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TMI Blog2009 (3) TMI 956X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-2005 and 2005-2006. As far as levy of interest and penalty is concerned, since the first appellate authority had set aside the same, the Revenue preferred another batch of six appeals and these 12 appeals came to be disposed of by a common judgment of the Tax Board dated June 18, 2007. It may also be stated that the assessment orders for the assessment year 2000-01 to 2003-04 were passed by the assessing authority by invoking the power of reassessment under section 30 of the Act to impose tax on turnover having escaped assessment, whereas, for assessment years 2004-05 and 2005-06 said assessment was framed under section 28 of the Act. The issue which arises for consideration by this court in the present revision petitions is as to whether the assessing authority could impose tax on the assessee, a dealer of Tata vehicles, on the value of credit notes issued by the manufacturer, M/s. Tata Motors, for defective parts of cars and other vehicles supplied by the assessee, a dealer of the manufacturer under a warranty agreement between the manufacturer and the ultimate customer to whom such vehicles are sold by the assessee. The sole reason on which such tax was imposed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case. In other words, he prays for dismissal of revision petitions filed by the Revenue. Learned senior advocate Mr. Bhatt also submitted that in fact, the facts of the present case were covered by the earlier decision of the honourable Supreme Court in the case of Premier Automobiles Ltd. v. Union of India AIR 1972 SC 1690 as also the decisions of the three High Courts in the case of Geo Motors v. State of Kerala [2001] 122 STC 285 (Ker), Prem Motors v. Commissioner of Sales Tax [1986] 61 STC 244 (MP) and Commissioner of Sales Tax v. Prem Nath Motors (P.) Ltd. [1979] 43 STC 52 (Delhi). He fairly submitted that though the decision of the Kerala High Court in Geo Motors case [2001] 122 STC 285 and the Madhya Pradesh High Court in Prem Motors [1986] 61 STC 244 were overruled by the Supreme Court in Mohd. Ekram's case [2004] 136 STC 515; [2004] 6 SCC 183; AIR 2004 SC 3965, however, the facts of Mohd. Ekram [2004] 136 STC 515 (SC); [2004] 6 SCC 183; AIR 2004 SC 3965 were clearly different and distinguishable from the facts of the present case and, therefore, the Revenue authorities had erred in applying the judgment of the honourable Supreme Court in Mohd. Ekram's case [200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hased from the manufacturer. No money is charged from the customer as he has not been sold any new part/s or vehicle. Only a defective component or vehicle has been replaced. This defective component/s or vehicle received on exchange by the dealer from the customer is returned back to the manufacturer from whom the dealer had purchased the same in the first place, i.e., Tata Motors, who after receiving the part/s or the entire vehicle and satisfying themselves about its being defective and defect being in the nature of manufacturing defect compensate the purchasing dealer at this purchase price which is their selling price by crediting the running account of the dealer with them used exclusively for the purpose of transaction of sale from them to dealer for such spare part/s or vehicle/s as the case may be. As such the transaction train is as under: 1.. Sale of vehicle along with the warranty thereon with warranty by Tata Motors to dealer (Marudhara Motors) at cost plus Central sales tax as applicable against C form. 2.. Sale of spare parts of vehicles by Tata Motors to Marudhara Motors (Dealer) at cost plus Central sales tax as applicable against C form. 3.. Sale of vehicle al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . dated . . . for Rs. . . and CST Rs. . . .) (ii) Marudhara Motors (Parts Sales) A/c. To parts sales A/c. To CST A/c. (Parts sold to Marudhara Motors through Inv. No. . . . . dated . . . . for Rs. . . . .) Dr. (iii) Bank A/c. To Marudhara Motors (Vehicle Sales) A/c. (payment received from Marudhara Motors) Dr. (iv) Bank A/c. To Marudhara Motors (parts sales) A/c. (Payment received from Marudhara Motors) Dr. (v) Sales return A/c. Dr. CST A/c. Dr. To Marudhara Motors parts/vehicle A/c. (Part/s or vehicle found defective by Marudhara Motors returned by them and received by us found to be defective, therefore, credit given for value received and being sales return CST is debited to reverse the earlier credit to CST A/c. The following clause relating to "warranty", clause No. 18 of the said agreement reads as under: "18. The dealer agrees that the only warranty binding on the company shall be the warranty published by the company and all implied warranties under law are hereby excluded. The dealer shall have no authority to give to his purchasers a different warranty binding upon the company. The dealer shall meet the company's warranty obligations to the purchasers of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is replaced by us under the warranty shall be our property." The learned counsel for the assessee also urged 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 and since the facts of the case are distinguishable from the facts obtaining before the honourable Supreme Court in Mohd. Ekram's case [2004] 136 STC 515; [2004] 6 SCC 183; AIR 2004 SC 3965, the assessing authority was not justified in imposing tax much less interest and penalty upon the assessee and, therefore, the Tax Board was correct in setting aside the imposition of tax and also upholding the deletion of interest and penalty by the first appellate authority and revision petitions filed by the Revenue before this court deserve dismissal. I have heard learned counsels at length and given my thoughtful consideration to the impugned order of the Tax Board, contentions raised by learned counsels and the judgments cited at the bar. It is first considered appropriate to refer to the judgment of the honourable Supreme Court in the case of Mohd. Ekram Khan [2004] 136 STC 515; [2004] 6 SCC 183; AIR 2004 SC 3965 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was different. The issues in the said case were different. One of the issues was whether the expenses on account of warranty and statutory bonus were to be excludable while working out the ex-work cost. It was held by this court that manufacturers furnish warranty covering the cars sold. Under the warranty all defects on account of faulty manufacture have to be set right and the defective parts have to be replaced free of costs by the manufacturer or his dealer within the specified period or given distance travelled by the car. The car manufacturers enter 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 reasonable length of time. Therefore, entire cost of warranty was to be borne by the manufacturer. The issue was entirely different from the one at hand and the ratio in the said case provides no answer to the present dispute. Prem Nath's case [1979] 43 STC 52 (Delhi), as the factual position goes to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arranty covering the cars sold. Under the warranty all defects on account of faulty manufacture in workmanship have to be set right and the defective parts have to be replaced, free of cost by the manufacturer or his dealer within a specified period or a given distance travelled by the car. During the period of warranty which is now for one year three free services have to be rendered. The car owner has to pay the cost of consumable items like oil, grease, packing, etc., during those free services. The car manufacturers enter into an agreement with the manufacturers of components providing for a warranty so far as the components supplied are concerned. As has been rightly observed by the Commission the whole object behind the warranty is that the consumer who has to make a heavy investment should be assured of a proper performance of the vehicle 'in a trouble-free manner for a reasonable length of time'. 14.. . . . 15.. The Commission was of the view that many of the ancillary manufacturers cover their supplies to the car manufacturers with a warranty and are liable to replace the defective parts free of cost. The manufacturers are expected to use only those components wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also reproduced hereunder: In Commissioner of Sales Tax, Delhi Administration, Vikas Bhawan, New Delhi v. Prem Nath Motors (P.) Ltd. [1979] 43 STC 52, the Delhi High Court held as under (at page 52): ". . . The questions that arose for consideration were: (i) whether the replacement of the spare parts free of cost under the warranty constituted a sale liable to sales tax, and (ii) if it did not constitute a sale, whether the purchase price of such parts was liable to be included in the taxable turnover under the second proviso to section 5(2)(a)(ii) of the Act. The Financial Commissioner held that the transfer of property in the parts replaced as a consequence of the terms and stipulations of the warranty constituted a sale and must be deemed to be a continuation of the original sale, the price of which stood included in the consolidated sale price determined and realised at the time of transfer of goods in the shape of the car with a warranty and on which sales tax was paid and that, therefore, the parts so replaced under the warranty were not liable to the imposition of further sales tax. On a reference at the instance of the Commissioner of Sales Tax: Held, that the conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over and is liable to tax: Held, allowing the revision, that the transaction in question cannot be said to be a sale. The petitioner is the agent of the automobile manufacturer and the spare parts are given on the basis of warranty for replacement. It may be true that the petitioner had purchased the spare parts by giving C forms. But so far as the purchase of the spare parts is concerned, it is purely for replacement and not for sale. It is further seen that the credit notes are issued by the manufacturer reducing the sale value. The turnover of the spare parts which were given for replacement are to be exempted. Commissioner of Sales Tax v. Prem Nath Motors (P.) Ltd. [1979] 43 STC 52 (Delhi) followed. " In a recent decision of a Division Bench of the Andhra Pradesh High Court in Vijaya Vasava Motors v. Assistant Commissioner (LTU), Eluru Division, Eluru [2009] 19 VST 322 held that Mohd. Ekram's case [2004] 136 STC 515 (SC); [2004] 6 SCC 183; AIR 2004 SC 3965 would not apply prospectively and the Government order declaring it to be so applicable only prospectively was liable to be quashed. From the head note of the reports to quote: ". . . The law laid down by the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e foundational difference. (ii) In Mohd. Ekram's case [2004] 136 STC 515; [2004] 6 SCC 183; AIR 2004 SC 3965, as can be seen from para No. 5, the assessee had supplied the goods for which it received the consideration by way of credit notes and/or other modes of payments whereas in the present case the spare parts or defective parts collected by the assessee, M/s. Marudhara Motors, are sent back physically to the manufacturer M/s. Tata Motors, who either replenishes those spare parts or gives credit note equal to the value of such replaced new parts. Thus, transactions between dealer-assessee and customer is independent from the one between dealer and the manufacturer here. (iii) Such spare parts are supplied by the present assessee free of cost to the customers is a fact not disputed by the Revenue in the present case, whereas in Mohd. Ekram's case [2004] 136 STC 515; [2004] 6 SCC 183; AIR 2004 SC 3965 the honourable Supreme Court observed in para No. 6 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 transactions, it would have paid taxes. The position is not different because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the respondent-assessee, it is sine qua non by definition of "sale" itself that transfer of property in goods takes place for consideration. Admittedly, in the present case customer is not charged anything for the parts replaced by the respondent-assessee as a dealer of the manufacturer, M/s. Tata Motors, under the warranty agreement between the manufacturer and the customer. The manufacturer in discharge of its warranty obligation either replaces those defective parts which are physically sent back by the dealer or gives the equal credit in the form of credit notes against the debit notes sent by the assessee-dealer and, therefore, such credit notes cannot be said to be consideration or payment for such spare parts supplied by the assessee to the customer free of any cost. Thus, it appears to be more plausible to arrive at a conclusion that the same is in discharge of manufacturer's warranty obligation and amounts to reduction in sale value of the vehicle itself. Cost of such spare parts is also included in the cost of vehicle while giving such warranty for limited period to the customer and warranty is given by the manufacturer, therefore, replacing of spare parts cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mere agreement to sell. The State Legislature cannot, by enlarging the definition of 'sale' by including forward contracts arrogate to itself a power which is not conferred upon it by the Constitution, and the definition of 'sale' in section 2(h) of the Act 15 of 1948 must, to that extent, be declared ultra vires. 11.. It was, inter-alia, held as follows: '. . . It would be proper to interpret the expression "sale of goods" in entry 48 in the sense in which it was used in legislation both in England and India and to hold that it authorizes the imposition of a tax only when there is a completed sale involving transfer of title'. 12.. Significantly, the court observed about substance of the levy as under: '. . . The substance of the matter is that the sales tax is a levy on price of the goods, and the reason of the thing requires that such a levy should not be made, unless the stage has been reached when the seller can recover the price under the contract.' 13.. The aforesaid decision makes it clear that subject 'tax on sales of goods' in entry 48 of List II of the Seventh Schedule of the 1935 Act providing for legislative field of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 5 STC 193 (SC); AIR 1954 SC 459: 'A power to enact a law with respect to tax on sale of goods under entry 48 must, to be intra vires, be once relating in fact to sale of goods, and, accordingly, the Provincial Legislature cannot, in the purported exercise of its power to tax sales, tax transactions which are not sales by merely enacting that they shall be deemed to be sales. . . "sale" in entry 48 must be construed as having the same meaning which it has in the Sale of Goods Act, 1930. . . It is of the essence of this concept that both the agreement and the sale should relate to the same subject-matter.' 18.. Summing up the conclusions it was held: '. . . The expression "sale of goods" in entry 48 is a nomen juris, its essential ingredients being an agreement to sell moveable for a price and property passing therein pursuant to that agreement'. 19.. The State Legislature does not have legislative competence to give the expression 'sale of goods' extended meaning and to enlarge its legislative field to cover those transactions for taxing which do not properly conform to elements of sale of goods within the Sales Act. Tax on value of the material used i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed, and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability.' 25.. Obviously, all the four components of a particular concept of tax have to be inter related having nexus with each other. Having identified tax event, tax cannot be levied on a person unconnected with event, nor the measure or value to which rate of tax can be applied can be altogether unconnected with the subject of tax, though the contours of the same may not be identified. 26 to 29 . . . 30.. The question of tax on sale of goods may be examined in the said background. The subject of tax being sale, measure of tax for the purpose of quantification must retain nexus with 'sale' which is subject of tax. As noticed above, tax on sale of goods, is tax on vendor in respect of his sales and is substantially a tax on sale price. The vendor or buyer cannot be taxed de hors the subject of tax that is sale by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price/quantity in a completed sale transaction, for the purpose of levy of tax on the subject-matter of tax results in taking away from it the character of 'sale of goods' as envisaged under the Sales Act. 53.. . . . 54.. Every transaction of sale is independent and can be subject to levy of tax and the components and the measure which can make the tax levy effective must have nexus with the taxable event. 55.. By devising a methodology in the matter of levy of tax on sale of goods, law prohibits taxing of a transaction which is not a completed sale and also confine sale of goods to mean 'sale' as defined under the Act. This cannot be overridden by devising a measure of tax which relates to an event which has not come into existence when tax is ex-hypothesis determined, much less which can be said a completed sale and which cannot be subject of legislation providing tax on 'sale of goods' by transplanting a sum related to a 'likely price' to be charged for subsequent sale to be taxed by the devise of measuring tax for the completed transaction which has become subject of tax. 56.. . . . 57.. If the legislation can provide for a measure of tax on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of splitting the sale price of the commodity into the sale price of the commodity and the packing material relating to different commodities so as to constitute two sales in place of one. The provision is against splitting the cost incurred by dealer before commodity comes to the deliverable state." Thus, this court concludes that credit notes received from manufacturer by the assessee-dealer could not be taxed as sale value of spare parts replaced for defective parts under warranty by the manufacturer to the customer, in the present case. Consequently, the Tax Board cannot be said to have committed any error in distinguishing the judgment of Supreme Court in Mohd. Ekram's case [2004] 136 STC 515; [2004] 6 SCC 183; AIR 2004 SC 3965 and finding that in the facts and circumstances of the case, the assessing authority was not justified in imposing tax in the hands of the respondent-assessee. The Tax Board is also justified in upholding the setting aside of interest and penalty because as far as interest is concerned the same is consequential to levy of tax which falls to the ground for the aforesaid reasons and penalty also because same in any case could not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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