In an important decision, the Supreme Court has held that the free replacement of defective motor vehicle parts during warranty period is subject to the levy Sales Tax.
Justice Sanjay Kishan Kaul had pronounced the judgment for the Bench comprising Justice L. Nageswara Rao. The matters were then referred to the Larger Bench in terms of the signed reportable judgment.
In the referred matter, the reservations in respect of the observations and legal propositions laid down in the Mohd. Ekram Khan & Sons case were expressed and considered it appropriate that the matter be considered by a larger Bench.
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 notes 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 upon the return of the spare parts, as credit note is given for the same, to the dealer.
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 Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, UP, Lucknow set aside the order passed by the Tribunal, restoring the order of the assessing authority.
P. Chidambaram, senior counsel appearing for the appellant, drew the Apex Court’s 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.
He conceded that if the judgment in Mohd. Ekram Khan & Sons case is applicable, then the appellant would really have no case, but that his endeavor 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.
The counsel appearing for the other assessees also supported the stand taken by Mr. Chidambaram.
On the other hand, Basava Prabhu S. Patil, senior counsel appearing for the respondents in the aforesaid civil appeal, sought to contend otherwise and submitted that the Mohd. Ekram Khan & Sons case is the binding precedent, and in this light, the matter does not need to be examined any further.
The two-judge Bench of Justice L Nageswara Rao and Justice Sanjay Kishan Kaul stated at this instance, “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”, referring the matter to the Division Bench of Supreme Court Justices K M Joseph, B V Nagarathna and Ahsanuddin Amanullah.
The three-judge bench, while deciding a batch of appeals with Tata Motors as the lead matter, held that the value of the credit note issued by the Original Equipment Manufacturer (OEM) to the dealer replacing the defective part to complete the warranty obligation of the manufacturer is exigible to sales tax under the respective statute under consideration.
The ruling brings clarity to the situation where auto-parts are replaced under warranty by an OEM. The credit note issued by the manufacturer to the dealer in such cases will now be subject to sales tax, as per the relevant statute.
The decision was made after a thorough consideration of the appeals made by various parties, with Tata Motors as the lead matter. The Supreme Court’s verdict now sets a precedent for future cases involving sales tax on auto-parts replaced under warranty.
The decision is expected to have far-reaching implications for the automotive industry, which relies heavily on warranties to ensure customer satisfaction. The ruling will also be closely watched by other industries that offer warranties and replacements as part of their sales and service offerings.
This landmark judgment is a significant development in the field of sales tax and is likely to impact the way manufacturers, dealers, and customers deal with warranty claims. It will be interesting to see how the ruling plays out in the coming days and how it shapes the industry’s practices and policies.
In the case of 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 bench asked while reference was made to the Division Bench to address the conundrum.
The Division Bench of Supreme Court Justices K M Joseph, B V Nagarathna and Ahsanuddin Amanullah observed 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.”
It was also noted by the Apex Court Bench 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 so as to replace a defective part therein under a warranty collateral to the sale of the
automobile. In such a situation also, the dealer may receive a consideration for the purpose of 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.”
Thus, the appeals filed by the dealers were dismissed and the appeals filed by the revenue were allowed, leaving parties to bear respective costs.
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