1965 (11) TMI 123 - SC - VAT and Sales Tax

Hire-Purchase Agreements: Financing, Not Sales; Sales Tax Exemption Upheld

Sundaram Finance Ltd. Versus The State of Kerala and Another

The court held that the hire-purchase agreements were financing arrangements, not sales, and therefore not liable to sales tax under the Travancore-Cochin ... Whether the hire-purchase agreements entered into by the appellant with its customers are transactions of sale of goods or are only documents securing the return of the loans advanced by it to its customers? Held that:- Appeal allowed. The intention of the appellants in obtaining the hire- purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions. Issues Involved:1. Nature of hire-purchase agreements: sale of goods or loan security.2. Liability of transactions to sales tax under the Travancore-Cochin General Sales Tax Act.3. Determination of ownership and transfer of property in hire-purchase agreements.4. Intention of parties in hire-purchase agreements and related documents.Issue-Wise Detailed Analysis:1. Nature of Hire-Purchase Agreements: Sale of Goods or Loan SecurityThe primary issue was whether the hire-purchase agreements entered into by the appellant with its customers were transactions of sale of goods or documents securing the return of loans advanced by the appellant. The court noted that hire-purchase agreements have become a common instrument in the commercial world, enabling individuals to buy necessities on easy installments while allowing dealers to profit without risk. The agreements typically involve the dealer or financier retaining ownership until the customer fulfills the agreement terms and exercises the option to purchase.2. Liability of Transactions to Sales Tax under the Travancore-Cochin General Sales Tax ActThe Sales Tax Officer issued notices to the appellants to file returns of their turnover from sales and secure registration as dealers under the Travancore-Cochin General Sales Tax Act. The appellants contended they were mere financiers and not liable for sales tax. The High Court of Kerala upheld the Sales Tax Officer's view that the transactions were sales liable to sales tax. The appellants argued that the transactions were merely financing arrangements, not sales.3. Determination of Ownership and Transfer of Property in Hire-Purchase AgreementsThe court examined the hire-purchase agreements and related documents, noting that the customer executed several documents, including a sale letter, bill, receipt, hire-purchase agreement, and promissory note. The court observed that the vehicle remained registered in the customer's name, and the customer was responsible for insuring and maintaining the vehicle. The court emphasized that the hire-purchase agreement's terms indicated that ownership would transfer to the customer upon fulfilling the agreement terms, suggesting a financing arrangement rather than a sale.4. Intention of Parties in Hire-Purchase Agreements and Related DocumentsThe court considered the intention of the parties, noting that the appellants were financiers whose business was to advance loans on the security of vehicles. The court found that the transactions were intended to secure the return of loans, not to effect a sale of the vehicles. The court highlighted that the hire-purchase agreement contained several onerous covenants to ensure compliance and secure the appellants' interests. The court concluded that the transactions were financing arrangements, not sales.Separate Judgments:- Subba Rao, J. delivered a separate judgment, disagreeing with the majority. He emphasized the common intention of the parties and the nature of the hire-purchase agreements, arguing that they should be treated as sales liable to sales tax.- Shah, J. delivered the majority judgment, concluding that the transactions were financing arrangements and not liable to sales tax.Conclusion:The appeals were allowed with costs, and the court held that the transactions were financing arrangements, not sales, and therefore not liable to sales tax. The judgment emphasized the importance of the parties' intention and the nature of the hire-purchase agreements in determining the transactions' true character.