HDFC Bank Ltd (formerly Centurion Bank of Punjab Ltd) v State of Kerala

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY, THE 11TH DAY OF JUNE 2018 / 21ST JYAISHTA, 1940 **OT.Rev.No. 97 of 2013 ----------------------** AGAINST THE ORDER/JUDGMENT IN TA 176/2010 of KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM DATED 04-04-2013 ## **REVISION PETITIONER(S)/PETITIONER/APPELLANT:** ## **--------------------------------------------** H.D.F.C.BANK LTD (FORMERLY CENTURION BANK OF PUNJAB LTD) KOCHI-682 025. BY ADVS.SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.BINU MATHEW SRI.TOM THOMAS (KAKKUZHIYIL) SRI.ABRAHAM JOSEPH MARKOS ## **RESPONDENT(S)/RESPONDENT/RESPONDENT:** ## **------------------------------------** STATE OF KERALA REPRESENTED BY THE SECRETARY (TAXES), TRIVANDRUM-695 001. R BY SR. GOVERNMENT PLEADER SRI MOHAMMED RAFIQ THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 11-06-2018, THE COURT ON THE SAME DAY PASSED THE FOLLOWING: O.T. REV. NO.97/2013 ## APPENDIX ## REVISION PETITIONER'S ANNEXURES: - ANNEXURE A: TRUE COPY OF OBJECTIONS DATED 11.12.2009 FILED BY THE PETITIONER BEFORE THE ASSISTANT COMMISSIONER, DEPARTMENT OF COMMERCIAL TAXES, THIRUVANANTHAPURAM - ANNEXURE B: TRUE COPY OF ORDER NO. NC/2005-06 DATED 30.12.2009 PASSED BY THE ASSISTANT COMMISSIONER COMMERCIAL TAXES, SPECIAL CIRCLE, THIRUVANANTHAPURAM - ANNEXURE C: TRUE COPY OF ORDER DATED 25.03.2010 PASSED BY THE DEPUTY COMMISSIONER (APPEALS) THIRUVANANTHAPURAM - ANNEXURE D: TRUE COPY OF ORDER DATED 04.04.2013 PASSED BY THE KERALA VALUE ADDED TAX APPELLATE TRIBUNAL ERNAKULAM - ANNEXURE E: TRUE COPY OF JUDGMENT DT 22.06.2010 PASSED BY THIS HON'BLE COURT IN WPC NO. 19340/2010 - ANNEXURE F: TRUE COPY OF BANK GUARANTEE DT 13.07.2010 AND RENEWAL FURNISHED BY THE PETITIONER RESPONDENTS ANNEXURES: NIL TRUE COPY P.A TO JUDGE jma ## K. VINOD CHANDRAN & ASHOK MENON, JJ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - O.T Rev. Nos. 97 of 2013, 100 of 2013, 101 of 2013 & 102 of 2013 - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 11[th] day of June, 2018 ## O R D E R ## Vinod Chandran, J H.D.F.C Bank is the assessee who is the revision petitioner in all these cases. OTRV No.97/2013 and 100/2013 are with respect to assessment years 2005-06 and 2006-07 and are assessments made against Centurion Bank of Punjab Limited, which was taken over by the revision petitioner herein, subsequent to the subject assessment year. OTRV No.101/2013 is with respect to the assessment year 2005-06 and OTRV No.102/2013 is with respect to the penalty imposed on the petitioner on allegations of suppression and incorrect returns, under Section 67 of the Kerala Value Added Tax Act, 2003, again for the assessment year 2006-07. The questions of law raised 2 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 against the Tribunal order affirming the assessments made are as follows: I Whether on the facts and in the circumstances of the case and in the light of its findings that (a) the Bank is not the owner of the vehicle at the time of sale and property in the vehicle was with the registered owner and (b) the Borrower executes irrevocable power of attorney to the Bank authorizing the bank to sell the vehicles and other documents necessary under the Motor Vehicles Act for transferring the vehicles and based on these documents the sold vehicles gets transferred from the owner to the registered purchaser - the Appellate Tribunal is right in holding that the 3 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 petitioner Bank is liable to KVAT on the proceeds realized from the sale of hypothecated vehicles. II) Whether on the facts and in the circumstances of the case, the Petitioner is a dealer falling within the definition of dealer under Section 2(xv) with respect to the realization of proceeds from the sale of hypothecated vehicles. III) Whether on the facts and in the circumstances of the case there is any evidence or material on record to justify the findings of the Appellate Tribunal that the Bank is to be construed as a pledgee in possession of the hypothecated vehicles and so the bank is a dealer falling within the definition of dealer under Section 2(xv). The questions of law raised in OTRV No. 102/2013 in addition to 4 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 what is raised above is re-framed as follows: Whether in the facts and circumstances of the case the Intelligence Officer could have imposed the penalty especially noticing that the issue is one debatable and whether the appellate authorities were right in confirming such penalty order ? 2. The questions are restricted to the transaction of the Bank insofar as re-possession of vehicles and sale of the same; on default committed by the original registered owner, who has hypothecated the vehicles in favour of the Bank; the assessee, who is hereinafter referred to as the financier. On default being committed by the original owner who purchased the vehicle after availing finance, the financier exercises its right to possess the vehicle as conferred by the contract and sells the same. However, the vehicle being registered in the name of the 5 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 loanee, the sale is effected with the sale letter of the owner which is obtained at the time of disbursing the finance to purchase the vehicle. The sale is also effected on the terms of the contract which permits such re-possession and sale of the vehicle in satisfaction of the liability. Whether on such sale being effected, the consideration received by the financier and adjusted to the account of the loanee has to be treated as the turnover of the financier or not, is the vexing question raised. 3. The learned Senior Counsel appearing for the appellant fairly submits that the High Court of Madras and the High Court of Calcutta have found the sale consideration, in identical transactions, as liable to be included as turnover of the financier; exigible to tax on sale of goods. However, it is argued that both the High Courts relied on a decision of the Hon'ble Supreme Court in Federal Bank Limited v. State of Kerala [(2007) 6 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 6 VST 736 (SC)]. The said decision dealt with the sale of pledged ornaments. The Hon'ble Supreme Court found the amounts received on sale of pledged ornaments, liable to be included in the turnover of the Bank as sale of goods exigible to tax under the sales tax enactments. The learned Senior Counsel seeks to draw a distinction insofar as the sale of the pledged ornaments by the Bank being in exercise of a statutory right under Section 176 of the Contract Act; while in the instant transaction the sale is by the registered owner and the consideration is also adjusted towards the liability of the registered owner. The financier merely facilitates such sale and hence there can be no inclusion of consideration received on such sale in the turnover of the financier. 4. The learned Senior Counsel takes us through the judgment of the Hon'ble Supreme Court in Federal Bank 7 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 Limited; to distinguish the transactions specifically through the following extract: “When a bank sells the pledged ornaments it is not acting as an agent of the borrower even under the 1949 Act. When the bank sells the goods pledged to them they do not act as the agents of the borrower. As pledgees, the banks, acting under section 176 of the Contract Act, 1872 have a right to sell the goods. That sale is not as agents but that sale is in exercise of the statutory power under the 1949 Act. No doubt the sale is on behalf of the pledgor, however, the sale is in exercise of the statutory power [ Deputy Commissioner of Commercial Taxes. V. A.R.S Thirumeninatha Nadar Firm (1968) 21 STC 184 (Mad )] 8 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 5. It is argued that in the case of pledge, the possession of the goods are with the bank and the sale is made exercising the statutory right which stands on a different footing from the exercise of a contractual right to sell a vehicle, whose registered owner is the loanee. It is contended that the Motor Vehicles Act contemplates transfer of vehicle only from the registered owner to the purchaser and the Bank as financier having hypothecation cannot be equated with the registered owner. 6. The learned Government Pleader however, takes us to the following extract from Federal Bank Limited: “Further, when charge or pledge is enforced that enforcement is by way of sale of the pledged or hypothected goods; that sale is for consideration and, therefore it falls within the ambit of Section 2(xxi) of 9 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 the 1963 Act” Per contra, the learned Senior Counsel points out that the declaration with respect to hypothecated goods at best is per incuriam since the issue never came up for consideration before the Hon'ble Supreme Court in Federal Bank Limited; wherein the question was confined to sale of pledged ornaments. 7. We have gone through the judgments of the High Courts and we agree in principle with what is declared therein. We notice that the two High Courts in their decision have dealt with the specific provisions in the relevant enactments of the respective States. We also have to notice certain definitions as available in the Kerala Value Added Tax Act 2003, the relevant portions of which are extracted herein below: “dealer” means any person who carries on the business of or buying, selling, supplying 10 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 distributing goods, executing works contract, delivering any goods on hire purchase or on any system of payment by installments; transferring the right to use any goods or supplying by way of or as part of any service, any goods directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration not being an agriculturist and includes:- (a) to (e) xxx xxx xxx (f) a bank or a financing institution, which, whether in the course of its business or not sells any gold or other valuable article pledged with it to secure any loan, for the realisation of such loan 11 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 amount. Explanation I : Bank for the purpose of this clause includes a Nationalised Bank or a Scheduled Bank or a Co-operative Bank Explanation II: Financing Institution means a financing institution other than a Bank. “Sale” with all its grammatical variations and cognate expressions means any 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 for other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge; “ turnover ” means the aggregate amount for which 12 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or for other valuable consideration, provided that the proceeds of the sale by a person not being a Company or Firm registered under the Companies Act, 1956 (Central Act 1 of 1956) and Indian Partnership Act, 1932 (Central Act 9 of 1932) [or society including a co-operative society or association of individuals whether incorporated or not] of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded 13 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 ## from his turnover. 8. The definition of dealer as extracted herein above, includes any person who is engaged in a system of payment by installments and in pursuance to that, transfer right to use any goods or supply by way of or as part of a service, directly or otherwise whether for cash or for deferred payment or for other valuable consideration. Sale includes any 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 deferred payment or valuable consideration. Explanation VII to the definition of sale is also relevant and is extracted herein below: ## EXPLANATION VII: “Unless otherwise expressly provided in this Act, any transfer, delivery or supply 14 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 of any goods referred to in this clause shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made.” The sale made by the financier would, in any event, fall under the above Explanation. The definition of turnover also takes within its ambit any sale made by the dealer on his own account or on account of others whether for cash or for deferred payment or for other valuable consideration. 9. In the instant case, we are concerned with an agreement of hypothecation wherein the original owner is the borrower. The borrower purchases the vehicle with the amounts advanced by the financier, on specific terms as entered into between the parties; inter alia as to the repayment of the loan 15 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 advanced and the rights of the financier in the event of default. The financier reserves to itself the right to possess the vehicle and sell it on default being committed. It is also an admitted fact that the original owner who is the loanee at the time of availing finance itself as a pre-condition of finance, executes sale letters and hands it over to the Bank with a specific condition that the Bank on default would be entitled to re-possess the vehicle and sell it. The learned Senior Counsel would specifically point out that Federal Bank Limited was grounded on the premise that the pledgee-Bank had a statutory right to sell the pledged ornaments under The Contract Act; while in hypothecation there is no statutory right and the contractual right if at all does not digress from the fact that the sale is by the registered owner to the purchaser. The dictionary definition of “pledge” and “hypothecation” is also placed to further advance the case. 16 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 10. We do not think that there could be any distinction found from the definition of “pledge” and “hypothecation” insofar as the liability to tax on sale of goods is concerned. We extract the definition of “pledge” and “hypothecation” as available in the Law Lexicon: Pledge : a pledge is defined to be a bailment of personal property as security for some debt or engagement. Hypothecation : Hypothecation is defined as “a right which a creditor has over a thing belonging to another, and which consists in the power to cause it to be sold in order to be paid his claim out of the proceeds” 11. The distinction drawn is insofar as the “pledge” itself being an implied power of sale on default; which power a 17 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 “hypothecation” does not confer. Going by the definition we are unable to draw such a distinction since “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. 12. The sale, in the present case, is of a second hand vehicle which is taxable under the KVAT Act at that point of time at the rate of 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 18 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 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. 13. The statutory provisions under the Motor Vehicles Act, 1988 has also to be noticed, for completeness; which confers a statutory right on the person, to whom the vehicle is hypothecated. Section 51 speaks of special provisions regarding motor vehicles subject to hire purchase agreement etc. Subsections (1) and (2) provides for an endorsement in the registration certificate, the fact of a hire purchase, lease or hypothecation agreement entered into, with respect to the vehicle, by the registered owner at the time of registration or when there is a transfer effected after registration. On 19 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 termination of the said agreement sub-section (3) provides for cancellation of the entry made under sub-sections (1) or (2). Subsection (4) prohibits any transfer of ownership of the vehicle unless with the written consent of the person with whom the owner has entered into an of registered agreement hypothecation, lease or hire purchase. Sub-section (5) postulates a situation when the person who has entered into the agreement with the registered owner takes possession of the vehicle owing to the default of the terms of the agreement. 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 20 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 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 comes registered owner and it within the ambit of sale of goods as defined in the KVAT Act. The financier falls under the definition 21 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 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 learned Senior Counsel or on the specific provisions available in the KVAT Act and the Motor Vehicles Act. 14. With respect to the questions of law we notice that 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. The first question of 22 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 law hence is answered in favour of the Revenue and against the assessee. 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 and against the assessee. We hence confirm the orders of assessment, affirmed by the appellate authorities. 15. On the question of penalty we find force in the submission of the learned Senior Counsel that the issue is one 23 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 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 under Section 67. The learned Government Pleader, however, submits that the decision of the jurisdictional High Court in Federal Bank Limited was delivered in 2004 and the assessment year for which penalty was levied was after that. The assessee ought to have included the consideration with respect to transactions of sale on repossession of vehicles in the turnover and paid tax; failing which there could be presumed a deliberate attempt to evade tax. 16. We are not persuaded to accept the contention of the learned Government Pleader especially noticing the fact the amendment which brought in the sale of pledged ornaments 24 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 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 above judgment. That does not lead to a conclusion that there was any contumacious conduct on the part of the assessee. We rely on E.I.D. Parry (I) Ltd. v. Assistant Commissioner of Commercial Taxes [(2000) 2 SCC 321] & Sree Krishna Electricals v. State of Tamil Nadu and Another [(2009) 11 SCC 687] to hold that the penalty as levied by the Intelligence Officer in 25 OT Rev. No. 97/2013, 100/2013 101/2013 &102/2013 OTRev.102/2013 is not sustainable. We hence answer the question of law separately raised in the said O.T Revision against the Revenue and in favour of the assessee and set aside the orders of the Intelligence Officer and the appellate authorities. Ordered accordingly. No costs. Sd/K. Vinod Chandran, Judge Sd/Ashok Menon, Judge jma