2005 (10) TMI 580 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the warranty replacement by the respondent at the cost of TELCO results in a sale, though consideration for the same is received from TELCO by way of credit notes?
2. Whether in order to bring the turnover on the sale of warranty replacement to tax, the consideration ought to have been received from the vehicle owner alone to term the same as sale?
3. Whether the credit note issued by TELCO in respect of warranty replacement is not consideration for the sale of spare parts?

Issue-wise Detailed Analysis:

Issue 1: Warranty Replacement as Sale
The core issue is whether the warranty replacement by the respondent at the cost of TELCO constitutes a sale, even though the consideration is received from TELCO via credit notes. The assessing authority rejected the respondent's claim for exemption on the turnover of spare parts used for warranty replacements, arguing that the replacement parts provided free of cost to customers still constitute a sale. The authority reasoned that the cost of warranty claims is accounted separately and not included in the original cost of the motor car. Therefore, the replacement of defective parts with new parts is considered a sale on behalf of TELCO, making it subject to tax.

Issue 2: Consideration from Vehicle Owner
The second issue questions whether the turnover on the sale of warranty replacements should be taxed only if the consideration is received from the vehicle owner. The assessing authority concluded that the replacement parts are sold from the dealer's stock and that the dealer acts both as a seller and as a service agent for TELCO. Thus, the transaction is considered a sale liable to tax, regardless of whether the consideration comes directly from the vehicle owner or via credit notes from TELCO.

Issue 3: Credit Note as Consideration
The third issue addresses whether the credit note issued by TELCO for warranty replacements constitutes consideration for the sale of spare parts. The assessing authority determined that the credit notes represent the receipt of consideration for the new parts provided, thereby satisfying the conditions for a sale under the Karnataka Sales Tax Act. Consequently, the transaction is taxable.

Judgment:
The Karnataka High Court referenced the Supreme Court's decision in Mohd. Ekam Khan & Sons Vs. Commissioner of Trade Tax, U.P., which held that the supply of parts under warranty and the receipt of payment through credit notes constitute a sale subject to tax. The High Court found the facts of the present case identical to those in the Supreme Court case. The Court emphasized that judicial decisions should not be treated as statutes and must be interpreted in the context of their specific facts.

The High Court concluded that the findings of the Karnataka Appellate Tribunal were contrary to the law declared by the Supreme Court. Therefore, the revision petition filed by the revenue was allowed, setting aside the Tribunal's order and restoring the assessing authority's decision to tax the turnover of spare parts used for warranty replacements. The parties were directed to bear their own costs.