2025 (11) TMI 1797 - HC - VAT / Sales Tax

Tax on warranty and AMC replacement parts upheld as dealer failed proof of free supply, revision dismissed

M/s. Telco Construction Equipment Company Limited Versus Commissioner Commercial Tax.

HC upheld the levy of tax on parts replaced during the warranty and under Annual Maintenance Contracts, noting that the dealer had realized amounts from ... Levy of tax on the parts replaced free of cost during the warranty period - only stand taken by the revisionist is that the parts were replaced free of cost without there being any consideration - correctness in relying judgment of the Hon'ble Supreme Court in the case of Mohd. Ekram Khan [2004 (7) TMI 341 - SUPREME COURT] and ignoring the judgment in the case of M/s. Tata Motors Limited Vs. The Deputy Commissioner of Commercial Taxes (Spl.) & Others [2023 (5) TMI 744 - SUPREME COURT] - HELD THAT:- The finding of fact recorded by the first appellate authority shows that the revisionist has realized the amount from the customer and further, not provided the detail of the parts used against the supply of particular machinery to the particular customer. The said finding of fact has not been assailed before the Tribunal in the ground of appeal (Annexure No. 6). At serial no. 6 of the statement of facts, it has averred that the first appellate authority rejected the appeal without looking the legal position and facts of the case. Similarly, at ground no. 5 of the grounds of appeal, the reply to the notice has been pasted only. The finding of fact recorded by the first appellate authority has not been assailed before the Tribunal. While passing the impugned order, the said fact was also not argued as well. The first appellate authority as well as the Tribunal have recorded that apart from warranty, the Annual Maintenance Contract has also been undertaken by the revisionist. No averment with regard to AMC has been made either before this Court or before any authorities below. Once the finding of fact recorded against the revisionist that some money has been charged, the same cannot be disputed without any cogent material. Therefore, mere assertion that neither any credit note nor any amount has been charged from the customer or from the dealer is of no help to the revisionist. The issue in hand is squarely covered by the judgement of the Apex Court in Tata Motors in favour of the State. Thus, no interference is called for in the impugned order - revision dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether tax is leviable on parts replaced during the warranty and Annual Maintenance Contract (AMC) period, treating such replacements as 'sales' under the Central Sales Tax law. 1.2 Whether, in assessing taxability of warranty replacements, it is legally relevant that no separate price is charged from customers or dealers and that the manufacturer asserts that no consideration or credit notes are passed for such parts. 1.3 Whether the Tribunal erred in its application of precedent by relying on a previous decision (including Mohd. Ekram Khan) and not accepting the assessee's reliance on the later decision in Tata Motors, and whether Tata Motors supports the assessee or the Revenue on the facts as found. 1.4 Whether the findings of fact recorded by the first appellate authority and affirmed by the Tribunal, particularly regarding recovery of consideration and the existence of AMC arrangements, could be reopened in revision in the absence of specific grounds and supporting material challenging such findings. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Taxability of parts replaced during warranty/AMC period as 'sale' (a) Legal framework (as discussed) 2.1.1 The Court noted the first appellate authority's reliance on the statutory definition of 'sale' under the Sale of Goods Act, namely, a contract whereby the seller transfers the property in goods to the buyer for a price. (b) Interpretation and reasoning 2.1.2 The assessee contended that parts replaced during the warranty period were supplied free of cost; that no price was charged either from customers or dealers; that no credit notes were issued; and that only reimbursement towards manpower/technical services was made to dealers. 2.1.3 The first appellate authority, on examination of invoices and records, found that: (i) authorized dealers/service providers had responsibility for sale and warranty support; (ii) invoices for warranty replacements contained details of quantity and price and bore 'Warranty Replacement' endorsement; (iii) parts were in some cases sent directly to customers, but consignment and liability for price rested with the service provider/authorized dealer; (iv) when the service provider replaced parts and repaired the machine during the warranty period, the value of parts and fitting charges were reimbursed to the service provider by the manufacturer through credit memo/cash; and (v) the manufacturer maintained a separate warranty provision account, from which the value of parts and service charges used in warranty were debited as 'used during the year'. 2.1.4 On these facts, the first appellate authority concluded that: (i) when the manufacturer transfers parts to the service provider with quantity and price indicated, ownership passes to the service provider for a definite value; (ii) the service provider then transfers ownership to the customer with a definite value; and (iii) although the customer is not directly charged, the consideration for the parts is realized by the service provider from the manufacturer, funded through the warranty provision. Thus, there is transfer of property in goods for a price, satisfying the definition of 'sale'. 2.1.5 The Tribunal accepted these factual findings and concurred that the replacement of parts under warranty/AMC, in this arrangement, amounted to taxable sales. 2.1.6 The High Court noted that the assessee did not bring on record any evidence to substantiate its assertion that parts were supplied free of cost and that no consideration, directly or indirectly, was received. It further noted that the first appellate authority found that the assessee had realized amounts from customers (through the structured dealer/service-provider mechanism) and had not furnished details of parts used against specific machinery supplied to specific customers. 2.1.7 The Court also recorded that both the first appellate authority and the Tribunal had found that, in addition to warranty, the assessee had entered into AMCs, indicating existence of consideration for parts and services, and this finding was never specifically challenged or controverted with material. (c) Conclusions 2.1.8 On the unchallenged factual findings that: (i) property in parts was transferred at a definite price to dealers/service providers and ultimately to customers; (ii) consideration for parts was reimbursed by the manufacturer; and (iii) AMCs existed involving monetary consideration, the Court held that the transactions constituted 'sale' of goods, attracting tax on the parts replaced during warranty/AMC. 2.1.9 The levy of tax on such replacement parts at the prescribed rate was upheld, and the challenge to taxability of warranty/AMC replacements was rejected. 2.2 Relevance of absence of direct charge/credit note and applicability of Tata Motors (a) Legal framework (as discussed) 2.2.1 The assessee relied on a decision in Tata Motors to argue that where parts are supplied free of cost by the manufacturer during warranty and no consideration or credit note passes, such transactions do not constitute 'sale'. 2.2.2 The Revenue contended, and the Court accepted, that Tata Motors, properly understood, supports taxability where the factual matrix shows existence of consideration or financial adjustment for warranty parts. (b) Interpretation and reasoning 2.2.3 The assessee argued that, following Tata Motors, the absence of any consideration and any credit notes meant that the replacement of parts could not be treated as sale. 2.2.4 The Court held that this argument was purely assertive and not supported by the record. The factual findings of the first appellate authority, not challenged before the Tribunal, clearly established that: (i) invoices bore prices; (ii) dealers bore liability for the parts and were reimbursed; and (iii) the manufacturer operated a systematic warranty provision account reflecting usage and reimbursement. These findings were treated as conclusive for the purpose of revision. 2.2.5 On these facts, the Court held that the case fell within the category where consideration, though not recovered directly from the customer at the point of warranty replacement, was nonetheless embedded and realized through the structured arrangement between manufacturer, dealer/service provider and customer. 2.2.6 The Court, therefore, distinguished the assessee's characterization of Tata Motors and held that the principle that 'no sale occurs where there is no consideration and no credit note' did not apply because, on the established facts, consideration did pass. Accordingly, Tata Motors was found to support the Revenue's position. (c) Conclusions 2.2.7 The Court concluded that mere assertion that no credit notes were issued and no consideration passed cannot override or displace unchallenged factual findings to the contrary. 2.2.8 Applying Tata Motors to the facts as found, the Court held that the warranty/AMC replacements were taxable sales and answered the legal question in favour of the Revenue and against the assessee. 2.3 Scope of revision and effect of failure to challenge findings of fact (a) Interpretation and reasoning 2.3.1 The Court noted that the grounds of appeal before the Tribunal (annexed in the record) contained only general assertions that the first appellate authority had ignored the legal position and facts, and reproduced the reply to the show cause notice, without specifically assailing the detailed factual findings of the first appellate authority regarding: (i) pricing and invoicing of warranty parts; (ii) reimbursement mechanisms; (iii) realization of consideration; and (iv) the existence and nature of AMC arrangements. 2.3.2 The Court held that since these findings of fact were not specifically challenged before the Tribunal and no contrary material was brought on record, they attained finality. Arguments before the High Court could not be entertained to dispute those findings in the absence of cogent material and specific grounds taken at the earlier stages. 2.3.3 The Court emphasized that once the authorities below have recorded a finding that consideration has been charged and that AMCs were undertaken, such findings cannot be reopened in revision merely on the strength of bare assertions unsupported by evidence. (b) Conclusions 2.3.4 The Court declined to interfere with the concurrent findings of fact of the first appellate authority and the Tribunal. 2.3.5 On this basis, the Court held that there was no ground to unsettle the conclusion that the impugned transactions were taxable sales, and the revisions were dismissed with the questions of law answered in favour of the Revenue.