2019 (2) TMI 302 - SC - VAT and Sales Tax

Levy of sales tax - free replacement of defective parts in motor vehicles, during the period of warranty - difference of opinion - Held 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. Matter referred to Larger Bench.

Summary

Issues:
Liability towards sales tax on free replacement of defective parts in motor vehicles during the warranty period.

Analysis:
1. The primary issue in this case is the liability towards sales tax concerning the free replacement of defective parts in motor vehicles during the warranty period. The appellant, a dealer of Tata Motors, provided a warranty for free replacement of parts during the warranty period, with the dealer obligated to keep a stock of spare parts. The customer could visit any dealer for replacements, and sales tax was paid on spare parts purchased. The Revenue contended that sales tax was payable even on returned spare parts due to credit notes issued by Tata Motors to the dealer.

2. The assessment order and appeal initially favored the appellant, but the High Court overturned the decision based on the precedent set by the Supreme Court in Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, U.P., Lucknow. The appellant's senior counsel highlighted the Dealership Agreement, emphasizing the free replacement concept under the warranty.

3. The appellant's counsel referred to various judgments to distinguish the case from Mohd. Ekram Khan & Sons. For instance, in Prem Motors v. Commissioner of Sales Tax, it was held that the responsibility of replacing defective parts during the warranty period lies with the manufacturer, not the dealer, and such replacements do not constitute a sale.

4. The appellant's counsel argued that the spare parts provided free of cost under warranty were not subject to sales tax as no separate consideration was paid for them. Additionally, the counsel cited legal principles from The Sale of Goods Act, emphasizing the requirement of a price for a contract of sale, which was absent in this scenario.

5. The judgment acknowledged the conflicting views presented by the appellant and the respondents, with the latter relying on the binding precedent of Mohd. Ekram Khan & Sons. The Court decided that the issue required examination by a larger Bench to determine whether sales tax should be levied on the replacement parts provided free of cost during the warranty period.

6. Given the uncertainties surrounding the legal propositions in Mohd. Ekram Khan & Sons and the differing interpretations of credit notes as consideration, the Court expressed reservations and deemed it necessary for a larger Bench to review the matter. The case was to be referred to the Chief Justice for further orders.