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TMI Blog2023 (5) TMI 744X X X X Extracts X X X X X X X X Extracts X X X X ..... -12808/2016), CIVIL APPEAL No.3740 of 2023, (@ SLP(C) No. 12280/2014), CIVIL APPEAL Nos.3725-3727_of 2023, (@ SLP(C) Nos. 5449-5451/2014), CIVIL APPEAL No.3724 of 2023, (@ SLP(C) No. 5447/2014), CIVIL APPEAL Nos. 3825-3826/2011, CIVIL APPEAL No. 3823/2011, CIVIL APPEAL No. 6172/2009, CIVIL APPEAL No. 3824/2011, CIVIL APPEAL No. 3820/2011 And CIVIL APPEAL No.3715_ of 2023, (@ SLP(C) No. 14260/2007) Hon'ble K.M. Joseph, Hon'ble B.V. Nagarathna And Hon'ble Ahsanuddin Amanullah, Jj. For the Appellant(s) : Mr. Kavin Gulati, Sr. Adv., Mr. Avi Tandon, Adv., Mr. Rohit Amit Sthalekar, Adv., Mr. Vishal Gehrana, Adv., Mr. Japppanpreet Hura, Adv., Mr. M. P. Devanath, AOR, Ms. Pragati Neekhra, AOR, Mr. Sonal Jain, AOR, Mr. R. K. Raizada, Sr. Adv., Mr. Bhakti Vardhan Singh, AOR, Mr. Ankit, Adv., Mr. Rahul Kaushik, AOR, Mrs. Manik Karanjawala, AOR, Mr. Irshad Ahmad, AOR, Mr. Yashraj Singh Deora, AOR, Mr. Priyesh Mohan Srivastava, Adv., Mr. Abhishek Singh, Adv., Mr. Punit Dutt Tyagi, AOR, Mr. P. K. Manohar, AOR, Mr. K. K. Mani, AOR, Ms. T.archana, Adv., Mr. Rajeev Gupta, Adv., Mr. Vinay Rajput, Adv., M/S. Karanjawala & Co., AOR, Mr. V Sridharan, Sr. Adv., Ms. Apeksha Mehta, Adv., Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to as the "Reference Order". The pertinent paragraphs of the Reference Order read as under: "15. We are not delving into the controversy in any further detail as we are of the opinion 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. This is in the context of the observations discussed aforesaid regarding the price of the car being inclusive of the cost of the spare parts, the latter being supplied for free, upon replacement. Sales tax on the car is paid. Sales tax on the inventory purchased by the dealer is paid. Thus, if there is no consideration for these replaced parts, can sales tax be levied at all? The judgment in Mohd. Ekram Khan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183] refers to the credit notes received as conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar questions of law. Thus, the facts in Commercial Tax Officer vs. M/s Marudhar Motors, C.A. No. 3856/2013 only are encapsulated for the sake of convenience as under: i. The assessee, M/s Marudhar Motors is a dealer of TATA Vehicles. Under the dealership agreement, the dealer/assessee would provide replacement of warranty goods sold to the customer. ii. There exists a separate warranty agreement between the manufacturer and the ultimate customer to whom such vehicles are sold by the assessee. iii. In the normal course of business transactions involving the sale of automobile parts, Tata Motors sells vehicles and spare parts to Marudhara Motors by charging CST against "C" form. Thereupon, Marudhara Motors sells these goods to customers through invoices collecting local sales tax at a price not exceeding the maximum price prescribed by the manufacturer. iv. However, in the case of warranty claims raised by customers due to the emergence of defects in some parts, such parts are replaced free of cost to the customers to avoid delay in first securing such parts from the manufacturer, Tata Motors, and replacing the same. The dealer, on behalf of the manufacturer, collects a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 86 of the Rajasthan Sales Tax Act, 1994. The Rajasthan High Court, while dismissing these revision petitions and affirming the order of Rajasthan Tax Board, distinguished the facts in the case from the facts and reasoning in Mohd. Ekram Khan by underlining three distinguishing factors. Firstly, it noted that the agreement between the manufacturer and dealer reflected a principal-to-principal relationship, and not a principal-agent relationship. Secondly, it was noted that the transaction between manufacturer and dealer, pertaining to the return of defective parts to the manufacturer and the issue of credit notes to the dealer, is independent of the transaction between manufacturer and customer, pertaining to the discharge of warranty obligation. Thirdly, it was considered that the warranty obligation was being discharged free of cost. It was noted that, Mohd. Ekram Khan was decided on the premise that the dealer assessee had supplied the parts and had received the price. Gist of Cases under consideration: 7. The present appeals assail judgments rendered by eight High Courts. While all fifteen decisions rendered by Rajasthan High Court are in the favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of the dealer.' 7.3. In a later judgment rendered by the same High Court, the above decision was found to be of no assistance to the assessee. Therefore, in The Commissioner, Commercial Tax Lko. vs. S/S Maskat Motors Pvt. Ltd., decided on 08.12.2016, the said Court reversed the finding of the Tribunal that the imposition of the tax was not justified because defective parts of motor vehicles have been replaced free of cost and the manufacturer had issued credit notes. The High Court found the above conclusion to be perverse, self-contradictory, and 'contrary to the charging section as well as the definition of "Sale" under the U.P. Act and Central Act.' Applying Mohd. Ekram Khan, the High Court found all elements of sale to be completed as the transaction of supply of spare parts to consumers was concluded by the payment of valuable consideration by the manufacturer in the form of credit notes to the dealer. Therefore, the High Court held that the assessee has sold spare parts for valuable consideration attracting liability to tax under the U.P. Act. 7.4. The assessees have impugned four decisions of the Karnataka High Court. All these decisions have followed the reasoning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the transaction was not taxable. 7.8. The three impugned decisions, emanating from the Bombay High Court, follow the decision in M/s Navnit Motors Pvt Ltd. vs. State of Maharashtra, decided on 29.11.2011. The High Court recorded that the Sales Tax Tribunal had declined to refer the matter to the High Court under Section 61 of the Bombay Sales Tax Act, 1959. It further noted that the Tribunal, while following the law laid down in Mohd. Ekram Khan found that the dealer was not an agent of the manufacturer, i.e., Maruti Udyog Ltd. Furthermore, it was observed that the title and risk in the goods pass to the dealer once it is purchased from Maruti Udyog Ltd. and the delivered goods pass to him at the factory gate. Moreover, the replacement for defective parts covered by warranty is done by the dealer out of his stock of purchased goods. Also, the cost of parts incurred by the dealer in carrying out a repair, or replacement of the defective part is reimbursed by the manufacturer. The High Court rejected the attempt of the assessee to distinguish the facts in Mohd. Ekram Khan as the attempt was premised on the assertion that in Mohd. Ekram Khan, the relationship between the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defective parts were purchased from the open market, the manufacturer would have been obliged to pay sales tax. 7.11. Two decisions of the Andhra Pradesh High Court are assailed in the present case by the assessees. These cases pertain to M/s Jasper Industries (P) Ltd. vs. State of Andhra Pradesh, decided vide common order dated 11.02.2011. The High Court applied the dictum in Mohd. Ekram Khan and reasoned that it was not open to the High Court to distinguish the judgment of the Supreme Court on a microscopic examination of the different facts situation. Therefore, the High Court refused to entertain the view of the Rajasthan High Court, as enunciated in Marudhara Motors. Triology of Cases considered/overruled in Mohd. Ekram Khan: 8. The three cases considered in Mohd. Ekram Khan shall be discussed at this stage. I. Commissioner of Sales Tax vs. Prem Nath Motors, (1979) 43 STC 52 (Delhi): (Prem Nath Motors) (i) The aforesaid case was a sales tax reference in which the following two questions were referred to the High Court of Delhi: "(I) Whether, having regard to the facts and circumstances of the case, the replacement of the parts during the continuance of the warranty en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the warranty to replace defective parts free of cost and the price was fixed at the time of the sale. After noting the distinction between the condition and warranty in a contract of sale of goods, it was observed that the consideration on the defective part, that might be replaced under the warranty was not separately specified because it was included in the price fixed at the time of sale of the car. In other words, the transfer of property and the part replaced in pursuance of stipulation of warranty is part of the original sale of the car for the price fixed and received from the buyer or consumer. The price so fixed and received was a consolidated price for the car and the parts that may have been supplied by way of replacement in pursuance of the warranty. Accordingly, it was observed that the Financial Commissioner was right in holding that the price for the replaced part was already charged and paid, on which sales tax was already levied and collected and hence, there was no liability to the imposition of further sales tax. II. Prem Motors, Gwalior vs. Commissioner of Sales Tax, Gwalior, 1986 (61) STC 244 MP: (Prem Motors) (i) The question considered in the said case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacement, the petitioner therein would make a claim to the manufacturer who would issue the credit notes. The manufacturer would issue credit notes for the value together with excise duty and sales tax, thereby, cancelling the original sale made to the petitioner in respect of the item replaced. Therefore, it was contended that there was only a sale cancellation between the manufacturer and the petitioner and that the petitioner therein had already suffered tax at the point of a sale and therefore, every component part of the car would have to be taken to have suffered tax at the point of a sale and when replacement was made it is in respect of an item which has suffered a tax at the point of a sale. According to the revenue, the replacement of the spare parts was by purchase made from outside the State by issue of C-forms. (ii) The Division Bench of the Kerala High Court held that the transaction in question cannot be said to be a sale. That the purchase of spare parts may have been by giving C-forms but it was used purely for replacement and not for sale. That credit notes are issued by the manufacturer by reducing the sale value. In this regard, reliance was placed on Prem N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition in Prem Nath Motors case was different. That in Geo Motors and Prem Motors, the nature of the transaction between the assessee and manufacturer was lost sight of. It was observed that when the manufacturer may have purchased from the open market, parts for the purpose of replacement of the defective parts, it would have paid taxes. But the position is not different because the assessee had supplied the parts and had received the price. That the assessee had received the payment of the price supplied to the customer. Therefore, the transaction is subject to levy of tax. The decisions in Geo Motors and Prem Motors were overruled. It is in the above context that the Reference Order has been passed doubting the aforesaid observations. Submissions: 10. We have heard learned senior counsel and learned counsel for the respective parties at length and shall proceed to answer the reference. Arguments on Behalf of Assessees in the present Appeals/SLPs: I. Submissions of Sri Kavin Gulati, senior counsel for the appellant in Civil Appeal No.1822/2007: (i) Learned senior counsel Sri Gulati submitted that the Tata Motors dealership agreement, particularly clauses 1(a), 1(b), 1(e), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and through him, the dealer, while selling the original goods. As the spare parts are deducted from the stock of the dealer due to convenience, credit is deservedly given by the manufacturer to the dealer to account for the value of the goods supplied on behalf of the manufacturer. d. fourthly, any dealer of the manufacturer herein can be approached for discharging the warranty obligation free of charge. e. fifthly, the department has wrongly assumed that the supply of spare parts to the customer is a sale made to the manufacturer albeit the title is being transferred to the customer on account of the dealership agreement. (iii) Learned senior counsel further submitted that replacement of spare parts during the warranty period does not constitute a sale. This proposition is supported by Section 12(3) of the Sale of Goods Act, 1930 ("the Act", for short) which states that a warranty is a stipulation collateral to the main purpose of the contract. Reliance was also placed upon the decision of the Canadian Supreme Court in General Motors Products of Canada Ltd. vs. Leo Krabvitz, (1979) SCC Online CAN SC 2, wherein it was clarified that the warranty claim by a purchaser was conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he manufacturer's warranty obligation, which forms a part of the original sale of the automobile. Sri Bagaria referred to the relevant clauses of the Dealership Agreement and Warranty Policy to highlight two facts: (a) dealers are contractually obligated to provide free-of-cost warranty services for warranty parts to the customer and (b) defective parts are returned by the customers and become the property of the manufacturer. (ii) Learned senior counsel clarified that the nature of the transaction was as a compensation to the buyer, and the measure thereof was equivalent to the cost of exchange of defective parts. He cited Benjamin's Sale of Goods Act (10th edn., para 16.032) to underline the compensatory principle, following which the manufacturer compensates the buyer for the breach that occurred by way of the defect in the part covered by way of a warranty. Citing para 1.069, learned senior counsel asserted that a transaction involving contractual compensation would not amount to the sale of a thing as the property passes merely as an incident of performance of a contract of indemnity. (iii) Therefore, learned senior counsel submitted that enforcement of a contractual right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel maintained that there is no inter-state movement of replacement parts as they are fitted at the dealer's location. There is only the movement of defective parts from the dealer's location to the manufacturer if located in another State. (iii) Learned senior counsel stressed the importance of keeping prudent commercial sense in mind while construing the contractual obligations in the present case. In this regard, the decision of the United Kingdom Supreme Court in Rainy Sky SA & Orad vs. Kookmin Bank, (2011) UKSC 50 was cited wherein it was held that the Court was entitled to prefer the construction which is consistent with business common sense. Therefore, it was submitted that the contract of warranty cannot be equated with a contingent contract of sale, with the contingency being the occurrence of a defect in the parts covered under the warranty. Moreover, the construction preferred by the Revenue that there is an agreement to sell an unspecified good in the future for which the manufacturer will pay the consideration is an unreasonable one. On the other hand, the decision of this Court in Nabha Power Ltd. vs. Punjab State Power Corporation Ltd., (2018) 11 SCC 508 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a car and reasoned that even when a customer did not purchase a car with a warranty but had taken an insurance, his expenses on the replacement of defective parts are reimbursed. Yet, the transaction is understood as a component of the taxable turnover of the dealer as per Explanation (5) to Section 2 (xxi) of the Kerala General Sales Tax Act, 1963. Even when the customer enforces the warranty, the dealer obtains a discharge of warranty obligation as a valuable consideration for the transfer of fresh parts from the dealer to the customer. The car dealer gets the replacement of parts as co-warrantor from the manufacturer towards the discharge of warranty obligation either on a principal-to-principal basis or as an agent of the manufacturer. Moreover, there exists a form of recompense from the manufacturer to the dealer. It makes no difference if the recompense is in the form of a credit note or cheque or cash. Irrespective of the nature of the transfer of goods between manufacturer and dealer, it is a sale for the purposes of sales tax laws. (ii) It was submitted that the Prem Nath Motors line of cases was decided on fallacious reasons, and the decision in Mohd. Ekram Khan deserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 8(4) of Central Sales Tax Act, 1956 read with Rule 12 of Central Sales Tax Rules, 1957. Any internal adjustment qua accounts or even contracts is alien for the charging section to operate. Thus, in the case at hand, all spare parts were sold against C-Forms, and have been sold again, in violation of conditions pertaining to resale. That, spare parts were fitted during the warranty period for a consideration given by way of credit notes by the manufacturer. Therefore, the penalty is bound to be imposed on Dealer/Manufacturer company. Submissions of Sri Nikhil Goel, Counsel for the State of Karnataka in Civil Appeal Nos. 1822/2007, 1821/2007 and SLP (C) Nos. 5449-5451/2014, 5447/2014: (i) Sri Goel, learned counsel submitted that the Karnataka Value Added Tax Act, 2003 specifically excludes those transactions which are not sales. Since the transaction under dispute is not specifically excluded, the assessees have sought to canvass that it does not satisfy the definition of sale under Section 2(t) of the Karnataka Value Added Tax Act, 2003. It was further submitted that the four elements of the sale are completed in the transaction under dispute. The State seeks to tax sales and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er submitted that all elements of sale are complete because there is a seller and a buyer, i.e. dealer and manufacturer; valuable consideration was paid by the manufacturer in the form of credit notes and the transfer of the property of goods is taking place to the nominee of the manufacturer, i.e. car purchaser. It was also contended that there is no question of the delivery of spare parts and the consequent payment by way of credit note being an instance of sales return. The sale of the car is separate from the sale of spare parts, the sales in question would be specifically applicable to the latter. Submissions of Ms. Deepanwita Priyanka, Counsel for the State of Gujarat in SLP (Civil) Nos. 12806-12808/ 2016: (i) Learned counsel submitted that the assessee's claim for exemption from payment of sales tax is not covered by the exemption notification issued under Section 8(4) of Central Sales Tax Act, 1956 on 13.05.2002. It was submitted that the burden of proving exemption was on the assessee and that the benefit of any ambiguity ought to go to the State. 11. Points for consideration: (i) Whether the judgment of this Court in Mohd. Ekram Khan calls for reconsideration in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enshrined under Sections 19 to 24 of the Act. The contract may be oral or in writing, or it may be inferred even from the conduct of the parties, but it must originate from an offer and its acceptance. A sale must not be distinguished from a mere agreement to sell. If under the contract of sale, title to goods has not passed, then there is an agreement to sell and not a completed sale. An agreement to sell becomes a sale when the time lapses, or the conditions are fulfilled, subject to which the property in the goods are transferred. Thus, under the common law as well as the statute law, relating to sale of goods, it is of the essence that there must be an agreement, express or implied, relating to goods, to be completed by passing of title therein and also the agreement and the sale should relate to the same subject-matter. Thus, existence of a contract to sell is sine qua non for the coming into existence of a sale. 12.3. Therefore, the following elements must be present to constitute a valid contract of sale, namely, - (1) a contract (as required by the Act and the Contract Act); (2) between two parties, (the one called the "seller" and the other called the "buyer"); (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the very goods in which eventually the property passes. It was further observed in the aforesaid case that both under the common law and the statute law relating to sale of goods in England and in India, to constitute a transaction of sale, there should be an agreement, express or implied, relating to goods to be completed by passing of title in those goods. It is of the essence of this concept that both the agreement and the sale should relate to the same subject matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has got a right to reject them, or to accept them and claim damages for breach of warranty. Under the law, therefore, there cannot be an agreement relating to one kind of property and a sale as regards another. Thus, the expression sale of goods must relate to an agreement between the parties for the sale of the very goods in which eventually the property passes. 12.6. It was further observed that the interpretation to the expression sale of goods in Gannon Dunkerley and Co.-I was made on the basis of the common law definition contained in Blackstone, Benjamin on Sale, Halsbury's Law of England, Chalmer's Sale of Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of these cases and the same read as under: "12. Condition and warranty. - (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. (2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. (3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. (4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract. 13. When condition to be treated as warranty. - (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. (2) Where a contract of sale is not severable and the buyer has accepted the goods o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt, default or miscarriage of another person whose primary liability to the promisee must exist, or be contemplated. It is an additional or collateral or conditional contract as distinguished from an original or absolute contract. 13.3. A warranty can only exist when the subject matter of the contract of sale is ascertained and is existing so as to be capable of being inspected at the time of the contract. It is a collateral engagement that the specific thing possesses certain qualities after the passing of the property under the contract of sale to the buyer. A warranty may be express or implied. It is express if entered into a contract in express terms or implied when deemed to be entered into a contract by implication of law, that is, in the absence of express stipulation to the contrary. 13.4. A breach of the warranty cannot entitle the vendee to rescind the contract and revest the property in the vendor without his consent. Under Section 59 of the Act, the remedies available for a breach of warranty for a seller are prescribed. One of the remedies is the right to return of goods; return of goods by the buyer falls into two categories, namely, (i) where there is an obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (iv) Thus, a contract between two persons may be accompanied by a collateral contract between one of them and a third person relating to the same subject matter. When a person buys goods from a dealer and is given a guarantee issued by the manufacturer, the main contract of sale is between dealer and the purchaser or customer but the guarantee from the manufacturer is a collateral contract between the manufacturer and the customer. To be enforceable as a collateral contract, a promise must be supported by consideration. (i) In the case of purchase of goods by the customer from the dealer for consideration, the guarantee from the manufacturer is collateral contract between the manufacturer and the customer. (ii) When a customer buys goods from a shop and the payment involves use of cheque, cards or credit cards issued by the bank, the main contract is between the customer and the shopkeeper but there is also a contract between the shop keeper and the issuer of the credit card, by which the latter undertakes that the shop keeper will be paid. (iii) In the case of a hire-purchase agreement, the primary contract is the customer entering into a hire-purchase agreement with the finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13.7. In the context of levy of excise duty on the manufacturer who is also a seller at the point of first sale, this Court in Medley Pharmaceuticals Ltd. vs. Commissioner of Central Excise and Customs, Daman, (2011) 2 SCC 601 at paragraph 12 referred to Firm Ram Krishna Ramnath Agarwal vs. Municipal Committee, Kamptee, AIR 1950 SC 11 which had in turn referred to the distinction made by the Federal Court between a duty of excise and a tax on sale in Province of Madras vs. Boddu Paidanna and Sons, AIR 1942 FC 33 wherein it was observed as under: "9. ... ... Plainly, a tax levied on the first sale must, in the nature of things, be a tax on the sale by the manufacturer or producer; but it is levied upon him qua seller and not qua manufacturer or producer. It may well be that a manufacturer or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking 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. 15. 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. 16. It was further observed in Mohd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pare part is done during the warranty period free of charge, the same cannot be treated as a sale and included in the taxable turnover, even if the purchase of such spares was effected from outside the State by issuance of 'C' forms. This is because the transaction between the dealer and the customer is one as an agent of automobile manufacturer and the spare part is given on the basis of the warranty for replacement even though the dealer may have purchased the spare part by giving the 'C' form. It is purely for replacement and not for sale. Credit notes are also issued by the manufacturer reducing the sale value. Therefore, the spare parts which are given for replacement have to be exempted from the turnover. 19. In the Reference order, an attempt has been made to distinguish the judgment in Mohd. Ekram Khan by contending that a car manufacturer would enter into an agreement with the manufacturer of components, providing for a warranty so far as the components are concerned. During the period of warranty, the car manufacturer or his dealer has to replace the defective part free of cost. The whole object behind the warranty is that a consumer who has made a heavy investment, whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo situations are identical. Thus, a situation where the assessee supplies the part from his own stock and receives a credit note by way of recompense for the said replacement from the manufacturer is construed to be identical to a situation where a manufacturer buys a spare part from the open market and replaces the defective part through the dealer (assessee) and the dealer returns the defective part to the manufacturer. In the latter situation there would be no recompense paid to the dealer as the dealer has acted merely as an intermediary and/or an agent of the manufacturer in replacing the defective part with a part received from the manufacturer and returning the defective part received from the customer to the manufacturer. In contradiction, if the dealer replaces a defective part from his own stock and returns the defective part to the manufacturer, pursuant to a warranty clause appended to a sale of an automobile and, in turn, receives a recompense for the same, can it be termed a sale is the question to be considered. 24. In both of the above situations, firstly, a dealer is acting pursuant to a warranty which he is bound to honour along with the manufacturer vis-à ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rne in mind is that the replacement of the spare part is from the stock of the dealer who would have earlier bought the same by paying the requisite tax on the same. If the said part, instead of being replaced pursuant to the warranty free of cost had been sold, the dealer would have earned a return on his investment and possibly with a reasonable profit also and would have also collected the sales tax. But when the dealer replaces a defective part with a spare part from his stock pursuant to a warranty, he does not receive anything in return from the customer for the spare part used from his own stock. It is in such a situation that the manufacturer issues a credit note to recompense the dealer for his investment on the spare part in his stock which was used to replace a defective part pursuant to a warranty in the sale of automobile as nothing would have been received in return from the customer. This is because if the spare part from the stock of the dealer had been sold to any other customer, across the counter and not pursuant to any warranty, he would have received a return on his investment. But such a return is not received by the dealer from the customer when he replaces a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art which he used to replace a defective part pursuant to a warranty clause, he would have received a return for his investment plus a profit. But, while acting under the warranty on behalf of the manufacturer, the dealer does not receive any price from the customer. Hence, he is recompensated by the manufacturer in the form of a credit note. 29. In this context, it is necessary to understand the legal import of the expression credit note which has been cited by Sri Kavin Gulati, learned senior counsel for the appellants. According to various dictionaries and references, definitions of credit note are as follows: (i) In P. Ramanatha Aiyar, Advanced Law Lexicon, 6th Edition, Volume 1 - "Credit Note" is defined as "A note showing that an allowance is to be made for shortage or defects in goods supplied and returned to sender, or for overcharge in price. The term is also used for a note or document that confirms the availability of funds for future purchases (as when goods are paid for but later returned to the supplier)". A "sales credit note" is defined as - "Note sent from a seller to a buyer to cancel (partly or in total) a charge that has already been invoiced. The credit thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 already discussed above. 31. Thus, as a sequel to the aforesaid discussion, the following situations may be adumbrated by way of illustration. When a dealer-assessee sells an automobile to a customer containing a warranty for the replacement of a defective part of the automobile in terms of the warranty and when the customer during the period of warranty approaches the dealer for the replacement of a defective part, the dealer could resort to the following: - (a) request the manufacturer to supply the defective part of the automobile for replacement. In such a situation, the manufacturer of the automobile could do any of the following: - (i) send the spare part from his factory either as a manufacturer of the same to the dealer for replacement and seek return of the defective part, or (ii) pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the dealer can be termed to be a "sale" between manufacturer and the dealer within the meaning of the definition of "sale" under the Sales Tax Acts is the question. In other words, can it be construed that when the dealer has utilised a spare part from his own stock to undertake an obligation pursuant to a warranty for the sale of an automobile on behalf of the manufacturer to the customer and by acting as an intermediary, there would be a "sale" between a dealer and manufacturer of the automibile of the spare part and thus, a credit note being issued by the manufacturer to the dealer? 34. It has to be borne in mind that there is no transfer of property between the manufacturer and the dealer when the spare part from the stock of the dealer is used for the purpose of replacement of defective part in the automobile. The spare part used from the stock of a dealer is the property of the dealer which could have been either sold to any other customer and seek a return on his investment, in which case, the customer would have paid the requisite taxes to the dealer. Alternatively, the spare part could also be used from the stock maintained by the dealer to replace a defective pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for replacement of a defective part and the dealer does so from his own stock of the spare parts, he receives a credit note from the manufacturer of the automobile. What is significant to note is in both of the aforesaid situations, there is transfer of property in the goods from the dealer to the customer. 36. Thus, the bifurcation of the two transactions as suggested by learned senior counsel Sri Sisodia, i.e., one, between the dealer and the customer for the sale of the automobile and the second, between the manufacturer and the dealer, when the dealer is discharging his warranty pursuant to the sale of the automobile, cannot be accepted. 37. But the issuance of a credit note to a dealer by a manufacturer is only when the dealer replaces a spare part from his stock in the automobile to the customer or has purchased the spare part from the open market for the said purpose and returns the defective part to the manufacturer which is pursuant to the warranty appended as a collateral agreement to the earlier sale of the automobile and the dealer acting on behalf of the manufacturer. Hence, whether the revenue is right in contending that the credit note issued to the dealer whilst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 41. For ease of reference, the definition of "sale" and "sale price" under the Rajasthan Value Added Tax Act, 2003, which is one of the legislations under consideration as per Section 2(35) and (36), are extracted for easy reference: "(35)"sale" with all its grammatical variations and cognate expressions means every transfer of property in goods by one person to another for cash, deferred payment or other valuable consideration and includes- (i) a transfer, otherwise than in pursuance of a contract, of property in goods for cash, deferred payment or other valuable consideration; (ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (iii) any delivery of goods on hire-purchase or other system of payment by instalments; (iv) a transfer of the right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) a supply of goods by an uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a sale, but only an exchange or barter. If no consideration is given, then it will be a gift. 43. However, under Section 2(g) of the Central Sales Tax Act or the Sales Tax Act of the respective states under consideration, sale, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration. The definition of sale under the Sales Tax legislations are in consonance with Article 366(29-A) as per the Constitution 46th Amendment Act, 1982. The expression "dealer" is defined in Section 2(b) of the Central Sales Tax Act and, accordingly, under the respective State Acts to mean any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred payment, or for commission, remuneration or other valuable consideration. 44. The expression "valuable consideration" is not defined either under the Central Sales Tax or under the respective State Acts under consideration. "Price" is the amount of consideration which a seller charges the buyer for parting with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would supply to 'A' the article named by him. It was held that the consideration was not only money paid or promised to be paid, but it was something more. According to the High Court of Madras, the title to the goods did not pass to 'A' under a contract of sale. The transactions were held not to be sales liable to tax. However, the State came up to this Court contending that the respondent therein had offered the coupons against payment, in the scheme of circulation sales, and the article of choice was ultimately sent to the customer for payment of a price which was accepted by the customer; there was, thus, offer and acceptance. All the attributes and characteristics and requirements of a sale were present in the transaction. Though, designed by the adoption of a circuitous method, the transaction amounted to nothing but a sale and was liable to sales tax. 46. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The seller can obtain through the banking system in direct debit forms to the buyer's bank. A converse to the system of direct debit is the credit note issued by a buyer in favour of a seller which is a recompense or monetary benefit showed in the buyer's accounts. Thus, the use of the banking system by instructing the bank to transfer of balance from the buyer's account to the credit of a seller is a form of transmission of a valuable consideration. 48. 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. On discharging his obligation under the warranty appended to a sale of an automobile, a dealer receives a credit note. This would be a receipt in the account of the dealer and a liability in the returns of the manufacturer which may ultimately enable the manufacturer to decrease his tax liability. Consequently, the dealer of the automobile in whose account a credit is shown would be ultimately a recipient of a valuable consideration on account of a transfer of goods, namely, spare part by a dealer to a customer while discharging his obligation under a war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration through the mode of credit note signifies 'other monetary payment in the nature of a valuable consideration.' This decision is hence of no assistance to the assessees in the present case. 50. Our attention was also drawn to this Court's decision in CIT vs. Motors and General Stores (P) Ltd., (1967) 3 SCR 876. This Court, in that case, adjudicated the exigibility of the profits emanating from the sale of assets by way of transfer of 5% tax-free cumulative preference shares under the Income Tax Act. This Court noted that the transaction was one of exchange and the value of shares, as well as immovable properties, were recorded solely for the purpose of computing stamp duty. Due to the sheer variance of facts in the above case to the present cases, we find the above decision to be of no assistance. 51. We, however, clarify that the judgment of this Court in Mohd. Ekram Khan must be read in the context of a case where a dealer is utilising a spare part from his stock to replace a defective part under a warranty and receiving a recompense in the form of a credit note from the manufacturer. When given such an understanding of the judgment in Mohd. Ekram Khan to the aforesaid c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the controversy under the provisions of the Rajasthan Sales Tax Act, 1994 in the context of a dealer of automobiles receiving credit notes issued by the manufacturer for replacement of defective parts of the automobiles, supplied by the dealer under a warranty agreement between the manufacturer and the ultimate customers to whom vehicles were sold by the dealer (assessee). After referring to the judgment of the Supreme Court in Mohd. Ekram Khan in paragraph 20, the major points of distinction between the facts in Mohd. Ekram Khan case and in the said case were considered in paragraph 21 and it was observed as under: "21. .... Since title of property in goods namely spare parts passes from the hands of respondent assessee to the customer free of cost and such title of property in spare parts does not pass from assessee dealer to the manufacturer, no taxable sale can be said to have taken place in the hands of respondent assessee at all." 56. Thereafter, the learned Single Judge of the Rajasthan High Court has observed that: "22. In other words, where there is supply of spare parts to the customer by the dealer there is no consideration passing as it is free of cost and wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be overruled. 58. We further place reliance on the decision of this Court in Govind Saran Ganga Saran vs. Commissioner of Sales Tax, AIR 1985 SC 1041 while analysing Article 265 of the Constitution while noting as follows: "The components which entered into tax are well known. The first is the character of the imposition known by its nature which transpires attracting the levy. The second is a clear communication of the person on whom the levy is imposed and which is obliged to pay the tax. The third is rate at which the tax is imposed and the fourth is the measure or value to which the rate is applied for computing the tax liability". Obviously, all the four components of a particular concept of tax has 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." 59. Reliance was placed on behalf of the Revenue on Dhampur Sugar Mills Ltd. vs. Commissioner of Trade Tax, U.P., (2006) 5 SCC 624, wherein the question was, whether, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The aforesaid judgment is squarely applicable to the facts of the present cases on the interpretation of the expression valuable consideration in the definition of sale in the legislations under consideration. 61. In Commissioner of Central Excise, Mumbai vs. Fiat India Private Limited, (2012) 9 SCC 332, this Court observed that consideration means something which is of value in the eye of the law. In other words, it may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other. 62. Webster's Third New International Dictionary (unabridged) defines, consideration thus: "Something that is legally regarded as the equivalent or return given or suffered by one for the act or promise of another." In Salmond on Jurisprudence, the word "consideration" has been explained in the following words: "A consideration in its widest sense is the reason, motive or inducement, by which a man is moved to bind himself by an agreement. It is for nothing that he consents to impose an obligation upon himself, or to abandon or transfer a right. It is in consideration of such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee carries out on behalf of the manufacturer. There is transfer of property in the spare part from the stock of the dealer to the customer for which the manufacturer pays by way of a credit note. The said promise is carried out and a valuable consideration is received by the dealer through credit notes. In substance, when the dealer receives a credit note, it is a sale within the meaning of the definition under the respective sales tax legislation under consideration, pursuant to the warranty for which the manufacturer compensates the dealer by issuance of a credit note. 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. 66. In this context, it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is because the manufacturer would have proposed to the dealer to recompensate the dealer for the above act which proposal would have been accepted by the dealer and, thus, the manufacturer who has made the proposal is the promisor and the dealer who has accepted the proposal is the promisee. Further, when at the desire of the promisor (the manufacturer), the promise (the dealer) does some act or promises to do an act, such act or promise is called consideration for the promise. Therefore, 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. 69. In view of the above, 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. 70. In the circumstances, the reference is answered in the following terms: i) The judgment of this Court in M ..... X X X X Extracts X X X X X X X X Extracts X X X X
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