Madras High Court
M/S.Cholamandalam Investment & vs The State Of Tamil Nadu on 25 September, 2019
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam, V.Bhavani Subbaroyan
T.C(R).Nos.2 to 9 of 2019
THE HIGH COURT OF JUDICATURE AT MADRAS
DATE: 25.09.2019
Order Reserved on: Order delivered on:
28.02.2019 25.09.2019
CORAM :
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
AND
THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN
Tax Case (Revision) Nos.2 to 9 of 2019
T.C(R).No.2 of 2019
M/s.Cholamandalam Investment &
Finance Company Ltd.,
No.2, N.S.C. Bose Road,
Parrys Corner, Chennai – 600 001. ... Petitioner
-vs-
The State of Tamil Nadu
(represented by
The Assistant Commissioner (CT),
Esplanade Assessment Circle,
116, Angappa Naicken Street,
Chennai – 600 001. ...Respondent
PRAYER: Tax Case (Revision) filed under Section 60(1) of the Tamil Value Added
Tax Act, 2006 (TNVAT Act) against the order of the Tamil Nadu Sales Tax
Appellate Tribunal (Additional Bench), Chennai dated 24.05.2018 passed in
T.A.No.49 of 2016 (Common order passed in T.A.No.49/2016 and
COP.No.47/2016 and STA.No.768/2016) for the assessment year 2006-07.
1/38
http://www.judis.nic.in
T.C(R).Nos.2 to 9 of 2019
For Petitioner
in all the Revisions : Mr.N.Sriprakash
For Respondent
in all the Revisions : Mr.Mohammed Shaffiq
Special Government Pleader (Taxes)
Assisted by Ms.G.Dhana Madhiri
COMMON ORDER
(Order of the Court was made by T.S.Sivagnanam, J.) Tax Case Revision Petitions filed under Section 60(1) of the Tamil Value Added Tax Act, 2006 (TNVAT Act) are directed against the common order dated 24.05.2018 passed by the Tamil Nadu Sales Tax Appellate Tribunal (Additional Bench), Chennai (hereinafter referred to as “the Tribunal”) in T.A.No.49 of 2019, COP.No.47 of 2016 and STA. No.768 of 2016.
2.In this order, the revision petitioner shall be referred to as the assessee and the respondent as the revenue.
3.The assessee has raised the following questions of law for the decision of this Court:
1. Whether the scheme of the Tamil Nadu Value Added Tax Act, 2006 including Sections 2(15) and 2(33) of that Act relied upon by the Sales Tax Appellate Tribunal enabled imposition of VAT on the petitioner on the sales of the 2/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 hypothecated Motor vehicles?
2. Whether liability on the sale of hypothecated Motor vehicles could be fastened on the Petitioner when the principal on whose behalf the sale was effected i.e. the borrower was not a dealer and therefore not liable to pay taxes under the VAT Act on the sales of the hypothecated Motor vehicles?
3. Whether the Sales Tax Appellate Tribunal has committed an error of law in applying the principles laid down by this Hon'ble Court in the judgment reported in 88 VST 239 (HDFC vs. State of Tamil Nadu) to a case of a Non-Banking Finance Company like the petitioner?
4.The assessee's place of business was inspected by the Enforcement Wing officials on 24.07.2014. Pursuant to which, notice dated 12.11.2014 was issued to the assessee stating that they have repossessed the vehicles from the customers and disposed of the same to realize the outstanding dues and as per the provisions of Section 2(15) of the TNVAT Act which stipulates that banks or financial institutions, who dispose of any goods including unclaimed or confiscated or unserviceable or scrap surplus, old or obsolete goods or discarded material or waste products whether by auction or otherwise directly or through an agent for cash or for deferred payment or for any other valuable consideration, notwithstanding anything contained in the TNVAT Act shall 3/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 deemed to be a dealer for the purpose of the Act. It was further stated that the assessee having effected sales of vehicles in such a way, the same is assesseable to tax at 12.5% and accordingly proposed that the transaction will be taxed at 12.5%. The assessee was given an opportunity to submit their objections along with supportive documents. The assessee by letter dated 10.12.2014 objected to the proposal stating that the motor vehicles in question belonged to the borrowers, who had hypothecated the same as security for loans extended by the assessee and upon default, the hypothecated motor vehicles were brought to sale, however the sales remained that of the borrowers. Further, by referring to the terms and conditions in the loan agreement, sale acceptance letter , etc., it was stated that there was a single and direct transfer of the motor vehicles from the borrowers to the buyers and the entire sale consideration was also credited to the loan account of the borrower and only thereafter the monies due to the assessee is appropriated out of the loan account and excess, if any, remained with the borrower. Thus, it was stated that the liability to pay VAT, if any, will only be that of the borrower. Further, it was stated that the borrowers in question did not have the status of the dealer as defined under Section 2(15) of the TNVAT Act and as a result, they will not incur any VAT liability, since the sale was theirs, no liability can therefore be cast upon the assessee. Further, it was stated that 4/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 the assessee being a Non-Banking Finance Company (NBFC), are not engaged in the business of buying and selling of motor vehicles, have no right, title or interest in the motor vehicles sold except the right to repossess and bring to sale the hypothecated motor vehicles pursuant to the loan agreement, that too in the case of default by a borrower. Thus the assessee contended that they do not have the status of a “dealer” and cannot be treated of having carried on any business in motor vehicle as defined under Section 2(10) of the TNVAT Act. Without prejudice to the above submission, the assessee stated that even if they were to be looked upon as a person who facilitates the sale made by the borrower, since the borrower do not incur any liability, no independent liability can be inferred on the assessee. It was stated that if any such inference is made it will fall foul of the charging provision, i.e. Section 3(1) read with Section 3(2) of the TNVAT Act which requires the seller to have the status of a “dealer”. In this regard, the assessee referred to the Explanation-
III to Section 2(33) of the TNVAT Act. With the above submission, the assessee requested for dropping the proposal to levy tax at 12.5%.
5.The Assessing Officer completed the assessment by order dated 26.12.2014, rejecting the contentions raised by the assessee by stating that the assessee are acting on behalf of the borrower in carrying out the auction, 5/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 empowered by virtue of the agreement made with the borrower for selling the vehicle through auction and realize the amount. It was further stated that when the assessee has been authorized to conduct the auction all the conditions of the sale transactions has to be carried out by them, the proceeds amount is finalized by them without separate concurrence from the borrower and they are performing independently. Further, it was stated that collection of tax, on any sale, whether they are absolute owners of the commodity or not is the fundamental responsibility of the concern performer and when such liability is involved in their action, it is the responsibility of the assessee to get registered under the provisions of the Act. The Assessing Officer parallely proceeded for levy of penalty under Section 27(3) of the TNVAT Act and issue notice calling upon the assessee to submit their objections. The objections were held to be not tenable and the proposal made in the show cause notice was confirmed and by order dated 17.02.2015 penalty was imposed under Section 27(3) of the Act.
6.Challenging the assessment order dated 26.12.2014 and the order imposing penalty dated 17.02.2015 the asssessee preferred appeals before the Appellate Deputy Commissioner (CT), Chennai-North (FAC) in A.P.No.27/2015 and A.P.No.74/2015 (VAT). The Appellate Authority by order dated 04.01.2016 6/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 dismissed the appeal in so far as it relates to levy of tax at 12.5%, but however, deleted the imposition of penalty. The Appellate Authority placed reliance on the decision in the case of ICICI Bank Limited and another vs. Joint Commissioner, Sales Tax [(2010) 131 VST 178 (WBTT)], the decision of the Division Bench of the Calcutta High Court in the case of Tata Motor finance Limited and another vs. Assistant Commissioner, Sales Tax [(2013) VST 85- CAL] and the decision of the Division Bench of this Court in the case of HDFC Bank Limited vs. State of Tamil Nadu [(2016) 88 VST 239(Mad)] and held that the case of the assessee is squarely covered by the decision in the case of HDFC Bank Limited and that the disposal of the hypothecated vehicle of the assessee constitute sale within the meaning of Section 2(33) of the TNVAT Act and is liable to be taxed under the purview of the TNVAT Act. Aggrieved by such order, the assessee preferred appeal before the Tribunal in T.A.No.49 of 2013 and the State filed cross objection against the order deleting the penalty imposed.
7.The Tribunal noted that the main activity of the assessee is lending and as per the loan agreement, when the borrower defaults in payment of loan amount, the assessee repossess the hypothecated motor vehicle and sells the same for recovery of the loan amount. The Tribunal extensively referred to 7/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 the decision in the case of HDFC Bank Limited and pointed out that in the said decision, the banks and financial institutions were held to come within the purview of the expression 'Dealer' as defined under Section 2(15) of the TNVAT Act and sale of hypothecated repossessed vehicles comes under 'Sale' under Section 2(33) of the TNVAT Act and liable to pay tax on the sale amount of the repossessed vehicles. Accordingly, the Tribunal affirmed the finding of the First Appellate Authority. With regard to the Cross Objection by the State against the order of the First Appellate Authority deleting the penalty, the Tribunal pointed out various decisions of this Court and has laid down the principle that the Assessing Authority while imposing penalty under Section 27(3) of the TNVAT Act should render a finding about mensrea and wilful non- disclosure by the assessee and without such finding, penalty cannot be imposed. Noting that the Assessing Officer in the order dated 17.02.2015 did not record any such specific finding of mensrea and wilfulness on the part of the assessee in respect of the escaped turnover held, imposing penalty to be not justified and accordingly the appeal stood allowed. The assessee is before us by way these tax case revisions challenging the order passed by the Tribunal and raising the questions of law referred above.
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8.Mr.N.Sriprakash, learned counsel appearing for the assessee after elaborately setting out the modus operandi adopted by the assessee while entering into the loan agreement with the borrowers and the nature of action taken by the assessee in the event of default by the borrowers, submitted that the owners of the motor vehicles which were sold were of the defaulting borrowers and the sales of the motor vehicles were also the sales effected by them. Consequently assuming there is any liability the payment of tax under the TNVAT Act it is only of that of the borrower and no liability can be cast upon the assessee. It is further submitted that the defaulting borrowers not being dealers, as defined under the TNVAT Act, no liability could have been cast upon the assessee as what cannot be done directly cannot be done indirectly. The assessee acted only as an agent of the defaulting borrower on their expressed authorization and the liability of the assessee was only co- extensive with that of the defaulting borrowers and the borrowers not being the dealers the assessee as an agent of the borrower could not be held liable. It is further submitted that the assessee does not fall within any of the category of persons contemplated by Explanation III to Section 2(15) of the TNVAT Act which defines dealer and hence could not have been treated as a “dealer”. It is submitted that the decision which was relied on by the Tribunal in the case of HDFC Bank Ltd. vs. State of Tamil Nadu [(2016) 88 VST 239 9/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 (Mad)] was dealing with the case of a bank which admittedly fell within Explanation III(ix) to Section 2(15) of the TNVAT Act and the assessee does not fall within the ambit of that provision and the decision in the case of HDFC Bank Ltd. could not have been relied on by the Tribunal. Further, it is submitted that Explanation III to Section 2(33) of the TNVAT Act which defines “sale” did not treat the deemed sale conceived by it as that of persons or bodies referred to in Explanation III in Clause 15 of Section 2 of the TNVAT Act and consequently no liability could have been cast upon the assessee.
9.The learned counsel referring to the assessment order dated 26.12.2014 submitted that the Assessing Officer himself has accepted that the assessee are acting on behalf of the borrower and if that is so, the sale transaction is that of the borrower and the role of the assessee is only as an agent of the borrower. The learned counsel referred to the sample agreement and the sample sale acceptance letter to state that the role of the Company is that of an agent of a borrower. The learned counsel referred to Section 2(15) of the TNVAT Act which defines “dealer”, Explanation III in Section 2 and in particular Clause (ix). Referring to Section 2(33) of the TNVAT Act which defines “sale”, the learned counsel took great pains to refer to the four explanations in Section 2(33), namely, Explanations I, II, III and IV and argued that Explanation IV deals with sale by an agent whereas Explanations I to III are 10/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 contingencies where transfer of property in goods would be deemed sale. It is submitted that there is a marked difference between Explanation IV and Explanations I to III as there is no deeming fiction in Explanations I to III and therefore, Explanation IV clearly shows that it is the sale effected by the borrower. The learned counsel referred to Section 3(1)(a) and submitted that the fact that the assessee is a dealer may not lead to the conclusion that they are liable to tax. Sub-sections (2) and (3) of Section 3 of the TNVAT Act were also referred to. Reference was made to Section 19(2)(vi) which deals with input tax credit for purchase of goods made within the State from a registered dealer and which are for the purpose of agency transaction by the Principal within the State in the manner prescribed. The learned counsel referred to Section 21 which deals with filing of returns, Section 22 which deals with deemed assessment and the procedure to be followed by the Assessing Officer. Section 80(2)(a) and (b) which is the rule making power for rules to be framed under Section 21 of the TNVAT Act. Reference was made to Rule 7 of the TNVAT Rules, 2007 which deals with filing of returns and Rule 7(2) to state that the obligation is on the Principal to include the transaction of the agent. Rule 10(7)(a), (b) and (c) which deals with input tax credit. Thus, it is the submission of Mr.N.Sriprakash that the assessee could not have been called upon to pay tax under the provisions of the TNVAT Act.
11/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019
10.Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Indian Oil Corporation vs. NEPC India Ltd. and others [(2006) 6 SCC 736] to explain the concept of entrustment in hypothecation. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Syed Abdul Khader vs. Rami Reddy and others [(1979) 2 SCC 601] for the proposition the relation between the donee of the power and the donor of the power is one of principal and agent and the expression 'agency' is used to connote the relation which exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal and third parties. It is submitted that the borrower executes a Power of Attorney in favour of the assessee and where the agency is created for valuable consideration and Power of Attorney is given to effectuate a security or to secure the interest of the agent, the said authority cannot be revoked and it would be a irrevocable Power of Attorney. In support of such contention, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Seth Loon Karan Sethiya vs. Ivan E.John and others [AIR 1969 SC 73]. Reliance was placed on the decision of the Calcutta High Court in the case of Tata Motors Finance Ltd. vs. Assistant Commissioner of Sales Tax, Central Section, Investigation Wing, Kolkata [(2016) 88 VST 227 (Cal)], wherein the decision of the Hon'ble Supreme Court in the case of Federal 12/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 Bank Ltd. vs. State of Kerala [(2007) 6 VST 736 (SC)] was noted to explain the concept of agency. Reliance was made to the decision in the case of Citi Bank vs. Commissioner of Sales Tax [(2016) 88 VST 246 (Delhi)]. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. vs. The State of Kerala and another [(AIR 1966 SC 1178], The Deputy Commissioner of Commercial Taxes, Madurai Division, Madurai vs. A.R.S.Thirumeninatha Nadar Firm, Tuticorin [(1968) Vol.XXI STC 184], Commissioner of Income Tax vs. M/s.Hindustan Bulk Carriers [AIR 2003 SC 3942] and State of Madras vs. The Cement Allocation and Co- ordinating Organisation [(1972) Vol.XXIX STC 114]. On the above submission, the learned counsel prayed for answering the questions of law framed for consideration in favour of the assessee.
11.Mr.Mohammed Shaffiq, learned Special Government Pleader appearing for the respondent assisted by Ms.Dhana Madhiri, learned Government Advocate submitted that four issues will arise for consideration in these cases, namely, (i) Whether the assessee is a dealer liable to pay sales tax on the sale of repossessed vehicles?; (ii) Whether the assessee exercised his right under the contract and the applicability of the decision in HDFC vs. State of Tamil Nadu?; (iii) Whether the assessee when acting as an agent of 13/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 the borrower is liable to pay sales tax? and (iv) Whether the liability of the agent is not co-extensive with that of the principal?.
12.The learned counsel referred to Rule 6 which deals with accounts, Rule 6(a) which gives the machinery for compliance by the agent, Rule 7(1) which deals with filing of returns which mandates that every person acting as an agent have to file returns, Rule 7(2) which states that every principal or head office shall include the turnover relating to the agent. Referring to Section 2(41) of the TNVAT Act which defines “turnover” would include even the sale by the agent. The learned counsel referred to Section 19 which deals with input tax credit and also referred to Rule 10(7) of the TNVAT Rules and submitted that Rule 10 can have no application in a case where the principal is unregistered. Reference was also made to Rule 3 of the TNVAT Rules. It is submitted that Section 2(15) defines “dealer” and the assessee will fall within Clause (ix) under Explanation III in Section 2(15) of the TNVAT Act. Thus, it is submitted that a combined reading of definition of “dealer”, “turnover” and “sale” will clearly show that the intention of the legislation is to make the agent liable to tax. It is submitted that in any event the Explanation IV under Section 2(33) of the TNVAT Act would stand attracted. Interpreting the word “whose” occurring in Section 3(1)(a) of the TNVAT Act, it is submitted that 14/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 there is no marked difference and will include turnover while acting as an agent. Thus, it is submitted that the liability is co-extensive, the scheme of the Act does not exclude an agent and if the argument of the assessee is to be accepted, Rule would be in conflict with Section 3 of the Act. It is submitted that Rules cannot supplant the provisions of the Act but can only supplement. In support of such contention, reliance was placed on the decision in the case of St.Johns Teachers Training Institute vs. Regional Director, National Council for Teacher Education and another [(2003) 3 SCC 321], Kedarnath Jute Manufacturing Co. Ltd. vs. Commercial Tax Officer and others [(AIR 1966 SC 12]. In support of the contention that a machinery section should be construed as to effectuate charging section, reliance was placed on the decision in the case of Gursahai Siagal vs. Commissioner of Income Tax, Punjab [AIR 1963 SC 1062] and K.P.Mohammed Salim vs. Commissioner of Income Tax, Cochin [(2008) 11 SCC 573]. To explain the rights under hypothecation agreement, reliance was placed on the decision in the case of M/s.Cholamandalam Investment & Finance Co. Ltd., Coimbatore vs. The Chief Secretary to Government, Government of Tamil Nadu, Fort St. George, Chennai-600 009 & others [(2014) 4 LW 240], Naveen Kumar vs. Vijay Kumar and others [(2018) 3 SCC 1], Indian Oil Corporation vs. NEPC India Ltd. and others [(2006) 6 SCC 736] and B.Gangadhar vs. 15/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 B.G.Rajalingam [(1995) 5 SCC 238]. To explain the scope of fiction under the provisions of the TNVAT Act, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Builders' Association of India and others vs. Union of India and others [(1989) 2 SCC 645 and Yellappagouda Shankargouda Patil vs. Basangouda Shiddangouda Patil [AIR 1960 SC 808]. It is the submission of the learned Special Government Pleader that once fiction is imported it has to be given full effect. Therefore, Explanation III should be given full effect and no restriction can be read into the said provision. Admittedly on the date of sale, the vehicle had been repossessed and the assessee Company is the owner of the asset which was sold. The learned counsel referred to P.Ramanatha Aiyar's The Law Lexicon to explain the meaning of the word “includes” and it is used in order to enlarge the words or phrases occurring in the body of the statute. It is submitted that on the date of sale the defaulting borrower had no right over the vehicle and in such circumstances the assessee who brings the vehicle for sale is liable to pay sales tax. In support of such contention, reliance was placed in the case of Srinivasa Naicker vs. Ponnammal [(1961) Vol.76 LW 794]. On the above submission, the learned Special Government Pleader sought to sustain the order of the tribunal.
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13.In reply, the learned counsel for the assessee while reiterating the submissions made earlier submitted that there can be no charge since the principal, namely, the borrower is not a dealer and there can be no charge on an agent. To explain the components which enter into the concept of tax, namely, the character of imposition which prescribes the taxable event, secondly, the person on whom the levy is imposed, thirdly, the rate at which tax is imposed and fourthly, the measure or value to which the rate will be applied for computing the tax liability, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Govind Saran Ganga Saran vs. Commissioner of Sales Tax and others [(1985) Vol.60 STC 1]. To explain the concept of hire purchase contract/agreement and how the terms have to be interpreted, reliance was placed on the decision in the case of Charanjit Singh Chadha and others vs. Sudhir Mehra [(2001) 7 SCC 417]. Finally, it is submitted that all clauses have to be read as a whole.
14.We have heard the learned counsels for the parties and perused the materials placed on record.
15.The petitioner is a non-banking finance company, engaged in the business of Hire Purchase Finance, largely catering to finance for purchase of 17/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 motor vehicles. For the assessment year under consideration, the Assessing Officer issued notice to the assessee, which was fallout of an inspection conducted by the enforcement wing in the business premises of the assessee. The Assessing Officer opined that as per Section 2(15) of the TNVAT Act, 2006, banks or financial institutions, who dispose of any goods, including unclaimed or confiscated or unserviceable or scrap surplus, old or obsolete goods or discarded materials or waste products whether by auction or otherwise directly or through an agent for cash or for deferred payment or for any other valuable consideration are liable to pay tax at 12.5%. With this reasoning, the Assessing Officer proposed to reassess the turnout.
16.While resisting the proposal for reassessment, the assessee stated that the premise on which the Assessing Officer issued notice for reassessment was on the ground that the assessee has effected sale of motor vehicles. It was stated that this assessment of the Assessing Officer is incorrect. To substantiate such stand, the assessee submitted that the motor vehicles for which they have financed belonging to borrowers and the motor vehicles are hypothecated to the assessee as security for the loan extended by them. In default, the hypothecated motor vehicle will be brought for sale and the sale remains as the sale by the borrower. They explained the transaction by referring to the 18/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 documents, which they have executed with the borrower and stated that there is a single and direct transfer of the motor vehicle from the borrower to the buyer. The sale consideration received is credited to the loan account of the borrower and after appropriating the dues payable by the assessee, if there is anything in excess, the same will be returned to the borrower. With this stand, the assessee sought to shift the payment of tax on the borrower.
17.Alternatively, it was submitted that the borrower also cannot be taxed as he will not fall within the definition of dealer as defined under Section 2 (15) of the Act. Thus, the assessee's contention was that they being an agent of the borrower, having financed the transaction, the borrower is the owner of the vehicle and if he defaults in payment of the instalments, the vehicle which has been hypothecated by the borrower as security for the loan will be repossessed in terms of the conditions contained in the loan agreement and sold in the name of the borrower and therefore, they cannot be subject to payment of VAT.
18.Supplementing the above stand, the assessee contended that they being NBFC are not in the business of buying and selling motor vehicles. They do not have any right or title over the hypothecated vehicles and they have a 19/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 right to repossess the hypothecated vehicle in the event of default and bring the same for sale. Thus, the assessee seeks to exclude themselves from the definition of 'business' as defined under Section 2(10) of the Act.
19.A subsidiary submission was made to the effect that if the authorities state that the assessee facilitates the transaction made by the borrower, yet no liability be imposed on them because the borrower is not liable and no individual liability can be inferred against the assessee because levy of tax is on sale of goods and in terms of Section 3(1) it is only a 'dealer', who can be subjected to tax and in terms of Section 3(2), the liability to pay tax is only on the 'dealer'. Therefore, it is submitted that if the respondent states that liability can be fixed on the assessee, then it would fall foul of the charging provision 3(1) read with 3(2) of the Act.
20.To strengthen this contention, the assessee refers to Section 2(33) of TNVAT Act, which would define 'sale' and refers to Explanation III contained therein, which applies to persons or bodies occurring in Explanation III of clause 15 of Section 2 of TNVAT Act. Therefore, it is the assessee's case, Explanation requires the sale to be effected by persons or bodies referred to in explanation III in clause 15 of Section 2. Referring to Explanation III in Section 20/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 2(15), it was contended that the persons or bodies mentioned in clause (xi) dispose of any goods whether by auction or otherwise directly or through an agent for cash or deferred payment or for any other valuable consideration shall be deemed to be 'dealer' for the purpose of the Act and though Companies and Banks included in the Second Schedule to Reserve Bank of India Act, 1934 is mentioned in clause (ix) under Explanation III, the assessee has not disposed of any goods whether by auction or otherwise directly or through agent for cash or deferred payment or for any valuable consideration and the transfer of the property in the form of motor vehicle was not done by the assessee, but by the customer directly and therefore, Section 2(33) can have no application to the assessee.
21.Alternatively, it was submitted that even if Explanation III to section 2(15) is found applicable to the assessee as the assessee has not effected any transfer of property in the form of motor vehicle, cannot be treated to be a person, who has effected any sale within the meaning of Section 2(33) of the Act. Thus, the assessee would contend that neither they nor their borrower are liable to be taxed. The Assessing Officer, the first appellate authority and the Tribunal concurrently held against the assessee.
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22.We have heard the elaborate arguments put forth by Mr.N.Sriprakash, followed by the submissions made by the learned Special Government Pleader on several dates. In our view the learned Special Government Pleader has rightly crystallized the arguments made on either side and has framed questions/issues, which are required to be answered by us in these revision petitions. The four questions/issues, which required our consideration are hereunder:
(i)Whether the assessee is a dealer as defined under Section 2(15) of the TNVAT Act and liable to pay sales tax on the sale of the repossessed vehicles?
(ii)Whether the decision in HDFC Bank Ltd., would apply to the case of the asseessee?
(iii)Whether the assessee when acts as an agent of the borrower is liable to pay sales tax?
(iv)Whether the liability of the agents is not co-extensive with that of the Principal?
23.When we heard the case at the first instance, the learned Special Government Pleader appearing for the respondent submitted that the issues raised in these revision petitions are clearly covered by the decision in HDFC Bank Ltd., Mr.N.Sriprakash submitted that the Tribunal erred in applying the 22/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 decision in HDFC Bank Ltd., to the case of the assessee, who is the non- banking finance company. Therefore, we are to test the applicability or otherwise of the decision in HDFC Bank Ltd., For such reason, we propose to test question No.(ii) at the first instance and the necessity to answer the other three questions will be subject to the decision we take on question No.(ii).
24.In HDFC Bank Ltd., the revision petition was filed before this Court questioning the correctness of the order of the Sales Tax Appellate Tribunal, which held that the Bank is liable to pay sales tax. The assessment under the TNVAT Act was revised by the Assessing Officer on the ground that the bank had not reported the sale of repossessed vehicle from defaulting customers in their return and not paid taxes thereon. As in the case on hand, the appeals filed before the first appellate authority as well as the Tribunal were dismissed. The question, which was framed for consideration by the Division Bench was whether the bank, which holds the hypothecation of vehicles in their favour would be a 'dealer' within the definition under Section 2(15) of the TNVAT Act, merely because, the bank seized and repossessed the hypothecated vehicle and brings it to sale. In the said case, the Tribunal took note of the expression 'business', 'dealer' and 'sale' respectively under Sections 2 (10), 2(15) and 2(33) of the TNVAT Act. The Tribunal also took note of Sections 6 and 8 of Banking 23/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 Regulations Act, 1949 and came to the conclusion on the basis of the decision of the Hon'ble Supreme Court in Federal Bank Ltd., v. State of Kerala [(2007) 6 VST 736] that the Bank would come within the expression 'dealer' under Section 2(15) of TNVAT Act.
25.The Division Bench noted the type of transaction done by HDFC with its borrower, which empowers it to repossess the vehicle in the event of default and to direct the vehicle to be sold on public auction or by private negotiations without even involving the owner of the vehicle. The Division Bench also took note of the direction issued by the Hon'ble Supreme Court in the case of Manager, ICICI Bank Ltd., v. Prakash Kaur [(2007) 136 Comp Cas 327 (SC), wherein the arbitrary seizure and sale of hypothecated vehicles by the financial institutions was depreciated and also the fact that after the said decision, the banks started invoking the provisions of the Arbitration and Conciliation Act, 1996, seeking appointment of an Advocate Commissioner instead of collecting agents to seize and repossess the vehicle. The Division Bench pointed out that it is not as though the sale of the hypothecated vehicle is arranged by the banks and finance institutions for and on behalf of willing vendor. These sales effected by the Bank are in the nature of compulsory sales for realization of debts due to the financial institutions. Therefore, it was held 24/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 that to say that the banks sold the hypothecated goods only as an agents of the owners may not be true completely. After noting the Explanation III to Section 2(15), it was held to be exhaustive. Identical contentions as raised before us were raised before the Division Bench in HDFC. While dealing with the said contentions, the Court pointed out that the contention that the bank does not become the owner of the property and that too for the forms TM29 and TM 30 handed over by the owners, the banks cannot even sell the property, may be technically right, but Explanation III to Section 2(15) includes even the disposal of goods that are unclaimed and in respect of unclaimed goods, the seller does not claim ownership but he exercises the right to dispose of the goods. Thus, it was held that if Explanation III to Section 2(15) of the Act covers the sale of even unclaimed goods, the contention of the seller (bank) must be in a position to pass on title, may not stand.
26.With regard to the distinction, which was sought to be drawn to the decision in Federal Bank, it was pointed out that though the Hon'ble Supreme Court was concerned with the exercise of a statutory right of sale and the exercise of the contractual right to bring the hypothecated property to sale could not be excluded on that account Explanation III to Section 2(15) covers even the sale of unclaimed goods and if sale of unclaimed goods can be 25/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 included within the purview of Explanation III, the distinction sought to be drawn between the statutory right of sale and a contractual right of sale, cannot stand.
27.The first contention raised by Mr.N.Sriprakash, learned counsel for the petitioner is that HDFC case cannot be applied to the case on hand on the ground that the assessee is a NBFC and not a person or body falling within Explanation III of Section 2(15). It is true that the assessee in the HDFC was a bank, falling within clause (ix) under Explanation III to Section 2(15) of the TNVAT Act. However, the nature of transaction done by the HDFC and that of the assessee are identical. Both HDFC and the assessee enter into agreements with the borrower and the agreement empowers the lender to repossess the vehicle in the event of default by the borrower without the express written consent of the borrower. As pointed out earlier, Banks and NBFC had used the service of collecting agents because they had to repossess the vehicle and in most cases after much resistance by the borrower. When the Hon'ble Supreme Court came down heavily on the manner in which repossession was done, the Banks and financial institutions like the petitioner started exercising their right under the loan agreement by filing application before the High Court under Section 9 of Arbitration and Conciliation Act, 1996 for appointment of an 26/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 Advocate Commissioner to seize and repossess the vehicle and also seeking permission for sale of the vehicle. These applications are being allowed by orders of this Court and this has been the consistent practice, though in certain cases the Court appointed one of the Officers of the financial institutions to carry out the process of repossession and sale at their cost. Considering the modus adopted by the assessee if they are acting on behalf of the borrower as its agent, it presupposes that there is valid consent of the borrower, which is never the case, at least in the case which are subject matter of the impugned assessments. If the assessee is the agent of the borrower effect repossession and consequent sale, there would never arise a need to approach the Court to obtain orders to effect repossession and seizure of the vehicle and put it for sale. That apart, when the vehicle is put up for sale through auction, invariably it is by negotiation with the prospective purchaser either directly or through dealers. Undoubtedly, it is done without involving the owner of the vehicle. In many cases, along with main agreement and other documents the borrower's signature is obtained in statutory forms prescribed under Motor Vehicles Act to enable the lender to transfer the certificate of registration in favour of the purchaser without bringing the borrower in the scene. In the event, there is a resistance by the borrower, the situation is taken care by appropriate amendments to Motor Vehicles Act, 27/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 which empowers the lender to approach the appropriate authority and execute the transfer of ownership without consent of the borrower. Therefore, the right exercisable by the assessee is under a contract.
28.This issue was also considered by the Division Bench in HDFC, wherein a distinction was sought to be drawn to the decision of the Hon'ble Supreme Court in Federal Bank and the distinction was not accepted and the Court pointed out that the exercise of statutory right of sale and exercise of contractual right to bring hypothecated property to sale, both, could not be excluded and would be covered in Explanation III as the explanation is widely couched.
29.While on this issue, we wish to refer to an identical situation, which was considered in Cholamandalam Investment & Finance Co., Ltd., Coimbatore v. The Chief Secretary to Govt. and others [2014-4-L.W. 240] and while considering an identical type of transaction as done by the assessee, it was pointed out that in an agreement of hire purchase, the purchaser remains merely a trustee/bailee on behalf of the financier/financial institution. To this effect, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Anup Sharmah vs. Bhola Nath Sharma & Ors. 28/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 [(2013) 1 SCC 400]. In the said case (Cholamandalam), the NBFC sought for a direction to quash a Government Order and to return the vehicle. The NBFC, who had financed the vehicle, had a valid hypothecation. However, the vehicle was confiscated by the Government under the provisions of Tamil Nadu Protection of Interest of Depositors (in Financial Establishment) Act, 1997. The NBFC moved the Special Court praying that they should be granted interim custody of the vehicles. The petitions were dismissed, against which Criminal Revision was filed before the High Court. The Writ Petition, challenging the Government Order of confiscation and the Criminal Revision Case, challenging the order of the Special Court rejecting the prayer for interim custody were clubbed together and heard by this Court. This Court by interpretation of hire purchase agreement and taking note of the decision of the Hon'ble Supreme Court, it was held that the respondent in the said case viz., the borrower was only hirer of the vehicle and in the light of the valid deed of hypothecation executed in favour of NBFC, they retained the ownership and the same remains with them till the hypothecation is revoked. With this reasoning the Special Court was directed to consider the case of NBFC.
30.In Indian Oil Corporation v. NEPC India Ltd., and Others [(2006) 6 SCC 736], it was pointed out that the deed of hypothecation created a charge 29/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 over the hypothecated asset with right to take possession in the event of default. Thus, on a conjoint reading of the above decisions and the modus operandi of the assessee, which in our considered view, is no different from that of the modus operandi adopted in the case of HDFC. Therefore, we are necessarily conclude that the decision in HDFC, would squarely apply to the case of the assessee.
31.Mr.N.SriPrakash took stenuous efforts to distinguish HDFC. It was pointed out that the registration certificate stands in the name of the borrower, this being a vital feature, the ownership of the vehicle vests with the borrower. We are to note that though the hire purchaser was branded as owner, nothing falls out of the same as the Hire Purchase Act continuous to remain a legislation on paper as it has not been notified. Conscious of the increase in the number of financial agreements by NBFCs and Banks for purchase of vehicles, the provisions of the Motor Vehicles Act were suitably amended. Therefore, we are required to examine in the instant case what is the nature of the contract between the assessee and the borrower.
32.The decision in the case of Federal Bank (supra) was distinguished by contending that it was case of pledge not a hypothecation and in the case of a 30/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 bank, power under the Banking Regulations Act, 1949 is invoked. We do not accept the said submissions for the reason that nature of the activity done by the Bank and the NBFC like the assessee are identical. It may be true that the banks are covered by the Banking Regulations Act, 1949. Nevertheless, the test to be applied is as to whether assessee is liable to payment of sales tax and is to be done by examining the nature of transaction and not by taking note of the statute under which their business is regulated. If this exercise is done, the nature of transactions being identical, hardly makes a difference as to whether the assessee is a NBFC or a Bank.
33.The contention that the assessee takes the role of agent of the borrower, when he brings the property for sale cannot be fully right because on facts it has been found that the accessee was entitled to act independently without the express consent by the borrower to effect sale of the hypothecated vehicle. This aspect was noted in HDFC. Therefore, we respectfully agree with the observations/findings in HDFC that the sales are in the nature of compulsory sales for realization of debts due to the financial institutions and to say that the assessee sold the hypothecated goods only as agents of the owner is not completely true.
31/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019
34.Various statutory provisions, which were referred to by Mr.Sriprakash, learned counsel appearing for the petitioner have been set out by us in the preceding paragraphs and in addition there to, we need to refer to a few more provisions which will bring better clarity as to whether the agent would be also liable. Section 2(41) of the Act defines turnover to mean aggregate amount for which goods are brought or sold, or delivered or supplied or otherwise disposed of in any of the ways referred to in clause (33), by a dealer either directly or through another, on his own account or on account of others whether for cash or for deferred payment. Therefore, this provision clearly indicates that turnover will include aggregate amount of net sales effected by the seller on his account or on account of others. Therefore, assuming the contentions raised by the Mr.Sriprakash is acceptable and that the assessee is acting as an agent of the borrower is wholly true, yet the turnover assessee should include the aggregate amount of the goods sold on his account or on account of others.
35.Next, we turn on to the definition of dealer as defined under Section 2(15) of the TNVAT Act. The definition is exhaustive and would encompass agent to bring him within the tax umbrella. If we look at the definition of sale as defined under Section 2(3), it is a very wide definition. 32/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019
36.The arguments of Mr.N.Sriprakash, learned counsel appearing for the petitioner is that Explanation III to Section 2(33) will not be attracted to the assessee because the assessee is not a person or body refered to in Explanation III to clause 15 of Section 2. In the earlier paragraph of our order we have held that the assessee would be liable to sales tax, by examining the nature of the transaction. Even assuming that the assessee would not fall within Explanation III to Section 2(33), nevertheless Explanation IV to Section 2(33) would stand attracted.
37.Mr.N.Sriprakash, learned counsel appearing for the petitioner referred to the decision of the Hon'ble Supreme Court in Indian Oil Corporation v. NEFC India Ltd. & Ors (SC) [(2006) 6 SCC 736], to explain as to whether there is entrustment in the hypothecation. In our considered view, we need not go into this aspect to examine the correctness of the impugned order passed by the Tribunal. We have taken note of all the decisions, which have interprepted identical agreements and are of the firm view that the assessee is liable for payment of sales tax.
38.The decision Syed Abdul Khader v. Rami Reddi & Ors. (SC) [(1972) 2 SCC 601] was pressed into service to explain as to who is the agent. We have 33/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 examined the facts of the assessee and also the scheme of the Act and held that considering the nature of contract entered into between the assessee and borrower, the assessee will continue to be liable for sales tax even if its claim of agent is accepted. The agent is also liable to pay tax as held by us supra.
39.The decision in the case of Seth Loon Sethiya v. Ivan E. John and Others [AIR 1969 SC 73] would have no application to the case for the reason that the question which arose for consideration there was whether the power of attorney is a power coupled with interest; if it is so, whether the same is revocable? No dispute of that nature arises in the instant case and the transaction between the assessee and the borrower is quite distinct and different from what was examined by the Supreme Court in the said case.
40.The decision of the Delhi High Court in Citi Bank v. Commissioner of Sales Tax (Del.) [88 VST 246] was relied by Mr.N.Sriprakash, learned counsel appearing for the petitioner to support his case that the assessee was acting on behalf of the borrower and therefore, the liability, if at all should be fastened on the borrower which also shall not be done because borrower is not a dealer as defined under the Act. This decision also refers to the decision HDFC and Federal bank, which were noted by this Court and we have already held that 34/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019 even accepting the case of the assessee to be that of a agent, the assessee exercises the right under the contract and bringing for sale the vehicle without the express consent of the borrower would make them fully liable for payment of salestax.
41.We may take a slightly different view point, while interpreting the terms and conditions of the Loan Agreement. Clause 8 of the loan agreement deals with Security and Clause 8 (c) deals with the Certificate of Registration issued under the Motor Vehicles Act and shall contain the endorsement of hypothecated with the assessee company and in terms of clause (d) as long as the asset is hypothecated with the assessee, the borrower shall not sell or create any other hypothecation, charge, mortgage, pledge, lien or encumbrance over the Asset without prior approval of the accessee. The borrower has executed a demand promissory note in favour of the accessee, for the security as required in clause 8(f). In terms of clause 8 (g) the hypothecation shall remain until the assessee issues a certificate discharging the security created. Any change in status of the borrower will not affect the hypothecation in terms of 8(h). In terms of 8(j) the assessee is entitled to direct the borrower to furnish additional security including guarantees from any third parties. Clause 11 of the agreement deals with possession, termination and company's other rights.
35/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019
42.We, may also refer to a few more clauses. A reading of clause 11(c)(ii) makes abundantly clear that the sale by the assessee of the hypothecated asset is without the consent of the borrower. The borrower has no right to question the value at which the asset was sold and sale will be done by the assessee without accountability to the borrower and the guarantor and the assessee will not be liable for loss or damage or diminution in value of asset/ security on account of exercise or non exercise of rights by the assessee and the borrower/guarantor will not be entitled to raise any claim against the assessee on the ground that a large sum of amount might have been received or dispute their liability for the remaining dues under this agreement. Clause 11(c)(iii) empowers the assessee to initiate legal proceedings against the borrower and entitled to appoint third parties to carryout its functions rights and powers. Clause 13 of the agreement deals with Covenants and representations of the borrowers and the guarantors. Clause 13(b) empowers the assessee to sell, assign or transfer the assessee's right and obligations under the agreement to any person. There are many such clauses in the agreement, which clearly elucidate that theory as propounded by the assessee that the sale is effected by them as an agent of the borrower has to necessarily fall. For all the above reasons, no ground is is made for interference of the order of the Tribunal.
36/38 http://www.judis.nic.in T.C(R).Nos.2 to 9 of 2019
43.Accordingly, the Tax Cases (Revision) are dismissed and the substantial questions of law framed for consideration are decided against the assessee. No costs.
(T.S.S., J.) (V.B.S., J.)
25.09.2019
cse/sj
Index: Yes/No
Speaking Order/Non-speaking Order
To
1.The Assistant Commissioner (CT),
Esplanade Assessment Circle,
116, Angappa Naicken Street,
Chennai – 600 001.
2.The Tamil Nadu Sales Tax Appellate Tribunal
(Additional Bench), Chennai
37/38
http://www.judis.nic.in
T.C(R).Nos.2 to 9 of 2019
T.S.SIVAGNANAM, J.
AND
V.BHAVANI SUBBAROYAN, J.
cse
Pre-delivery judgment made in
T.C.(R)Nos.2 to 9 of 2019
25.09.2019
38/38
http://www.judis.nic.in