M/S. TATA MOTORS LTD. versus THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES (SPL) & ANR. on 5 February 2019

[2019] 3 S.C.R. 835

M/S. TATA MOTORS LTD.

v.

THE DEPUTY COMMISSIONER OFCOMMERCIAL TAXES (SPL) & ANR.

(Civil Appeal No. 1822 of 2007)

FEBRUARY 05, 2019

[L. NAGESWARA RAO AND SANJAY KISHAN KAUL, JJ.]

Sales Tax :–

Liability towards, in respect of the free replacement of defectiveparts in motor vehicles, during the period of warranty – Appellant,dealer of Tata Motors – Warranty is given to the purchaser for freereplacement of defective parts, during the period of warranty – Tofacilitate this, the dealer is obliged to keep a stock of spare parts –Sales tax is paid on the stock of spare parts so purchased from TataMotors – Defective parts are sent back by the dealer to Tata Motorsand credit note may be given by Tata Motors for the said parts –Plea of Revenue that sales tax is liable to be paid even qua thereturn of the spare parts, as credit note is given to the dealer for thesame – Assessment order and appeal went against the appellant –Tribunal held in favour of the appellant – High Court set aside theorder and restored the order of the assessing authority – Held:Judgment in Mohd. Ekram Khan & Sons case refers to the creditnotes received as consideration for the replacement; but the mootpoint is whether credit notes can be treated as a mode of paymentor not – Issue raised, as to whether, in the case of warranty for thesupply of free spare parts; once the replacement is made, and thedefective part is returned to the manufacturer, sales tax would bepayable on such a transaction, based on a credit note, which maybe issued for the said purpose, required to be looked into by alarger Bench – Papers be placed before Hon’ble the Chief Justicefor necessary action.

Referring the matter to larger Bench, the Court HELD : 1.1 The crucial point which would arise forconsideration, and over which the matter needs to be debated, isas to whether, in the case of such a warranty for the supply of free

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Aspare parts; once the replacement is made, and the defectivepart is returned to the manufacturer, sales tax would be payableon such a transaction relating to the spare part, based on a creditnote, which may be issued for the said purpose. The issue raisedis required to be looked into by a larger Bench. This is in thecontext of the observations regarding the price of the car beingBinclusive of the cost of the spare parts, the latter being suppliedfor free, upon replacement. Sales tax on the car is paid. Salestax on the inventory purchased by the dealer is paid. Thus, ifthere is no consideration for these replaced parts, can sales taxbe levied at all? The judgment in the Mohd. Ekram Khan & SonsCcase refers to the credit notes received as consideration for thereplacement; but it is a moot point whether credit notes can betreated as a mode of payment or not. The judgment in PremierAutomobiles Ltd. & Anr. Etc. case is stated to contain a differentfactual situation, as per the observations in the Mohd. EkramKhan & Sons case. There are observations, again in the Mohd.DEkram Khan & Sons case, of the possibility of the manufacturerhaving purchased, from open markets, the parts for replacement,on which taxes would be paid. In that context, it was observedthat “the position is not different because the assessee hadsupplied the parts and received the price.” The assessee actuallyEhad purchased the parts and paid sales tax on it, but on return ofthe defective part, was given a credit note. There are somereservations in respect of the observations and legal propositionslaid down in the Mohd. Ekram Khan & Sons case and it isconsidered appropriate that the matter be considered by a largerBench. The papers be placed before Hon’ble the Chief JusticeFfor necessary orders. [Paras 20-22][843-E-H; 844-A-C]

Mohd. Ekram Khan & Sons v. Commissioner of TradeTax, U.P., Lucknow (2004) 6 SCC 183 : [2004] 3 Suppl.SCR 116 ; Premier Automobiles Ltd. & Anr. Etc. v. Unionof India : [1972] 2 SCR 526 ; Commissioner of SalesGTax v. M/s. Prem Nath Motors (P) Ltd. : ILR (1978) IIDelhi 273 ; Prem Motors v. Commissioner of Sales Tax,Madhya Pradesh (1986) 61 STC 244 (MP DivisionBench) : Geo Motors v. State of Kerala (2001) 122 STC285 (Kerala Division Bench) : Commercial Tax OfficerH(Anti-Evasion), Jodhpur v. Marudhara Motors (2010)

M/S. TATA MOTORS LTD. v. THE DY. COMMNR. OF COMM.

TAXES (SPL)

29 VST 114 (Raj) : Navnit Motors Pvt. Ltd. v. State ofMaharashtra (2012) 47 VST 511 (Bom) ; KatariaAutomobiles (P.) Ltd. v. State of Gujarat (2015) 51 GST403 (Gujarat) ; The Commissioner, Commercial Tax, Lko.v. S/S Maskat Motors Pvt. Ltd. (2017) 102 VST 220(All) ; Bharat Heavy Electricals Ltd. v. Commissionerof Customs & Central Excise, Indore (2003) 9 SCC 185– referred to.

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Case Law Reference

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CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1822of 2007.

From the Judgment and Order dated 19.10.2005 of the High Courtof Karnataka at Bangalore in Sales Tax Revision Petition No. 69 ofF2004.

WITH

Civil Appeal Nos. 3004-3006/2017, 1821/2007, 2756/2012, 3856/2013, 3824/2011, 3827/2011, 3820/2011, 3821/2011, 3825-3826/2011, 3823/2011, 3822/2011, 5815/2012, 8049/2009, 6167/2009, 6171/2009, 6166/2009,6160/2009 6173/2009, 6161/2009, 6164/2009, 6163/2009, 6162/2009,6165/2009, 5967/2011, 5969/2011, 6168/2009, 6172/2009, 4019/2011, 4021/2011, 4516/2018, 9979/2018, 10924/2018, 11724/2018, S.L.P.(Civil) Nos.15642-15643/2011, 25905/2013, 12806-12808/2016, 12280/2014, 19758/2009, 19745/2009, 19754/2009, 19748/2009, 19750/2009, 19756/2009, G

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A19757/2009, 19746/2009, 19755/2009, 19752/2009, 19753/2009,19751/2009, 14260/2007, 28859/2011, 31698-31702/2013, 5447/2014,5449-5451/2014.

Dr. Manish Singhvi, AAG, P. Chidambaram, Kavin Gulati,S. K. Bararia, Basava Prabhu S. Patil, Sr. Advs., Amar Dave, NikhilBRohatgi, Shashank Khurana, R. N. Karanjewala, Ms. Ruby Singh Ahuja,Vishal Gehrana, Utsav Trivedi, Nakul Gandhi, Anupam Prakash,Sahil Monga, Shravan Sahney, Mrs. Manik Karanjawala, K. K. Mani,Ms. T. Archana, K. Ajit Singh, D. K. Devesh, Satyendra Kumar,Irshad Ahmad, Rahul Kaushik, Ms. Ruchi Kohli, Milind Kumar,Satyendra Kumar, Ms. Pragati Neekhra, V. Lakshmi Kumaran,CMs. L. Charanya, Aaditya Bhattacharya, Manish Rastogi, Victor Das,Ms. Apeksha Mehta, Punit Dutt Tyagi, M/S. Karanjawala & Co.,P. K. Manohar, Yashraj Singh Deora, Shyam Agarwal, Abhishek Anand,Vivek Sharma, Udit Jain, M. P. Devanath V. N. Raghupathy,Chinmay Deshpande, Ms. Rachitha Hiremath, Geet Ahuja,DParikshit P. Angadi, Kunal Cheema, C. K. Sasi, Ms. Nayantar Roy,Abdulla Naseeh, Naresh Kumar, Ms. Prerna Singh, Guntur Prabhakar,Prashant Mathur, G. N. Reddy, Kamlendra Mishra, Arurag Tandon,Savmay Kapoor, Sanjay Jain, Nishe Rajen Shonker, Ms. SwarupamaChaturvedi, B. N. Dubey, Mukesh Kumar, Ms. Indira Bhakar,Santanu Singh, Nishant Ramakantrao Katneshwarkar, Ms. DeepaEKulkarni, Anoop Kanduri, Advs. for the appearing Parties.

The Judgment of the Court was delivered by SANJAY KISHAN KAUL, J.

1. The common question of law, which arises for consideration inFthese appeals, is the liability towards sales tax, in respect of the freereplacement of defective parts in motor vehicles, during the period ofwarranty.

2. Civil Appeal No.1821/2007, filed by one of the dealers [M/s.Prerana Motors (P) Ltd.], was taken up as the main appeal for addressingGthe submissions and, thus, reference to some of the relevant facts is quathat appeal.

3. M/s. Prerana Motors (P) Ltd./appellant is a dealer of TataMotors. Sales Tax is paid on the vehicles sold. There isa warrantygiventothe purchaser forfree replacement of parts, during the period ofHwarranty. To facilitate this, the dealer is obliged to keep astock of spare

parts. The purchaser has an option to go to any dealer,and not be confinedto the dealer from whom the purchase was made. Sales tax is paid onthe stock of spare parts purchased from Tata Motors. The defectiveparts are sent back to Tata Motors and credit note may be given by TataMotors for the said parts. The customer does not pay for thereplacementof the defective part, which is stated to be the crucial fact.The stand of the Revenue is that sales tax is liable to be paid even quathe return of the spare parts, as credit note is given for the same, to thedealer.

4. In the facts of this case, the assessment order and the appealwent against the appellant/dealer, while the Tribunal held in favour ofthe appellant/dealer. However, the High Court, relying upon the judgmentof this Court in Mohd. Ekram Khan & Sons v. Commissioner of TradeTax, U.P., Lucknow[1] set aside the order passed by the Tribunal, restoringthe order of the assessing authority.

5. Mr. P. Chidambaram, learned senior counsel appearing for theappellant, drew our attention to the Dealership Agreement and pointedout that it is a principal-to-principal agreement, but that would not reallymake a difference to the controversy in question. In terms of thisAgreement,inter aliaa stock of spare parts has to be kept by the dealer.

6. Learned senior counsel fairly conceded that if the judgment inMohd. Ekram Khan & Sons[2] case is applicable, then the appellantwould really have no case, but that his endeavour would be to distinguishthe said judgment and/or persuade this Court that some of the observationsmade therein were per incuriam, and that in any case the matter needsto be examined by a larger Bench. In this course of action, learnedsenior counsel referred to the following judgments:

7. Premier Automobiles Ltd. &Anr. Etc. v. Union of India:[3]Mr. Chidambaram, learned senior counsel submitted by reference topages 537 & 538 that the principle of warranty covering cars sold hasbeen well enunciated. Accordingly, all defects on account of faultymanufacture in workmanship have to be set right and the defective partshave to be replaced, free of cost, by the manufacturer or his dealer,within a specified period of timeor a given distance travelled by the car.Free services haveto be rendered. Car manufacturers enterinto anagreement with the manufacturers of components, providing for a 1 (2004) 6 SCC 183

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Awarranty so far as the components are concerned.The whole objectbehindwarranty is that a consumer who hasmade a heavy investment,while purchasing a car,isassured of proper performance of the vehicle“in a trouble-free manner for a reasonable length of time.”It is, thus, hissubmission that this fundamental concept appears to have been lost inMohd. Ekram Khan & Sons.[4]B

8. Commissioner of Sales Tax v. M/s. Prem Nath Motors (P)Ltd.:[5] Learned senior counsel drew our attention to paras 17 & 18 ofthis judgment, where observations have been made to the effect that adealer sells cars along with awarranty, under which it is agreed that itwould replace the parts free of cost. When such a part is replaced, itCbecomes a part of the car and the property in it stands transferred to thebuyer/consumer. There is no separate consideration paid for the part sotransferred and, thus, the only reasonable inference is that theconsideration for the part or parts that might be replaced, under thewarranty, was not separately specified because it was included in theDprice fixed and paid for the car at the time of its sale. The price so fixedand received is, thus, a consolidated price for the car and the parts thatmay have to be supplied by way of replacement, in pursuance of thewarranty.

9. Prem Motors v. Commissioner of Sales Tax, MadhyaEPradesh[6]: The Court rejected the contention of the Revenue that whenspare parts are replaced by the assesseeand givento the customer freeof charge,that being the condition of the warranty, the assesseerecoversthe price from the manufacturer and, in substance, it is a sale of thespare parts to the manufacturer and therefore liable to be taxed. It wasopined that when a dealer sells automobile vehicles, he sells it with allFparts in a saleable condition. The warranty given isa warranty from themanufacturer and therefore, if during the warranty period, any part isfound to be defective and is to be replaced, the responsibility ofreplacement is on the manufacturer. This is neither a sale of parts by thedealer to the customer nor to the manufacturer. What is effectively doneGis a passing on, of the parts, from the manufacturer to the customer, butin order to avoid delays and prevent any inconvenience to the customer,he replaces the part first and gets them from the manufacturer later.The cost for the same is reimbursed by the manufacturer.

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5 ILR (1978) II Delhi 273H6 (1986) 61 STC 244 (MP Division Bench)

It may be noted that this judgment has specifically been overruledin the Mohd. Ekram Khan & Sons[7]case.

10. Geo Motors v. State of Kerala[8]: The reasoning of the DelhiHigh Court in Commissioner of Sales Tax v. M/s. Prem Nath Motors(P) Ltd.[9] was adopted to conclude that the transaction could not becategorised as a ‘sale’ even though the dealer had purchased spareparts by giving ‘C’ Forms.Such a transaction was purely for replacementand not for sale.

This judgment again has been specifically overruled in Mohd.Ekram Khan & Sons[10] case.

11. Commercial Tax Officer (Anti-Evasion), Jodhpur v.Marudhara Motors[11]: This opinion is post the judgment intheMohd.Ekram Khan & Sons[12 ]case. The learned single Judge of the RajasthanHigh Court distinguished the case of the assessee dealer from the factsobtaining in Mohd. Ekram Khan & Sons[13] case. One such distinguishingfactor was that in the Mohd. Ekram Khan & Sons[14] case,there was arelationship of principal to agent and not of principal to principal. Themost crucial aspect observed in this case, and which is also the plea ofMr. Chidambaram, learned senior counsel, is qua the observations inpara 6 of the Mohd. Ekram Khan & Sons[15] case. It was observedthat “in a case the manufacturer may have purchased from the openmarket parts for the purpose of replacement of the defective parts, forsuch transactions, it would have paid taxes. The position is not differentbecause the assessee had supplied the parts and had received the price.”

12. While giving relief to the assessee, the significance of lack ofconsideration passing, i.e., spare parts being provided free of cost wastaken note of, and thus, the cost of spare parts was held to be part of thecost of the vehicle, while giving such warranty fora limited periodof timeto the customer.

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8(2001) 122 STC 285 (Kerala Division Bench)

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10(supra)11(2010) 29 VST 114 (Raj)12(supra)13(supra)

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A13. Learned senior counsel, thus, contended that the aforesaidsignificant aspect clearly distinguishes his case from the case of Mohd.Ekram Khan & Sons[16], i.e., the aspect of thereplacement beingundisputedly free. In this behalf, he referred to Section 4(1) of The Saleof Goods Act, 1930, which reads as under:B“4. Sale and agreement to sell.—

(1) A contract of sale of goods is a contract whereby the sellertransfers or agrees to transfer the property in goods to the buyerfor a price. There may be a contract of sale between one part-owner and another.”

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The submission, thus, is that for the sale of the parts of the car,aprice has to be paid, which is not so in the present case.

14. SLP (C) Nos.12806-12808/2016: Learned counsel inter aliadrew our attention to “Treitel- The Law of Contract” by G.H. Treitel,(7[th]ed.), to contend that to be enforceable as a collateral contract, aDpromise must be supported by consideration. It was submitted that thecontract to supply spare parts, during the warranty period was akin to acollateral contract.

15. Learned counsel appearing for the other assessees alsosupported the stand taken by Mr. Chidambaram.E

16. On the other hand, Mr. Basava Prabhu S. Patil, learned seniorcounsel appearing for the respondents in the aforesaid civil appeal, soughtto contend otherwise and submittedthattheMohd. Ekram Khan & Sons[17]case is the binding precedent,and in this light, the matter does not needto be examined any further.F

17. Learned senior counsel drew our attention to the followingjudgments:

i.Navnit Motors Pvt. Ltd. v. State of Maharashtra[18]

ii.Kataria Automobiles (P.) Ltd. v. State of Gujarat[19]

Giii. The Commissioner, Commercial Tax, Lko. v. S/S MaskatMotors Pvt. Ltd.[20]

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18(2012) 47 VST 511 (Bom)

19(2015) 51 GST 403 (Gujarat)

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18. These judgments emanate from the Bombay High Court,Gujarat High Court andthe Allahabad High Court respectively, and thesubmission is that a consistent view, in favour of the Revenue, has beentaken by these three High Courts. We may, however, notice that theview emanates only by reason of reliance upon the Mohd. Ekram Khan& Sons[21] case.

19. Learned counsel also referred to the judgment in Bharat HeavyElectricals Ltd. v. Commissioner of Customs & Central Excise,Indore[22] to contend that while considering the issue of excise duty inrespect of components towardsthe “complaint reserve”, it was held thatthe same would be excisable. It was observed that while the initial pricecharged for the machinery may include the element of the “complaintreserve”, at the time of purchase, it is not known whether there will beany requirement to replace any part and, in many cases,the parts are notrequired to be replaced. In suchan eventuality, the price equivalent ofthe “complaint reserve” is not returned to the customer.

20. We are not delving into the controversy in any further detailas we are of the opinion that the issue raised is required to be looked intoby 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 thecase of such a warranty for the supply of free spare parts;once thereplacement ismade, and the defective part is returned to themanufacturer, sales tax would be payable on such a transaction relatingto the spare part, based on a credit note, which may be issued for thesaid purpose. This is in the context of the observations discussed aforesaidregarding the price of the car being inclusive of the cost of the spareparts, the latter beingsupplied for free,upon replacement. Sales tax onthe car is paid. Sales tax on the inventory purchased by the dealer ispaid. Thus, if there is no consideration for these replaced parts, cansales tax be leviedat all? The judgment in the Mohd. Ekram Khan &Sons[23] case refers to the credit notes receivedas considerationfor thereplacement; but it is a moot point whether credit notes can be treatedas a mode of paymentor not. The judgment in Premier AutomobilesLtd. &Anr. Etc.[24]case is stated to contain a different factual situation,as per the observations in theMohd. Ekram Khan & Sons[25] case. There 21(supra)

22(2003) 9 SCC 185

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24(1972) 2 SCR 526

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Aare observations referred to above, again in the Mohd. Ekram Khan &Sons[26]case, of the possibility of themanufacturer having purchased, fromopen markets, the parts for replacement, on which taxes would be paid.In that context, it was observed that “the position is not different becausethe assessee had supplied the parts and received the price.” The assesseeactually had purchased the parts and paid sales tax on it, but on return ofBthe defective part to the manufacture, was given a credit note.

21. We have some reservations in respect of the observationsand legal propositions laid down in the Mohd. Ekram Khan & Sons[27]case and consider it appropriate that the matter be considered by a largerBench.

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22. The papers be placed before Hon’ble the Chief Justice fornecessary orders.

Divya Pandey

Matter referred to larger Bench.

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