Meaning of ‘warranty’ - Indian Laws - General

Meaning of warranty According to Halsbury s Laws of England, Fifth Edition-2012, Volume 91, as under: 64. Warranty means an agreement with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of such a contract, the breach of which gives rise to a claim for damages, but not to a right to reject the goods and tret the contract as repudiated. In order to satisfy the definition, therefore, a warranty must, first, be an agreement, a promise that the representation is or will be true; and, secondly, the agreement must be collateral to the main purpose of the contract, such purpose being the transfer of the property in, and the possession of, goods of the description contracted for. A warranty may be given in consideration of an agreement to enter into a contract of sale of the goods to which the warranty relates with a party other than the person giving the warranty. [M/S. TATA MOTORS LTD.- 2023 (5) TMI 744 - SUPREME COURT] In Rotork Controls India Pvt. Ltd. vs. Commissioner of Income Tax, 2009 (5) TMI 16 - SUPREME COURT, ...a provision within the meaning of Section 40-A of the Income Tax Act, 1961 which deals with expenses or payment 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 incurred a present obligation as a result of past events which resulted in an outflow of resources.