TMI Blog2019 (9) TMI 1597X X X X Extracts X X X X X X X X Extracts X X X X ..... ivision 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. 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 - In the event, there is a resistance by the borrower, the situation is taken care by appropriate amendments to Motor Vehicles Act, 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. In INDIAN OIL CORPORATION VERSUS NEPC INDIA LTD ORS [ 2006 (7) TMI 575 - SUPREME COURT] , it was pointed out that the deed of hypothecation created a charge 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 modu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Sales Tax Appellate Tribunal enabled imposition of VAT on the petitioner on the sales of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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, 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to 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 nondisclosure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Coordinating 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. [(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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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