Tata Motors Ltd. Vs Deputy Commissioner of Commercial Taxes (SPL) & Anr. (Supreme Court of India)
In Assistant Collector of Central Excise vs. Madras Rubber Factory Ltd., 1986 Supp SCC 751, the question arose under the Central Excises and Salt Act, 1944 with regard to the method of computation of assessable value in a cum-duty price at the factory gate and the permissible deductions to be made from the cum-duty paid selling price to arrive at the assessable value and then tariff rate being applicable to the assessable value. One of the contentions regarding deduction was with regard to TAC-warranty discount to be made for determining the assessable value. It was observed that a warranty is not a discount on the tyre already sold, but relates to the goods which are being subsequently sold to the same customers. It cannot be strictly called as discount on the tyre being sold. It is in the nature of a benefit given to the customers by way of compensation for the loss suffered by them in the previous sale.
The said view was reiterated in Government of India vs. Madras Rubber Factory Ltd., (1995) 4 SCC 349 where the question was whether the claim put forward as TAC -warranty discount is a trade discount within the meaning of Section 4 of Central Excises and Salt Act, 1944. It was observed that the claim is only a claim for refund by the buyer for the manufacturing defect in the tyre sold by the assessee therein, which is being honoured by the assessee in a manner acceptable to both the parties. It was reiterated that it is a benefit given to the customers by way of compensation for the loss suffered by them in the previous sale owing to a defective tyre. It is a compensation in the nature of a warranty allowance on a defective tyre.
Thus, the manufacturer gives the warranty to the consumer by making a representation with regard to the automobile. It is in the nature of a promise which the dealer assessee carries out on behalf of the manufacturer. There is transfer of property in the spare part from the stock of the dealer to the customer for which the manufacturer pays by way of a credit note. The said promise is carried out and a valuable consideration is received by the dealer through credit notes. In substance, when the dealer receives a credit note, it is a sale within the meaning of the definition under the respective sales tax legislation under consideration, pursuant to the warranty for which the manufacturer compensates the dealer by issuance of a credit note. The value of the credit note is a valuable consideration received which is in the nature of a benefit from the manufacturer which is exigible to tax. If the dealer had sold a spare part of the automobile from his stock to any other consumer across the counter, he would have collected the requisite sales tax along with the price from that consumer but in the instant case, the consideration is received in the form of a credit note from the manufacturer which is subject to sales tax. The person who pays the valuable consideration in a sale transaction is irrelevant so long as it is paid.
In this context, it would be relevant to refer to the provisions of the Indian Contract Act, 1872. Section 2 (d) of the said Act states that when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise; Section 2 (c) states that the person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”; Section 2 (a) states that when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal; Section 2 (b) states that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise; Further, promises which form the consideration or part of the consideration for each other, are called reciprocal promises vide Section 2 (f) of the said Act.
Applying the aforesaid definitions of the Indian Contract Act, 1872 to the facts of the present case, it would mean that as between the manufacturer of the automobile, the dealer and the customer, the manufacturer is the promisor who makes the proposal to recompensate the dealer when pursuant to a warranty clause, the dealer replaces a spare part from out of his own stock or by buying the same from the open market or from the manufacturer of the spare part. Thus, the dealer is the promisee. The occasion to replace the spare part is when the customer brings to the notice of the dealer a defect in a part of the automobile, pursuant to a warranty which has been given by the manufacturer to the customer.
Section 2(d) of the said Act in fact enables the promisee (the dealer) to provide consideration by conferring a benefit on a third party (customer) at the promisor’s (the manufacturer’s) request pursuant to a warranty between the manufacturer and customer. Thus, a contract could arise even though the promise is for doing or abstaining from doing something for the benefit of a third party. In other words, if the promisee (the dealer) replaces a defective part of an automobile sold to a third party, i.e., the customer, he would receive a credit note from the manufacturer. This is because the manufacturer would have proposed to the dealer to recompensate the dealer for the above act which proposal would have been accepted by the dealer and, thus, the manufacturer who has made the proposal is the promisor and the dealer who has accepted the proposal is the promisee. Further, when at the desire of the promisor (the manufacturer), the promise (the dealer) does some act or promises to do an act, such act or promise is called consideration for the promise. Therefore, the dealer (promisee) agrees to replace a defective part which is a consideration for the promise and in turn, receives a recompense in the form of a credit note from the manufacturer. Thus, there is an agreement between the manufacturer and the dealer, and it would be in an instance of there being reciprocal promises.
In view of the above, the transaction between the manufacturer and dealer while acting pursuant to a warranty in the circumstances explained above has to be construed as sale within the meaning and definition of sale under the Sales Tax Acts under consideration.
FULL TEXT OF THE SUPREME COURT JUDGMENT
Leave granted.
2. These Civil Appeals arise from the judgments of the High Courts of Karnataka, Rajasthan, Allahabad, Madhya Pradesh, Bombay, Andhra Pradesh, Kerala and Gujarat. Since common questions of law and facts have been raised in these appeals vide Reference Order dated 05.12.2019 made by a Bench of two judges to a Bench comprising of three judges, the reference has been heard and is accordingly answered.
In some of the civil appeals, the dealers–assessee are the appellants, while in rest of the appeals the respective States are the appellants.
Preface:
3. By order dated 05.02.2019, reference has been made to a Bench of three Judges which shall hereinafter be referred to as the “Reference Order”.
The pertinent paragraphs of the Reference Order read as under:
“15. 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 Mohd. Ekram Khan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183] 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. case [Premier Automobiles Ltd. v. Union of India, (1972) 4 SCC (N) 1: (1972) 1 SCR 526] is stated to contain a different factual situation, as per the observations in Mohd. Ekram Khan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183]. There are observations referred to above, again in Mohd. Ekram Khan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183], 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 manufacturer, was given a credit note.
16. We have some reservations in respect of the observations and legal propositions laid down in Mohd. Ekram Khan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183] and consider it appropriate that the matter be considered by a larger Bench.”
4. The point for consideration under the Reference Order is, whether, a credit note issued by a manufacturer to a dealer of automobiles in consideration of the replacement of a defective part in the automobile sold pursuant to a warranty agreement being collateral to the sale of the automobile is exigible to sales tax under the sales tax enactments of the respective States. While considering the said question, the Reference Order doubts the correctness of the observations made in Mohd. Ekram Khan & Sons vs. CTT, (2004) 6 SCC 183 (Mohd. Ekram Khan).
5. It may be mentioned that in the aforesaid decision three other judgments of the Delhi High Court, Madhya Pradesh High Court and Kerala High Court in Commissioner of Sales Tax vs. Prem Nath Motors, (1979) 43 STC 52 (Delhi), (Prem Nath Motors); Prem Motors, Gwalior vs. Commissioner of Sales Tax, Gwalior 1986 (61) STC 244 MP (Prem Motors) and Geo Motors vs. State of Kerala (2001) 122 STC 285 (Geo Motors) respectively were considered and the latter two judgments were overruled.
Factual Background:
6. Of the thirty-four cases before us, the factual conspectus involves provisions of the respective Sales Tax Act and similar questions of law. Thus, the facts in Commercial Tax Officer vs. M/s Marudhar Motors, C.A. No. 3856/2013 only are encapsulated for the sake of convenience as under:
i. The assessee, M/s Marudhar Motors is a dealer of TATA Vehicles. Under the dealership agreement, the dealer/assessee would provide replacement of warranty goods sold to the customer.
ii. There exists a separate warranty agreement between the manufacturer and the ultimate customer to whom such vehicles are sold by the assessee.
iii. In the normal course of business transactions involving the sale of automobile parts, Tata Motors sells vehicles and spare parts to Marudhara Motors by charging CST against “C” form. Thereupon, Marudhara Motors sells these goods to customers through invoices collecting local sales tax at a price not exceeding the maximum price prescribed by the manufacturer.
iv. However, in the case of warranty claims raised by customers due to the emergence of defects in some parts, such parts are replaced free of cost to the customers to avoid delay in first securing such parts from the manufacturer, Tata Motors, and replacing the same. The dealer, on behalf of the manufacturer, collects a defective component or the vehicle itself from the customer and replaces it with part/s or vehicle in his stock purchased from the manufacturer. This defective component/s or vehicle received on exchange by the dealer from the customer is returned back to the manufacturer from whom the dealer had purchased the same in the first place i.e., Tata Motors, who after receiving the parts or the entire vehicle and satisfying themselves about it being defective, issues credit notes, thereby crediting the running account of the dealer which is maintained for sale transactions, at the price at which the good was initially sold to the dealer.
v. Pursuant to the decision of this Court in Ekram Khan, the assessing authority invoked the power of reassessment under Section 30 of the Rajasthan Sales Tax Act, 1994 to impose a tax on assessee’s turnover having escaped assessment for the assessment years 2000-2001 to 2003- 2004. However, for the assessment years 2004-2005 and 2005-2006, regular assessment proceedings were initiated under Section 28 of the Rajasthan Sales Tax Act, 1994.
vi. On July 22, 2006, the Deputy Commissioner (Appeals) of Jodhpur passed an order upholding the levy of tax upon an assessee but setting aside the levy of interest and penalty imposed by the assessing authority under Section 65 of the Act.
vii. This decision gave rise to six cross-appeals filed by the assessee and another six appeals filed by the Revenue. The assessee was dissatisfied with the decision to uphold the levy of tax and filed six separate appeals for six different assessment years – 2000-2001, 2001-2002, 2002-2003, 20032004, 2004-2005, and 2005-2006. On the other hand, the Revenue was aggrieved by the decision to set aside the levy of interest and penalty and filed another batch of six appeals.
viii. The matter was taken up by the Rajasthan Tax Board in Ajmer, which issued a common judgment on June 18, 2007, disposing of all twelve appeals. The Rajasthan Tax Board set aside the decision of Deputy Commissioner (Appeals) and thereby set aside the imposition of tax. It found the transaction of replacing the defective parts did not fall within the definition of ‘sale’ as defined under Section 2(38) of the Rajasthan Sales Tax Act. It also concluded that the facts of the case are distinguishable from the facts in Mohd. Ekram Khan.
ix. The Revenue filed revision petitions under Section 86 of the Rajasthan Sales Tax Act, 1994. The Rajasthan High Court, while dismissing these revision petitions and affirming the order of Rajasthan Tax Board, distinguished the facts in the case from the facts and reasoning in Mohd. Ekram Khan by underlining three distinguishing factors. Firstly, it noted that the agreement between the manufacturer and dealer reflected a principal-to-principal relationship, and not a principal-agent relationship. Secondly, it was noted that the transaction between manufacturer and dealer, pertaining to the return of defective parts to the manufacturer and the issue of credit notes to the dealer, is independent of the transaction between manufacturer and customer, pertaining to the discharge of warranty obligation. Thirdly, it was considered that the warranty obligation was being discharged free of cost. It was noted that, Mohd. Ekram Khan was decided on the premise that the dealer assessee had supplied the parts and had received the price.
Gist of Cases under consideration:
7. The present appeals assail judgments rendered by eight High Courts. While all fifteen decisions rendered by Rajasthan High Court are in the favour of the assessee, all decisions rendered by Kerala, Karnataka, Bombay, Andhra Pradesh, Madhya Pradesh, and Gujarat High Courts are in the favour of Revenue. In the case of Allahabad High Court, one decision is in favour of Revenue while the other is in favour of the assessee. A table of cases is drawn up as under:
