NBFCs Are Dealers Under VAT Law When Selling Repossessed Vehicles Without Borrower’s Consent:  Madras High Court Upholds Tax on Hypothecated Sales

“Sale of Repossessed Vehicles by NBFCs Is Not Agency-Based But Compulsory in Nature and Attracts VAT” – Madras High Court, in a significant ruling on the taxation of financial institutions, dismissed the revision petition filed by Tvl. Shriram Finance Ltd., affirming that non-banking financial companies (NBFCs) are liable to pay Value Added Tax (VAT) on the sale of repossessed  hypothecated vehicles under the Tamil Nadu Value Added Tax Act, 2006 (TNVAT). The judgment, delivered by a Division Bench comprising Justice S.M. Subramaniam and Justice Mohammed Shaffiq, held that such sales, even without borrower consent, fall squarely within the statutory definition of a “dealer” and constitute “sale” attracting VAT.

The case centered around the classification of NBFCs as ‘dealers’ under Section 2(15) of the TNVAT Act, and the taxability of sales of repossessed vehicles and fixed business assets. The petitioner argued that they were merely acting as agents for the borrowers and thus not liable for tax on such sales.

“Dealer” Definition Is Broad and Covers Even Non-Owners: NBFC Liable Despite Lack of Title

The High Court clarified that ownership is not the determinative factor under VAT law. Citing the exhaustive Explanation III to Section 2(15) of the TNVAT Act, the Court emphasized:

“The definition of ‘dealer’ under Section 2(15) is wide enough to include any person who disposes of goods, even if they do not hold ownership or title.”

It was further held that:

“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.”

This interpretation was rooted in a functional view of commercial reality, where NBFCs repossess and dispose of hypothecated assets without the borrower’s active participation or consent, and often under court supervision.

Repossession and Sale Are Compulsory Actions for Recovery – Not Voluntary Sales on Behalf of Borrower

The Court rejected the NBFC’s argument that it was acting as an agent of the borrower when selling the repossessed vehicle. Instead, it noted the contractual and legal autonomy granted to the lender under the loan agreement:

“The borrower has no right to question the value at which the asset was sold and the sale will be done by the assessee without accountability to the borrower.”

Further:

“These sales effected by the NBFC are in the nature of compulsory sales for realization of debts due to the financial institutions. Therefore, to say that the assessee sold the hypothecated goods only as agent of the owner is not completely true.”

This autonomy, the Court found, negated any claim of agency, especially where the borrower’s consent was not obtained and legal avenues such as Section 9 of the Arbitration and Conciliation Act, 1996 were resorted to for seizure and sale.

Cholamandalam Investment Ruling Is Binding – Issue Already Settled

The Court held that the exact questions raised by Shriram Finance Ltd. had already been settled in 2019 in Cholamandalam Investment v. State of Tamil Nadu, where the Division Bench affirmed VAT liability on repossessed vehicle sales by NBFCs.

Refusing to re-litigate the same legal ground, the Court held:

“We are necessarily to conclude that the decision in HDFC Bank Ltd. and Cholamandalam Investment would squarely apply to the case of the assessee.”

It was emphasized that the identity of transaction, not the nature of the institution (bank or NBFC), determined tax liability.

Sale of Fixed Assets Like Machinery and Furniture Also Attracts VAT

The petitioner also challenged VAT liability on the sale of used business assets, such as plant, machinery, furniture, and air conditioners, claiming these were “scrap” and not part of business turnover.

This was categorically rejected:

“The sale of fixed assets like air conditioners, furniture, machinery used for business purposes falls within the definition of ‘sale’ and attracts VAT.”

The Court ruled that business asset disposals, even if occasional, are taxable as long as the goods were used in the course of business and sold for consideration.

Even If NBFC Is Deemed an Agent, It Remains Liable to VAT Under Section 2(41)

To rebut the petitioner’s fallback argument of agency, the Court invoked Section 2(41) of the TNVAT Act:

“Turnover includes aggregate amount of goods sold by a dealer either directly or through another, on his own account or on account of others. Thus, even if the assessee is an agent, it is liable for VAT.”

This ensured that agency relationships do not provide tax immunity, further broadening the taxable net under the TNVAT Act.

NBFCs Cannot Escape VAT Liability on Repossessed Sales

The High Court ultimately dismissed the petition, holding that all five substantial questions of law were decided against the assessee. The Bench affirmed that:

“No ground is made for interference with the order of the Tribunal. Accordingly, the Tax Case (Revision) is dismissed.”

No costs were awarded. This decision strengthens the legal position that financial institutions executing repossession and sale of goods—whether banks or NBFCs—are taxable as dealers under the TNVAT regime.

Key Takeaways:

• NBFCs are “dealers” under the TNVAT Act when selling repossessed vehicles.

• Consent of the borrower is not a prerequisite to attract VAT liability.

• The sale of business-used fixed assets (furniture, machinery) by NBFCs is also liable to VAT.

• Even when acting as agents, NBFCs cannot escape tax liability under Section 2(41).

• The decision reaffirms binding precedent set in Cholamandalam Investment and HDFC Bank Ltd. cases.

Date of Decision: 16 October 2025