MADRAS HIRE PURCHASE ASSOCIATION Vs. UNION OF INDIA

JUDGEMENT

(1.) WA No. 4119 of 2003: Appeal under Clause 15 of Letters Patent against the Order dated 23.04.2003 made in W.V.M.P. No. 255 of 2002 in W.M.P. No. 22743 of 2001 in W.P. No. 15328 of 2001 on the file of this Court.)WP No. 14905 of 2001: Petition filed under Article 226 of The Constitution of India praying for a Writ of Declaration to declare Section 65 (10) and 67 of Chapter V of the Finance Act, 1994 (as amended) levying inter alia, service tax on leasing/hire purchase transactions as ultra vires the provisions of Article 14, 19 (1) (g), 265, 366 (29A), Entry 54, List-II, Schedule VII of the Constitution of India and also being beyond the legislative competence of Parliament in so far as the members of the petitioner is concerned.WP No. 15327 & 15328 of 2001: Petition filed under Article 226 of The Constitution of India praying for a Writ of Declaration to declare Section 65 (10) and 67 of Chapter V of the Finance Act, 1994 (as amended) levying inter alia, service tax on leasing/hire purchase transactions as ultra vires the provisions of Article 14, 19 (1) (g), 265, 366 (29A), Entry 54, List-II, Schedule VII of the Constitution of India and also being beyond the legislative competence of Parliament in so far as the Corporate members of the petitioner is concerned.WP No. 15559 of 2001: Petition filed under Article 226 of The Constitution of India praying for a Writ of Declaration to declare Section 137 of the Finance Act, 2001 and all other provisions in the said Act which affect the rights of the petitioners herein in relation to the business of Hire Purchase and finance leasing as unconstitutional without Legislative Competence and null and void so far as petitioner is concerned.)Common Judgment :The prayer in all the above writ petitions i.e., W.P. Nos. 14905, 15327, 15328, 15559 and 15560 of 2001 are identical, W.A. No. 4119 of 2003 was filed against the vacation of the interim order passed in WP No. 15328 of 2001, hence, all the writ petitions as well as the writ appeal are disposed of by this common judgment.

(2.) THE learned senior counsel Mr. Aravind P. Datar appearing for the petitioners submitted that the writ petitioners are non banking financial companies engaged in the business of hire purchase and leasing that 46th Amendment inserted Article 366 (29A), of the Constitution of India, in which clauses a to f, particularly clauses c & d, which are relevant to this case, explain the ambit of the expressions of tax on the delivery of goods on hire-purchase or any system of payment by instalment and also a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration that the said expression is also found in the Entry 54 of List II that after the said 46th Amendment, hire purchase and leasing transactions are treated as deemed sales and the State had imposed sales tax, now called as VAT, on both transactions and the entire amount paid by way of installments are liable for sale tax that the service tax is leviable if any element of service is involved that hire purchase/leasing are transfer of movable where there is no service element is involved. For the said contention, the learned senior counsel relied on the invoices raised by the members of petitioners association that the petitioners are not collecting any charges for service, hence, no service tax can be leviable that when the constitution under Article 366 (29A) authorises levy of sales tax on hire purchase/leasing transaction and the State levied sales tax, Parliament has no authority to levy service tax that introduction of Service Tax on hire purchase and leasing transaction by the Parliament is violative of Article 14 and 19 (1) (g), 265, 366 (29A), Entry 54 of List II of Schedule VII of the Constitution of India. All the other counsel appearing for the appellant/petitioners adopted the argument of the Senior Counsel Mr. Aravind P. Datar and all of them relied on the below mentioned decisions:-I) K. Damodarasamy Naidu & Bros. v. State of Tamil Nadu 2000 (1) SCC Page No,521 in which Para Nos. 12, 13 and 23 are relevant, which are extracted below:-"12. It was not disputed by learned counsel for the State of Maharashtra that the tax on food and drink could be imposed only upon that component of the composite charge for lodging and boarding at a residential hotel as related to the supply of food and drink. But, in his submission, no rules in this behalf were necessary the Sales Tax Officers would make assessments depending upon the facts of each individual case.13. THEre are several hundred residential hotels in the State of Maharashtra. THEy provide lodging and boarding to several thousands of customers in every assessment year. It is in practical terms impossible for the Sales Tax Authorities to make assessments upon the basis of the facts relevant to each individual customer in each individual hotel. Generalisations are, therefore, inevitable and there is every likelihood that the basis of the generalisation made by one Sales Tax Officer would differ from the basis of the generalisation made by another, leading to unacceptable arbitrariness. Rules that indicate to Sales Tax Officers how to treat composite charges for lodging and boarding would eliminate substantial differences in their approach and, thus, arbitrariness.23. Writ Petition No. 9901 of 1983 is made absolute to this extent:THE State of Maharashtra is directed henceforth not to make assessments of the tax on the supply of food and drink on hotel-owners who provide lodging and boarding for a composite sum until it frames rules that set out for such assessment which take account of the fact that residential hotels may provide lodging and full or part-board. If the rules are framed by 1-6-2000 the assessments that are not completed only by reason of this order may be proceeded with. If the rules are not framed by the said date, these assessments shall lapse. No proceedings for assessments shall be commenced hereafter until the rules have been framed. At the same time, completed assessments as of today shall not be affected by this order and the assessees would be entitled to adopt proceedings thereagainst, subject to the law."ii) Bharat Sanchar Nigam Ltd. v. Union of India, (2006 (3) SCC 1 - wherein the Honourable Supreme Court in Para Nos. 42, 44 and 45 held thus:-"42. All the sub-clauses of Article 366(29-A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerley Ltd. (sic modified). THE amendment especially allows specific composite contracts viz. works contracts [sub-clause (b)] hire-purchase contracts [sub-clause (c)], catering contracts [sub-clause (e)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax.44. Of all the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in sub-clauses (b) and (f) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Article 366(29-A) do not cover hospital services. THErefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the Sales Tax Authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking, with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.45. THE reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. THE test therefore for composite contracts other than those mentioned in Article 366(29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. THE test for deciding whether a contract falls into one category or the other is to as what is -the substance of the contract-. We will, for the want of a better phrase, call this the dominant nature test."iii) Imagic Creative (P) Ltd. v. Commissioner of Commercial Tax, 2008 (2) SCC 614 wherein in Para Nos. 28, 32 and 34, it was held thus:- "28. We have, however, a different problem at hand. THE appellant admittedly is a service provider. When it provides for service, it is assessable to a tax known as service tax. Such tax is leviable by reason of a parliamentary statute. In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with the Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including -aspect theory-, as was noticed by this Court in Federation of Hotel & Restaurant Assn. of India v. Union of India.32. Payments of service tax as also VAT are mutually exclusive. THErefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided. THE approach of the assessing authority, to us, thus, appears to be correct.34. For the reasons aforementioned, the impugned judgment cannot be sustained. It is set aside accordingly. THE appeal is allowed. No costs."iv) Unreported judgment of Division Bench of Delhi High Court in WP (C) No. 1659/2008 etc., batch dated 18.04.2009 wherein in Para Nos. 34 and 35, it was held thus:-"34. From the above discussion, it is apparent that service tax is a value added tax It is a tax on value addition provided by a service provider. It is obvious that it must have connection with a service and, there must be some value addition by that service. If there is no value addition, then there is no service. With this in mind, it would be instructive to analyse the provisions of Section 65 (105) (zzzz). It has reference to a service provided or to be provided to any person, by any other person in relation to "renting of immovable property for use in the course or furtherance of business or commerce". THE wordings of the provision are so structured as to entail - a service provided or to be provided to "A" by "B" in relation to "C" is the subject matter. As pointed out above by Mr. Ganesh, the expression 'in relation to' may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, 'in relation to' would include the subject matter following it and on other occasions it would not. As in the case of the service of dry cleaning, the expression 'in relation to dry cleaning' also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65 (105) (v), which refers to a service provided by a real estate agent 'in relation to real estate' does not, obviously include the subject matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service. Going back to the structured sentence i.e., - service provided or to be provided to 'A' by 'B' in relation to 'C', it is obvious that 'C' can either be a service (such as dry cleaning, hair dressing etc.,) or not a service by itself, such as real estate. THE expression ' in relation to' would therefore, have different meanings depending on whether "C" is a service or is not a service. If "C": is a service, then the expression 'in relation to' means the service 'C' as well as any other service having connection with the service 'C'. Where 'C' is not a service, the expression 'in relation to' would have reference only to some service which has a connection with 'C'. But, this would not imply that 'C' itself is a service. 35. From this analysis, it is clear that we have to understand as to whether renting of immovable property for use in the course or furtherance of business or commerce by itself is a service. THEre is no dispute that any service connected with the renting of such immovable property would fall within the ambit of Section 65 (105) (zzz) and would be exigible to service tax. THE question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business or commerce by itself does not entail any value addition, and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided along with the renting of immovable property, then it would fall within Section 65 (105) (zzzz)."

(3.) THE appellant/petitioners are engaged in the business of hire purchase/leasing transaction. THE hire purchase and leasing are more or less identical. In leasing, the lessee selects the goods with the manufacturer and thereafter, approach the financier to lend loan and after executing the agreement, the amount is paid to the dealer or manufacturer and invoice is raised in the name of the financier, however, goods are being used by the lessee on payment of installments, and later after paying the entire installments, the lessee exercise option to purchase the same. In hire purchase, after agreement with the hirer, the financier purchases the goods from the manufacturer or dealers in the name of the hirer, thereafter the financier name is endorsed in the documents, thereby creating a charge on it. On payment of intallments i.e., the principal and interest, the hirer become the owner of the goods after cancelling the endorsement in the documents.