Contractual security for contingent tax liability upheld; mandamus cannot stop a corporation demanding bank guarantees from dealers.

The Madras HC held that a dealership clause allowing the corporation to demand deposits or security for sums due was enforceable against dealers facing possible differential sales tax exposure from withheld C Forms. Because the bank guarantee requirement was a contractual safeguard against contingent fiscal liability under the Puducherry Value Added Tax Act, 2007, mandamus could not be issued to restrain its invocation absent illegality. The challenge to the demand was rejected, while the court noted that individual dealers could seek waiver on a case-by-case basis where hardship arose.

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Issues: Whether the dealer associations and dealers were entitled to a writ of mandamus restraining the corporation from insisting on bank guarantees to secure anticipated differential sales tax liability arising from possible withholding of C Forms.

Analysis: The requirement flowed from the dealership agreement, which authorised the corporation to call upon the dealer to furnish deposits or security to secure due performance of obligations and any sums due. The court noted that the corporation was protecting itself against a contingent liability that could arise if C Forms were withheld because of defaults by dealers under the Puducherry Value Added Tax Act, 2007. In that setting, the court held that a dealer could be required to furnish a bank guarantee when called upon, and that a writ of mandamus could not be issued to prevent enforcement of such a contractual safeguard. The court also observed that, where the condition operated harshly, individual dealers could make representations for waiver on a case-to-case basis.

Conclusion: The writ relief was not maintainable and the demand for bank guarantees was upheld as a permissible contractual protection, though discretionary waiver could be considered by the corporation in appropriate cases.

Final Conclusion: The petitions challenging the insistence on bank guarantees were rejected, leaving the contractual security mechanism intact.

Ratio Decidendi: A contractual clause permitting the corporation to require security for contingent fiscal liabilities is enforceable, and mandamus will not lie to prohibit its invocation absent illegality.

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