By TIOL News Service

ERNAKULAM, JUNE 29, 2018: THE ISSUE AT HAND BEFORE THE COURT IS - Whether a bank acting as a financier & engaged in selling hypothecated goods will come within the ambit of the term 'dealer' under the Kerala VAT Act, 2003. AND THE VERDICT IS YES.

Facts of the case:

The assessee bank, had preferred the present revision petition. The issue was restricted to the transaction of the assessee towards re-possession of vehicles and sale of such vehicle. The original registered owner had hypothecated the vehicles in favour of the assessee (financier). The original owner had purchased the vehicle after availing finance, the financier exercises its right to possess the vehicle as conferred by the contract and sold the same. However, the vehicle being registered in the name of the loanee, the sale was effected with the owner's sale letter which was obtained during disbursing the finance to purchase the vehicle. The sale was also effected on the terms of the contract which permitted such re-possession and sale of the vehicle in satisfaction of the liability.

High Court held that,

++ no distinction could be found from the definition of "pledge" and "hypothecation" insofar as the liability to tax on sale of goods is concerned. "Hypothecation" also confers on the creditor the right to a thing belonging to another and encompass the power to cause it to be sold in order to be paid his claim out of the proceeds. The only distinction probably is that in a "pledge", the goods remain with the financier while in a "hypothecation" it is with the original owner who is the loanee who availed the finance. The sale, in the present case, is of a second hand vehicle which is taxable under the KVAT Act at that point of time @4%; on the consideration. The fact that the financier had merely facilitated the sale cannot be a cause for absolving itself from the liability to include the consideration received in the turnover of the financier; exigible to tax on sale of goods. As was noticed, the KVAT Act, takes within the definition of dealer, any person involved in transactions where there is a system of payment by installments and definition of sale and turnover includes a sale made by one on behalf of another where the latter is the owner; on which tax is payable as has been specified in the schedules;

++ in the event of the registered owner refusing to deliver the certificate of registration, on any of the contingencies, on application made by the person who has entered into the agreement, the registration certificate is liable to be canceled after issuing notice to the registered owner and considering representation if any, filed by him. The proviso also enable issuance of a fresh certificate of registration to that person who validly repossessed the vehicle. Just as in the case of a pledge here too the financier has a right over the hypothecated vehicle flowing from the terms of the agreement and recognised by statute, the provisions of which enable a transfer of the ownership and registration in favour of the financier. The financier however does not avail this measure of first transfer of ownership and registration in their name and a subsequent sale because often the registered owner from whom the vehicle is repossessed does not challenge the action of the financier or has voluntarily surrendered the vehicle, on default. The borrower also realises the futility of a challenge in view of the specific provisions under the Motor Vehicles Act. Either way the sale is one carried out by the financier on behalf of the registered owner and it comes within the ambit of sale of goods as defined in the KVAT Act. The financier falls under the definition of dealer and so is the consideration liable to be included as turnover of sale of goods. We do not find any reason to come to a different conclusion insofar as the transactions are concerned, either on the distinction attempted to be drawn by the Counsel or on the specific provisions available in the KVAT Act and the Motor Vehicles Act;

++ the Bank is not the owner of the vehicle at the time of sale. But however, after re-possession, sells the vehicles and effects transfer and delivery of the goods (vehicle) to the purchaser after receiving consideration, by effecting such transfer on delivery of the vehicle and handing over the sale letter executed by the registered owner which was received by the Bank as per the specific terms of the contract of finance; the right being recognised by the Motor Vehicles Act too. Hence, this issue is answered in favour of the Revenue. We have already found that the Bank acting as a financier and selling hypothecated goods would come within the definition of dealer; the second question is also answered in favour of the Revenue. We have found that there is no distinction insofar as a pledge or hypothecation is concerned and sale effected on default of payment, especially in the context of the financier exercising the right to sell the goods, which belongs to another, either under a statute or on the specific terms of the contract, would be effecting sale of goods exigible to tax. The third question is also answered in favour of the Revenue;

++ on the question of penalty, we find force in the submission of the Counsel that the issue is one debatable and there could be no penalty imposed especially since there is no suppression and the turnover was discernible from the books of accounts. The Intelligence Officer himself had found out the turnover from the books of account to so levy the penalty on proceeding further u/s 67. We noticed the fact that in the case of Federal Bank Limited, the amendment which brought in the sale of pledged ornaments within the definition of sale of goods was challenged before the High Court and a decision came only in the year 2003 dated 03.04.2003. The fact that the amendment was brought in and there was a challenge to it indicates that there was a debatable issue even with respect to the pledge of ornaments. In the present case, the transaction was hypothecation and the possession was with the registered owner who is the loanee. The assessee bonafide claimed a distinction insofar as pledge and hypothecation which however is negatived by this Court in the said judgment. That does not lead to a conclusion that there was any contumacious conduct on the part of the assessee.

(See 2018-TIOL-1213-HC-KERALA-VAT)