“What is the issue of sale of repossessed asset is not clear under GST too?” Jyoti said just before we reached to the home.
Hi, I am Akhil Chawala, Chartered Accountant by profession. I am working as an Advisory officer on Indirect Taxation matters at LMC & Associates. Thank you for reading this short story of mine.
Its late 9:30 P.M. I just had dinner and was ready for a walk in our colony garden. I found Jyoti was also walking in the garden.
(Jyoti is also a Chartered Accountant by profession and working as compliance officer in SIB Bank. She is very intelligent and brainy as she is working with one of the leading bank of our Nation. We had a talk earlier and she said she needed some suggestions from me.)
Me: Hey Jyoti, Have you had a dinner?
Jyoti: Hi Akhil!! Yeah. What about You?
Me: Same here. So’ how was your day? Must be busy in converting notes of Rs. 500 and Rs. 1000 in your bank branch.
Jyoti: With an annoying face. No, this is not my job. I am compliance officer and not a cashier. But yeah, the day was not that much good.
Me: What happened, Is everything fine?
Jyoti: There is a problem and it creating a lot of confusion in my mind. Our client Mr. Vijay M to whom we landed a sum of Rs 100 Crore.
Me: 100 Cores!!! A big amount!!!
Jyoti: You and your interruption skills, Hats Off!! Can you please allow me to complete.
Me: My bad. Please carry on.
Jyoti: He defaulted and now we are stuck in this deal. A bit silence. It’s your turn Akhil!!!
Me: With awkward reaction. So’ what SIB going to do now?
Jyoti: Yeah. SIB decided to get maximum recovery and they probably sell all the secured assets of Vijay M. The compliance head of the company gave me the responsibility to check the applicability of any tax on sale of assets which bank will repossess.
“I already said that she is clever. The way she picked the topic was awesome. Though, I realize later. Nevertheless, let us carry on.”
Me: So you are not aware with taxation provisions of sale of repossess assets by banks.
Jyoti: Are you kidding with me. I am working with SIB (the bank where she works) and not with LMC (the consulting firm where I work)
Me: Yes, I forget for a while.
Jyoti: So’ Can you please help me on this issue.
Me: Now!!! It’s already 10:00 P.M. We both have office tomorrow. Can we discuss this tomorrow?
Jyoti: No, I need to let my senior know by tomorrow.
Me: Ohh!! That’s Great …So you want………….Phone ringing…. Hello Yeah Maa.
Mamma: Where are you?
Me: In the garden, with Jyoti.
Mamma: It's already more than 10.
Me: Maa, it will take a bit more time.
Mamma: Okay, but be on time. Cut the phone.
Me: So, you want me to resolve this issue right now
Jyoti: Yeah.
(The technical conversation)
Me: After a long breath. Okay, are you precisely aware of the term sale?
Jyoti: Transfer of title in the goods.
Me: Exactly. Please interrupt me, if I’m wrong here, when you guys give a loan, you insert certain conditions in the agreement. The main clauses generally are hypothecation clause, irrevocable power of attorney in the name of bank, Letter of authorization to sell the impugned asset, etc.
Jyoti: Wow. Great Akhil. You are aware how we use to work.
Me: I know everything :-D :-D. We both laughed. After a few seconds…Okay, Jokes apart. Now there are several judgments on this issue, let me make you very clear that the final ruling on this issue is pending before the Hon’ble Supreme Court.
Jyoti: What is that judgment’s says?
Me: Several High courts interpreted this transaction in different ways. But many of them come to common conclusion that “Bankers are dealers and transaction of sale of repossessed asset is sale by bank and not by the person who actually owned that asset”.
Jyoti: But how can it be my sale. As a banker, I am not the actual owner of that asset. And unless I’m not the owner of the asset how can I transfer it to someone else?
Me: Hold on! Let me clear. Similar arguments has been put-forth before the various High Courts and let me tell you how the courts analyzed this transaction
Let me start with Delhi High Court judgment in case Citi Bank (Citi Bank V. Commissioner of Sales Tax, 2015-TIOL-2842-HC-DEL-CT) where court said that “Even if borrower is the owner in possession of car, the sale is made by the bank on the strength of the letter of authorization executed in its favour by the borrower. The Court further said that such sale of reposed cars by bank through auction in order to realize its dues was incidental or ancillary to its main banking business. Therefore the bank is dealer under Sales Tax.”
Jyoti: Ohh!!! So it means the bankers are liable to pay VAT on such sale. I have also read the Federal bank judgment (Federal Bank Limited vs. State of Kerala, 2007 (6) VST 736 (SC)) in which the Apex Court stated that the pledge gold sold by the bank would amount to sale and bank is called as dealer.
Me: No, Jyoti. The Apex Court in federal bank judgment analyzed the pledge transactions where in the pledge has a statutory right to sell the pledged asset in terms of Contract Act. The pledge transactions are clear to understand. The transaction which we are discussing is in the nature of hypothecation.
Jyoti: Really, it is difficult. You said there are other rulings too. How the other court analysed this transaction.
Me: Yes, Madras High Court in case of HDFC Bank (HDFC Bank Limited Vs The State of Tamil Nadu, 2015-TIOL-2160-HC-Mad-Vat) interpreted this transaction in different way, but come to the same conclusion. It said hypothecation agreement entered between bank and borrower empowers bank to repossess the vehicle in the event of default and also bring the vehicle to sale without even involving the owner of vehicle. Further, sale of the hypothecated vehicles is not arranged by banks for and on behalf of a willing vendor and such sales are in the nature of compulsory sales for the realization of debts due to the banks. Therefore, it is in the nature of sale.
Jyoti: Okay!!! I think this judgment sounds better than the Delhi High Court judgment. But you were saying the matter is pending before the Apex Court.
Me: Yes, the Calcutta High Court in case of Tata Motors (Tata Motors Finance Limited) held that the banks and NBFC’s are agent and thus called as dealer under the State VAT. The Special Leave Petition (SLP) has been filed before the Apex Court and was accepted.
Jyoti: So, finality over the issue is pending.
Me: Yes.
Jyoti: Akhil, What would be the scenario under proposed GST?
Me: Still Controversial!!!
Jyoti: “What the issue of sale of repossessed asset is not clear under GST too?”
Me: The draft model which was issued in July, 2016 made clear that it would be sale of the borrower and not banker. It was really a big relief for the banking Industry. However, the revised version which was issued in the November, 2016, has omitted this clause.
The clause which was in earlier law says “Where any goods, forming part of the Business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to supplied by the taxable person in the course or furtherance of his business.”
Jyoti: Oh No!!!
Me: I believe the government is waiting for the final ruling too. We reached at my house. Okay, now it’s very late. I will catch you later.
Jyoti: Yeah. It was a great discussion. Good Night and Thanks. With a smiling face
Me: You should say Good Night with a smiling face
Conclusion: The matter is subject to finality before the Apex Court. But many banking companies are not paying tax and making appropriate provision for this probable liability. It was expected that the Government might bring clarity on this transaction under GST. However, omission of the clause clearly indicates that the Government is also waiting for the Apex Court judgment.
The author can also be reached at akhilsunil1@gmail.com.
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