Customer Care Or Taxable Supply? Warranty Replacement & Its Boundaries Under GST

Customer Care Or Taxable Supply? Warranty Replacement & Its Boundaries Under GST

Introduction

OnePlus’s recent Registrar-of-Companies disclosure in relation to its “Green Line Worry-Free Solution” has crystallised a deceptively simple yet legally unsettled question: when does a manufacturer’s free replacement of defective displays attract Goods and Services Tax and when does it not? The company’s filing, and contemporaneous reporting, situates this debate against a backdrop of falling FY25 revenues and auditor observations on internal controls.

At issue is a genuine question of statutory interpretation and supply characterisation: whether a lifetime replacement promise constitutes an assurance-type warranty embedded in the original sale (and thus outside separate GST liability) or a separate, ex-post gratuitous supply that attracts tax because it was not priced at sale. India’s GST law defines “supply” and “consideration,” but jurisprudence on extended lifetime warranties remains unresolved. Established guidance on non-taxation of warranty parts replaced without extra consideration exists, yet administrative practice and advance rulings reflect divergent factual applications.

This piece examines that jurisprudential gap, reconciles GST practice with accounting recognition under Ind AS, and canvasses practicable solutions for harmonising fiscal and commercial certainty in consumer electronics warranty programmes.

The Taxing Anatomy: Warranty Replacement at the Edge of “Supply”

Under the GST architecture, taxability turns not on benevolence but on legal characterisation. The fulcrum is “supply.” Section 7 of the Central Goods and Services Tax Act, 2017 provides that:

“For the purposes of this Act, the expression ‘supply’ includes […] all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.”

On first principles, a replacement of a smartphone display if taxable at all must fall within the species of “sale,” understood as “any transfer of property in goods for cash or deferred payment or other valuable consideration and includes a transfer of property in goods involved in the supply […]”. This definitional architecture is not ornamental. It embeds two indispensable predicates: consideration, and transactional nexus with the original supply.

Section 15 then anchors valuation:

“The value of a supply […] shall be the transaction value, which is the price actually paid or payable for the said supply.”

Read together, these provisions collapse the enquiry into a precise factual–legal test: is a free screen replacement merely the execution of an already-priced contractual obligation, or is it an ex-post, gratuitous or promotional act that introduces fresh consideration (or disturbs the original transaction value)?

Indian tax jurisprudence has answered this question with remarkable consistency long before GST. In Commissioner of Sales Tax v. Prem Nath, the Court held:

“That the future replacement of the parts in pursuance of the warranty have to be regarded as ‘sales’, the price for which was already paid and on which sales tax has already been levied and collected, and that the assessee-dealer was not liable to the further imposition of sales tax.”

The principle was reaffirmed in Prem Motors v. CST and articulated with doctrinal clarity in Geo Motors v. State of Kerala, where the Court observed:

“The transfer of property in the part or parts replaced in pursuance of the stipulation or warranty is a part of the original sale […] for the price fixed and received from the buyer/consumer.”

The animating logic is unmistakable, warranty performance does not constitute a second taxable event where the economic consideration has already been exhausted at the point of sale. The replacement is not a new sale; it is the delayed performance of an existing one.

This judicial understanding now finds explicit administrative affirmation. Circular No. 195/07/2023 clarifies:

“The value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and / or repair services to be incurred during the warranty period, on which tax would have already been paid at the time of original supply of goods […] where the manufacturer provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services, no further GST is chargeable on such replacement of parts and/ or repair service during warranty period.”

The clarification goes further. Circular No. 216/10/2024 draws a critical line:

“Liability to reverse ITC [arises] only in cases involving replacement of ‘parts’ and not if goods as such are replaced under warranty.”

Professional consensus aligns with this position. Leading practitioners and institutional bodies uniformly treat warranty replacements as tax-neutral where the cost is demonstrably embedded in the original transaction price and supported by contemporaneous accounting and reconciliation. Further according to Advance Ruling No. KAR ADRG 32/2019 it is equally cautioned that GST consequences do arise where third-party dealers supply parts independently or where OEMs reimburse dealers because those are distinct taxable supplies inter se, not warranty execution.

Accounting the Obligation: The Ledger Test

Accounting law supplies the complementary rule of decision. Ind AS 37 defines a “provision” as “a liability of uncertain timing or amount” and mandates recognition where a present obligation exists and an outflow is probable and reliably estimable. Ind AS 115, in turn, requires allocation of transaction price to distinct performance obligations. Together, they impose discipline: where warranty-type obligations are priced or arise from established business practice, the seller must allocate consideration and recognise expected costs (or disclose contingent exposure where probability is remote).

In the OnePlus controversy, the law does not punish generosity; it interrogates proof. Ei incumbit probatio qui dicit: the burden lies on the supplier to show that what looks like largesse is, in truth, contractual performance already paid for.

Technically, the “green line” phenomenon is widely reported across AMOLED-based devices and OEMs, linked to panel or flex-connector failures, sometimes manifesting post-update but requiring hardware replacement. Several manufacturers, including Oppo, have implemented limited free-replacement measures. OnePlus’s lifetime policy thus represents an unusually expansive consumer-centric response in an industry-wide context.

Consumer Protection as the Normative Anchor

Consumer law supplies the normative imperative that explains why OnePlus elected to replace green-line displays at scale: the Consumer Protection Act, 2019 under Section 2(10) defines “defect” as “any fault, imperfection or shortcoming in the quality[…]” and empowers remedies that reach beyond narrow contractual formalities. The Supreme Court in National Seed Corporation v M. Madhusudan Reddy underscores that remedial relief for consumers is a central object of consumer adjudication and must be interpreted purposively.

That legal posture, however, does not short-circuit evidentiary and accounting obligations. The maxim actus curiae neminem gravabit cautions that remedial acts should not automatically create fiscal prejudice; ei incumbit probatio qui dicit places the burden on OnePlus to show that replacements were part of the original performance obligation (contractual or customarily priced) or else to recognise a constructive obligation under Ind AS for expected outflows. Public filings and press reports (and contemporaneous community reports) show OnePlus alone has adopted a sweeping lifetime promise, amplifying the need for clear contractual and accounting evidence to avoid indirect-tax disputes.

Pathways forward: Clarifying the Warranty–Tax Interface

The moment of doctrinal choice is simple: make contract, accounting and tax say the same thing. Firstly, OEMs must classify and document warranty commitments at sale, either (a) as assurance-type warranties priced into the transaction (allocated under Ind AS 115) or (b) as post-sale/promotional obligations that create a constructive liability (Ind AS 37). This binary determines whether the act of replacement is the execution of an existing sale (tax-neutral) or a fresh supply (potentially taxable under s.7 and valued under s.15).

Secondly, conservative provisioning and disclosure as compliance insurance may be adopted.

Further, operationalisation of documentary hygiene can be achieved by linking each RMA to the original invoice and warranty clause; using of credit-note mechanics under Section 15(3) for post-supply adjustments; and preserving of supplier invoices when third-party repairs are involved.

Lastly, Use Advance Rulings and, where material, pursue expedited appellate resolution on whether large, retrospective lifetime remedies are “supply” in the particular facts; this prevents inconsistent field enforcement and grants binding clarity.

Conclusion

The OnePlus controversy is not a story of corporate excess, but of legal misalignment. Consumer law commands remediation, accounting law insists on recognition, and tax law demands proof. When these regimes diverge, even bona fide conduct attracts fiscal suspicion.

The answer is neither to tax generosity nor to excuse opacity, but lies in Ubi probatio, ibi securitas. If firms will promise lifetime remedies, they must make their contracts, ledgers and tax filings mirror that promise. Coherence must be a priority, only then can consumer protection and fiscal neutrality coexist without collision.