Conclusion: In case of warranty for the supply of free spare parts, once the replacement was made and the defective part was returned to the manufacturer, whether sales tax would be payable on such a transaction relating to the spare part, based on a credit note, which may be issued for the said purpose to dealer by the manufacturer was referred to Larger Bench to decide.
Held: Assessee was a dealer of Tata Motors. Sales Tax was paid on the vehicles sold. There was a warranty given to the purchaser for free replacement of parts, during the period of warranty. To facilitate this, the dealer was obliged to keep a stock of spare parts. The purchaser had an option to go to any dealer, and not be confined to the dealer from whom the purchase was made. Sales tax was paid on the stock of spare parts purchased from Tata Motors. The defective parts were sent back to Tata Motors and credit note might be given by Tata Motors for the said parts. The customer did not pay for the replacement of the defective part, which was stated to be the crucial fact. The stand of the Revenue was that sales tax was liable to be paid even qua the return of the spare parts, as credit note was given for the same, to the dealer.The crucial point for consideration was whether in the case of warranty for the supply of free spare parts, once the replacement was made and the defective part was returned to the manufacturer, sales tax would be payable on such a transaction relating to the spare part, based on a credit note, which may be issued for the said purpose. Thus, if there was no consideration for these replaced parts, can sales tax be levied at all? The judgment in the Mohd. Ekram Khan & Sons case referred to the credit notes received as consideration for the replacement; but it was a moot point whether credit notes could be treated as a mode of payment or not. The judgment in Premier Automobiles Ltd. & Anr. Etc. case was stated to contain a different factual situation, as per the observations in the Mohd. Ekram Khan & Sons case. There were observations referred to above, again in the Mohd. Ekram Khan & Sons case, of the possibility of the manufacturer having purchased, from open markets, the parts for replacement, on which taxes would be paid. In that context, it was observed that “the position was not different because assessee had supplied the parts and received the price.” Assessee actually had purchased the parts and paid sales tax on it, but on return of the defective part to the manufacture, was given a credit note. It was consider it appropriate that the matter be considered by a Larger Bench.
FULL TEXT OF THE SUPREME COURT JUDGMENT
1. The common question of law, which arises for consideration in these appeals, is the liability towards sales tax, in respect of the free replacement of defective parts in motor vehicles, during the period of
2. Civil Appeal No.1821/2007, filed by one of the dealers [M/s. Prerana Motors (P) Ltd.], was taken up as the main appeal for addressing the submissions and, thus, reference to some of the relevant facts is qua that
3. M/s. Prerana Motors (P) Ltd./appellant is a dealer of Tata Motors. Sales Tax is paid on the vehicles sold. There is a warranty given to the purchaser for free replacement of parts, during the period of warranty. To facilitate this, the dealer is obliged to keep a stock of spare parts. The purchaser has an option to go to any dealer, and not be confined to the dealer from whom the purchase was made. Sales tax is paid on the stock of spare parts purchased from Tata Motors. The defective parts are sent back to Tata Motors and credit note may be given by Tata Motors for the said parts. The customer does not pay for the replacement of the defective part, which is stated to be the crucial fact. The stand of the Revenue is that sales tax is liable to be paid even qua the return of the spare parts, as credit note is given for the same, to the dealer.
4. In the facts of this case, the assessment order and the appeal went against the appellant/dealer, while the Tribunal held in favour of the appellant/dealer. However, the High Court, relying upon the judgment of this Court in Ekram Khan & Sons v. Commissioner of Trade Tax, U.P., Lucknow1set aside the order passed by the Tribunal, restoring the order of the assessing authority.
5. P. Chidambaram, learned senior counsel appearing for the appellant, drew our attention to the Dealership Agreement and pointed out that it is a principal-to-principal agreement, but that would not really make a difference to the controversy in question. In terms of this Agreement, inter alia a stock of spare parts has to be kept by the dealer.
6. Learned senior counsel fairly conceded that if the judgment in Ekram Khan & Sons2case is applicable, then the appellant would really have no case, but that his endeavour would be to distinguish the said judgment and/or persuade this Court that some of the observations made therein were per incuriam, and that in any case the matter needs to be examined by a larger Bench. In this course of action, learned senior counsel referred to the following judgments:
7. Premier Automobiles Ltd. & Anr. Etc. v. Union of India:3 Chidambaram, learned senior counsel submitted by reference to pages 537 & 538 that the principle of warranty covering cars sold has been well enunciated. Accordingly, all defects on account of faulty manufacture in workmanship have to be set right and the defective parts have to be replaced, free of cost, by the manufacturer or his dealer, within a specified period of time or a given distance travelled by the car. Free services have to be rendered. Car manufacturers enter into an agreement with the manufacturers of components, providing for a warranty so far as the components are concerned. The whole object behind warranty is that a consumer who has made a heavy investment, while purchasing a car, is assured of proper performance of the vehicle “in a trouble-free manner for a reasonable length of time.” It is, thus, his submission that this fundamental concept appears to have been lost in Mohd. Ekram Khan & Sons.4
8. Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd.:5Learned senior counsel drew our attention to paras 17 & 18 of this judgment, where observations have been made to the effect that a dealer sells cars along with a warranty, under which it is agreed that it would replace the parts free of cost. When such a part is replaced, it becomes a part of the car and the property in it stands transferred to the buyer/consumer. There is no separate consideration paid for the part so transferred and, thus, the only reasonable inference is that the consideration for the part or parts that might be replaced, under the warranty, was not separately specified because it was included in the price fixed and paid for the car at the time of its sale. The price so fixed and received is, thus, a consolidated price for the car and the parts that may have to be supplied by way of replacement, in pursuance of the warranty.
9. Prem Motors v. Commissioner of Sales Tax, Madhya Pradesh6: The Court rejected the contention of the Revenue that when spare parts are replaced by the assessee and given to the customer free of charge, that being the condition of the warranty, the assessee recovers the price from the manufacturer and, in substance, it is a sale of the spare parts to the manufacturer and therefore liable to be taxed. It was opined that when a dealer sells automobile vehicles, he sells it with all parts in a saleable condition. The warranty given is a warranty from the manufacturer and therefore, if during the warranty period, any part is found to be defective and is to be replaced, the responsibility of replacement is on the manufacturer. This is neither a sale of parts by the dealer to the customer nor to the manufacturer. What is effectively done is a passing on, of the parts, from the manufacturer to the customer, but in order to avoid delays and prevent any inconvenience to the customer, he replaces the part first and gets them from the manufacturer later. The cost for the same is reimbursed by the manufacturer.
It may be noted that this judgment has specifically been overruled in the Mohd. Ekram Khan & Sons7 case.
10. Geo Motors v. State of Kerala8: The reasoning of the Delhi High Court in Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd.9was adopted to conclude that the transaction could not be categorised as a ‘sale’ even though the dealer had purchased spare parts by giving ‘C’ Forms. Such a transaction was purely for replacement and not for sale. This judgment again has been specifically overruled in Ekram Khan & Sons10 case.
11. Commercial Tax Officer (Anti-Evasion), Jodhpur v. Marudhara Motors11: This opinion is post the judgment in the Ekram Khan & Sons12case. The learned single Judge of the Rajasthan High Court distinguished the case of the assessee dealer from the facts obtaining in Mohd. Ekram Khan & Sons13 case. One such distinguishing factor was that in the Mohd. Ekram Khan & Sons14 case, there was a relationship of principal to agent and not of principal to principal. The most crucial aspect observed in this case, and which is also the plea of Mr. Chidambaram, learned senior counsel, is qua the observations in para 6 of the Mohd. Ekram Khan & Sons15 case. It was observed that “in a case the manufacturer may have purchased from the open market parts for the purpose of replacement of the defective parts, for such transactions, it would have paid taxes. The position is not different because the assessee had supplied the parts and had received the price.”
12. While giving relief to the assessee, the significance of lack of consideration passing, i.e., spare parts being provided free of cost was taken note of, and thus, the cost of spare parts was held to be part of the cost of the vehicle, while giving such warranty for a limited period of time to the customer.
13. Learned senior counsel, thus, contended that the aforesaid significant aspect clearly distinguishes his case from the case of Ekram Khan & Sons16, i.e., the aspect of the replacement being undisputedly free. In this behalf, he referred to Section 4(1) of The Sale of Goods Act, 1930,
which reads as under:
“4. Sale and agreement to sell.—
(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.”
The submission, thus, is that for the sale of the parts of the car, a price has to be paid, which is not so in the present case.
14. SLP (C) Nos.12806-12808/2016: Learned counsel inter alia drew our attention to “Treitel- The Law of Contract” by G.H. Treitel, (7th ), to contend that to be enforceable as a collateral contract, a promise must be supported by consideration. It was submitted that the contract to supply spare parts, during the warranty period was akin to a collateral contract.
15. Learned counsel appearing for the other assessees also supported the stand taken by Mr. Chidambaram.
16. On the other hand, Mr. Basava Prabhu S. Patil, learned senior counsel appearing for the respondents in the aforesaid civil appeal, sought to contend otherwise and submitted that the Ekram Khan & Sons17case is the binding precedent, and in this light, the matter does not need to be examined any further.
17. Learned senior counsel drew our attention to the following judgments:
i. Navnit Motors Pvt. Ltd. v. State of Maharashtra18
ii. Kataria Automobiles (P.) Ltd. v. State of Gujarat19
iii. The Commissioner, Commercial Tax, Lko. v. S/S Maskat Motors Pvt. Ltd.20
18. These judgments emanate from the Bombay High Court, Gujarat High Court and the Allahabad High Court respectively, and the submission is that a consistent view, in favour of the Revenue, has been taken by these three High Courts. We may, however, notice that the view emanates only by reason of reliance upon the Ekram Khan & Sons21case.
19. Learned counsel also referred to the judgment in Bharat Heavy Electricals v. Commissioner of Customs & Central Excise, Indore22to contend that while considering the issue of excise duty in respect of components towards the “complaint reserve”, it was held that the same would be excisable. It was observed that while the initial price charged for the machinery may include the element of the “complaint reserve”, at the time of purchase, it is not known whether there will be any requirement to replace any part and, in many cases, the parts are not required to be replaced. In such an eventuality, the price equivalent of the “complaint reserve” is not returned to the customer.
20. We are not delving into the controversy in any further detail as we are of the opinion that the issue raised is required to be looked into by a larger Bench. The crucial point which would arise for consideration, and over which the matter needs to be debated, is as to whether, in the case of such a warranty for the supply of free spare parts; once the replacement is made, and the defective part is returned to the manufacturer, sales tax would be payable on such a transaction relating to the spare part, based on a credit note, which may be issued for the said purpose. This is in the context of the observations discussed aforesaid regarding the price of the car being inclusive of the cost of the spare parts, the latter being supplied for free, upon replacement. Sales tax on the car is paid. Sales tax on the inventory purchased by the dealer is paid. Thus, if there is no consideration for these replaced parts, can sales tax be levied at all? The judgment in the Mohd. Ekram Khan & Sons23case refers to the credit notes received as consideration for the replacement; but it is a moot point whether credit notes can be treated as a mode of payment or not. The judgment in Premier Automobiles Ltd. & Anr. Etc.24 case is stated to contain a different factual situation, as per the observations in the Mohd. Ekram Khan & Sons25 case. There are observations referred to above, again in the Mohd. Ekram Khan & Sons26 case, of the possibility of the manufacturer having purchased, from open markets, the parts for replacement, on which taxes would be paid. In that context, it was observed that “the position is not different because the assessee had supplied the parts and received the price.” The assessee actually had purchased the parts and paid sales tax on it, but on return of the defective part to the manufacture, was given a credit note.
21. We have some reservations in respect of the observations and legal propositions laid down in the Ekram Khan & Sons27case and consider it appropriate that the matter be considered by a larger Bench.
22. The papers be placed before Hon’ble the Chief Justice for necessary orders.
1. (2004) 6 SCC 183
5. ILR (1978) II Delhi 273
6. (1986) 61 STC 244 (MP Division Bench)
8. (2001) 122 STC 285 (Kerala Division Bench)
11. (2010)29 VST 114 (Raj)
18. (2012)47 VST 511 (Bom)
19. (2015) 51 GST 403 (Gujarat)
20. (2017) 102 VST 220 (All)
22. (2003) 9 SCC 185
24. (1972) 2 SCR 526