Parts Replaced During Warranty with Consideration is Taxable: Allahabad HC favours State applying TATA Motors Ruling [Read Order]

The Allahabad High Court has upheld the levy of sales tax on parts replaced during the warranty period, holding that the transaction constitutes a “sale” when consideration direct or indirect is involved.

In the case of M/s Telco Construction Equipment Company Ltd., filed a revision petition before the court where the Court dismissed two revisions challenging tax imposed on warranty replacements for Assessment Year 2007-08 under the Central Sales Tax Act.

The revisionist argued that parts supplied under warranty were provided “free of cost,” claiming that neither dealers nor customers paid for the components, and only manpower charges for servicing were reimbursed.

The revisionist noted the Supreme Court’s decision in Tata Motors Ltd. v. DCCT (2023), the company contended that absent any consideration or credit notes, the replacement could not be treated as a sale.

However, the Court found that this defence was unsupported by evidence. The first appellate authority had already recorded clear factual findings that the company did realize amounts for warranty replacements dealers acted as consignees, invoices mentioned prices and quantities, parts were transferred with reflected values, and dealers ultimately recovered part and service charges through credit notes from the manufacturer.

The Tribunal noted additional documents, including invoices stamped as “warranty replacement,” and detailed analysis of warranty provisions in the company's balance sheets. These findings were never rebutted by the company at any appellate stage.

The bench also noted that the company had entered into Annual Maintenance Contracts (AMC) in addition to warranty obligations. Since AMCs involved monetary consideration, parts replaced under these arrangements could not be treated as gratuitous. The absence of any challenge to these findings further weakened the assessee’s position.

Justice Piyush Agrawal held that once factual findings establish that consideration whether directly from customers or indirectly through dealer reimbursements has been passed on, the transaction amounts to a taxable sale.

In such circumstances, the Tata Motors actually supports the State’s stand rather than the assessee’s. The Court observed that mere assertions of “no consideration” could not override evidence from the department.

Accordingly, the high court dismissed the revision.

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