Setback to IndusInd Bank: Sale of Repossessed Vehicles attract VAT, rules Delhi HC [Read Order]

In a major setback to IndusInd Bank, the Delhi High Court has held that Sale of repossessed vehicles attract Value Added Tax (VAT).

The petitioner has filed the present petition, inter alia, challenging the constitutional validity of the definition of the term ‘dealer’ as defined under Clause (j) of Sub-section (1) of Section 2 of the Delhi Value Added Tax Act, 2004 (DVAT Act).

The petitioner is, essentially, aggrieved by the Explanation to Sub-clause (vii) of Clause of Section 2(j) of the DVAT Act, inasmuch as it also includes any corporation or company engaged in commercial banking.

According to Section 2(1)(j)(vii) of the Delhi Value Added Tax Act, a “Dealer” is —

any person who, for the purposes of or consequential to his engagement in or in connection with or incidental to or in the course of his business disposes of any goods as unclaimed or confiscated, or as unserviceable or scrap, surplus, old, obsolete or as discarded material or waste products by way of sale.

Explanation.- For the purposes of this clause, each of the following persons, bodies and entities who sells any goods whether in the course of his business, or by auction or otherwise, directly or through an agent for cash or for deferred payment or for any other valuable consideration, shall, notwithstanding anything contained in clause

(d) or any other provision of this Act, be deemed to be a dealer, namely:-

(i) Customs Department of Government of India administering Customs Act, 1962 (52 of 1962);

(ii) Departments of Union Government, State Governments and Union territory Administrations;

(iii) Local authorities, Panchayats, Municipalities, Development Authorities, Cantonment Boards;

(iv) Public Charitable Trusts;

(v) Railway Administration as defined under the Indian Railways Act, 1989 (24 of 1989) and Delhi Metro Rail Corporation Limited;

(vi) Incorporated or unincorporated societies, clubs or other associations of persons;

(vii) Each autonomous or statutory body or corporation or company or society or any industrial, commercial, banking, insurance or trading undertaking, corporation, institution or company whether or not of the Union Government or any of the State Governments or of a local authority;

(viii) Delhi Transport Corporation;

(ix) Shipping and construction companies, air transport companies, airlines and advertising agencies.

The petitioner is a scheduled bank and its challenge is premised on the ground that the expansive definition of the word ‘dealer’ militates against the object of the DVAT Act. The petitioner also impugns the definition of the word ‘dealer’ as being ultra vires Article 265 of the Constitution of India.

The petitioner was aggrieved by the notices issued under Sections 32 and 33 of the DVAT Act by the respondent – notices dated 23.03.2018 seeking to recover tax and interest amounting to

₹39,35,466/- and penalty of ₹75,33,449/- and notices dated 06.03.2019 seeking to recover tax and interest amounting to ₹94,09,083/- and penalty of ₹1,79,71,806/-. The said notices (hereafter referred to as the impugned notices) have been issued imposing liability of value added tax (VAT) on the petitioner as a dealer in respect of sale of repossessed vehicles.

Kumar, the counsel appearing for the petitioner submitted that the petitioner is not involved in adding any value to any vehicle repossessed by it. It is merely engaged in selling the same on behalf of the borrower for the purpose of recovery of its dues. He submits that in the aforesaid circumstances, the levy of VAT on the sale of repossessed vehicles would amount to imposing a tax, which is not based on any value addition.

He also referred to the object of introducing DVAT Act and emphasized that the said DVAT Act was enacted to introduce a VAT regime in the local area of National Capital Territory of Delhi. He submitted that the expansive definition of the term ‘dealer’ seeks to expand the incidence of VAT under the DVAT Act to beyond any charge of tax on value addition.

He also contended that there was a paradigm shift in the nature of tax with the enactment of the DVAT Act, from the earlier regime of sales tax under the Delhi Sales Act, 1975. He submitted that the sales tax under the Delhi Sales Tax Act was imposed on sale of goods but the levy of VAT under the DVAT Act was confined to the element of value addition.

Counsel appearing for the respondent countered the aforesaid submissions.

The Division Bench of Delhi High Court comprising Justice Vibhu Bakhru and Justice Amit Mahajan observed that, “We are not persuaded to accept that the definition of the word ‘dealer’ falls foul of the Constitution of India. Article 265 of the Constitution of India merely provides no tax will be levied without authority of law. Clearly, the DVAT Act is an enacted law and there is no dispute that the tax sought to be collected is in terms of said law. Thus, any challenge on the ground that the definition of dealer is ultra vires of the Constitution of India would have to be sustained on the basis of the same falling foul of any other provision of the Constitution of India.”

It was further noted that, “The contention that the petitioner is not liable to pay any tax on sale of goods on the ground that there is no value addition, is insubstantial” and that, “The petitioner’s challenge to the constitutional validity of the definition of the ‘dealer’ is founded on ex facie erroneous premise”, resulting in rejection of the same contentions.

Citing precedents, the bench observed that, “The controversy regarding levy of tax on the sale of re-possessed is squarely covered by an earlier decision of the Coordinate Bench of this Court, of which one of us (Vibhu Bakhru, J) was a member, in M/s Citi Bank v. Commissioner of Sales Tax M/s Citi Bank v. Commissioner of Sales Tax: ST. REF. 1/2003, decided on 14.12.2015. The said decision was rendered in the context of the Delhi Sales Tax Act, 1975. However, in a later decision in HDFC Bank v. Commissioner of Value Added Tax, Delhi: VAT APPEAL 29/2016, another Coordinate Bench of this Court had, following the decision of M/s Citi Bank v. Commissioner of Sales Tax M/s Citi Bank v. Commissioner of Sales Tax (supra), rejected an appeal against the decision of the VAT Tribunal holding that sale of such re-possessed vehicles was subject to the charge of VAT. The said two decisions cover the petitioner’s challenge to the impugned notices demanding VAT, interest, and penalty under the DVAT Act.”

In result, the petition being unmerited, was dismissed by the Delhi High Court, holding that the sale of repossessed vehicles attract Value Added Tax.

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