Credit Note Issued By Automobile Manufacturer To Dealer, In Consideration Of Replacement Of Defective Part, Attracts Sales Tax: Supreme Court

The Supreme Court has ruled that a credit note issued by an automobile manufacturer to a dealer of automobiles, in consideration of the replacement of a defective part done by the dealer pursuant to a warranty agreement, is exigible to sales tax.The court has held that when a dealer replaces a defective part of the automobile by a spare part maintained in its stock or when the same is purchased by the dealer from the open market, in such situations, the credit note issued in the name of the dealer is a valuable consideration for transfer of property in the spare part made by the dealer to the customer. The same constitutes a “sale” under both the Central Sales Tax Act as well as the respective sales tax legislations of the States under consideration. Thus, the assessee-dealers are liable to pay sales tax on the said transaction.The bench comprising Justices K.M. Joseph, B.V. Nagarathna and Ahsanuddin Amanullah was hearing a batch of appeals in pursuance to a larger bench reference made by the Division bench of the Supreme Court in 2019, where the top court had expressed reservations in respect of the observations and legal propositions laid down in Mohd. Ekram Khan & Sons vs CTT, (2004) 6 SCC 183. In Mohd. Ekram Khan (2004), the Apex Court had held that the amount received by the assessee-dealers for supply of spare parts to the customers as a part of the warranty agreement, was liable to sales tax.While hearing the larger bench reference, the Supreme Court held that merely because the dealer acts as an intermediary on behalf of the manufacturer pursuant to a warranty, and receives a recompense in the form of a credit note, the same cannot escape its liability to pay tax under the Sales Tax Acts.The bench clarified that the judgment in Mohd. Ekram Khan (2004) 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 under a warranty collateral to the sale of the automobile. Thus, the court said that, in view of the same, the decision in Mohd. Ekram Khan does not call for any interference.The assessee, M/s Marudhar Motors, is a dealer of TATA Vehicles. Under the dealership agreement, the dealer/assessee is obliged to provide replacement of warranty goods sold to the customer.In pursuance of the warranty agreement, the dealer is required to replace the defective parts of the automobile free of cost to the customers. In order to avoid delay, the dealer, on behalf of the manufacturer, Tata Motors, collects a defective component from the customer and replaces it with the parts in the stock purchased from the manufacturer. This defective component is returned back to Tata Motors from whom the dealer had purchased the same in the first place. Tata Motors, thereafter, issues credit notes, crediting the running account of the dealer which is maintained for sale transactions, at the price at which the good was initially sold to the dealer.Pursuant to the decision of the Supreme Court in Mohd. Ekram Khan (2004), the assessing authority had invoked the power of reassessment under Section 30 of the Rajasthan Sales Tax Act, 1994 to impose a tax on assessee’s turnover, which had escaped assessment. The Deputy Commissioner (Appeals), in appeal, upheld the levy of tax upon the assessee.In the appeal filed before the Rajasthan Tax Board, the decision of the Deputy Commissioner (Appeals) was set aside. The Board had ruled that the transaction of replacing the defective parts did not fall within the definition of ‘sale’ as defined under Section 2(38) of the Rajasthan Sales Tax Act.The revision petitions filed by the Revenue Department were dismissed by the Rajasthan High Court.In the appeal filed before the Supreme Court, Senior Advocate Kavin Gulati, on behalf of Tata Motors, submitted that replacement of spare parts during the warranty period does not constitute a sale; adding that a dealer is contractually bound to service the warranty obligations undertaken by the manufacturer at the time of the sale. He placed reliance on Section 12(3) of the Sale of Goods Act, 1930, which states that a warranty is a stipulation collateral to the main purpose of the contract.He argued that a case of discharge of a warranty is the exact opposite of a contract of sale, which involves the volitional transfer of goods. He further contended that a credit note is not a sale price or valuable consideration, as the character of the credit is not towards the price of the newly replaced part, but is, in fact, a credit that embodies the diminution of the price already paid for the car.Therefore, he claimed that Mohd. Ekram Khan (2004) does not correctly appreciate the nature of a warranty transaction and thus, ought to be overruled.Referring to the decision in Mohd. Ekram Khan, the top court observed that where there is a warranty clause appended to the sale of a motor vehicle for the replacement of a defective part on the part of the manufacturer, if the...

Credit Note Issued By Automobile Manufacturer To Dealer, In Consideration Of Replacement Of Defective Part, Attracts Sales Tax: Supreme Court

Parina Katyal

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