Ramachandran Nair, J.

The first petitioner, an association of non-banking financial companies, and petitioners 2 and 3 it's members, have filed this Writ Petition challenging the constitutional validity of Section 137 of the Finance Act, 2001 by which service tax is introduced on "banking and other financial services" which includes "equipment leasing and hire purchase". The provisions providing for service tax on equipment leasing and hire purchase transactions are introduced by amending the Finance Act, 1994. The relevant definition clauses introduced therein are extracted hereunder for easy reference.

"S.65(12) "banking and other financial services" means --(a) the following services provided by a banking company or a financial institution including a non- banking financial company or any other body corporate or commercial concern namely:-

(i) financial leasing services including equipment leasing and hire-purchase;

Explanation: For the purposes of this item, "financial leasing" means a lease transaction where-

(i) contract for lease is entered into between two parties for leasing of a specific asset;

(ii) such contract is for use and occupation of the asset by the lessee;

(iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and

(iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;

................"

"S.65(14) "body corporate" has the meaning assigned to it in clause(7) of section 2 ofthe Companies Act, 1956."

"S.65(105) "taxable service" means any service provided or to be provided,--

................

(zm) to any person, by a banking company or a financial institution including a non-

banking financial company, or any other body corporate or commercial concern, in relation to banking and other financial services.

............."

2. Along with introduction of the above definition clauses, the charging section namely, Section 66 of the Finance Act, 1994 was also amended to cover tax on value of taxable services referred to in clause (zm) of Section 65(105) above.

3. According to the first petitioner, by virtue of the above amendment, it's members including petitioners 2 and 3 are liable to pay service tax in respect of their leasing and hire purchase transactions. Respondents have contended that even though service tax

is payable on the value of taxable service pertaining to leasing and hire purchase transactions, Government of India has vide Notification No.4/2006-ST dated 1.3.2006 granted exemption on 90% representing interest income earned by the service provider. Therefore, according to respondents, while considering the constitutional validity, this court should consider that the incidence of service tax falls only on 10% of the receipts. Since the writ petition was filed soon after the introduction of the impugned provisions and stay was also granted, petitioners 2 and 3 or any other member of the first petitioner-association has not received any assessment determining service tax liability on their leasing or hire purchase arrangements. Therefore, the exact service tax liability on any transaction is not on record. However, on the constitutional validity raised by the petitioners, we have heard heard Senior counsel Sri. Aravind P Dattar, appearing for the petitioners, and Addl. Solicitor General of India from Chennai, Sri. M. Ravindran, appearing along with Sri. John Varghese on behalf of respondents.

4. The first ground raised by the petitioners to challenge the impugned provisions is that Parliament has no authority to legislate on hire purchase and leasing transactions which are subjects left for levy of sales tax by the States under Entry 54 of List II of VIIth Schedule to the Constitution of India. According to petitioners, after the 46th Amendment to the Constitution introducing clauses 29A (c) and (d) to Article 366, States are authorised to provide for sales tax