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TMI Blog2010 (4) TMI 1003X X X X Extracts X X X X X X X X Extracts X X X X ..... business from the financing companies and its case should be considered separately. As some of the issues are common we have decided to dispose of all these six applications by this judgment but we shall deal with special features of a banking company and contentions raised by ICICI Bank separately, wherever necessary. Basic common questions which arise for consideration in all these cases are: (i) Whether respective petitioner is "dealer" within the meaning of the West Bengal Value Added Tax Act, 2003 (in short, "the VAT Act")? (ii) Whether the petitioners are liable to pay sales tax on the sales of motor vehicles hypothecated to the petitioners as securities for realization of loan advanced? (iii) Whether the sales of hypothecated vehicles can be said to be sales by the bank and non-banking finance companies? It appears that previously VAT was not being levied on resale of hypothecated motor vehicles by Banks and non-banking finance companies for realization of unpaid loan amount. The Supreme Court delivered a judgment in Federal Bank Ltd. v. State of Kerala reported in [2007] 6 VST 736; [2007] 4 SCC 188 on March 21, 2007 under the Kerala General Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f VAT for the year 2007-08 without prejudice to its contention that bank was/is not liable to pay VAT on the resales of repossessed hypothecated vehicles for realization of unpaid loan amount (hereinafter referred as, "the disputed sales"). Being aggrieved by clear opinion/views expressed by the Assistant Commissioner, Central section, Investigation Wing, holding the bank liable to pay VAT on the disputed sales, the petitioner-bank has moved this Tribunal for quashing notices demanding tax and threatening criminal prosecution. The main contentions of the ICICI Bank are that it is not a "dealer" within the meaning of the VAT Act and it is also not the seller of the hypothecated goods inasmuch as those vehicles belonged to the borrowers and the bank had no ownership in those vehicles. According to the bank its right is confined to realise unpaid amount of loan along with interest from the sale proceeds. Non-banking finance companies, viz. Family Credit Ltd., Tata Motors Finance Ltd. and Magma Fincorp Ltd., have also contended that they are not dealers and they, not being sellers of their own goods, are not liable to pay VAT on those sales. Dealer under the VA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration, and such transfer, delivery, or supply of any goods shall be deemed to be a sale of those goods by the person or unincorporated association or body of persons making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery, or supply is made, but does not include a mortgage, hypothecation, charge or pledge. Explanation I.-- . .(a) and (b) . . . Explanation II.-- . ." Undisputed facts which are material for determination of the issues involved in those petitions are: (a) The petitioners were not the owners of the hypothecated vehicles at or before the time of disputed sales. (b) Sold vehicles were hypothecated to the petitioners as securities for securing the loan given by them to the borrowers for purchasing those vehicles. (c) Property in those hypothecated vehicles was with the registered owners thereof and upon sale property in the sold vehicles got transferred from the registered owners (borrowers) to the purchasers. (d) Borrowers executed irrevocable power of attorney in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the value added tax (VAT) and sells the vehicles to the purchaser. Vehicle is registered in the name of the purchaser. In the registration certificate an entry is made that the vehicle is hypothecated with the lender bank. Upon repayment of loan along with accrued interest, entry of hypothecation is deleted from the certificate of registration. The purchaser becomes unqualified owner of the purchased vehicle. (c) In case the customer (borrower) makes default in payment of instalments reminders are sent requesting the borrower to make payment and giving notice that bank will take possession of hypothecated vehicle and sell the same to realize unpaid amount. If the borrower persists in making default bank initiates the process of obtaining possession of the vehicle. Bank also recalls the loan by giving legal notice. After taking possession of the hypothecated vehicle customer (borrower) is given a further opportunity of settling bank's dues. If the customer complies, vehicle is returned. If he does not comply, bank arranges for sale of the re-possessed hypothecated vehicle through approved auctioneer either by private or public auction. All documents relating to sale are exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned this writ petition as it was of the opinion that it would be better to consider and decide the question raised in the writ petition in order to avoid unnecessary multiplicity of proceedings. Issues raised for decision involve intricate legal questions and interpretation of the judgment of the Supreme Court in Federal Bank Ltd. [2007] 6 VST 736 (SC); [2007] 4 SCC 188 and it may not be useful to leave it to be decided by the sales tax authorities. Legal foundation for assuming jurisdiction under the VAT Act is a subject-matter of adjudication in the present application. Several decisions of the Supreme Court and High Courts have been cited by Dr. Pal, Senior Advocate on the question of entertainability of writ petitions. In Paradip Port Trust v. Sales Tax Officer, Cuttack [1999] 114 STC 178, the Supreme Court opined that in cases involving Constitution related questions and legal nature of the transaction, High Court should have heard and decided such questions instead of sending such important legal issues to the sales tax authorities for adjudication. The Supreme Court pronounced as far back as in 1958 in State of U.P. v. Mohammad Nooh AIR 1958 SC 86: ". . . But this ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the VAT Act. Section 2(5) of the VAT Act has defined "business". "2(5) 'Business' includes,-- (a) any trade, commerce, manufacture, execution of works contract of any adventure or concern in the nature of trade, commerce, manufacture or execution of works contract, whether or not such trade, commerce, manufacture, execution of works contract, adventure or concern is carried on with the motive to make profit and whether or not any profit accrues from such trade, commerce, manufacture, execution of works contract, adventure or concern; and (b) any transaction in connection with, or ancillary or incidental to, such trade, commerce, manufacture, execution of works contract, adventure or concern;" In support of his submission Mr. Basu has referred to a decision of the Supreme Court in State of West Bengal v. O. P. Lodha with State of West Bengal v. Chowringhee Sales Bureau Private Ltd. [1997] 105 STC 561 and a decision of the Full Bench of this Tribunal in Peerless General Finance and Investment Co. Ltd. v. State of West Bengal [2010] 31 VST 155 (FB); [2008] 52 STA 18. Both these decisions are on the definition of "dealer" under the Bengal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "all such other things as are incidental or conducive to the promotion or advancement of the business of the company" (banking company) Section 6(2) of the Banking Regulation Act prohibits a banking company from engaging in any form of business other than those enumerated in sub-section (1) of section 6. Section 8 of the Banking Regulation Act contains further prohibition. Section 8 provides: "8. Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realization of security given to or held by it, or engage in any trade or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) of sub-section (1) of section 6. Provided . . . Explanation.--For the purpose of this section, goods means every kind of movable property, other than actionable claims, stocks, shares, money, bullion and specie and all instruments referred to in clause (a) of sub-section (1) of section 6. (emphasisHere italicised. suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied to VAT Act in West Bengal. Definition of "sale" in the Kerala General Sales Tax Act has been quoted in the judgment in Federal Bank Ltd. [2007] 6 VST 736 (SC); [2007] 4 SCC 188 and is reproduced below: "Section 2(xxi). 'sale' with all its grammatical variations and cognate expressions means every transfer, whether in pursuance of a contract or not, of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge." Definition of "sale" in VAT Act is much wider. Main part of definition of sale in VAT Act is materially similar to that in the Kerala Act of 1963. Both the provisions require transfer of property in the goods. Although the bank was not the owner of the pledged goods and had no property therein the Supreme Court held such sale as sale by the bank within the meaning of the Kerala Act. In the Kerala Act bank has been expressly and specifically included within the definition of "dealer" but under the said amended definition bank becomes a dealer only if it sells any gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly a body corporate, comes within the fold of dealer as covered by section 2(ii)(b) of the VAT Act. Even if "body corporate" mentioned in clause (b) of section 2(ii) does not cover companies under the Companies Act, as contended by the non-banking financing companies in their petitions, ICICI Bank qualifies as a dealer even under the main part as it is a legal person engaged in the business of selling goods as part of its banking business or as incidental to banking business. Decision of the Supreme Court in Federal Bank Ltd. [2007] 6 VST 736; [2007] 4 SCC 188 has practically settled the issue in case of banking companies under the Banking Regulation Act and the said decision is binding on us. We have not considered the contention raised on behalf of the nonbanking financing companies that expression "body corporate" used in clause (b) of section 2(ii) is not intended to cover common "body corporates" like companies under the Companies Act in this part of the judgment relating to ICICI Bank which is not only a company under the Companies Act but also a banking company recognized and regulated by the Banking Regulation Act, 1949. If necessary we sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and sell or otherwise deal with the vehicle(s) to enforce ICICI Bank's security and recover the borrower/s's outstanding dues." It appears that bank has assumed an absolute contractual right to sell hypothecated vehicles and to appropriate the sale price for realization of the outstanding loan. This right was/is a contractual right but it is an absolute right and admittedly bank exercised and exercises the said contractual right in selling those hypothecated cars. Applying the ratio of the Supreme Court's decision in Federal Bank Ltd. [2007] 6 VST 736; [2007] 4 SCC 188 it appears that the petitioner-ICICI Bank is a dealer under the VAT Act and it is liable to pay sales tax on sales of hypothecated vehicles. However, we do not find any justification or lawful reason for issuing threat of prosecution at the present stage. Proposal to initiate proceedings for prosecution under section 93 of the VAT Act is premature and unsustainable. Non-Banking Financing Companies Excepting ICICI Bank, the petitioner in R. N. 534 of 2009, all other petitioners in other cases, viz., R. N. Nos. 518 of 2008, 695 of 2008, 104 of 2009, 220 of 2009 and 838 of 2009 are non-banking fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 736; [2007] 4 SCC 188 that sale of hypothecated goods is part of the banking business. The Banking Regulation Act does not apply to the N.B. Companies. It is thus necessary to examine whether sale of the hypothecated vehicles is a part of the business of these non-banking companies. Like all other business organizations these N.B. Companies have their business schemes. Description of their business in broad terms as business of providing finance for purchase of motor vehicles is insufficient and incomplete. These companies provide loan finance upon hypothecation of the vehicles as securities and as integral part of the said business obtains authority and contractual right to seize, regain possession and sell those hypothecated vehicles. Loan would not have been granted if the vehicles were not hypothecated and the borrowers did not execute documents including irrevocable power of attorney authorizing the lenders to take possession of the vehicle and to sell the hypothecated vehicle for recovery of the unpaid amount of loan and interest. Had these companies not provided finance, they would not have obtained such contractual right and got the hypothecated vehicles sold in exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pears that to be covered by main part of clauses (a), (b), (ba) or (c) of the inclusive part of section 2(11) the dealers are required to sell goods having ownership or property in the sold goods or in exercise of any independent right of their own. Persons who sell goods belonging to others as part of their business and as their agents are covered by clause (d) of the inclusive part of section 2(11). Clause (d) of section 2(11) covers a factor, a broker, a commission agent, a del credere agent, an auctioneer, an agent for handling or transporting of goods or handling of document of title to goods, or any other mercantile agent, who carries on the business of selling goods and who has, in the customary course of business authority to sell goods belonging to principals. There is no dispute that the disputed transactions were/are sales even within the meaning of the Sale of Goods Act. It is to be examined how, by whom and on what right or authority these sales were and are being effected. The Banking Regulation Act does not apply to these N.B. Companies. Those are governed by the Reserve Bank of India Act. No provision of the Reserve Bank of India Act has been placed before us to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the relevant sections of the Contract Act. Hypothecation is only extended idea of a pledge, the creditor permitting the debtor to retain possession either on behalf of or in trust for himself (the creditor)." The Gujarat High Court in Bank of Baroda v. Rabari Bachubhai Hirabhai AIR 1987 Guj 1 has dealt with the position and rights of the creditors as hypothecatees: "6. 'Hypothecation' according to Corpus Juris Secundrum (volume XLII), means a contract of mortgage or pledge in which the subjectmatter is not delivered into the possession of the pledgee or pawnee; or, conversely, a right which a creditor has over a thing belonging to another, and which consists in a power to cause it to be sold in order to be paid his claim out of the proceeds'. In para 635 of Halsbury's Laws of England, (Fourth Edition), at page 438, the expression 'hypothecation of the cargo' has been explained as; a pledge of the cargo without immediate change of possession; it gives right to the person making advances on the faith of it to have the possession of the goods if the advances are not paid at the stipulated time; but it leaves to the owner of the goods hypothecate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor, had merely advanced a loan against the security of that vehicle and had a special right to recover its dues in the event of default by, if need be, the sale of the vehicle. It had, therefore, no title over the vehicle. It was not even in constructive possession of the vehicle but it had merely a right to recover its dues by the sale of that vehicle. So long as there was no default in the payment of the loan amount, it could not exercise that special right to sell the vehicle for realization of its dues. . ." Legal nature and features of hypothecation and the rights of the hypothecatee have been discussed by the Andhra Pradesh High Court in State Bank of India v. S.B. Shah Ali AIR 1995 AP 134. In the said decision a Division Bench of the A.P. High Court considered earlier judgments of different High Courts and also of foreign courts. After considering various decisions of the High Courts in India the Division Bench summed up: "35. From the aforesaid decisions, the following points will also emerge: (1) So far as the movables actually covered by the hypothecation deeds are concerned, there can be no doubt that the bank is entitled to retain possession and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the creditor as security for the debt taken by the debtor but without physical transfer of the pledged property. The property under hypothecation, therefore, remains in possession of the debtor during the period of repayment of the debt. However, the creditor is entitled to seize and dispose of the hypothecated property and adjust the sale proceeds towards the loan, in case debt is not repaid by the debtor as per the terms of the agreement of hypothecation. The said right to seize and dispose of the property to realize the loan amount is exercised by the creditor being the first option available to him under the agreement of hypothecation as it would be the most effective and convenient option to realize the loan amount in the event of non-payment of loan. . ." We need not multiply decisions. It is, thus, clear that the hypothecatee has an independent recognized right to sell hypothecated goods for realisation of loan in case of default by the borrower, if the hypothecation agreement provides for such right. It has been submitted that such right is just a contractual right. May be, it is a contractual right but once agreement is entered into the creditor comes to posses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal and agent is essentially a contractual relationship. In the present cases the borrowers and the N.B. Companies have entered into written agreements conferring right on the lenders to sell the hypothecated vehicles. All the essential ingredients of relationship of principal and agent are present. N.B. Companies are not brokers, commission agents or del credere agents or auctioneers. Section 2(11)(d) refers to other classes of agents, viz., factor or mercantile agent. Factor is an agent who has right and authority to sell goods possession of which are entrusted with him by the principal. Factors have possession and control of the goods and they have right to sell those goods in their possession in the name of the principal or even in their own names. Factors are also a sort of mercantile agent. "Mercantile agent" has been defined in section 2(9) of the Sale of Goods Act as hereunder: "mercantile agent means a mercantile agent having in the customary course of business as such agent authority either to sell goods or to consign goods for the purposes of sale, or to buy goods or 'to raise money' on the security of goods." An agent having authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the customary course of that business, as agent, as aforesaid, authority to sell goods, thus coming within the definition of mercantile agent, as quoted above." That apart, kind of authority obtained by these N.B. Companies through agreements with the borrowers brings them within the description of "factor". Under the agreement the N.B. Companies first take possession of the vehicles and thereafter sell those vehicles on behalf of the principal. These companies have been given contractual authority to sell hypothecated vehicles after they are put in possession of the vehicles. It appears to us that those N.B. Companies were/are dealers as "factors" and/or mercantile agents under clause (d) of section 2(11) of the VAT Act. These N.B. Companies are "persons" but they do not come within the main part of the definition of "dealer" if they were/are selling borrower's goods as their agents. Being companies within the meaning of the Companies Act these companies are also body corporates. We have not considered the submission of the petitioners-N.B. Companies that "bodycorporate" in clause (b) of section 2(11) of the VAT Act d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exactly the same as the language in section 2(11)(d) of the VAT Act. The Supreme Court remarked therein (at page 566): "5. It will appear from the wide definition of 'dealer' that a person who sells goods on behalf of disclosed or undisclosed principals has been treated as 'dealer'. The extended definition given to a dealer which includes, inter alia, a commission agent, del credere agent and auctioneer goes to show that the agents who sell goods for and on behalf of others for a commission will have to be treated as dealers and are liable to be assessed as such under section 6B of the Bengal Finance (Sales Tax) Act, 1941. . . " In O. P. Lodha [1997] 105 STC 561 the Supreme Court reversed the decision of this Tribunal in Chowringhee Sales Bureau (P) Ltd. v. State of West Bengal [1990] 23 STA 49 and held: "6. . . . In fact, there is no sense in treating the agent on the one hand as a dealer for the purpose of levying sales tax on its taxable turnover and exclude from his turnover the sales made for and on behalf of others on the other hand. The mere fact that the agent is being treated as a dealer for imposition of sales tax precludes the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless context suggests any other meaning. In all the State Acts agents have been included within the definition of "dealer". Once it is found that particular person or company actually acts as an agent, he/it cannot but be treated as a dealer. There may be dispute whether the concerned person or company was/is an agent within the meaning of the particular Act but an agent selling goods of others in course of its business, becomes a dealer and incurs liability as a dealer. Under the general law when a hypothecation agreement creates a mere charge and does not empower the hypothecatee to take possession of the hypothecated goods and to sell, the hypothecatee is to approach the civil court for money decree and/or for sale of the hypothecated goods through court (vide judgment of the Andhra Pradesh High Court in State Bank of India v. S. B. Shah Ali AIR 1995 AP 134 (para 34)). Thus when these N.B. Financing Companies sell hypothecated goods they are exercising either contractual right to sell the goods themselves as hypothecatee or their right as agent conferred by the irrevocable power of attorney and other related documents. If these lenders sell on their own right to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t;dealer" as defined in the particular Act. The petitioners have referred to the decision of the Supreme Court in Government of Andhra Pradesh v. Corporation Bank [2007] 6 VST 755. In the said case definition of "dealer" was expanded in the Andhra Pradesh General Sales Tax Act, 1957 by adding Explanation IV to cover banks, LICs and statutory financial institutions. Said amendment operated from August 1, 1996. The auction sale held on August 19, 1987 by the Corporation Bank was sought to be taxed on the strength of Explanation IV. The only question raised in the said case whether the said amendment would apply retrospectively to the auction sale held on August 19, 1987. The Supreme Court held that the amending Act would operate from August 1, 1996. No other question was raised or examined therein. The judgment of the Madras High Court in Provincial Government of Madras v. Mudukuru Munirathnam Chetti [1953] 4 STC 296 is very short. There is no discussion of the statutory provisions. It is not also clear whether the stock of produces was pledged or with the lender or not. There is no dispute on the proposition that if a sale is effected in exercise of statutory power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the bank nor the non-banking companies can be called agents. The Supreme Court has said so because sale on the basis of an independent statutory or contractual right cannot be regarded as a sale by an agent. Bank was exercising its statutory right. The decision of the Supreme Court in Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 cannot be applied to the main issues, involved in the present case. Sundaram Finance [1966] 17 STC 489 (SC) was concerned with hire-purchase agreement. Majority in Sundaram Finance has taken the view that even in case of hire-purchase agreements, the customer is the purchaser and owner of the vehicle and the "sale letter" was just a formal document and not made effective by registering the vehicle in the name of the financier. The said judgment was delivered long before the 46th Amendment of the Constitution. In any event, there is no dispute in the present cases that the borrowers were/are owners of the vehicle even at the time of sale. Issue decided in Government of Andhra Pradesh v. Corporation Bank [2007] 6 VST 755 (SC) is totally different from the issue involved herein. In the said decision the Supreme Court merely consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislations of other States. It is wellsettled that courts are to attribute common and recognized meaning to an expression or term in legislative enactments. Where meaning of a particular expression is well known and well understood it is not open to the court to attribute any other meaning. By introducing inclusive part State Legislature in West Bengal has clearly intended to include all those persons or bodies selling goods whether or not in course of business. Legislative intent of the State Legislature of West Bengal is to be ascertained from the provisions of the VAT Act. By way of illustration it may be pointed out that in the Kerala Act "body corporate" was not separately mentioned in the definition of "dealer". In Andhra Pradesh companies carrying on the business of buying, selling, supplying, distributing goods or delivering goods on hire-purchase, or works contracts have been included. Definition of "dealer" in Maharashtra Act is much wider. Rajasthan Act has not used expression companies or body corporates but has used the expression "any trading, commercial or financial establishment including a bank, an insurance company, a transpor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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