A two-judge bench of the Supreme Court has referred to the issue of leviability of sale tax on free replacement of defective parts during the warranty period.
Justices L Nageswara Rao and Sanjay Kishan Kaul were hearing an appeal filed by Tata Motors.
The bench doubted the correctness of 2004 judgment in the case Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, U.P., delivered by a bench of Justices S N Vairava and Arijit Pasayat, which had held that sales tax will be payable in such instances.
The Court’s reasoning in Mohd. Ekram Khan was based on the fact that when defective parts are returned by the dealer to the manufacturer, it is issued a credit note by the manufacturer.
According to the Revenue, sales tax is liable to be paid as credit note is given for the spare parts to the dealer.
Senior Counsel P Chidambaram appearing for the dealer took the bench through several decisions of SC and High Courts prior to Mohd.Ekram, which consistently took the position that that free supply of spares cannot be regarded as sale(Premier Automobiles Ltd. & Anr. Etc. v. Union of India, Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd, Premier Automobiles Ltd. & Anr. Etc. v. Union of India etc). The line of thinking in
“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 the Mohd. Ekram Khan & Sons23 case refers to the credit notes received as consideration for the replacement, but it is a moot point whether credit notes can be treated as a mode of payment or not. The judgment in Premier Automobiles Ltd. & Anr. The etc.24 case is stated to contain a different factual situation, as per the observations in the Mohd. Ekram Khan & Sons25 case. There are observations referred to above, again in the Mohd. Ekram Khan & Sons26 case, of the possibility of the manufacturer having purchased, from open markets, the parts for replacement, on which taxes would be paid. In that context, it was observed that “the position is not different because the assessee had supplied the parts and received the price.” The assessee actually had purchased the parts and paid sales tax on it, but on the return of the defective part to the manufacturer, was given a credit note,” the bench said.
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