Madras High Court
Tvl. Shriram Transport Finance ... vs State Of Tamil Nadu Represented By on 11 November, 2021
Tax Case Nos.25 to 32 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 11.11.2021
CORAM
THE HON'BLE MR. JUSTICE R. MAHADEVAN
AND
THE HON'BLE MR. JUSTICE MOHAMMED SHAFFIQ
Tax Case Nos.25 to 32 of 2021
Tvl. Shriram Transport Finance Company Ltd.,
SRI Towers, 14-A, South Phase,
Industrial Estate, Guindy,
Chennai 600 032. ...Appellant in all Cases
-vs-
State of Tamil Nadu represented by
The Joint Commissioner (CT),
Chennai (East) Division,
Chennai. ...Respondent in all Cases
Tax Case (Revision) Petitions filed under Section 60(1) of the Tamil
Nadu Value Added Tax Act, 2006 to set aside the common order dated
05.02.2021 passed by the Tamil Nadu Sales Tax Appellate Tribunal (Main
Bench), Chennai-104, in T.A. Nos.14,15,12,16,17,18,11 & 13 of 2016.
For Appellant : Mr. R. Sivaraman (in all cases)
For Respondent : Mr. M.Venkateswaran (in all cases)
Government Advocate (Taxes)
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Tax Case Nos.25 to 32 of 2021
COMMON JUDGMENT
(Judgment was delivered by R. MAHADEVAN, J.)
These tax cases have been filed by the petitioner, raising the following
substantial questions of law:-
(1) Whether, on the facts and in the circumstances of the case, the
Hon'ble Appellate Tribunal was right in law in stating that the
Petitioner/Appellant would fall within the ambit of ''dealer'' as per
section 2(15) of the TNVAT Act, 2006?
(2) Whether, on the facts and in the circumstances of the case, the
Hon'ble Appellate Tribunal was right in law in stating that sale of
repossessed vehicle on behalf of the defaulter by the
Petitioner/Appellant would be liable to pay taxes under VAT Act
on the sale of the Hypothecated Motor Vehicles?
(3) Whether, on the facts and in the circumstances of the case, the
Hon'ble Appellate Tribunal was right in law in stating that the
Petitioner/Appellant is a dealer even though the contractual
agreements specifically states the Petitioner/Appellant as not the
owner of the Vehicle?
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Tax Case Nos.25 to 32 of 2021
(4) Whether, on the facts and in the circumstances of the case, the
Hon'ble Appellate Tribunal was right in law in stating that Resale
of Plant and Machinery, Furniture and Fittings and Fixed Asset by
the Petitioner/Appellant which is used for the purpose of own
business would fall within the meaning of sale and subject to
VAT as per the TNVAT ACT, 2006?
(5) Whether on the facts and in the circumstances of the case the
Hon'ble Appellate Tribunal was right in law in not treating the
sale of Plant & Machinery, fixture, furniture, air conditioners etc.,
as scrap?
2. When the matters were taken up for consideration, the learned counsel
appearing for both sides in unison submitted that the identical questions of law
were already decided against the assessee by a Division Bench of this Court, in
Tax Case (Revision) Nos.2 to 9 of 2019 on 25.09.2019 in the case of
Cholamandalam Investment v. The State of Tamil Nadu. The relevant
paragraphs of the said order are usefully extracted below:
“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
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Tax Case Nos.25 to 32 of 2021
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 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
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Tax Case Nos.25 to 32 of 2021
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 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
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Tax Case Nos.25 to 32 of 2021
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 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 included
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Tax Case Nos.25 to 32 of 2021
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 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.
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Tax Case Nos.25 to 32 of 2021
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, 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.
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Tax Case Nos.25 to 32 of 2021
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 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
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Tax Case Nos.25 to 32 of 2021
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 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 bank, power under the Banking
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Tax Case Nos.25 to 32 of 2021
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.
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
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Tax Case Nos.25 to 32 of 2021
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.
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.
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Tax Case Nos.25 to 32 of 2021
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 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.
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Tax Case Nos.25 to 32 of 2021
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 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 sales tax.
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
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Tax Case Nos.25 to 32 of 2021
additional security including guarantees from any third parties.
Clause 11 of the agreement deals with possession, termination and
company's other rights.
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 made
for interference of the order of the Tribunal.
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Tax Case Nos.25 to 32 of 2021
43.Accordingly, the Tax Cases (Revision) are dismissed and
the substantial questions of law framed for consideration are decided
against the assessee. No costs.”
3. Thus, following the above decision, these Tax Cases are dismissed. No
costs.
[R.M.D,J.] [M.S.Q, J.]
11.11.2021
av
Internet : Yes
Index : Yes / No
To
The Joint Commissioner (CT),
Chennai (East) Division,
Chennai.
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Tax Case Nos.25 to 32 of 2021
R. MAHADEVAN, J.
AND
MOHAMMED SHAFFIQ, J.
av
Tax Case Nos.25 to 32 of 2021
11.11.2021
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