Credit Note Issued by Manufacturer to Dealer related to Replacement of Defective Part is a Valuable Consideration, Tata Motors Liable to Pay Sales Tax: Supreme Court [Read Judgement]

The Supreme Court has ruled that a credit note issued by an automobile manufacturer to a dealer related to defective Parts is a Valuable Consideration and held Tata Motors liable to pay Sales Tax.

A reference was made before the court wherein a two-judge bench had some reservations in respect of the observations and legal propositions laid down in Mohd. Ekram Khan & Sons case. The case applies to a situation where a manufacturer issues a credit note to a dealer acting under a warranty given by the manufacturer under a sale of an automobile in the following situations.

The dealer replaces a defective part of the automobile with a spare part maintained in the stock of the dealer or when the same is purchased by the dealer from the open market.

It was argued that the credit note issued in the name of the dealer is a valuable consideration for a transfer of property in the spare part made by the dealer to the customer and hence a sale within the meaning of the sales tax legislation of the respective States under consideration. The value in the credit note is thus exigible for sales tax under the respective sales tax enactments under consideration.

The Division bench comprising of Justice K.M. Joseph, Justice B.V. Nagarathna and Justice Ahsanuddin Amanullah noted that the judgment in Mohd. Ekram Khan does not apply to a case where the dealer has simply received a spare part from the manufacturer of the automobile to replace a defective part therein under a warranty collateral to the sale of the automobile.

It was observed that in such a situation the dealer may receive a consideration for the service rendered by him as a dealer under a dealership agreement or any other agreement akin to an agent of the manufacturer which is not a sale transaction.

The Court held that “a credit note issued by a manufacturer to the dealer, in the situations explained above, is a valuable consideration within the meaning of the definition of sale and hence, exigible to sales tax under the respective State enactments of the States under consideration. In the result, appellants-dealer/assessee are liable to pay sales tax under the respective State enactments under consideration.”

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates