2023 (5) TMI 744 - SC - VAT and Sales Tax

Levy of Sales Tax - consideration passed through credit notes - credit note issued by a manufacturer to a dealer of automobiles in consideration of the replacement of a defective part in the automobile sold pursuant to a warranty agreement being collateral to the sale of the automobile. Whether the judgment of this Court in MOHD. EKRAM KHAN SONS VERSUS COMMISSIONER OF TRADE TAX, UP. (AND ANOTHER APPEAL) 2004 (7) TMI 341 - SUPREME COURT calls for reconsideration in terms of the Reference Order dated 05.12.2019? HELD THAT - In Mohd. Ekram Khan, this Court distinguished the judgment in PREMIER AUTOMOBILES VERSUS UOI. 1971 (11) TMI 159 - SUPREME COURT 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 warranty is that the consumer who has to make a heavy investment for the vehicle should be assured of a proper performance of the vehicle in a trouble-free manner for a reasonable length of time. Therefore, entire cost of warranty was to be borne by the manufacturer. Referring to Prem Nath Motors, it was observed in Mohd. Ekram Khan that the said case dealt with transfer of property in the part or parts replaced in pursuance of a stipulation or a warranty which is a part of the original sale of the car for the price fixed and received from the buyer or consumer. It was observed that the price so fixed and received was a consolidated price for the car and the parts that may have to be supplied by way of replacement in pursuance of the warranty. It was observed by this Court that the decision in Prem Nath Motors did not apply to the controversy in Mohd. Ekram Khan. This Court in Mohd. Ekram Khan distinguished the factual situation in Premier Automobiles and COMMISSIONER OF SALES TAX, DELHI ADMINISTRATION, VIKAS BHAWAN, NEW DELHI VERSUS PREM NATH MOTORS (P.) LTD. 1978 (5) TMI 108 - DELHI HIGH COURT . In other words, after distinguishing the aforesaid cases, it was noted that in a case the manufacturer may have purchased from the open market parts for the purpose of replacement of the defective parts. For such transaction, it would have paid taxes. The position is not different because the assessee had supplied the parts and had received the price. In other words, in Mohd. Ekram Khan, a situation where a manufacturer has purchased the part from the open market for the purpose of replacement of the defective part and for which taxes have been paid by the manufacturer and a situation where the dealer/assessee supplies the part from his own stock and has received the price for the same in the form of credit note on return of the spare part to the manufacturer have been considered to be not different to each other, but the same. Whether, this Court in Mohd. Ekram Khan was right in equating both the factual situations and holding that in the latter case, the dealer was liable to pay sales tax on the premise that the transaction between the manufacturer and dealer was one of sale? - HELD THAT - 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 from a commercial perspective but also jurisprudentially or in the legal sense. There need not be a reiteration of the significance of a warranty in a transaction of a sale of goods. 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 respective States under consideration has to be considered. The aforesaid discussion could be illustrated better with reference to STATE OF TAMIL NADU VERSUS SRI SRINIVASA SALES CIRCULATION (AND OTHER APPEALS) 1996 (10) TMI 379 - SUPREME COURT . Applying the aforesaid principles and the judgment of this Court to the case at hand, it is noted that when the dealer uses one of the spare parts from his stock for the replacement of a defective part in an automobile under a warranty, he is given a monetary benefit in the form of a credit note. The definition of credit note from various dictionaries and Law Lexicons have been adverted to above. A perusal of the aforesaid definitions would clearly indicate that a credit note issued by a manufacturer in favour of a dealer is a valuable consideration within the meaning of the definition of sale under both, Central Sales Tax Act as well as the respective State enactments under consideration - No doubt, cash is a money consideration but the definition of sale under the Central Sales Tax Act as well as under the State enactments does not imply price to mean only a money consideration in a narrower sense but in a wider sense to include different forms of money consideration such as deferred payment and also a valuable consideration which need not be restricted to cash or deferred payment only but a valuable consideration which would include a credit note which is to be read within the definition of price . A credit note is a valuable consideration which is essentially a document to inform a buyer that the buyer s account is being credited because of errors, returns or allowances. - 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. The manufacturer gives the warranty to the consumer by making a representation with regard to the automobile. It is in the nature of a promise which the dealer assessee carries out on behalf of the manufacturer. The value of the credit note is a valuable consideration received which is in the nature of a benefit from the manufacturer which is exigible to tax. If the dealer had sold a spare part of the automobile from his stock to any other consumer across the counter, he would have collected the requisite sales tax along with the price from that consumer but in the instant case, the consideration is received in the form of a credit note from the manufacturer which is subject to sales tax. The person who pays the valuable consideration in a sale transaction is irrelevant so long as it is paid. Application of Indian Contract Act, 1872 Applying the definitions of Section 2(d) of the Indian Contract 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. The dealer (promisee) agrees to replace a defective part which is a consideration for the promise and in turn, receives a recompense in the form of a credit note from the manufacturer. Thus, there is an agreement between the manufacturer and the dealer, and it would be in an instance of there being reciprocal promises. Conclusion The transaction between the manufacturer and dealer while acting pursuant to a warranty in the circumstances explained above has to be construed as sale within the meaning and definition of sale under the Sales Tax Acts under consideration.

Summary

Issues Involved:
1. Whether the judgment of this Court in Mohd. Ekram Khan calls for reconsideration.
2. Whether a credit note issued by a manufacturer to a dealer in consideration of the replacement of a defective part under a warranty is exigible to sales tax.

Summary:

Issue 1: Reconsideration of Mohd. Ekram Khan Judgment
The Court examined whether the judgment in Mohd. Ekram Khan & Sons vs. CTT was correctly decided. The judgment had equated two situations: (1) a manufacturer purchasing parts from the open market for replacement and paying taxes, and (2) a dealer replacing defective parts from his own stock and receiving a credit note from the manufacturer. The Court reaffirmed that the judgment was correctly decided, emphasizing that a credit note issued to a dealer for replacing a defective part from his own stock under a warranty constitutes a sale and is subject to sales tax.

Issue 2: Credit Note and Sales Tax Liability
The Court analyzed whether the issuance of a credit note by a manufacturer to a dealer for replacing a defective part under a warranty constitutes a sale under the sales tax enactments. It was held that:
- When a dealer replaces a defective part from his own stock or purchases it from the open market, and receives a credit note from the manufacturer, this transaction is considered a sale and is subject to sales tax.
- A credit note is deemed a valuable consideration within the meaning of "sale" under the respective sales tax legislations.
- The judgment in Mohd. Ekram Khan does not apply when the dealer merely receives a spare part from the manufacturer to replace a defective part without any transfer of property from the dealer to the manufacturer.

Conclusion:
The Court concluded that the judgment in Mohd. Ekram Khan was correctly decided and does not call for interference. The issuance of a credit note by the manufacturer to the dealer for replacing defective parts under a warranty is a sale and is exigible to sales tax. The appeals filed by the dealers were dismissed, and those filed by the revenue were allowed.