts such a provision for Part C State under Article 246(4) and Entry 97, List I read with Article 248(2) for which the Parliament is competent. (Paras 23 and 24)

        (1959) SCR 379; (1965) 2 SCR 112 – Relied upon

        (j) Constitution of India – Article 366(29A) – Scope – Concept of deemed sale in case of hire-purchase contracts was brought in – Article 366(29A) is essentially sales tax specific – It was brought in to expand the tax base. (Paras 30 and 32)

        (k) Interpretation of statutes – Pith and substance – To find out whether a piece of legislation falls within any entry, its true nature and character must be in respect to that particular entry – Residuary power of the Parliament cannot be so expansively interpreted as to whittle down the power of the State Legislature. (Paras 33 to 35)

        AIR 1970 SC 999; (1989) 3 SCC 488; AIR 1981 SC 774 – Relied upon

        (l) Constitution of India – Entry 97, List I – The word “other” means “any subject of legislation other than the subject mentioned in Entries 1-96” – Moreover distinction between subject and measure of tax must be borne in mind. (Para 36)

        (1995) Suppl 1 SCC 707 – Relied upon

        (m) Finance Act, 1994 – Sections 65(12) and 65(105)(zm) – Validity – The impugned tax is on “banking and other financial services” and not on material or sale. It is on activity/ service rendered by the service provider to its customer – Merely because service tax is imposed on financial services with reference to “hiring/ interest” charges, the impugned tax does not cease to be service tax and nor does it become tax on hire-purchase/ leasing transactions. 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”, 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. (Para 37)

        (2004) 5 SCC 632; (2005) 4 SCC 214; (2007) 7 SCC 527 – Relied upon

        (2006) 3 SCC 1 – Distinguished

        (n) Finance Act, 1994 – Section 66 – Validity of the provision on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12)(a)(i) could not be challenged without exhausting then statutory remedy. (Para 40)

       Facts of the case:

        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.

       Finding of the Court:

        Parliament has the legislative competence to enact the section 66 of the Finance Act, 1994

       Result : Appeals dismissed.