S. 65(12) & 65(105)(zm) of the Finance Act, 1994 levies service tax on leasing and hire purchase transactions. The constitutional validity of the said provisions was challenged primarily on the ground that as under Article 366(29A) of the Constitution hire-purchase and leasing transactions are deemed to be a ‘sale’ and liable to sales-tax, only the State Legislature has jurisdiction to impose tax and not Parliament. HELD dismissing the challenge:
(i) The circulars and guidelines issued by RBI read with AS-19 “Accounting for Leases” issued by the ICAI show that the equipment leasing and hire-purchase are activities undertaken by NBFCs and banks are regulated as para-banking activities by the RBI. Such activities of leasing & hire-purchase are financing activities and that fall within the meaning of the words “banking and other financial services” for purposes of service tax. The taxable event is rendition of service and it is not a tax on material or sale;
(ii) In a hire-purchase, there is a hire of goods with the option to purchase. If that is the real effect of the agreement there is no contract of sale until the hirer has made the required number of payments and he remains a bailee till then. But some so-called hire-purchase agreements are in reality contracts to purchase; the price to be paid by installments and in those cases the contract is a contract of sale and not of hiring. 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;