WHETHER OFFICIAL LIQUIDATOR IS A DEALER FOR THE PURPOSES OF SALES TAX?

[Mr. M. GOVINDARAJAN]

Official Liquidator

The provisions relating to Official liquidator under the Companies Act, 2013 have not yet been notified.   It is relevant to refer to the provisions of Companies Act, 1956.  Section 448 of the 1956 Act provides for the appointment of an official liquidator for the purpose of winding up of a company.   The official liquidator so appointed conducts the proceedings in the winding up of the company and performs other duties as the court imposes upon him, on consonance with the provisions of the Act.  Section 456 of the Act states that pursuant to a winding up order, the liquidator shall take into custody or under his control, all the properties, effects and actionable claims to which the company is or appears to be entitled to.   By the said provision, all the properties and effects of the company are deemed to in the custody of the court, from the date of the winding up order.   Section 457 of the Act lists the powers of the official liquidator.   The powers include to carry on business of the company for the beneficial winding  up, to sell the immovable and movable property and actionable claims of the company, by public auction or private contract and to do all things as maybe necessary for winding up the affairs of the company and distribution of its assets.

Issue

The issue to be discussed in this article is whether the official liquidator is to be considered as a dealer for the purposes sales tax/VAT since he is given power to sell the movable and immovable properties of the company which come under his custody from the date of winding up order with reference to decided case law.

Dealer

The definition of ‘dealer’ under various sales tax legislations has been given a broad and inclusive interpretation.  It would be gainsaid to state that such a broad and expansive interpretation is in consonance with all transactions of sale of goods.   The general definition of the term ‘dealer’ would persons, if they are involved in carrying on any business or trading activity such as the sale of machinery etc.,  As a necessary sequitur, the company in liquidation, whose assets are sold by way of an auction would be a ‘dealer’ for the purposes of sales.   The Official liquidator sales the properties on behalf of the company would automatically come under the definition of ‘dealer’.

Case law

The case law taken for discussion in respect of this article is ‘Assistant Commissioner V. Hindustan Urban Infrastructure Limited and others’ – 2015 (1) TMI 908 - SUPREME COURT.   The facts of the case run as follows:

M/s Premier Cable Company Limited (‘company’ for short) was engaged in the manufacture of PVC power cables, aluminium conductors, enameled wires etc.,  On the recommendation by the BIFR the company was ordered to be wound by an order passed by the High Court

 dated 18.06.1998.  The Official Liquidator attached to the High Court was appointed to take charge of the assets and liabilities of the company and to deal with the same in accordance with the provisions of Companies Act, 1956 and the Rules framed there under.

The Official Liquidator issued a notice inviting tenders in respect of sale of assets of the company in liquidation.  The aforesaid assets included land with factory building, workshop building, canteen building, godowns, quarters and other auxiliary buildings and also plant and machinery of the company in liquidation.   The terms and conditions of the sale of assets of the company expressly provided that sale would be subject to confirmation by the High Court and further subject to any subsequent terms and conditions as may be imposed by the High Court.

The respondent No. 1 offered to purchase Lot Nos. 1-2 for a total amount of ₹ 5.76 crores by an offer letter.   It was expressly stated therein that the said amount would be inclusive of all statutory levies such as sales tax, central sales tax, excise duty etc., if any, as may be applicable.  The auction purchaser, being desirous to transport the purchased assets across the border of multiple states, had requested to official liquidator to incorporate the relevant sales tax registration number in the sale invoice.  The Official liquidator has declined to accede to the request so made.  In the opinion of the Official Liquidator  the auction purchaser should be directed  by the High Court to meet any expenses or liability towards payment of cess, sales tax, etc., if and when the same becomes payable.

The Official Liquidator filed an application before the High Court for clarification on certain aspects of the matter including whether the auction purchaser would be liable to pay tax on the purchase of goods, pursuant to the auction conducted and further to direct the auction purchaser to pay any tax as may be leviable by the sales tax department.  The High Court held that the sale in question cannot be treated as a sale by the Central government or by a registered dealer entitled to collect tax and further has observed that the auction purchaser cannot be treated as a dealer under the Kerala General Sales Tax Act, 1956 and the rules made there under and further held that the said sale in question would not be exigible to sales tax.

Aggrieved against this order the appellant filed appeal before the Division Bench and contended that the official liquidator would be bound to pay sales tax as and when a sale of assets of the company in  liquidation would be effected by him.  The Division Bench observed that the ‘official liquidator’ would not fall within the definition of ‘dealer’ under the Kerala General Sales Tax Act, 1963 and dismissed the appeal.

Aggrieved by the aforesaid order the appellant filed a review petition before the High Court in which a new plea was advanced by the appellant claiming that even if the Official Liquidator cannot be treated as a dealer under the Act, Section 5A of the act would be attracted insofar as the auction purchaser is concerned.  The High Court was of the view that the auction purchaser is liable to pay purchase tax under Section 5A of the Act.

Therefore he approached the Supreme Court.   The Supreme Court considered the following issues to be decided:

• Whether the Official Liquidator is a ‘dealer’ within the meaning of the Act, 1963?
• Whether the official liquidator would be required to pay sales tax in respect of the sales effected pursuant of a winding up proceedings?

The Department submitted the following before the Supreme Court:

• The official liquidator is liable to pay sales tax on the transactions in question;
• The official liquidator was held to be a ‘dealer’ under the Act, 1963;
• The official liquidator is an agent of the Central Government and therefore would deemed to be a dealer as provided under Explanation (2) to Section 2(viii)(f) of the Act;
• The Official liquidator would be liable to pay tax at the relevant rate under the Act, whether or not he had collected the same from the auction purchaser.

The Official liquidator contended that he would not be liable to pay any tax under the Act, 1963 and the liability would in fact be on the auction purchaser who would be exigible to purchase tax under Section 5A of the Act.  An Official liquidator is an officer of the court, he merely discharges statutory functions imposed upon him and, therefore, cannot be held liable to pay tax under the Act.   Since he discharges the statutory functions of selling the assets of the company in liquidation, he cannot be perceived to be carrying on ‘business’ as defined under Act and thus cannot be exigible to tax.

The auction purchaser submitted the following:

• The question of payment of purchase tax could not arise because, firstly, the contention was raised for the first time in review petition, and secondly the tax is a single point levy at the first point of sale;
• An auction purchaser could not be made liable for a tax that was not even imposed or demanded by the competent authority;
• The official liquidator makes the sale on behalf of the company and not as the owner;
• Rule 54 of Kerala Sales Tax rules and Section 17 of Central Sales Tax Act demonstrate that the liability to pay sales tax was clearly on the official liquidator.

The Supreme Court analyzed the provisions of Section 2 (vi) which defines the term ‘business’ and Section 2(viii) which defines the term ‘dealer’.    The SC observed that the term ‘business’ has been given a broad meaning by including within its ambit both incidental and ancillary transactions.   It has also eliminated the requirement of a profit motive as being an essential component.  The definition of ‘dealer’ has also been given a wide ambit.   It includes any person carrying on business of, inter alia, buying, selling, supply or distribution of goods, whether directly or otherwise.   All modes of payment whether by way of cash, commission, remuneration or other valuable consideration have been included therein.   It also includes a casual trader, a non resident dealer, a commission agent, a broker, an auctioneer and other mercantile agents.  Sub clause (f) further expands the scope of the provision by including within its ambit, an array of transactions, which may or may not be in the course of business.

The Supreme Court held that given the exceptionally wide scope of the definition, prima facie, it can be concluded that any person or entity that carries on any activity of selling goods, could be categorized as a ‘dealer’ under the Act, 1963.  A careful reading of the definition of ‘dealer’ makes it evident that the Legislature intended to provide for an inclusive criterion and broaden the ambit the said classification.   The Legislature did not propose to restrict the scope of the term perceived in common parlance.

By virtue of the notice issued by the Official Liquidator for inviting tenders, dated 26.11.2001, it is amply evident that the liquidator intended to conduct a transfer of the said goods in liquidation.   Since the conduct of an auctioned sale involved transfer of goods, it falls within the wide ambit of Section 2(viii)(f) of the Act, 1963.  The Supreme Court further held that it is settled law that an official liquidator steps into the shoes of the director of the company in liquidation and performs his statutory functions in accordance with the directions of the court.   Furthermore Rule 54 of the Rules, 1963 contemplates a situation where a business owned by a dealer, is under the control of a receiver or manager or any other person, irrespective of his designation, who manages the business on behalf of the said dealer, is under the control of a receiver or manager or any other person, irrespective of his designation who manages the business on behalf of the dealer, would be exigible to sales tax in the same manner as it would have been leviable upon and recoverable from the dealer itself.  Therefore the Supreme Court concluded that the liability to pay sales tax, in the present case, would be on the official liquidator in the same manner as the dealer, that is, company in liquidation.

The Supreme Court further held that pursuant to Section 5 of the Act, 1963 the company in liquidation, will incur the liability to pay sales tax at the point of first sale as incurred by any other dealer under the said Act.   By placing reliance upon rule 54 the liability to pay sales tax is borne by the official liquidator as a manager or receiver of the property of the company in liquidation.  Therefore the Supreme Court is of the opinion that the Official liquidator would be required to pay the tax payable on the sale of the assets of the company in liquidation.

As regards the liability of the auction purchases the Supreme Court held that the auction purchaser would not be liable to pay sales tax.  The offer of the auction purchaser, as accepted by the official liquidator and confirmed by the High Court, was inclusive of all taxes.   It would have been the bounden duty of the official liquidator to have separated an amount for the payment of taxes under the  Act to avoid any liability. 

The Supreme Court allowed the appeals and set aside the impugned judgments and orders passed by the High Court.

Conclusion

Since the official liquidator is akin to an agent employed for the purpose of winding up of a company, he steps into the shoes of the directors of the said company for the purposes of discharging the statutory functions of an official liquidator.   Thus during the said proceedings the directors ceased to exercise any functions from the date on which the official liquidator is appointed and all powers and functions for carrying on the business of the company thereafter vest with the official liquidator.  In respect of sales tax, the company is the dealer.   The Official liquidator acts on behalf of the company and he will be considered as a ‘dealer’ in sales of the assets of the company in liquidation, as discussed in this article for the purpose of sales.