Sales Tax liability on free replacement of defective parts in motor vehicles during warranty period. Matter to be decided by Larger Bench of SC
ABCAUS Case Law Citation:
ABCAUS 2773 (2019) (02) SC
Important Case Laws Cited/relied upon by the parties
Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, U.P., Lucknow 1 (2004) 6 SCC 183 ; Premier Automobiles Ltd. & Anr. Etc. v. Union of India 3 (1972) SCR 526 ; Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd ILR (1978) II Delhi 273 ; Prem Motors v. Commissioner of Sales Tax, Madhya Pradesh ; Geo Motors v. State of Kerala ; Commercial Tax Officer (Anti-Evasion), Jodhpur v. Marudhara Motors ; Navnit Motors Pvt. Ltd. v. State of Maharashtra18 ; Kataria Automobiles (P.) Ltd. v. State of Gujarat19 ; The Commissioner, Commercial Tax, Lko. v. S/S Maskat Motors Pvt. Ltd.
In the instant appeal, the issue concerned was the liability towards sales tax, in respect of the free replacement of defective parts in motor vehicles, during the period of warranty.
The appellant was a dealer of Cars. There was a warranty given to the purchaser for free replacement of parts, during the period of warranty. To facilitate this, the dealer was obliged to keep a stock of spare parts. The purchaser has an option to go to any dealer, and not be confined to the dealer from whom the purchase was made.
Sales tax was paid on the stock of spare parts purchased from Car Manufacturer. The defective parts are sent back to Manufacturer and credit note may be given by Manufacturer for the said parts. The customer would not pay for the replacement of the defective part.
The stand of the Revenue was that sales tax is liable to be paid even qua the return of the spare parts, as credit note is given for the same, to the dealer.
The Tribunal held in favour of the appellant dealer. However, the High Court, set aside the order passed by the Tribunal, restoring the order of the assessing authority.
Before the Hon’ble Supreme Court, both, the Petitioner and the Respondents placed reliance on a plethora of judgments.
The Hon’ble Supreme Court opined that the issue raised required to be looked into by a larger Bench. The crucial point which would arise for consideration, and over which the matter needed 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.
The Hon’ble Supreme Court clarified that the above question was in the context of 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 Hon’ble Supreme Court said that its judgment relied upon by the High Court refers to the credit notes received as consideration for the replacement; but it was a moot point whether credit notes can be treated as a mode of payment or not.
Accordingly it was decided to place the matter before Hon’ble the Chief Justice for necessary orders.