TaxTMI 
TaxTMI 
2023 (5) TMI 744
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....32 of 2023, (@ SLP(C) Nos. 12806-12808/2016), CIVIL APPEAL No.3740 of 2023, (@ SLP(C) No. 12280/2014), CIVIL APPEAL Nos.3725-3727_of 2023, (@ SLP(C) Nos. 5449-5451/2014), CIVIL APPEAL No.3724 of 2023, (@ SLP(C) No. 5447/2014), CIVIL APPEAL Nos. 3825-3826/2011, CIVIL APPEAL No. 3823/2011, CIVIL APPEAL No. 6172/2009, CIVIL APPEAL No. 3824/2011, CIVIL APPEAL No. 3820/2011 And CIVIL APPEAL No.3715_ of 2023, (@ SLP(C) No. 14260/2007) Hon'ble K.M. Joseph, Hon'ble B.V. Nagarathna And Hon'ble Ahsanuddin Amanullah, Jj. For the Appellant(s) : Mr. Kavin Gulati, Sr. Adv., Mr. Avi Tandon, Adv., Mr. Rohit Amit Sthalekar, Adv., Mr. Vishal Gehrana, Adv., Mr. Japppanpreet Hura, Adv., Mr. M. P. Devanath, AOR, Ms. Pragati Neekhra, AOR, Mr. Sonal Jain, AOR, Mr. R. K. Raizada, Sr. Adv., Mr. Bhakti Vardhan Singh, AOR, Mr. Ankit, Adv., Mr. Rahul Kaushik, AOR, Mrs. Manik Karanjawala, AOR, Mr. Irshad Ahmad, AOR, Mr. Yashraj Singh Deora, AOR, Mr. Priyesh Mohan Srivastava, Adv., Mr. Abhishek Singh, Adv., Mr. Punit Dutt Tyagi, AOR, Mr. P. K. Manohar, AOR, Mr. K. K. Mani, AOR, Ms. T.archana, Adv., Mr. Rajeev Gupta, Adv., Mr. Vinay Rajput, Adv., M/S. Karanjawala & Co., AOR, Mr. V Sridharan, Sr....
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....ench 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, (20....
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....actual 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 man....
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....ded 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....
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....mer by the dealer during the period of warranty free of charge, no sale consideration passes from the customer to the dealer and therefore the cost of the spare parts cannot be included in the turnover of the sale of the dealer.' 7.3. In a later judgment rendered by the same High Court, the above decision was found to be of no assistance to the assessee. Therefore, in The Commissioner, Commercial Tax Lko. vs. S/S Maskat Motors Pvt. Ltd., decided on 08.12.2016, the said Court reversed the finding of the Tribunal that the imposition of the tax was not justified because defective parts of motor vehicles have been replaced free of cost and the manufacturer had issued credit notes. The High Court found the above conclusion to be perverse, self-contradictory, and 'contrary to the charging section as well as the definition of "Sale" under the U.P. Act and Central Act.' Applying Mohd. Ekram Khan, the High Court found all elements of sale to be completed as the transaction of supply of spare parts to consumers was concluded by the payment of valuable consideration by the manufacturer in the form of credit notes to the dealer. Therefore, the High Court held that the assessee has sold spar....
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.... the discharge of his obligations under the dealership agreement. The Tribunal had rejected the argument that the dealer was merely discharging the obligations of the manufacturer in so far as the warranty was concerned and therefore, the transaction was not taxable. 7.8. The three impugned decisions, emanating from the Bombay High Court, follow the decision in M/s Navnit Motors Pvt Ltd. vs. State of Maharashtra, decided on 29.11.2011. The High Court recorded that the Sales Tax Tribunal had declined to refer the matter to the High Court under Section 61 of the Bombay Sales Tax Act, 1959. It further noted that the Tribunal, while following the law laid down in Mohd. Ekram Khan found that the dealer was not an agent of the manufacturer, i.e., Maruti Udyog Ltd. Furthermore, it was observed that the title and risk in the goods pass to the dealer once it is purchased from Maruti Udyog Ltd. and the delivered goods pass to him at the factory gate. Moreover, the replacement for defective parts covered by warranty is done by the dealer out of his stock of purchased goods. Also, the cost of parts incurred by the dealer in carrying out a repair, or replacement of the defective part is reim....
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....ve parts during the warranty period. It also noted that the dealer was being compensated by way of credit notes. Moreover, the manufacturer has received the defective parts from the dealer. The High Court reasoned that if the said defective parts were purchased from the open market, the manufacturer would have been obliged to pay sales tax. 7.11. Two decisions of the Andhra Pradesh High Court are assailed in the present case by the assessees. These cases pertain to M/s Jasper Industries (P) Ltd. vs. State of Andhra Pradesh, decided vide common order dated 11.02.2011. The High Court applied the dictum in Mohd. Ekram Khan and reasoned that it was not open to the High Court to distinguish the judgment of the Supreme Court on a microscopic examination of the different facts situation. Therefore, the High Court refused to entertain the view of the Rajasthan High Court, as enunciated in Marudhara Motors. Triology of Cases considered/overruled in Mohd. Ekram Khan: 8. The three cases considered in Mohd. Ekram Khan shall be discussed at this stage. I. Commissioner of Sales Tax vs. Prem Nath Motors, (1979) 43 STC 52 (Delhi): (Prem Nath Motors) (i) The aforesaid case was ....
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....r which had been subjected to the sales tax could be regarded as having included the cost or value of spare parts used in the replacement, in compliance with the stipulations in the warranty. On considering the warranty clause, it was noted that the sale of cars was along with the warranty to replace defective parts free of cost and the price was fixed at the time of the sale. After noting the distinction between the condition and warranty in a contract of sale of goods, it was observed that the consideration on the defective part, that might be replaced under the warranty was not separately specified because it was included in the price fixed at the time of sale of the car. In other words, the transfer of property and the part replaced in pursuance of stipulation of warranty is part of the original sale of the car for the price fixed and received from the buyer or consumer. The price so fixed and received was a consolidated price for the car and the parts that may have been supplied by way of replacement in pursuance of the warranty. Accordingly, it was observed that the Financial Commissioner was right in holding that the price for the replaced part was already charged and paid, ....
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....ent free of charge to the owners of the vehicle. The value of such spare parts replaced by the petitioner therein during the warranty period was reimbursed by the manufacturer by issuing credit notes. The spare parts were purchased in bulk and replacement was made from out of such stock held by the petitioner. After replacement, the petitioner therein would make a claim to the manufacturer who would issue the credit notes. The manufacturer would issue credit notes for the value together with excise duty and sales tax, thereby, cancelling the original sale made to the petitioner in respect of the item replaced. Therefore, it was contended that there was only a sale cancellation between the manufacturer and the petitioner and that the petitioner therein had already suffered tax at the point of a sale and therefore, every component part of the car would have to be taken to have suffered tax at the point of a sale and when replacement was made it is in respect of an item which has suffered a tax at the point of a sale. According to the revenue, the replacement of the spare parts was by purchase made from outside the State by issue of C-forms. (ii) The Division Bench o....
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.... possess the parts to meet the contractual obligation, he would have purchased the part from any seller of the part and would have paid the sales tax. In the said case, the assessee had supplied the goods for which it had received the consideration by way of credit notes and/or other mode of payment. This Court observed that the factual position in Prem Nath Motors case was different. That in Geo Motors and Prem Motors, the nature of the transaction between the assessee and manufacturer was lost sight of. It was observed that when the manufacturer may have purchased from the open market, parts for the purpose of replacement of the defective parts, it would have paid taxes. But the position is not different because the assessee had supplied the parts and had received the price. That the assessee had received the payment of the price supplied to the customer. Therefore, the transaction is subject to levy of tax. The decisions in Geo Motors and Prem Motors were overruled. It is in the above context that the Reference Order has been passed doubting the aforesaid observations. Submissions: 10. We have heard learned senior counsel and learned counsel for the respective parties a....
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.... firstly, spare parts are supplied to the customers by the dealers completely free of charge by way of replacement of goods already sold. b. secondly, customer receives the new spare part as installed in his vehicle and returns the defective part. c. thirdly, the substance of the transaction remains the discharge of a warranty obligation assumed by the manufacturer, and through him, the dealer, while selling the original goods. As the spare parts are deducted from the stock of the dealer due to convenience, credit is deservedly given by the manufacturer to the dealer to account for the value of the goods supplied on behalf of the manufacturer. d. fourthly, any dealer of the manufacturer herein can be approached for discharging the warranty obligation free of charge. e. fifthly, the department has wrongly assumed that the supply of spare parts to the customer is a sale made to the manufacturer albeit the title is being transferred to the customer on account of the dealership agreement. (iii) Learned senior counsel further submitted that replacement of spare parts during the warranty period does not constitute a sale. This proposition is s....
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....bmissions of Sri S.K. Bagaria, senior counsel for the petitioner, M/s TVS and Sons Ltd., in SLP (C) No. 14260 of 2007: (i) Sri Bagaria, learned senior counsel submitted that the nature of the transaction was not that of a sale, as the service was provided free of cost to the customer by a dealer pursuant to a warranty clause. The property in the replaced part passed merely as an incident of the performance of the manufacturer's warranty obligation, which forms a part of the original sale of the automobile. Sri Bagaria referred to the relevant clauses of the Dealership Agreement and Warranty Policy to highlight two facts: (a) dealers are contractually obligated to provide free-of-cost warranty services for warranty parts to the customer and (b) defective parts are returned by the customers and become the property of the manufacturer. (ii) Learned senior counsel clarified that the nature of the transaction was as a compensation to the buyer, and the measure thereof was equivalent to the cost of exchange of defective parts. He cited Benjamin's Sale of Goods Act (10th edn., para 16.032) to underline the compensatory principle, following which the manufacturer compensa....
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....t. Taking note of the chain of transactions, the customer is compensated for the consideration of purchase of an automobile from the petitioner. Therefore, there is no contract of sale either between the petitioner and the customer for the replacement of defective parts or between the petitioner and manufacturer as sale of parts replaced for the defective parts. (ii) Challenging the applicability of the Central Sales Tax Act, 1956 to the present case, learned counsel maintained that there is no inter-state movement of replacement parts as they are fitted at the dealer's location. There is only the movement of defective parts from the dealer's location to the manufacturer if located in another State. (iii) Learned senior counsel stressed the importance of keeping prudent commercial sense in mind while construing the contractual obligations in the present case. In this regard, the decision of the United Kingdom Supreme Court in Rainy Sky SA & Orad vs. Kookmin Bank, (2011) UKSC 50 was cited wherein it was held that the Court was entitled to prefer the construction which is consistent with business common sense. Therefore, it was submitted that the contract of warrant....
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....als/SLPs: Submissions of Sri Pallav Sisodia, senior counsel for the State of Kerala in SLP (C) No.14260/2007: (i) Learned senior counsel, Sri Pallav Sisodia submitted that the presence of a manufacturer's or dealer's warranty on the car sold by the dealer does not make any difference to whether the transaction of replacement of defective goods satisfies the elements of sale or not. The learned senior counsel listed various instances by way of illustrations when a customer purchases a car and reasoned that even when a customer did not purchase a car with a warranty but had taken an insurance, his expenses on the replacement of defective parts are reimbursed. Yet, the transaction is understood as a component of the taxable turnover of the dealer as per Explanation (5) to Section 2 (xxi) of the Kerala General Sales Tax Act, 1963. Even when the customer enforces the warranty, the dealer obtains a discharge of warranty obligation as a valuable consideration for the transfer of fresh parts from the dealer to the customer. The car dealer gets the replacement of parts as co-warrantor from the manufacturer towards the discharge of warranty obligation either on a principal-to-pri....
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....) No. 11509/2017, filed by a dealer, M/s Maskat Pvt Ltd, ought to be dismissed. Submissions of Dr. Manish Singhvi, senior counsel for the State of Rajasthan in Civil Appeal No. 3856/2013: (i) Dr. Singhvi, learned senior counsel, instructed by Sri Milind Kumar, submitted that the exact nature of the transaction has to be seen to determine whether sales tax was leviable or not. It was stressed that the crucial issue pertains to the misuse or misdeclaration of C-Forms which are issued at concessional rate under Section 8(4) of Central Sales Tax Act, 1956 read with Rule 12 of Central Sales Tax Rules, 1957. Any internal adjustment qua accounts or even contracts is alien for the charging section to operate. Thus, in the case at hand, all spare parts were sold against C-Forms, and have been sold again, in violation of conditions pertaining to resale. That, spare parts were fitted during the warranty period for a consideration given by way of credit notes by the manufacturer. Therefore, the penalty is bound to be imposed on Dealer/Manufacturer company. Submissions of Sri Nikhil Goel, Counsel for the State of Karnataka in Civil Appeal Nos. 1822/2007, 1821/2007 and SLP (C) Nos....
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....facturer is a composite document that includes multiple contracts of sale, as understood from Section 4(1) of the Act. These include: a. Agreement to sell the car to the dealer; b. Agreement to sell spare parts by manufacturer to the dealer; c. Conditional Agreement to sell the spare parts by the dealer to the manufacturer if such a condition is fulfilled. The condition is a warranty claim being raised by a purchaser. d. Agreement to purchase wherein the dealer undertakes to purchase spare parts from the manufacturer. (ii) The counsel further submitted that all elements of sale are complete because there is a seller and a buyer, i.e. dealer and manufacturer; valuable consideration was paid by the manufacturer in the form of credit notes and the transfer of the property of goods is taking place to the nominee of the manufacturer, i.e. car purchaser. It was also contended that there is no question of the delivery of spare parts and the consequent payment by way of credit note being an instance of sales return. The sale of the car is separate from the sale of spare parts, the sales in question would be specifically applicable to the latt....
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....n order to apply the said definition, four essential elements are necessary, namely, (i) parties competent to contract; (ii) mutual assent; (iii) passing of property; and (iv) price to be paid. 12.2. While understanding the said Section, the terms defined under Section 2, clauses (7), (13), (11), (1) and (10) respectively are necessary as the said clauses define the terms "goods", "seller", "property", "buyer" and "Price". Thus, to constitute a sale, in the legal sense, there must be a contract in pursuance of which the transfer of property, which transfer need not necessarily be by the owner himself, takes place on payment of a price, though there are exceptions to this rule enshrined under Sections 19 to 24 of the Act. The contract may be oral or in writing, or it may be inferred even from the conduct of the parties, but it must originate from an offer and its acceptance. A sale must not be distinguished from a mere agreement to sell. If under the contract of sale, title to goods has not passed, then there is an agreement to sell and not a completed sale. An agreement to sell becomes a sale when the time lapses, or the conditions are fulfilled, subject to which the property in....
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....ransaction property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale. So also, if the consideration for the transfer is not a money consideration but other valuable consideration, it may then be an exchange or barter but not a sale under the Act. Also if, under the contract of sale, title to the goods has not passed, then there is an agreement to sell and not a completed sale. Moreover under the law there cannot be an agreement relating to one kind of property and a sale as regards another. There must be an agreement between the parties for the sale of the very goods in which eventually the property passes. It was further observed in the aforesaid case that both under the common law and the statute law relating to sale of goods in England and in India, to constitute a transaction of sale, there should be an agreement, express or implied, relating to goods to be completed by passing of title in those goods. It is of the essence of this concept that both the agreement and the sale should relate to the s....
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.... to contract and the contract must be supported by valuable consideration and that as a result of the transaction, property must actually pass in the goods. It was observed that, "unless all these elements are present, there can be no sale." 12.8. In Sunrise Associates vs. Govt. of NCT of Delhi, (2006) 5 SCC 603, a Constitution Bench of this Court speaking through Ruma Pal, J. observed that when there is a sale of a lottery ticket, there is no sale of goods within the meaning of Sales Tax Acts of the different States but at the highest a transfer of an actionable claim. Accordingly, the earlier decision of this Court in H. Anraj vs. Govt. of T.N., (1986) 1 SCC 414 was overruled. 13. Sections 12, 13 and 59 of the Act are relevant for the purpose of these cases and the same read as under: "12. Condition and warranty. - (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. (2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. (3) A warranty is a stipulation collateral....
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....f the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. However, a stipulation may be a condition, though called a warranty in the contract. 13.2. There is also a distinction between a warranty and guarantee. As already stated, a warranty is an express or implied statement of something, which a party undertakes to fulfil as part of the contract, yet collateral to the main object of it. A warranty does not go to the root or substance of the contract. A guarantee is a contract which is ancillary and subsidiary to some other contract or liability whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person whose primary liability to the promisee must exist, or be contemplated. It is an additional or collateral or conditional contract as distinguished from an original or absolute contract. 13.3. A warranty can only exist when the subject matter of the contract of sale is ascertained and is existing so as....
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....he third-party rule, because the third party is a party to the collateral contract. It is a devise used or implied to impose obligations on persons not parties to the main contract. [Source: Pollock and Mulla - The Indian Contract Act]. (iii) Where a preliminary statement or assurance is not a term of the principal agreement, the Courts may deem it as a contract or warranty, collateral to the principal agreement. Where a necessary contractual intention is present, the Courts would treat or would construe an assurance as a collateral contract or warranty conferring a right to damages. The device of a collateral warranty has been employed where the principal contract is one to which either the person giving or the person receiving the assurance is not a party vide Shanklin Pier Ltd. vs. Detel Products Ltd., (1951) 2 KV 854. [Source: Anson's law of contract]. (iv) Thus, a contract between two persons may be accompanied by a collateral contract between one of them and a third person relating to the same subject matter. When a person buys goods from a dealer and is given a guarantee issued by the manufacturer, the main contract of sale is between dealer and the purchas....
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....nt not deductible in certain circumstances came up for consideration. In that context, it was observed that a provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognised when: (a) an enterprise has a present obligation as a result of a past event (such as a sale); (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. The assessee therein was in the business of valve actuators which are sophisticated goods and if any valve actuator was found defective then the warranty became significant. As the valve actuator is a sophisticated good, no customer was prepared to buy the same without a warranty. In other words, a warranty stood attached to the sale price of the product. In that context, it was observed that obligations arising from past events have to be recognized as provisions and these past events such as a sale of goods are known as obligating events. It was observed on the facts and circumstances of that case that provision for warranty was rightly made by the appellant enterprise therein because it had incur....
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....uld be any need to replace any part. In many cases, parts are not required to be replaced. When parts are not replaced, the component of "complaint reserve" is not returned to the customer. Thus, as far as the customer is concerned, the total amount paid, including the component towards "complaint reserve" is the price for the machinery. It was further observed that when a manufacturer offers a warranty to replace a defective part within a particular period and defective part is replaced by another part, the latter is exigible to excise duty. Pertinent Controversy: Analysis 14. In Mohd. Ekram Khan, this Court distinguished the judgment in Premier Automobiles by holding that the fact situation there was different and the issues in the said case were also different by observing that one of the issues was, whether, the expenses on account of warranty and statutory bonus were to be excludable while working out the ex-works cost. It was noted therein that car manufacturers furnish warranty covering the cars sold by entering into an agreement with the manufacturers of components providing for a warranty so far as the components supplied are concerned. The whole object behind the wa....
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.... if, during the warranty period, any part is found to be defective and is to be replaced, the responsibility of replacement is that of the manufacturer. For the convenience of the customer, there is an arrangement between the manufacturer and the dealer so that the customer may get replacement done from the dealer which in due course is again made good by the manufacturer. The dealer/assessee replaces parts to the customers and gets it reimbursed, it is neither sale of these parts by the dealer to the customer or by the manufacturer. What he does only is to pass on the parts from the manufacturer to the customer but in order to avoid delay and inconvenience of the customer he replaces the parts first (from his own stock) and gets a recompense from the manufacturer later which is not a sale as per the definition of sale of goods. 18. Similarly, in Geo Motors, it was observed that when the replacement of the spare part is done during the warranty period free of charge, the same cannot be treated as a sale and included in the taxable turnover, even if the purchase of such spares was effected from outside the State by issuance of 'C' forms. This is because the transaction between th....
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....n Mohd. Ekram Khan, the facts were that the dealer/assessee therein had received the amount from the manufacturer for supply of spare parts to the customer as a part of the warranty, the manufacturer had the warranty agreement with the purchaser of automobiles to replace defective parts during the warranty period. The manufacturer made payment to the dealer / assessee as the price for the parts which were supplied by the dealer/assessee to the purchaser or customer. Credit notes were issued by the manufacturer to the dealer / assessee in respect of the price of the parts supplied to the purchaser of the automobile. 23. The above distinct factual basis in Mohd. Ekram Khan is equated to a case where a manufacturer purchases spare parts from the open market for the purpose of replacement of defective parts and the tax is paid by the manufacturer himself. The judgment in Mohd. Ekram Khan proceeds on the footing that the two situations are identical. Thus, a situation where the assessee supplies the part from his own stock and receives a credit note by way of recompense for the said replacement from the manufacturer is construed to be identical to a situation where a manufacturer buy....
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....uld have been paid by the manufacturer on it and dispatched to the dealer to replace it in place of the defective part. 26. But there can also be a situation when the dealer would replace the defective part in the automobile pursuant to a warranty from his own stock of spare parts which he would have purchased either from the manufacturer or from the open market or the manufacturer of the spare part. In the aforesaid three situations, the dealer would have paid sales tax while purchasing the said stock. When the defective part is replaced by the dealer from a spare part from his stock, the dealer is no doubt acting pursuant to the warranty on behalf of the manufacturer but is sourcing the spare part from his own stock. Simply put, the dealer is not "selling" the spare part to a customer while acting on behalf of the manufacturer but replacing the defective part free of cost by acting under the warranty. But what is to be borne in mind is that the replacement of the spare part is from the stock of the dealer who would have earlier bought the same by paying the requisite tax on the same. If the said part, instead of being replaced pursuant to the warranty free of cost had been sol....
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....In other words, whether the transaction is in the nature of a sale to attract payment of sales tax by the dealer under the sales tax laws under consideration. In this context, it is necessary to recapitulate as to why a credit note is issued by the manufacturer to the dealer. A credit note is issued with a particular intention in mind and that is to recompense the dealer. What is the reason for doing so? The reason is not far to see and has already been adverted to above. The recompense in the form of credit note to the dealer is because the dealer would not receive any price from the customer for the replacement of the defective part while acting under the warranty on behalf of the manufacturer while using the spare part from his own stock which belongs to him and which he had procured by paying the necessary price including tax, either from the manufacturer himself or from the open market. If the dealer had sold the said spare part which he used to replace a defective part pursuant to a warranty clause, he would have received a return for his investment plus a profit. But, while acting under the warranty on behalf of the manufacturer, the dealer does not receive any price from th....
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....kinds of situations the supplier is allowed to issue what is called as credit note to the recipient. Once the credit note has been issued, the tax liability of the supplier will reduce. The credit note is, therefore, a convenient and legal method by which the value of the goods or services in the original tax invoice can be amended or revised. The issuance of the credit note will easily allow the supplier to decrease his tax liability in his returns without requiring him to undertake any tedious process of refunds. 30. Therefore, the entire controversy must be viewed in the perspective of a composite transaction and not in isolation as the dealer (assessee) would be acting under a warranty with there being a manufacturer on one end and the purchaser or customer of an automobile at the other end and the dealer acting on behalf of the manufacturer or an intermediary between the said customer and manufacturer. The said transaction cannot be viewed in a myopic sense by truncating or excluding the role or action of a dealer under the warranty and viewing it only from the perspective of a transaction simpliciter between manufacturer and a dealer. Such an approach is not only skewed fr....
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....is used for the purpose of replacement of a defective part pursuant to a warranty, the dealer does not "sell" the part to the customer who has approached the dealer with the defective part. The dealer does not receive any consideration in the form of a price from the customer but on the basis of the warranty, the dealer is obliged to replace the defective part with a new part. The dealer then sends the defective part to the manufacturer of the automobile, who had given the warranty. The manufacturer, from whom the automobile has been purchased, then issues a credit note which may be equivalent to the value of the spare part used by the dealer. This credit note is in order to recompense the dealer for his investment made on the spare part which was "not sold" by him to the customer so as to earn any return but has been utilised to replace a defective part of the automobile as an obligation under a warranty given at the time of the sale of the automobile on behalf of the manufacturer. In such a situation, whether, the recompense made to the dealer can be termed to be a "sale" between manufacturer and the dealer within the meaning of the definition of "sale" under the Sales Tax Acts i....
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....aler discharges his warranty obligation pursuant to the earlier sale of the automobile made by him to the customer which transaction of sale is accompanied by a collateral contract in the form of a warranty. There cannot be a warranty unless there is a sale of goods in the first place. That is why a warranty is termed as a contract collateral to the main contract of sale. But for the warranty which is a contract collateral to the main contract of sale of an automobile, the dealer would not have replaced the defective part with a spare part from his stock without any consideration from customer. This is obvious because when the defective part is replaced by another part, no consideration passes from customer to the dealer. This could be contrasted with a situation where the dealer would have sold the same part to any other customer and received a price on the sale as well as collected the tax on the said sale. Since, the dealer does not receive any consideration from the customer who approaches the dealer during the warranty period for replacement of a defective part and the dealer does so from his own stock of the spare parts, he receives a credit note from the manufacturer of the ....
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....le consideration in the account of the dealer while the dealer is discharging his obligation pursuant to the warranty and therefore exigible to sale tax. This is based on the premise that the dealer "sells" the part while acting on behalf of the manufacturer while replacing a defective part under a warranty and discharging his warranty obligation for which the consideration flows from the manufacturer to the dealer and therefore is amenable to sales tax. There are two aspects to be considered here: firstly, there is transfer of property in the spare part between the dealer and the customer and secondly, for the said transfer, the manufacturer issues a credit note to the dealer which is in substance on behalf of the customer owing to the warranty with the customer. 40. Thus, when the transaction between the manufacturer and dealer is viewed in the larger canvas of a dealer discharging his obligations pursuant to a warranty appended to a sale of an automobile, the same cannot be narrowly construed. At the same time, whether the transaction resulting in payment by way of a credit note to a dealer/assessee is a sale within the definition of sale under the Sales Tax Acts of the respe....
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....ce of the goods on the date on which such goods are delivered to the buyer under such agreement, shall be deemed to be the sale price of such goods; Explanation II. - Cash or trade discount at the time of sale as evident from the invoice shall be excluded from the sale price but any ex post facto grant of discounts or incentives or rebates or rewards and the like shall not be excluded; Explanation III. - Where according to the terms of a contract, the cost of freight and other expenses in respect of the transportation of goods are incurred by the dealer for or on behalf of the buyer, such cost of freight and other expenses shall not be included in the sale price, if charged separately in the invoice;" 42. Under Section 4 of the Act, a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The expression "price" is defined in Section 2(10) of the said Act to mean a money consideration for sale of goods, i.e., whether the sale is for cash or credit, it must be in terms of money. If any consideration other than money is given, it is not a sale, but only an exchange or barter. If no....
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....y has a wider connotation to include a valuable consideration in the form of money or a payment in monetary terms which is the price for the transfer of property paid. Thus, a valuable consideration is also a species of money which is the consideration for the transfer of goods under the sales tax enactments. 45. The aforesaid discussion could be illustrated better with reference to State of T.N. vs. Sri Srinivasa Sales Circulation, (1996) 10 SCC 648. In the said case, the facts were that under a scheme introduced by the assessee, 'A' purchased one coupon from the assessee on payment of Rs.5. 'A' was to name a particular kind of goods required by him and mentioned in the said coupon. On receipt of the coupon from 'A', the asssessee would forward to him by V.P.P. three more such coupons. 'A' was required to give the said three coupons to three persons 'B', 'C' and 'D' and keep the money so realised to himself. Each of 'B', 'C' and 'D' were to forward in the above manner, their respective coupons to the assessee, who was to send to each one of them three coupons separately by post (V.P.P.). On realisation of the three V.P.Ps. the assessee would supply to 'A' the article named by h....
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....rice". 47. Benjamin's Sale of Goods, Eighth Edition, states that the consideration in a contract of sale of goods must in English law, be a price in money, either paid of promised. By money is meant legal tender; it does not mean money's worth. Payment need not, however, be made in cash: a method of payment that enables the seller to obtain money such as the use by the buyer of a credit card or a debit card or digital cash or cheque or banker's draft or trading cheque also comes within the expression "payment of price". It is only a method of payment or a form of payment. It is also irrelevant that the money payment comes, not from the buyer of the goods or to whom the property in the goods are transferred, but from the card issuer. Thus, there can be various methods of payment i.e., by cash, by negotiable instrument, by credit or charge card or by stored value card or sometimes referred to as digital cash card or electronic purses, internet payments on which that "value" is stored electronically. There can also be payment by direct debits to effect payment of goods supplied particularly when there are recurring payments of variable amounts. The seller can obtain through the ban....
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....part and would have remitted the same to the revenue. Merely because the dealer is acting as an intermediary or on behalf of the manufacturer pursuant to a warranty and receives a recompense in the form of a credit note, the same cannot escape liability of tax under the Sales Tax Acts under consideration. 49. The assessees herein have placed reliance on the decision of Constitution Bench of this Court Devi Dass Gopal Krishnan. This Court in the said case considered amendments to various sections of the Punjab General Sales Tax Act, 1948 and interpreted the expression 'other valuable consideration', included in section 2(ff) defining purchase and section 2(h), defining sale, to have a wider connotation than cash and deferred payment. In para 25 of its decision, the court reasoned that the said expression takes colour from the preceding expression "cash or deferred payment." It was reiterated that 'other valuable consideration' has to be monetary in nature. The nature of consideration in the form of a credit note is also monetary in nature. Thus, the definition of price includes consideration paid by way of credit note. Therefore, payment of consideration through the mode of credi....
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....s no recompense for spare part. It is only when a credit note is issued for a spare part used by a dealer from his own stock or when he has purchased it from the open market or from another manufacturer of a spare part that it becomes a sale within the meaning of the sales tax enactments under consideration. 54. On the other hand, when a dealer acts as an agent of the manufacturer (Principal) on the basis of an express or implied contract of agency he may be entitled to certain remuneration under the terms and conditions of agency which is recognised in law. Learned senior counsel for the respective parties have adverted to such agreements with regard to consideration received by a dealer under the terms of an Agency Agreement for the service rendered by the dealer pursuant to a warranty. We are not concerned with such kind of remuneration as the same cannot be construed as a transaction of sale. It is a service contract and possibly a service tax is leviable depending on the terms and conditions of the Agency. 55. In C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors, Jodhpur, (2010) 29 VST 114, the learned Single Judge of the Rajasthan High Court considered the controversy under....
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....the larger perspective of carrying out an obligation under a warranty at the time of sale of the vehicle and not independently as has been stated above. We also find that the learned single judge incorrectly distinguished the facts of the case with Mohd. Ekram Khan by reasoning that the dealership agreement contemplated a principal-principal relationship between the manufacturer and the dealer. On the other hand, we agree with the decision of the Division Bench of Bombay High Court in M/s Navnit Motors Pvt Ltd. vs. State of Maharashtra, where it compared the assessee's dealership agreement with Maruti Udyog Ltd. with the dealership agreement of the dealer in Mohd. Ekram Khan with Mahindra & Mahindra Ltd. The Bombay High Court correctly found that both dealership agreements established a Principal-to-Principal relationship and recorded that a solitary sentence in para 1 of the decision in Mohd. Ekram Khan ought not to be construed as the dealer was an agent of the manufacturer. Therefore, we do not approve of the observations made in paragraph 21 and 22 of the judgment of the learned Single Judge of the Rajasthan High Court in the aforesaid case and the said judgment is liable to be....
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.... the sugar mills, was the property of the appellant therein and it answers the description of goods, that the transfer of the ownership in the goods wherefor the company was to pay the price to the appellant therein was not in the form of cash but to be adjusted from the amount payable by the appellant therein to the owner by way of consideration for use of the mill. The expression cash, deferred payment or other valuable consideration had to be given its true meaning and the latter two expressions enlarge the ambit of consideration beyond cash only. It was observed that "once an essential component of sales takes place, sales tax would, indisputably, be payable". It was held that the arrangement between the parties therein being clear and unambiguous and not with a view to evade tax but there being transfer of goods from the appellant therein to the company in the form of supply of molasses, the appellant therein was entitled to a consideration which was in the form of the right to run the sugar mill under a deed of licence. It was also observed that a barter or an exchange being different from a sale, payment of a licence fee could not be a subject matter of barter or exchange. T....
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....iscount 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. 64. 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. 65. Thus, the manufacturer gives the warranty to the consumer by making a representation with regard to the automobile. It is in the nature....
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....tract 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. 68. 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 rec....