8/14/2019 Note on Madras High Court Ruling on Service Tax on Leasing

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Applicability of Service Tax on lease/ hire purchase transaction

In a recent decision of the Madras High Court ruling ofMadras Hire Purchase Association vs.

Union of India (judgment dated 9

th

June, 2009), constitutional validity of service tax on leasingand hire purchase of moveable goods was discussed. The question before the court was whether

such transactions evolve an element of service where such transactions were expressly made

chargeable to VAT.

The Petitioners argued that they being NBFCs have been carrying out leasing and hire purchase

transactions and under Article 366 (29A) inserted in the 46th

amendment of the Constitution of

India, and that the said transactions were included in the ambit of transaction constituting sale of

goods, hence chargeable to sales tax/ VAT. Also the Petitioners argued on the basis on the

invoices that there was no service involved in these transactions.

The Appellants relied on several judgments of Supreme Court including Bharat Sanchar NigamLimited vs. Union of India (judgment dated 2nd

March, 2006), wherein it was held that a

particular lease/ hire purchase transaction would be charged to either goods tax or service tax

depending upon the substance of the transaction the dominant nature test. Further in Imagic

Creative (P) Ltd. vs. Commissioner of Commercial Tax, 2008 (2) SCC 614, it was held that the

goods tax and service tax operated in mutually exclusive domains. Also in a Delhi High Court

case ofHome Solution Retail India Ltdvs. Union of India service tax on rentals pertaining to

letting out of immoveable property on lease was set aside.

The said argument was opposed by relying on the previous judgments of Supreme Court in

Tamil Nadu Kalyana Mandapam Association vs. Union of India, (judgment dated 30th

April,

2001) and in Gujarat Ambuja Cements Ltd. vs Union of India, wherein it was held that thedefinition of financial services included equipment leasing and hire purchase hence levy of

service tax on the lease/ hire purchase transactions was constitutionally valid. In the Tamil Nadu

Kalyana Mandapam Association vs. Union of India, case the government had granted a

deduction of 90% from the installment amount and only 10% was chargeable to sales tax/ VAT.

In the present case the appellants had admitted that they had charged a service tax of 1% on the

documentation and incidental activities relating to hire purchase/ leasing, but this however was

not the principal transaction in question.

The Madras High Court held that the hire purchase and leasing transactions admittedly included

the concept of rendering of services; consequently charging of service tax on such transactions

was constitutionally valid. The Court further held that since the banking companies were paying

tax on similar transactions, there was no basis for arguing that NBFCs should not pay service tax.

The high Court had held that whether or not lease/ hire purchase transactions were chargeable to

VAT, service tax would be applicable on such transactions, even if it amount to double taxation

of the said transaction under VAT and service tax.