Supreme Court: Credit note issued by a manufacturer to the dealer in consideration of replacement of defective parts is exigible to sales tax

On May 16, 2023, the Supreme Court addressed the question “Whether the sale price of the car which had been subjected to the sales tax could be regarded as having included the cost or value of spare parts used in the replacement, in compliance with the stipulations in the warranty?” The bench hearing the matter consists of Justice BV Nagarathna, Justice Ahsanuddin Amanullah, and Justice KM Joseph. The Supreme Court bench stated that the transaction between the manufacturer and dealer while acting pursuant to a warranty has to be construed as sale within the meaning and definition of sale under the Sales Tax Acts under consideration. It opined that the sale of cars was along with the warranty to replace defective parts free of cost and the price was fixed at the time of the sale. Also, 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. 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. It further added that a credit note issued by a manufacturer to the dealer was a valuable consideration within the meaning of the definition of sale and hence, exigible to sales tax under the respective State enactments of the States under consideration. The bench added, “In the result, appellants-dealer/assessee are liable to pay sales tax under the respective State enactments under consideration.” 

In this case, M/s Marudhar Motors (assessee) is a dealer of TATA vehicles. Under the dealership agreement, the dealer/assessee would provide replacement of warranty goods sold to the customer. There exists a separate warranty agreement between the manufacturer and the ultimate customer to whom such vehicles were sold by the assessee. The power of reassessment was invoked by the assessing authority under Section 30 of the Rajasthan Sales Tax Act, 1994 to impose a tax on the assessee’s turnover having escaped assessment. Deputy Commissioner (Appeals) of Jodhpur passed an order upholding the levy of tax upon an assessee but setting aside the levy of interest and penalty imposed by the assessing authority under Section 65 of the Act. This decision gave rise to six cross-appeals filed by the assessee and another six appeals filed by the Revenue. The matter was further taken up by the Tax Board, which issued a common judgment on, disposing of all twelve appeals. It was found that the transaction of replacing the defective parts did not fall within the definition of ‘sale’. The High Court dismissed revision petitions and affirmed the order of the Tax Board. Also, it dismissed the revision against the order of Customs, Excise and Service Tax Appellate Tribunal wherein the transaction of replacement of spare parts as part of warranty was held not to be assessable. The High Court held that it was ‘well recognized that in the supply of spare parts to the customer by the dealer during the period of warranty free of charge, no sale consideration passes from the customer to the dealer and therefore, the cost of the spare parts cannot be included in the turnover of the sale of the dealer. The matter was then presented before the top Court. 

The Supreme Court opined that a warranty can only exist when the subject matter of the contract of sale was ascertained and existing so as to be capable of being inspected at the time of the contract. It was a collateral engagement that the specific thing possesses certain qualities after the passing of the property under the contract of sale to the buyer. The bench illustrated that when a person buys goods from a dealer and was given a guarantee issued by the manufacturer, “the main contract of sale is between the dealer and the purchaser or customer but the guarantee from the manufacturer is a collateral contract between the manufacturer and the customer.” The Supreme Court said that the warranty clause runs along with the sale of the automobile, firstly, from the manufacturer to the dealer on a principal-to-principal basis and secondly, from the dealer to the customer. The dealer may replace the defective part in the car either by receiving a spare part from the manufacturer directly. The top Court further highlighted that if the manufacturer of the automobile purchased the spare part from the open market or from the producer of the spare part, sales tax would be paid by the manufacturer on it and dispatched to the dealer to replace it in place of the defective part. After hearing the contentions, the bench allowed the appeals filed by the revenue stating that appellants-dealer/assessee are liable to pay sales tax under the respective State enactments under consideration.