M/S TATA MOTORS LTD. versus THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES (SPL) & ANR. on 15 May 2023

[2023] 10 S.C.R.

M/s TATA MOTORS LTD.

A

v.

THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES(SPL) & ANR.

(Civil Appeal No. 1822 of 2007)

B

MAY 15, 2023

[K. M. JOSEPH, B. V. NAGARATHNA ANDAHSANUDDIN AMANULLAH, JJ.]

Sales Tax – Credit Note – Warranty Agreement – Whether, aCcredit note issued by a manufacturer to a dealer of automobiles inconsideration of the replacement of a defective part in theautomobile sold pursuant to a warranty agreement being collateralto the sale of the automobile is exigible to sales tax under the salestax enactments of the respective States – Observations made byDSupreme Court in Mohd. Ekram Khan case wherein three otherjudgments of the Delhi High Court, Madhya Pradesh High Courtand Kerala High Court in Prem Nath Motors; Prem Motors and GeoMotors respectively were considered and the latter two judgmentswere overruled – Correctness of – Held: The judgment of in Mohd.Ekram Khan is applicable to a situation where a manufacturer issuesEa credit note to a dealer acting under a warranty given by themanufacturer pursuant to a sale of an automobile in the followingsituations – The dealer replaces a defective part of the automobileby a spare part maintained in the stock of the dealer or when thesame is purchased by the dealer from the open market – In suchFsituations, the credit note issued in the name of the dealer is avaluable consideration for a transfer of property in the spare partmade by the dealer to the customer and hence a sale within themeaning of the sales tax legislations of the respective States underconsideration – The value in the credit note is thus exigible to salestax under the respective sales tax enactments under considerationG– The judgment in Mohd. Ekram Khan does not apply to a casewhere the dealer has simply received a spare part from themanufacturer of the automobile so as to replace a defective parttherein under a warranty collateral to the sale of the automobile –In such a situation also, the dealer may receive a consideration forHthe purpose of the service rendered by him as a dealer under a dealership agreement or any other agreement akin to an agent ofthe manufacturer which is not a sale transaction – On the aboveunderstanding of the judgment in Mohd. Ekram Khan, the same doesnot call for any interference – In light of the above, overruling ofthe judgments in the case of Prem Motors and Geo Motors in Mohd.Ekram Khan, is just and proper – A credit note issued by amanufacturer to the dealer, in the situations explained above, is avaluable consideration within the meaning of the definition of saleand hence, exigible to sales tax under the respective State enactmentsof the States under consideration – Appellants-dealers/assesseesliable to pay sales tax under the respective State enactments underconsideration – Sale of Goods Act, 1930 – Central Sales Tax Act.

Contract – Contract of sale – Elements to constitute a validcontract of sale – Discussed.

Contract – Contract of sale differentiated from other contracts– Question whether a given contract is one of sale or a contract ofany other description is one of substance and not of form – Itdepends on the real meaning and nature of the contract.

Contract – Contract of sale – Condition and warranty – Held:A condition is a stipulation essential to the main purpose of thecontract, the breach of which gives rise to a right to treat the contractas repudiated – A warranty is, on the other hand, a stipulationcollateral to the main purpose of the contract, the breach of whichgives rise to a claim for damages but not to a right to reject thegoods and treat the contract as repudiated – Whether a stipulationin a contract of sale is a condition or a warranty depends in eachcase on the construction of the contract – However, a stipulationmay be a condition, though called a warranty in the contract.

Contract – Collateral contracts and collateral warranties –Discussed.

Answering the Reference, the Court

Conclusion

HELD: 1. The entire controversy must be viewed in theperspective of a composite transaction and not in isolation as thedealer (assessee) would be acting under a warranty with therebeing a manufacturer on one end and the purchaser or customerof an automobile at the other end and the dealer acting on behalf AB

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Aof the manufacturer or an intermediary between the said customerand manufacturer. The said transaction cannot be viewed in amyopic sense by truncating or excluding the role or action of adealer under the warranty and viewing it only from the perspectiveof a transaction simpliciter between manufacturer and a dealer.Such an approach is not only skewed from a commercialBperspective but also jurisprudentially or in the legal sense.[Para 30][1326-F-H]

2. When a dealer–assessee sells an automobile to acustomer containing a warranty for the replacement of a defectivepart of the automobile in terms of the warranty and when theCcustomer during the period of warranty approaches the dealerfor the replacement of a defective part, the dealer could resort tothe following: - (a) request the manufacturer to supply thedefective part of the automobile for replacement. In such asituation, the manufacturer of the automobile could do any of the Dfollowing: - (i) send the spare part from his factory either as amanufacturer of the same to the dealer for replacement and seekreturn of the defective part, or (ii) purchase the spare part fromthe manufacturer of the particular part by paying the requisitetaxes and send it to the dealer and seek return of the defectivepart, or (iii) purchase the spare part from the open market afterEpaying the requisite taxes and send it to the dealer for replacementof the defective part in the automobile and seek return of thedefective part. or (b) may purchase the spare part from the openmarket by paying the requisite taxes and replace the defectivepart and return the same to the manufacturer, or (c) may replaceFthe defective part from his stock maintained in his showroomand return the defective part to the manufacturer. [Para 31][1327-A-G]

3. In situation (a), since the manufacturer himself hasdispatched the spare part to the dealer for the purpose ofGreplacement, there is no investment made by the dealer on thesaid part. The dealer merely acts on behalf of the manufacturer,pursuant to the warranty. [Para 32][1327-G-H]

4. In situations (b) and (c), the dealer would have investedon the spare part either by buying it from the open market or H

earlier would have purchased the same from the manufacturer ofthe automobile or from the manufacturer of the particular part bypaying the requisite price and taxes. The dealer has every rightto sell such a part and seek a return on his investment andpossibly a profit also. But when the same is used for the purposeof replacement of a defective part pursuant to a warranty, thedealer does not “sell” the part to the customer who hasapproached the dealer with the defective part. The dealer doesnot receive any consideration in the form of a price from thecustomer but on the basis of the warranty, the dealer is obligedto replace the defective part with a new part. The dealer thensends the defective part to the manufacturer of the automobile,who had given the warranty. The manufacturer, from whom theautomobile has been purchased, then issues a credit note whichmay be equivalent to the value of the spare part used by thedealer. This credit note is in order to recompense the dealer forhis investment made on the spare part which was “not sold” byhim to the customer so as to earn any return but has been utilisedto replace a defective part of the automobile as an obligationunder a warranty given at the time of the sale of the automobileon behalf of the manufacturer. In such a situation, whether, therecompense made to the dealer can be termed to be a “sale”between manufacturer and the dealer within the meaning of thedefinition of “sale” under the Sales Tax Acts is the question.[Para 33][1328-A-F]

5. There is no transfer of property between the manufacturerand the dealer when the spare part from the stock of the dealeris used for the purpose of replacement of defective part in theautomobile. The spare part used from the stock of a dealer is theproperty of the dealer which could have been either sold to anyother customer and seek a return on his investment, in whichcase, the customer would have paid the requisite taxes to thedealer. Alternatively, the spare part could also be used from thestock maintained by the dealer to replace a defective part whenan automobile has been sold by him and the customer approachesthe dealer during the warranty period when there is a defect inany part of the automobile. In such a situation, the dealer is actingon behalf of the manufacturer or as an intermediary between the A

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Amanufacturer and the customer of the automobile and discharginghis obligation under a collateral contract. Hence, it is a warrantygiven by the manufacturer through the dealer to the customerduring the period of warranty. In such a situation, when a creditnote is issued to the dealer on return of the defective part by themanufacturer is there a sale within the scope and meaning ofBdefinition of “sale” under the Sale Tax Legislation?[Para 34][1328-G-H; 1329-A-C]

6. The argument that the purchaser or the customerseeking replacement of a defective part is distinct and disjunctfrom the earlier sale of the automobile by the dealer to theCcustomer, cannot be accepted. This is for the simple reason thatthe dealer discharges his warranty obligation pursuant to theearlier sale of the automobile made by him to the customer whichtransaction of sale is accompanied by a collateral contract in theform of a warranty. There cannot be a warranty unless there is aDsale of goods in the first place. That is why a warranty is termedas a contract collateral to the main contract of sale. But for thewarranty which is a contract collateral to the main contract ofsale of an automobile, the dealer would not have replaced thedefective part with a spare part from his stock without anyconsideration from customer. This is obvious because when theEdefective part is replaced by another part, no consideration passesfrom customer to the dealer. This could be contrasted with asituation where the dealer would have sold the same part to anyother customer and received a price on the sale as well ascollected the tax on the said sale. Since, the dealer does not Freceive any consideration from the customer who approachesthe dealer during the warranty period for replacement of adefective part and the dealer does so from his own stock of thespare parts, he receives a credit note from the manufacturer ofthe automobile. In both of the aforesaid situations, there is transfer of property in the goods from the dealer to the customer.G[Para 35][1329-D-H]

7. The bifurcation of the two transactions i.e., one, betweenthe dealer and the customer for the sale of the automobile andthe second, between the manufacturer and the dealer, when the H

dealer is discharging his warranty pursuant to the sale of theautomobile, cannot be accepted. [Para 36][1330-A-B]

8. But the issuance of a credit note to a dealer by amanufacturer is only when the dealer replaces a spare part fromhis stock in the automobile to the customer or has purchased thespare part from the open market for the said purpose and returnsthe defective part to the manufacturer which is pursuant to thewarranty appended as a collateral agreement to the earlier saleof the automobile and the dealer acting on behalf of themanufacturer. [Para 37][1330-B-C]

9. It is also significant to note that there is transfer ofproperty in the spare part between the dealer and the customeron behalf of the manufacturer under a warranty. When the dealeris acting pursuant to a warranty, he is no doubt discharging hisobligation not as a seller stricto sensu, but as an intermediary oran agent of the manufacturer as the case may be vis-à-vis thepurchaser of the automobile. But, there is transfer of propertybetween the dealer and the customer/purchaser of the automobileon the one hand and receipt of a valuable consideration by thedealer for the same from the manufacturer on the other in theform of a credit note. Further, credit note is issued only when adealer discharges his obligation under the warranty and may berequired to return the defective part to the manufacturerwhile seeking a recompense in the form of a credit note.[Para 38][1330-D-F]

10. The contention of the revenue is that the credit note isa valuable consideration in the account of the dealer while thedealer is discharging his obligation pursuant to the warranty andtherefore exigible to sale tax. This is based on the premise thatthe dealer “sells” the part while acting on behalf of themanufacturer while replacing a defective part under a warrantyand discharging his warranty obligation for which the considerationflows from the manufacturer to the dealer and therefore isamenable to sales tax. There are two aspects to be consideredhere: firstly, there is transfer of property in the spare part betweenthe dealer and the customer and secondly, for the said transfer,the manufacturer issues a credit note to the dealer which is in AB

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Asubstance on behalf of the customer owing to the warranty withthe customer. [Para 39][1330-G-H; 1331-A]

11. When the transaction between the manufacturer anddealer is viewed in the larger canvas of a dealer discharging hisobligations pursuant to a warranty appended to a sale of anBautomobile, the same cannot be narrowly construed.[Para 40][1331-B-C]

12. Under Section 2(g) of the Central Sales Tax Act or theSales Tax Act of the respective states under consideration, sale,with its grammatical variations and cognate expressions, meansCany transfer of property in goods by one person to another forcash or deferred payment or for any other valuable consideration.The definition of sale under the Sales Tax legislations are inconsonance with Article 366(29-A) as per the Constitution 46thAmendment Act, 1982. The expression “dealer” is defined inSection 2(b) of the Central Sales Tax Act and, accordingly, underDthe 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 orfor deferred payment, or for commission, remuneration or othervaluable consideration. [Para 43][1333-C-D]

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13. The expression “valuable consideration” is not definedeither under the Central Sales Tax or under the respective StateActs under consideration. “Price” is the amount of considerationwhich a seller charges the buyer for parting with the title to thegoods. The price would include not only the price of the goodsFbut also the expenditure incurred for transporting the goods,duties levied, etc. The entire amount of consideration includingthe sales tax component which the purchaser pays, constitutesthe price of goods. The expression “price” under the Sale ofGoods Act is limited to a money consideration, cash or deferredpayment but under the definition of “sale” under the Sales TaxGlegislations, the expression used is not just cash or deferredpayment but also a valuable consideration. The expressionvaluable consideration has a wider connotation but must be readejusdem generis to cash and deferred payment. The expressionvaluable consideration takes colour from the preceding H

expressions cash or deferred payment, therefore, it meanspayment in monetary terms i.e. in the nature of cash or deferredpayment such as cheque, bank draft, promissory note, etc. Cashand deferred payment are relatable to the expression “money”.In other words, a transaction could amount to a sale ifconsideration is in terms of money. Thus, money is a genus ofwhich cash or deferred payment in the form of cheque, bank draft,promissory note, etc. are species. Money has a wider connotationto include a valuable consideration in the form of money or apayment in monetary terms which is the price for the transfer ofproperty paid. Thus, a valuable consideration is also a species ofmoney which is the consideration for the transfer of goods underthe sales tax enactments. [Para 44][1333-E-H; 1334-A-B]

14. When the dealer uses one of the spare parts from hisstock for the replacement of a defective part in an automobileunder a warranty, he is given a monetary benefit in the form of acredit note. A perusal of the definition of “credit note” fromvarious dictionaries and Law Lexicons would clearly indicate thata credit note issued by a manufacturer in favour of a dealer is avaluable consideration within the meaning of the definition of“sale” under both, Central Sales Tax Act as well as the respectiveState enactments under consideration. The object and purposeof including the expression valuable consideration within thedefinition of sale apart from cash and deferred payment is toenlarge the scope of the expression price than what is enunciatedunder the Sale of Goods Act which is an enactment of 1930. Theexpression is relatable to a money consideration. No doubt, cashis a money consideration but the definition of “sale” under theCentral Sales Tax Act as well as under the State enactments doesnot imply price to mean only a money consideration in a narrowersense but in a wider sense to include different forms of moneyconsideration such as deferred payment and also a valuableconsideration which need not be restricted to cash or deferredpayment only but a valuable consideration which would include acredit note which is to be read within the definition of “price”.[Para 46][1334-H; 1335-A-D]

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A15. Benjamin’s Sale of Goods, Eighth Edition, states thatthe consideration in a contract of sale of goods must in Englishlaw, be a price in money, either paid of promised. By money ismeant legal tender; it does not mean money’s worth. Paymentneed not, however, be made in cash: a method of payment thatenables the seller to obtain money such as the use by the buyerBof a credit card or a debit card or digital cash or cheque or banker’sdraft or trading cheque also comes within the expression “paymentof price”. It is only a method of payment or a form of payment. Itis also irrelevant that the money payment comes, not from thebuyer of the goods or to whom the property in the goods areCtransferred, but from the card issuer. Thus, there can be variousmethods of payment i.e., by cash, by negotiable instrument, bycredit or charge card or by stored value card or sometimesreferred to as digital cash card or electronic purses, internetpayments on which that “value” is stored electronically. Therecan also be payment by direct debits to effect payment of goodsDsupplied particularly when there are recurring payments ofvariable amounts. The seller can obtain through the bankingsystem in direct debit forms to the buyer’s bank. A converse tothe system of direct debit is the credit note issued by a buyer infavour of a seller which is a recompense or monetary benefitEshowed in the buyer’s accounts. Thus, the use of the bankingsystem by instructing the bank to transfer of balance from thebuyer’s account to the credit of a seller is a form of transmissionof a valuable consideration. [Para 47][1335-E-H]

16. A credit note is a valuable consideration which isFessentially a document to inform a buyer that the buyer’s accountis being credited because of errors, returns or allowances. Ondischarging his obligation under the warranty appended to a saleof an automobile, a dealer receives a credit note. This would be areceipt in the account of the dealer and a liability in the returns of the manufacturer which may ultimately enable the manufacturerGto decrease his tax liability. Consequently, the dealer of theautomobile in whose account a credit is shown would be ultimately arecipient of a valuable consideration on account of a transfer of goods,namely, spare part by a dealer to a customer while discharging hisobligation under a warranty and thereby receiving a valuableH

Analysis

consideration for the spare part used by the dealer from his stockfrom the manufacturer in the form of a credit note. When theentire transaction is viewed in the aforesaid perspective and injuxtaposition with the expression “sale” under the Central SalesTax Act as well as the respective State enactments underconsideration which is of a wider connotation than the definitionof sale under the Sale of Goods Act, the amount shown in theaccount of the dealer in the form of a credit note is nothing but aprice received for a sale of a spare part by the dealer which isfrom his stock and which belongs to him. Where there is transferof property by the dealer to the customer while acting under awarranty and the dealer being paid by the manufacturer, whenviewed in the aforesaid prism, the credit note shown in the accountof the dealer is a valuable consideration pursuant to the sale thathas taken place of a spare part from his stock. The aforesaidtransaction may be juxtaposed with the transaction of sale whichthe customer who would buy a spare part de hors a warranty. Insuch an event, the dealer would have collected the sales tax alongwith the price of the spare part and would have remitted the sameto the revenue. Merely because the dealer is acting as anintermediary or on behalf of the manufacturer pursuant to awarranty and receives a recompense in the form of a credit note,the same cannot escape liability of tax under the Sales Tax Actsunder consideration. [Para 48][1336-B-G]

17. It is necessary to take into consideration that all thecredit notes received by the dealer are not indicative of the valueof the spare part supplied by the dealer from his own stock orwhen he buys it from the open market, to the customer under awarranty. It could be for rendering a service under a dealershipagreement which can cover a situation when the manufacturersends the spare part to the dealer to replace a defective part andreceives a consideration for the said service. In such a case, thereis no recompense for spare part. It is only when a credit note isissued for a spare part used by a dealer from his own stock orwhen he has purchased it from the open market or from anothermanufacturer of a spare part that it becomes a sale within themeaning of the sales tax enactments under consideration.[Para 53][1338-A-C]

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A18. The manufacturer gives the warranty to the consumerby making a representation with regard to the automobile. It isin the nature of a promise which the dealer assessee carries outon behalf of the manufacturer. There is transfer of property inthe spare part from the stock of the dealer to the customer forwhich the manufacturer pays by way of a credit note. The saidBpromise is carried out and a valuable consideration is receivedby the dealer through credit notes. In substance, when the dealerreceives a credit note, it is a sale within the meaning of thedefinition under the respective sales tax legislation underconsideration, pursuant to the warranty for which the manufacturerCcompensates the dealer by issuance of a credit note. The valueof the credit note is a valuable consideration received which is inthe nature of a benefit from the manufacturer which is exigible totax. If the dealer had sold a spare part of the automobile from hisstock to any other consumer across the counter, he would havecollected the requisite sales tax along with the price from thatDconsumer but in the instant case, the consideration is receivedin the form of a credit note from the manufacturer which is subjectto sales tax. The person who pays the valuable consideration in asale transaction is irrelevant so long as it is paid. [Para 65][1343-B-E]E19.1. Applying the definitions of the Indian Contract Act,1872 to the facts of the present case, it would mean that asbetween the manufacturer of the automobile, the dealer and thecustomer, the manufacturer is the promisor who makes theproposal to recompensate the dealer when pursuant to a warrantyFclause, the dealer replaces a spare part from out of his own stockor by buying the same from the open market or from themanufacturer of the spare part. Thus, the dealer is the promisee.The occasion to replace the spare part is when the customerbrings to the notice of the dealer a defect in a part of theautomobile, pursuant to a warranty which has been given by theGmanufacturer to the customer. [Para 67][1344-B-C]

19.2. Section 2(d) of the said Act in fact enables the promisee(the dealer) to provide consideration by conferring a benefit on athird party (customer) at the promisor’s (the manufacturer’s)request pursuant to a warranty between the manufacturer andH

customer. Thus, a contract could arise even though the promiseis for doing or abstaining from doing something for the benefit ofa third party. In other words, if the promisee (the dealer) replacesa defective part of an automobile sold to a third party, i.e., thecustomer, he would receive a credit note from the manufacturer.This is because the manufacturer would have proposed to thedealer to recompensate the dealer for the above act whichproposal would have been accepted by the dealer and, thus, themanufacturer who has made the proposal is the promisor and thedealer 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 orpromise is called consideration for the promise. Therefore, thedealer (promisee) agrees to replace a defective part which is aconsideration for the promise and in turn, receives a recompensein the form of a credit note from the manufacturer. Thus, there isan agreement between the manufacturer and the dealer, and itwould be in an instance of there being reciprocal promises.[Para 68][1344-D-G]

20. In view of the above, the transaction between themanufacturer and dealer while acting pursuant to a warranty inthe circumstances explained above has to be construed as salewithin the meaning and definition of sale under the Sales TaxActs under consideration. [Para 69][1344-H]

21. In the circumstances, the reference is answered in thefollowing terms:

i) The judgment of this Court in Mohd. Ekram Khan isapplicable to a situation where a manufacturer issues a creditnote to a dealer acting under a warranty given by the manufacturerpursuant to a sale of an automobile in the following situations.The dealer replaces a defective part of the automobile by a sparepart maintained in the stock of the dealer or when the same ispurchased by the dealer from the open market. In such situations,the credit note issued in the name of the dealer is a valuableconsideration for a transfer of property in the spare part made bythe dealer to the customer and hence a sale within the meaningof the sales tax legislations of the respective States under A

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[2023] 10 S.C.R.

Aconsideration. The value in the credit note is thus exigible tosales tax under the respective sales tax enactments underconsideration.

ii) The judgment in Mohd. Ekram Khan does not apply to acase where the dealer has simply received a spare part from theBmanufacturer of the automobile so as to replace a defective parttherein under a warranty collateral to the sale of the automobile.In such a situation also, the dealer may receive a considerationfor the purpose of the service rendered by him as a dealer undera dealership agreement or any other agreement akin to an agentof the manufacturer which is not a sale transaction. On the aboveCunderstanding of the judgment of this Court in Mohd. EkramKhan, the same does not call for any interference. In light of theabove, overruling of the judgments in the case of Prem Motorsand Geo Motors in Mohd. Ekram Khan, is just and proper.

(iii) A credit note issued by a manufacturer to the dealer, inDthe situations explained above, is a valuable consideration withinthe meaning of the definition of sale and hence, exigible to salestax under the respective State enactments of the States underconsideration. In the result, appellants-dealer/assessee are liableto pay sales tax under the respective State enactments underEconsideration. [Para 70][1345-A-H; 1346-A]

Devi Dass Gopal Krishnan v. State of Punjab (1967) 3SCR 557; CIT v. Motor & General Stores Pvt. Ltd. AIR1968 SC 200 : [1967] 3 SCR 876 – held inapplicable.

M/s Navnit Motors Pvt Ltd. v. State of Maharashtra,Fdecided on 29.11.2011 of Bombay High Court –approved.

Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183: [2004] 3 Suppl. SCR 116 – affirmed.

State of T.N. v. Sri Srinivasa Sales Circulation (1996)G10 SCC 648 : [1996] 7 Suppl. SCR 185; Govind SaranGanga Saran v. Commissioner of Sales Tax, AIR 1985SC 1041 : [1985] 3 SCR 985; Dhampur Sugar MillsLtd. v. Commissioner of Trade Tax, U.P., (2006) 5 SCC

624 : [2006] 2 Suppl. SCR 673; Commissioner ofCentral Excise, Mumbai v. Fiat India Private Limited,(2012) 9 SCC 332 : [2012] 12 SCR 975; AssistantCollector of Central Excise v. Madras Rubber FactoryLtd., 1986 Supp SCC 751 : [1987] 1 SCR 846 andGovernment of India v. Madras Rubber Factory Ltd.(1995) 4 SCC 349 : [1995] 3 SCR 1143 – relied on.

State of Madras v. Gannon Dunkerley & Co. (1959)SCR 379; Government of India v. Madras RubberFactory Limited (1995) 4 SCC 349: [1995]3 SCR 1143; Kone Elevators Pvt. Ltd. v. State of TamilNadu (2014) 7 SCC 1:[2014] 5 SCR 912; Builders’Association of India v. Union of India (1989) 2 SCC645:[1989] 2 SCR 320; Commissioner of Customs v.Dilip Kumar & Co. (2018) 9 SCC 1:[2018] 7 SCR 1191;Nabha Power Ltd. v. Punjab State Power CorporationLtd. (2018) 11 SCC 508:[2017] 14 SCR 301; M/sVishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officers(1978) 1 SCC 520:[ 1978] 2 SCR 433 (12.7) M/s NewIndia Sugar Mills Ltd. v. Commissioner of Sales TaxAIR 1963 SC 1207: [1963] 2 Suppl. SCR 459; SunriseAssociates v. Govt. of NCT of Delhi (2006) 5 SCC 603:[2006] 1 Suppl. SCR 421; H. Anraj v. Govt. of T.N.(1986) 1 SCC 414: [1985] 3 Suppl. SCR 342; ShanklinPier Ltd. v. Detel Products Ltd. (1951) 2 KV 854; RotorkControls India Pvt. Ltd. v. Commissioner of Income Tax,Chennai (2009) 13 SCC 283: [2009] 8 SCR 1152;Medley Pharmaceuticals Ltd. v. Commissioner ofCentral Excise and Customs, Daman (2011) 2 SCC 601:[2011] 1 SCR 741; Firm Ram Krishna Ramnath Agarwalv. Municipal Committee, Kamptee AIR 1950 SC 11:[1950] SCR 15; Province of Madras v. Boddu Paidannaand Sons AIR 1942 FC 33; Bharat Heavy ElectricalsLtd. v. Commissioner of Customs and Central Excise,Indore (2003) 9 SCC 185: [2002] 4 Suppl. SCR 150;Commissioner of Sales Tax v. Prem Nath Motors (1979)43 STC 52 (Delhi); Prem Motors, Gwalior v.Commissioner of Sales Tax, Gwalior 1986 (61) STC244 MP; Geo Motors v. State of Kerala (2001) 122

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1282SUPREME COURT REPORTS

ASTC 285; Jodhpur v. M/s Marudhara Motors, Jodhpur(2010) 29 VST 114 and State of Madras v. GannonDunkerley and Co. (Madras) Ltd. 1958 (9) STC 353 –referred to.

Rainy Sky SA & Orad v. Kookmin Bank (2011) UKSCB50; Suzuki New Zealand Ltd. v. Commissioner of InlandRevenue (2001) 20 NZTC 17; Digital Satellite WarrantyCover Limited v. Financial Services Authority (2013)UKSC 7 – referred to.

Case Law Referenceaffirmed

C[2004] 3 Suppl. SCR 116[1959] SCR 379[1995] 3 SCR 1143(1967) 3 SCR 557D[2014] 5 SCR 912[1989] 2 SCR 320[2018] 7 SCR 1191[1967] 3 SCR 876E[2017] 14 SCR 301[1978] 2 SCR 433 [1963] 2 Suppl. SCR 459

Para 4

referred toreferred to

Para 10(1)(ii)

Para 10(I)(iii)

held inapplicablePara 10(I)(iii)referred toPara 10(II)(iii)referred toPara 10(II)(iii)referred toPara 10(II)(iv)held inapplicablePara10(II)(iv)referred toPara 10(III)(ii)referred toPara 12.7referred toPara 12.7referred toPara 12.8referred toPara 12.8referred toPara 13.6referred toPara 13.7referred toPara 13.7referred toPara 13.8relied onPara 45relied onPara 58relied onPara 59

[2006] 1 Suppl. SCR 421F[1985] 3 Suppl. SCR 342[2009] 8 SCR 1152[2011] 1 SCR 741G[1950] SCR 15[2002] 4 Suppl. SCR 150[1996] 7 Suppl. SCR 185[1985] 3 SCR 985H[2006] 2 Suppl. SCR 673

[2012] 12 SCR 975relied onPara 61A[1987] 1 SCR 846relied onPara 63[1995] 3 SCR 1143relied onPara 64

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

B

From the Judgment and Order dated 19.10.2005 of the High Courtof Karnataka at Bangalore in Sales Tax Revision Petition No. 69 of2004.

With

C

Civil Appeal Nos. 1446/2010, 3733, 3734/2023, 11724/2018, 3827/2011, 3856/2013, 5815, 2756/2012, 3718/2023, 5969, 5967/2011, 3716-3717/2023, 3821, 4019, 3822, 4021/2011, 3719-3723, 3735/2023, 4516,10924/2018, 1821/2007, 9979/2018, 3004-3006/2017, 3730-3732, 3740,3725-3727, 3724/2023, 3825-3826, 3823/2011, 6172/2009, 3824, 3820/2011 and 3715/2023.

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Nikhil Goel, Saurabh Mishra, A.A.Gs., Ms. Ankita Chaudhary,Dy. A.G., Santosh Kumar Bagaria, Kavin Gulati, R. K. Raizada, Dr.Manish Singhvi, V Sridharan, S. K. Upadhayay, Pallav Sisodia, Sr. Advs.,Punit Dutt Tyagi, P. K. Manohar, K. K. Mani, Ms. T. Archana, RajeevGupta, Vinay Rajput, Kumar Ajit Singh, Ms. Subasri Jaganathan, AmarDave, Ms. Ruby Singh Ahuja, Nikhil Rohatgi, Vishal Gehrana, Ms. HancyMaini, Jappanpreet Hura, Ms. Meghna Mishra, M/s. Karanjawala &Co., M. P. Devanath, Ms. Pragati Neekhra, Sonal Jain, Udayan Jain,Ms. Kajal Sharma, Bhakti Vardhan Singh, Ankit, Rahul Kaushik, Mrs.Manik Karanjawala, Arpit Parkash, Ms. Shubhangi Agarwal, IrshadAhmad, Yashraj Singh Deora, Siddhant Singh, Abhishek Singh, PriyeshMohan Srivastava, Ms. Apeksha Mehta, Ms. Neha Choudhary, Ms.Falguni Gupta, Sahil Parghi, Ms. Charanya Lakshmikumaran, VishalMeghwal, Ms. Yashka Bum, Milind Kumar, Sanjay Jain, Rajeev KumarDubey, Kamlendra Mishra, G. N. Reddy, Hitesh Kumar Sharma,Akhileshar Jha, Chaman Sharma, Saurabh Kumar Solanki, Amit KumarChawla, Ravish Kumar Goyal, Nitin Sharma, Naresh Kumar, V. N.Raghupathy, Manendra Pal Gupta, Md. Apzal Ansari, Adithya Roy, NisheRajen Shonker, C. K. Sasi, Abdulla Naseeh V T, Ms. Meena K Poulose,Rahul Kaushik, Ms. Deepanwita Priyanka, Bhakti Vardhan Singh,Aniruddha Joshi, Aniruddha Deshmukh, Siddharth Dharmadhikari, E

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AAaditya Aniruddha Pande, Bharat Bagla, Sourav Singh, Yashraj SinghBundela, Pashupathi Nath Razdan, Tarun Gulia, Puneet Jain, Sarad KumarSinghania, Ms. Rashmi Singhania, Abhinav Shrivastava, SunnyChoudhary, Shivang Rawat, Ms. Radhika Jalan, Ms. Deepti Gupta, ArunAdlakha, Naman Gupta, D. K. Sinha, Advs. for the appearing parties.

BThe Judgment of the Court was delivered by NAGARATHNA, J.

Leave granted.

2. These Civil Appeals arise from the judgments of the High CourtsCof Karnataka, Rajasthan, Allahabad, Madhya Pradesh, Bombay, AndhraPradesh, Kerala and Gujarat. Since common questions of law and factshave been raised in these appeals vide Reference Order dated 05.12.2019made by a Bench of two judges to a Bench comprising of three judges,the reference has been heard and is accordingly answered.

D In some of the civil appeals, the dealers–assessee are theappellants, while in rest of the appeals the respective States are theappellants.

Preface:

3. By order dated 05.02.2019, reference has been made to a BenchEof three Judges which shall hereinafter be referred to as the “ReferenceOrder”.

The pertinent paragraphs of the Reference Order read as under:

“15. We are not delving into the controversy in any further detailas we are of the opinion that the issue raised is required to beFlooked into by a larger Bench. The crucial point which wouldarise for consideration, and over which the matter needs to bedebated, is as to whether, in the case of such a warranty for thesupply of free spare parts; once the replacement is made, and thedefective part is returned to the manufacturer, sales tax would beGpayable on such a transaction relating to the spare part, based ona credit note, which may be issued for the said purpose. This is inthe context of the observations discussed aforesaid regarding theprice of the car being inclusive of the cost of the spare parts, thelatter being supplied for free, upon replacement. Sales tax on thecar is paid. Sales tax on the inventory purchased by the dealer is G

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paid. Thus, if there is no consideration for these replaced parts,can sales tax be levied at all? The judgment in Mohd. EkramKhan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004)6 SCC 183] refers to the credit notes received as considerationfor the replacement; but it is a moot point whether credit notescan be treated as a mode of payment or not. The judgmentin Premier Automobiles Ltd. case [Premier AutomobilesLtd. v. Union of India, (1972) 4 SCC (N) 1: (1972) 1 SCR 526]is stated to contain a different factual situation, as per theobservations in Mohd. Ekram Khan & Sons case [Mohd. EkramKhan & Sons v. CTT, (2004) 6 SCC 183]. There are observationsreferred to above, again in Mohd. Ekram Khan & Sonscase [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183],of the possibility of the manufacturer having purchased, from openmarkets, the parts for replacement, on which taxes would be paid.In that context, it was observed that “the position is not differentbecause the assessee had supplied the parts and received theprice”. The assessee actually had purchased the parts and paidsales tax on it, but on return of the defective part to themanufacturer, was given a credit note.

16. We have some reservations in respect of the observationsand legal propositions laid down in Mohd. Ekram Khan & Sonscase [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183]and consider it appropriate that the matter be considered by alarger Bench.”

4. The point for consideration under the Reference Order is,whether, a credit note issued by a manufacturer to a dealer of automobilesin consideration of the replacement of a defective part in the automobilesold pursuant to a warranty agreement being collateral to the sale of theautomobile is exigible to sales tax under the sales tax enactments of therespective States. While considering the said question, the ReferenceOrder doubts the correctness of the observations made in Mohd. EkramKhan & Sons vs. CTT, (2004) 6 SCC 183 (Mohd. Ekram Khan).

5. It may be mentioned that in the aforesaid decision three otherjudgments of the Delhi High Court, Madhya Pradesh High Court andKerala High Court in Commissioner of Sales Tax vs. Prem NathMotors, (1979) 43 STC 52 (Delhi), (Prem Nath Motors); PremMotors, Gwalior vs. Commissioner of Sales Tax, Gwalior 1986 (61)

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ASTC 244 MP (Prem Motors) and Geo Motors vs. State of Kerala(2001) 122 STC 285 (Geo Motors) respectively were considered andthe latter two judgments were overruled.

Factual Background:

6. Of the thirty-four cases before us, the factual conspectusBinvolves provisions of the respective Sales Tax Act and similar questionsof law. Thus, the facts in Commercial Tax Officer vs. M/s MarudharMotors, C.A. No. 3856/2013 only are encapsulated for the sake ofconvenience as under:

i.The assessee, M/s Marudhar Motors is a dealer of TATACVehicles. Under the dealership agreement, the dealer/assessee would provide replacement of warranty goods soldto the customer.

ii.There exists a separate warranty agreement between themanufacturer and the ultimate customer to whom suchDvehicles are sold by the assessee.

iii.In the normal course of business transactions involving thesale of automobile parts, Tata Motors sells vehicles andspare parts to Marudhara Motors by charging CST against“C” form. Thereupon, Marudhara Motors sells these goodsEto customers through invoices collecting local sales tax at aprice not exceeding the maximum price prescribed by themanufacturer.

iv.However, in the case of warranty claims raised by customersdue to the emergence of defects in some parts, such partsFare replaced free of cost to the customers to avoid delay infirst securing such parts from the manufacturer, Tata Motors,and replacing the same. The dealer, on behalf of themanufacturer, collects a defective component or the vehicleitself from the customer and replaces it with part/s or vehicleGin his stock purchased from the manufacturer. Thisdefective component/s or vehicle received on exchange bythe dealer from the customer is returned back to themanufacturer from whom the dealer had purchased thesame in the first place i.e., Tata Motors, who after receivingthe parts or the entire vehicle and satisfying themselves G

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about it being defective, issues credit notes, thereby creditingthe running account of the dealer which is maintained forsale transactions, at the price at which the good was initiallysold to the dealer.

v.Pursuant to the decision of this Court in Mohd. EkramKhan, the assessing authority invoked the power ofBreassessment under Section 30 of the Rajasthan Sales TaxAct, 1994 to impose a tax on assessee’s turnover havingescaped assessment for the assessment years 2000-2001to 2003-2004. However, for the assessment years 2004-2005 and 2005-2006, regular assessment proceedings wereCinitiated under Section 28 of the Rajasthan Sales Tax Act,1994.

vi.On July 22, 2006, the Deputy Commissioner (Appeals) ofJodhpur passed an order upholding the levy of tax upon anassessee but setting aside the levy of interest and penaltyimposed by the assessing authority under Section 65 of theAct.

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vii.This decision gave rise to six cross-appeals filed by theassessee and another six appeals filed by the Revenue. Theassessee was dissatisfied with the decision to uphold thelevy of tax and filed six separate appeals for six differentassessment years - 2000-2001, 2001-2002, 2002-2003, 2003-2004, 2004-2005, and 2005-2006. On the other hand, theRevenue was aggrieved by the decision to set aside thelevy of interest and penalty and filed another batch of sixappeals.

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viii.The matter was taken up by the Rajasthan Tax Board inAjmer, which issued a common judgment on June 18, 2007,disposing of all twelve appeals. The Rajasthan Tax Boardset aside the decision of Deputy Commissioner (Appeals)and thereby set aside the imposition of tax. It found thetransaction of replacing the defective parts did not fall withinthe definition of ‘sale’ as defined under Section 2(38) ofthe Rajasthan Sales Tax Act. It also concluded that thefacts of the case are distinguishable from the facts in Mohd.Ekram Khan.

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Aix.The Revenue filed revision petitions under Section 86 ofthe Rajasthan Sales Tax Act, 1994. The Rajasthan HighCourt, while dismissing these revision petitions and affirmingthe order of Rajasthan Tax Board, distinguished the factsin the case from the facts and reasoning in Mohd. EkramKhan by underlining three distinguishing factors. Firstly, itBnoted that the agreement between the manufacturer anddealer reflected a principal-to-principal relationship, and nota principal-agent relationship. Secondly, it was noted thatthe transaction between manufacturer and dealer, pertainingto the return of defective parts to the manufacturer and theCissue of credit notes to the dealer, is independent of thetransaction between manufacturer and customer, pertainingto the discharge of warranty obligation. Thirdly, it wasconsidered that the warranty obligation was being dischargedfree of cost. It was noted that, Mohd. Ekram Khan wasdecided on the premise that the dealer assessee had suppliedDthe parts and had received the price.

Gist of Cases under consideration:

7. The present appeals assail judgments rendered by eight HighCourts. While all fifteen decisions rendered by Rajasthan High CourtEare in the favour of the assessee, all decisions rendered by Kerala,Karnataka, Bombay, Andhra Pradesh, Madhya Pradesh, and GujaratHigh Courts are in the favour of Revenue. In the case of AllahabadHigh Court, one decision is in favour of Revenue while the other is infavour of the assessee. A table of cases is drawn up as under:

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7.1. As is clear from the table above, fifteen out of the thirty-fourcases before us pertain to revenue’s appeals against the decisions of theRajasthan High Court, relying upon the decision in C.T.O. (AE), Jodhpurvs. M/s Marudhara Motors, Jodhpur, (2010) 29 VST 114,(Marudhara Motors) dated 16.03.2009. In the aforementioned decision,the Rajasthan High Court distinguished the facts and reasoning in Mohd.Ekram Khan by underlining three distinguishing factors. Firstly, it notedthat the agreement between the manufacturer and dealer reflected aprincipal-to-principal relationship, and not a principal-agent relationship.Secondly, it was noted that the transaction between manufacturer anddealer, pertaining to the return of defective parts to the manufacturerand the issue of credit notes to the dealer, is independent of the transactionbetween manufacturer and customer, pertaining to the discharge ofwarranty obligation. Thirdly, it was considered that the warranty obligationwas being discharged free of cost. It was noted that, Mohd. EkramKhan was decided on the premise that the dealer assessee had suppliedthe parts and had received the price.

7.2. The other decision in favour of the assessee was renderedby Allahabad High Court in M/s. Vikrant Automobiles vs.Commissioner, Commercial Tax, U.P., vide order dated 06.11.2015.The High Court dismissed the revision against the order of Customs,Excise and Service Tax Appellate Tribunal wherein the transaction ofreplacement of spare parts as part of warranty was held not to beassessable. The High Court held that it was ‘well recognized that insupply of spare parts to the customer by the dealer during the periodof warranty free of charge, no sale consideration passes from thecustomer to the dealer and therefore the cost of the spare partscannot be included in the turnover of the sale of the dealer.’

7.3. In a later judgment rendered by the same High Court, theabove decision was found to be of no assistance to the assessee.Therefore, in The Commissioner, Commercial Tax Lko. vs. S/SMaskat Motors Pvt. Ltd., decided on 08.12.2016, the said Court reversedthe finding of the Tribunal that the imposition of the tax was not justifiedbecause defective parts of motor vehicles have been replaced free ofcost and the manufacturer had issued credit notes. The High Court foundthe above conclusion to be perverse, self-contradictory, and ‘contrary tothe charging section as well as the definition of “Sale” under the U.P.Act and Central Act.’ Applying Mohd. Ekram Khan, the High Court

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Afound all elements of sale to be completed as the transaction of supplyof spare parts to consumers was concluded by the payment of valuableconsideration by the manufacturer in the form of credit notes to thedealer. Therefore, the High Court held that the assessee has sold spareparts for valuable consideration attracting liability to tax under the U.P.Act.B

7.4. The assessees have impugned four decisions of the KarnatakaHigh Court. All these decisions have followed the reasoning andconclusions arrived at in the case of Dy. Commissioner of CommercialTaxes (Assessment), Bangalore vs. Prerana Motors (P) Ltd., disposedof on 19.10.2005. In the aforementioned case, an order against theCRevenue, by Customs, Excise and Service Tax Appellate Tribunal wasreversed on revision under Section 23(1) of Karnataka Sales Tax Act,1957, on the ground that the dispute is covered by the decision in Mohd.Ekram Khan. It was reasoned that in Mohd. Ekram Khan, the assesseewas a dealer registered under the provisions of the U.P. Trade TaxDAct,1948 and also an agent of M/s. Mahindra and Mahindra(manufacturer). The manufacturer had a warranty agreement with thepurchasers of vehicles to replace defective parts during the warrantyperiod. The conclusion of Mohd. Ekram Khan was relied upon toconclude that the transaction was taxable as the manufacturer had madepayment to its agent by issuing credit notes for the supply of defectiveEparts during the warranty period.

7.5. In a similar vein, the five impugned decisions rendered bythe High Court of Kerala followed the reasoning and conclusions in thecase of M/s TVS and Sons Ltd. vs. State of Kerala, decided on06.06.2007. Clause 23 of the Dealership Agreement states:F

“The Dealer is not and shall not be the agent of theCompany for any purpose, and the dealer has no right orauthority to assign or create any obligation of any kind, express orimplied, on behalf of the Company to bind the Company in anyway, to accept any service or process upon the Company or toGreceive any notice of any nature whatsoever.”

7.6. Also Warranty Policy of Mahindra & Mahindra Ltd. on‘Warranty Repair Attention’ states that the dealer should not charge thecustomer for warranty repairs. It emphasizes that the repairs should becarried out absolutely free of charge and the claims should be submittedHto the manufacturer for reimbursement.

7.7. The High Court affirmed the decision of the Kerala SalesTax Appellate Tribunal wherein the decision in Mohd. Ekram Khanwas applied to confirm the assessment order passed by the Revenueagainst the dealer who had replaced defective parts of automobiles forfree, in the discharge of his obligations under the dealership agreement.The Tribunal had rejected the argument that the dealer was merelydischarging the obligations of the manufacturer in so far as the warrantywas concerned and therefore, the transaction was not taxable.

7.8. The three impugned decisions, emanating from the BombayHigh Court, follow the decision in M/s Navnit Motors Pvt Ltd. vs. Stateof Maharashtra, decided on 29.11.2011. The High Court recorded thatthe Sales Tax Tribunal had declined to refer the matter to the High Courtunder Section 61 of the Bombay Sales Tax Act, 1959. It further notedthat the Tribunal, while following the law laid down in Mohd. EkramKhan 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 inthe goods pass to the dealer once it is purchased from Maruti UdyogLtd. and the delivered goods pass to him at the factory gate. Moreover,the replacement for defective parts covered by warranty is done by thedealer out of his stock of purchased goods. Also, the cost of parts incurredby the dealer in carrying out a repair, or replacement of the defectivepart is reimbursed by the manufacturer. The High Court rejected theattempt of the assessee to distinguish the facts in Mohd. Ekram Khanas the attempt was premised on the assertion that in Mohd. EkramKhan, the relationship between the dealer and manufacturer involvedan agency whereas in the present case, the transaction was on a principal-to-principal basis. The High Court affirmed the reasoning of the Tribunalon this question by recording that the nature of the relationship as foundin the dealership agreement contested in Mohd. Ekram Khan was thesame as that in the case at hand: principal-to-principal relationship.Therefore, the assessee cannot seek to take benefit of a sentence recordedin the judgment in Mohd. Ekram Khan that the dealer was an agent ofthe manufacturer. The High Court further reasoned that the terms ofagreement in Mohd. Ekram Khan was similar to the case beingconsidered as clause 49 of the Agreement of Dealership required thedealer to promptly and effectively deal with any claim made by thecustomer of any vehicle under the provisions of the warranty currentlyin force. In terms of the warranty, the cost of parts incurred by thedealer in carrying out repairs or replacement of defective parts is in

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Aaccordance with the procedure established by the manufacturer andreimbursed by the manufacturer to the assessee.

7.9. Two decisions of the Madhya Pradesh High Court are assailedin the present case by the assessees. Both orders follow the reasoningof court in M/s. Harsh Automobiles Private Limited vs. TheBCommissioner of Commercial Tax, Indore, decided on 25.01.2018.The High Court relied upon the dictum in Mohd. Ekram Khan andrejected the assessee’s contention that the replacement of motor vehiclepart during the warranty period was not covered in sale and, therefore,is not liable to tax.

C7.10. The sole impugned decision from the Gujarat High Court,M/s Kataria Automobiles Pvt Ltd. vs. State of Gujarat, was decidedon 20.03.2015. The High Court applied the decision of this Court inMohd. Ekram Khan and concluded that the transaction of replacementof defective parts was taxable as the dealer had received payment inthe form of credit notes for the discharge of the manufacturer’s warrantyDobligation. The High Court observed that it was admitted that the dealerwas purchasing the spare parts from the open market and replacing thedefective parts during the warranty period. It also noted that the dealerwas being compensated by way of credit notes. Moreover, themanufacturer has received the defective parts from the dealer. The HighECourt reasoned that if the said defective parts were purchased from theopen market, the manufacturer would have been obliged to pay salestax.

7.11. Two decisions of the Andhra Pradesh High Court are assailedin the present case by the assessees. These cases pertain to M/s JasperFIndustries (P) Ltd. vs. State of Andhra Pradesh, decided vide commonorder 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 todistinguish the judgment of the Supreme Court on a microscopicexamination of the different facts situation. Therefore, the High Courtrefused to entertain the view of the Rajasthan High Court, as enunciatedGin Marudhara Motors.Triology of Cases considered/overruled in Mohd. EkramKhan:

8. The three cases considered in Mohd. Ekram Khan shall bediscussed at this stage.H

M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF1293COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

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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 thefollowing two questions were referred to the High Court ofDelhi:

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“(I)Whether, having regard to the facts and circumstancesof the case, the replacement of the parts during thecontinuance of the warranty entered into by themanufacturer and/or by its authorised dealer with thepurchaser would constitute a “sale” within the meaningof Section 2(g) of the Bengal Finance (Sales Tax) Act,1941 as in force in Delhi which is liable to be taxedunder the provision of the Act?

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(II)Whether on the facts and in view of thecircumstances of this case,if the supply of partstransferred to the purchaser of vehicles in replacementDin compliance with the stipulations of the warranty isnot “sale” within the meaning of clause 2(g) of theAct, the purchase price of the parts purchased onthe strength of certificate of registration free of costor purchased at the concessional rate of tax underthe Central Sales Tax Act, 1956, on furnishing ‘C’Eform, is liable to be added to the taxable turnover ofthe purchasing dealer under the provisions of thesecond proviso to clause (ii) of sub-section (2)of Section 5, of the Bengal Finance (Sales Tax) Act1941, as in force in Delhi ?”F

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(Underlining by us)

(ii) In the said case, the Division Bench of the Delhi High Courtconsidered the order of the Financial Commissioner who hadheld that the transfer of property in the parts of a car replacedunder a warranty constituted a “sale” and, as such, theGreplacement of parts as a consequence of the terms andstipulations of the warranty must be deemed to be acontinuation of the original sale, the price of which wasincluded in the consolidated sale price determined and realisedat the time of transfer of goods in the shape of the car with a H

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warranty. It was further observed that the replacement ofparts of the car provided free of cost by the dealer in termsof the warranty was part of the consolidated price realisedat the time of the initial transfer and on which sales tax waspaid and the replacement of the parts would deem to be a‘sale’ not liable to imposition of further sales tax.

(iii) The precise question considered in the said case was,whether, transfer of the parts replaced in pursuance of thewarranty amounted to a sale within the meaning of the SalesTax Act and whether the sale price of the car which hadbeen subjected to the sales tax could be regarded as havingincluded the cost or value of spare parts used in thereplacement, in compliance with the stipulations in thewarranty. On considering the warranty clause, it was notedthat the sale of cars was along with the warranty to replacedefective parts free of cost and the price was fixed at thetime of the sale. After noting the distinction between thecondition and warranty in a contract of sale of goods, itwas observed that the consideration on the defective part,that might be replaced under the warranty was notseparately specified because it was included in the pricefixed at the time of sale of the car. In other words, thetransfer of property and the part replaced in pursuance ofstipulation of warranty is part of the original sale of the carfor the price fixed and received from the buyer or consumer.The price so fixed and received was a consolidated pricefor the car and the parts that may have been supplied byway of replacement in pursuance of the warranty.Accordingly, it was observed that the FinancialCommissioner was right in holding that the price for thereplaced part was already charged and paid, on which salestax was already levied and collected and hence, there wasno 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 under Section 44(1) of the M.P. General Sales Tax Act, 1958 is extracted asunder:

“Whether in the facts and circumstances of the case,the Tribunal was justified in holding that thereimbursement of Rs.33,263/- received from theprincipals will not form part of the sale price asdefined under section 2 (o) of the M. P. General SalesTax Act, 1958?”

(Underlining by us)

In the said case, the revenue contended that when thespare parts are replaced by the assessee (dealer) to thecustomer free of charge, being the condition of warranty,he recovers the price from the manufacturer and insubstance it is the sale of the spare parts to the customerand therefore, it is liable to tax payable by the dealer.

(ii) The Division Bench of the Madhya Pradesh High Court,however, held that the aforesaid contention of the revenuesuffered from a basic policy issue. That the warranty for asale of car is from the manufacturer and therefore, if duringthe warranty period any part is found to be defective and isto be replaced, the responsibility of replacement is that ofthe manufacturer. Therefore, when the assessee (dealer)replaces parts to the customers and either gets those partsfrom the manufacturer or gets it reimbursed, it is neither asale of those parts by the dealer to the customer nor to themanufacturer, what it does only is to pass on the part fromthe manufacturer to the customer but in order to avoid delayand inconvenience to the customer, he replaces the partsfirst and gets them from the manufacturer later and thus, itdoes not fall within the ambit of the definition of sale asprovided under the Act.

III.Geo Motors vs. State of Kerala, (2001) 122 STC 285:(Geo Motors)

III.Geo Motors vs. State of Kerala, (2001) 122 STC 285:(Geo Motors)

(i) The facts in the said case were that the petitioner (GeoMotors) was an agent for automobile manufacturers likeHindustan Motors Ltd. in the State of Kerala. The newvehicles were covered by a warranty for a specified period.During the warranty period if spare parts had to be replaced,the petitioner therein as the agent of the manufacture, made

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Athe replacement free of charge to the owners of the vehicle.The value of such spare parts replaced by the petitionertherein during the warranty period was reimbursed by themanufacturer by issuing credit notes. The spare parts werepurchased in bulk and replacement was made from out ofsuch stock held by the petitioner. After replacement, theBpetitioner therein would make a claim to the manufacturerwho would issue the credit notes. The manufacturer wouldissue credit notes for the value together with excise dutyand sales tax, thereby, cancelling the original sale made tothe petitioner in respect of the item replaced. Therefore, itCwas contended that there was only a sale cancellationbetween the manufacturer and the petitioner and that thepetitioner therein had already suffered tax at the point of asale and therefore, every component part of the car wouldhave to be taken to have suffered tax at the point of a saleand when replacement was made it is in respect of an itemDwhich has suffered a tax at the point of a sale.

According to the revenue, the replacement of the spareparts was by purchase made from outside the State by issueof C-forms.

(ii) The Division Bench of the Kerala High Court held that thetransaction in question cannot be said to be a sale. That thepurchase of spare parts may have been by giving C-formsbut it was used purely for replacement and not for sale.That credit notes are issued by the manufacturer by reducingthe sale value. In this regard, reliance was placed on PremNath Motors. Hence, a direction was issued to exempt theturnover of the spare parts which were used forreplacement.

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Mohd. Ekram Khan:

G9. The aforesaid two cases, namely, Prem Motors and Geo Motorswere overruled in Mohd. Ekram Khan. Further, the question consideredtherein was, whether, the amount received by the assessee therein forsupply of parts to the customers as a part of the warranty agreementwas liable to tax. The assessee therein was an agent of M/s Mahindraand Mahindra (manufacturer). The manufacturer had a warranty H

agreement with the purchasers of vehicles (the customers) to replacedefective parts during the warranty period. The manufacturer wouldmake payment of a certain price on account of parts supplied by theassessee to the customer by way of replacement of the defective partobviously without charging the customer for the same. Credit notes wereissued by the manufacturer to the assessee as the price of the partssupplied to the customers. The assessing officer was of the view thatthe payment received through credit notes amounted to a sale in termsof Section 2 (h) of the Uttar Pradesh Trade Tax Act, 1948. The TradeTax Tribunal, Varanasi held in favour of the assessee by stating thatthere was no sale. The revenue had carried the matter before the HighCourt which had held that the transactions constituted sale thereby,attracting levy of tax.

9.1. In the said case, reliance was placed on Prem Nath Motors,Prem Motors and Geo Motors by the assessee. It was contended thatas part of a warranty agreement, replacement of the defective agreementwas made by the dealer and there was no sale involved. As opposed tothis, the revenue contended that the transaction between the assesseeand manufacturer was a separate transaction. It was not the case of theassessee therein that the manufacturer had supplied the goods to thecustomers. If it had supplied parts to the customers through the assessee,the position may have been different. The manufacturer was obligatedto make the replacement. If he did not possess the parts to meet thecontractual obligation, he would have purchased the part from any sellerof the part and would have paid the sales tax. In the said case, theassessee had supplied the goods for which it had received theconsideration by way of credit notes and/or other mode of payment.This Court observed that the factual position in Prem Nath Motorscase was different. That in Geo Motors and Prem Motors, the natureof the transaction between the assessee and manufacturer was lost sightof. It was observed that when the manufacturer may have purchasedfrom the open market, parts for the purpose of replacement of thedefective parts, it would have paid taxes. But the position is not differentbecause the assessee had supplied the parts and had received the price.That the assessee had received the payment of the price supplied to thecustomer. Therefore, the transaction is subject to levy of tax. Thedecisions in Geo Motors and Prem Motors were overruled.

It is in the above context that the Reference Order has beenpassed doubting the aforesaid observations.

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ASubmissions:

10. We have heard learned senior counsel and learned counselfor the respective parties at length and shall proceed to answer thereference.

Arguments on Behalf of Assessees in the present Appeals/BSLPs:

I.Submissions of Sri Kavin Gulati, senior counsel for theappellant in Civil Appeal No.1822/2007:

(i) Learned senior counsel Sri Gulati submitted that the TataCMotors dealership agreement, particularly clauses 1(a), 1(b),1(e), 9, 10, 11(a), 12, 13(c), 25, and 33 indicate that thetransaction between the manufacturer and the dealer is oneof Principal and Principal. Tata Motors has already collectedand paid Sales Tax while selling the automobiles in questionto the dealers. The dealer is contractually bound to serviceDthe warranty obligations undertaken by the manufacturerat the time of the sale. It was brought to our attention thatin the present appeals, the respective State’s Sales Taxauthorities had adopted varying interpretations of theallegedly taxable transactions. While the Assessing Officerin Karnataka had characterized the sale as between dealerEand manufacturer; the authorities in Kerala deemed it to bea sale by the dealer without specifying to whom the salewas made. He clarified that during the course of the hearing,the counsel for the State of Kerala adopted the stand thatthe sale was between dealer and manufacturer.

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(ii) On the question of law referred to this Court, it wascontended that, Mohd. Ekram Khan struck a discordantnote against the well-established principle, enunciated inPremier Automobiles, Prem Nath Motors, Prem Motorsand Geo Motors, that the cost of warranty was included inGthe initial transaction of sale and was not taxable separately.Therefore, it was contended that all transfers are not sales,as a sale has a definitive connotation in sale tax law. Salestax is not applicable to all transfers which may happen bymeans of transactions other than sale, such as gift, barter,or exchange. Relying upon State of Madras vs. Gannon H

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Dunkerley & Co, (1959) SCR 379, [Gannon Dunkerley(I)], it was submitted that crucial elements of a tax-eligiblesale transaction are: i) the existence of buyer and seller, ii)existence of an agreement between parties for transferringtitle of goods, iii) such transfer should be supported bymonetary consideration, and iv) property in goods must passor be transferred. It was contended that the present factsdo not present a taxable sale because:

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a.firstly, spare parts are supplied to the customers bythe dealers completely free of charge by way ofreplacement of goods already sold.

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b.secondly, customer receives the new spare part asinstalled in his vehicle and returns the defective part.

c.thirdly, the substance of the transaction remains thedischarge of a warranty obligation assumed by themanufacturer, and through him, the dealer, whileDselling the original goods. As the spare parts arededucted from the stock of the dealer due toconvenience, credit is deservedly given by themanufacturer to the dealer to account for the valueof the goods supplied on behalf of the manufacturer.

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d.fourthly, any dealer of the manufacturer herein canbe approached for discharging the warranty obligationfree of charge.

e.fifthly, the department has wrongly assumed that thesupply of spare parts to the customer is a sale madeFto the manufacturer albeit the title is being transferredto the customer on account of the dealershipagreement.

(iii) Learned senior counsel further submitted that replacementof spare parts during the warranty period does not constituteGa sale. This proposition is supported by Section 12(3) of theSale of Goods Act, 1930 (“the Act”, for short) which statesthat a warranty is a stipulation collateral to the main purposeof the contract. Reliance was also placed upon the decisionof the Canadian Supreme Court in General MotorsProducts of Canada Ltd. vs. Leo Krabvitz, (1979) SCCH

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Online CAN SC 2, wherein it was clarified that thewarranty claim by a purchaser was connected to his titleover the product which was acquired through the originalsale. Therefore, it was contended that the old parts werereturned to the manufacturer through the dealer for thereason that it was crucial to servicing of the warrantyobligation. The decision of this Court in Government ofIndia vs. Madras Rubber Factory Limited, (1995) 4 SCC349, not validating the treatment of warranty as a tradediscount under excise law was also relied upon. Reliancewas also placed on Devi Dass Gopal Krishnan vs. Stateof Punjab, (1967) 3 SCR 557, (Devi Dass GopalKrishnan).

(iv) Learned senior counsel, Sri Gulati submitted that theenforcement of the warranty obligation presented theopposite of the contract of sale, which involves the volitionaltransfer of goods. A case of discharge of a warranty is theexact opposite as both the buyer and seller agree to subsistwithin the existing sale to facilitate the seller to compensatethe buyer for a breach or damage or defect caused to them.Reliance was also placed upon Section 59 of the Act, whichclearly stipulates that enforcement of the remedy for breachof warranty could be actualized in diminution or extinctionof the sale price, and if he is not compensated, he may suefor the breach of warranty. Therefore, it was contendedthat a credit note is issued by the manufacturer to the dealeras an acknowledgment of the diminution of the original saleprice. Axiomatically, credit note is not a sale price or valuableconsideration, as the character of credit is not towards theprice of the newly replaced part, but a credit that embodiesthe diminution of the price already paid for the car.Therefore, it was submitted that, Mohd. Ekram Khan doesnot correctly conceive and appreciate the nature of awarranty transaction, i.e., an undertaking to ensure defect-free functioning of the sold product for the stipulated periodof time. Therefore, the said judgment ought to be overruledwas the submission.

II.Submissions of Sri S.K. Bagaria, senior counsel for thepetitioner, M/s TVS and Sons Ltd., in SLP (C) No. 14260of 2007:

(i) Sri Bagaria, learned senior counsel submitted that the natureof the transaction was not that of a sale, as the service wasprovided free of cost to the customer by a dealer pursuantto a warranty clause. The property in the replaced partpassed merely as an incident of the performance of themanufacturer’s warranty obligation, which forms a part ofthe original sale of the automobile. Sri Bagaria referred tothe relevant clauses of the Dealership Agreement andWarranty Policy to highlight two facts: (a) dealers arecontractually obligated to provide free-of-cost warrantyservices for warranty parts to the customer and (b)defective parts are returned by the customers and becomethe property of the manufacturer.

(ii) Learned senior counsel clarified that the nature of thetransaction was as a compensation to the buyer, and themeasure thereof was equivalent to the cost of exchange ofdefective parts. He cited Benjamin’s Sale of Goods Act(10[th] edn., para 16.032) to underline the compensatoryprinciple, following which the manufacturer compensatesthe buyer for the breach that occurred by way of the defectin the part covered by way of a warranty. Citing para 1.069,learned senior counsel asserted that a transaction involvingcontractual compensation would not amount to the sale ofa thing as the property passes merely as an incident ofperformance of a contract of indemnity.

(iii) Therefore, learned senior counsel submitted thatenforcement of a contractual right for getting a freereplacement in exchange for a defective part was neitherany purchase by the buyer nor a sale to him. According tolearned senior counsel, this proposition was crystallized inGannon Dunkerley (I), Devi Dass Gopal Krishnan,Gannon Dunkerley (II), and Kone Elevators Pvt. Ltd.vs. State of Tamil Nadu, (2014) 7 SCC 1.

Relying upon Builders’ Association of India vs. Unionof India, (1989) 2 SCC 645, it was stressed that the

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constitutional position post-46th Amendment of the IndianConstitution whereby the States’ legislative competence totax the sale of goods was circumscribed by Entry 54, ListII, Schedule VII of the Constitution. That taxation underthis entry, being limited to “sale and purchase of goods”cannot be extended to activities that are not a sale.

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(iv) Reliance was also placed upon Commissioner of Customsvs. Dilip Kumar & Co., (2018) 9 SCC 1 and CIT vs.Motor & General Stores Pvt. Ltd., AIR 1968 SC 200 toemphasize that taxing statutes ought to be specific and mustbe interpreted strictly, as taxation on citizens should not besubject to the whims and fancies of the government.Learned senior counsel adopted the arguments with respectto Mohd. Ekram Khan. That the case did not apply tofacts of the present case where the warranty obligationwas being discharged free of cost and the defective goodswere being returned to the manufacturer. Alternatively, itwas contended that the said case was not correctly decidedas the essential elements of a sale were not considered inthe said judgment.

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III.Submissions of Sri V. Sridharan, learned senior counselEfor the petitioner in SLP (C) Nos. 12806-12808/ 2016:

(i) Learned senior counsel Sri Sridharan submitted that thepetitioner in the aforementioned cases being a dealer of M/s Maruti Suzuki India Ltd., merely fulfilled themanufacturer’s warranty obligation. It was urged that theFdealership agreement was a framework agreement. Takingnote of the chain of transactions, the customer iscompensated for the consideration of purchase of anautomobile from the petitioner. Therefore, there is nocontract of sale either between the petitioner and thecustomer for the replacement of defective parts or betweenGthe petitioner and manufacturer as sale of parts replacedfor the defective parts.

(ii) Challenging the applicability of the Central Sales Tax Act,1956 to the present case, learned counsel maintained thatthere is no inter-state movement of replacement parts asHthey are fitted at the dealer’s location. There is only the

movement of defective parts from the dealer’s location tothe manufacturer if located in another State.

(iii) Learned senior counsel stressed the importance of keepingprudent commercial sense in mind while construing thecontractual obligations in the present case. In this regard,the decision of the United Kingdom Supreme Court in RainySky SA & Orad vs. Kookmin Bank, (2011) UKSC 50was cited wherein it was held that the Court was entitled toprefer the construction which is consistent with businesscommon sense. Therefore, it was submitted that the contractof warranty cannot be equated with a contingent contractof sale, with the contingency being the occurrence of adefect in the parts covered under the warranty. Moreover,the construction preferred by the Revenue that there is anagreement to sell an unspecified good in the future for whichthe manufacturer will pay the consideration is anunreasonable one. On the other hand, the decision of thisCourt in Nabha Power Ltd. vs. Punjab State PowerCorporation Ltd., (2018) 11 SCC 508was relied upon asit laid a five-fold test for constructing a contract of warrantyas a sale. Therein, it was held that to imply a term in acontract, the same must be (i) reasonable and equitable;(ii) necessary to give business efficacy; (iii) passes officiousbystander test; (iv) be capable of clear expression; and (v)must not contradict express term of the contract. Thus, itwas contended that the construction preferred by theRevenue was contradicting the express terms of thecontract of warranty.

(iv) Learned senior counsel further submitted that even if thepresent transaction is assumed to be that of a sale betweenmanufacturer and dealer, the same has to be treated aspurchase return and not be eligible to sales tax. There is noscope for entertaining any doubt that a purchase returnwould be relevant only when a purchase tax is levied onthe purchaser. Furthermore, the present transaction wheremanufacturer-issued credits are accounted as sales returnwhich is a recognized accounting practice and not a taxavoidance strategy. Therefore, it was argued that salesreturn beyond statutory time limit does not lose its character

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Aof return. The only consequence could be that selling dealermay not be able to claim the deduction from gross turnover.

(v) Learned senior counsel also relied upon the judgment ofthe Court of Appeal, New Zealand, in the case of SuzukiNew Zealand Ltd. vs. Commissioner of Inland Revenue,B(2001) 20 NZTC 17.The said case pertained to supply ofspare parts by the car manufacturer to the purchaser directlyor through the dealer under the terms of a warranty. Here,the parts were transferred from the overseas Suzuki MotorCorporation to Suzuki New Zealand. Rejecting the claimfor imposition of Goods and Services Tax, the Court ofCAppeal held that there was no export of service for GSTpurposes.

Arguments on Behalf of Revenue in the present Appeals/SLPs:

Submissions of Sri Pallav Sisodia, senior counsel for the Stateof Kerala in SLP (C) No.14260/2007:

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(i) Learned senior counsel, Sri Pallav Sisodia submitted thatthe presence of a manufacturer’s or dealer’s warrantyon the car sold by the dealer does not make any differenceto whether the transaction of replacement of defectivegoods satisfies the elements of sale or not. The learnedsenior counsel listed various instances by way ofillustrations when a customer purchases a car and reasonedthat even when a customer did not purchase a car with awarranty but had taken an insurance, his expenses on thereplacement of defective parts are reimbursed. Yet, thetransaction is understood as a component of the taxableturnover of the dealer as per Explanation (5) to Section 2(xxi) of the Kerala General Sales Tax Act, 1963. Evenwhen the customer enforces the warranty, the dealerobtains a discharge of warranty obligation as a valuableconsideration for the transfer of fresh parts from the dealerto the customer. The car dealer gets the replacement ofparts as co-warrantor from the manufacturer towards thedischarge 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 themanufacturer to the dealer. It makes no difference if the E

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recompense is in the form of a credit note or cheque orcash. Irrespective of the nature of the transfer of goodsbetween manufacturer and dealer, it is a sale for thepurposes of sales tax laws.

(ii) It was submitted that the Prem Nath Motors line of caseswas decided on fallacious reasons, and the decision in Mohd.Ekram Khan deserves affirmation. Therefore, the idea of‘continuous sale’, ‘credit note as not a valuable consideration’,or ‘sales return’ are all red herrings not supported by factson record.

Submissions of Sri Ravindra K. Raizada, senior counsel forCommissioner, Commercial Tax, State of U.P. in SLP(C) Nos.12119/2017 and 11509/2017:

(i) Sri Raizada, learned senior counsel submitted that theDealership Agreement between Tata Motors and M/sVikrant Automobiles was on a principal-to-principal basis.Furthermore, the case did not involve an exchange of themanufacturer’s spare parts with customer’s defective parts.Instead, the dealer purchased the parts from themanufacturer. It is clearly not a stock transfer from themanufacturer to the dealer. The ingredients of sale in thepresent case ought to be considered complete when goodsi.e. new spare parts, are transferred to the customers andpayment is received from the manufacturer who is fulfillingthe warranty obligation as per established trade practice.He asserted that the manufacturer maintaining a runningaccount of the dealer, through a credit note in respect ofsuch sale of spare parts by dealer, has acknowledged suchadjustment to be made in Sale and Purchase Account ofthe dealer. Thus, the warranty claims ought to be taxableas elucidated in Mohd. Ekram Khan. On the issue ofwarranty obligation emanating from the original sale, learnedsenior counsel submitted that the performance of warrantyobligations is determined through actual damage to thedefective part at the relevant time a claim is made.Therefore, it cannot be said to have been totally accountedfor and debited in manufacturer’s Taxable Turnover of Salesand Purchase under VAT/Trade Tax.

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(ii) Accordingly, he prayed that the case of the revenue oughtto succeed in both SLPs, therefore, SLP(C) No. 12119/2017 should be allowed, and SLP(C) No. 11509/2017, filedby a dealer, M/s Maskat Pvt Ltd, ought to be dismissed.

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Submissions of Dr. Manish Singhvi, senior counsel for theBState of Rajasthan in Civil Appeal No. 3856/2013:

(i) Dr. Singhvi, learned senior counsel, instructed by Sri MilindKumar, submitted that the exact nature of the transactionhas to be seen to determine whether sales tax was leviableor not. It was stressed that the crucial issue pertains to themisuse or misdeclaration of C-Forms which are issued atconcessional rate under Section 8(4) of Central Sales TaxAct, 1956 read with Rule 12 of Central Sales Tax Rules,1957. Any internal adjustment qua accounts or evencontracts 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 conditionspertaining to resale. That, spare parts were fitted duringthe warranty period for a consideration given by way ofcredit notes by the manufacturer. Therefore, the penalty isbound to be imposed on Dealer/Manufacturer company.

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ESubmissions of Sri Nikhil Goel, Counsel for the State ofKarnataka in Civil Appeal Nos. 1822/2007, 1821/2007 andSLP (C) Nos. 5449-5451/2014, 5447/2014:

(i) Sri Goel, learned counsel submitted that the Karnataka ValueAdded Tax Act, 2003 specifically excludes thoseFtransactions which are not sales. Since the transaction underdispute is not specifically excluded, the assessees havesought to canvass that it does not satisfy the definition ofsale under Section 2(t) of the Karnataka Value Added TaxAct, 2003. It was further submitted that the four elementsGof the sale are completed in the transaction under dispute.The State seeks to tax sales and it does not matter if thereis an element of profit involved. The cost of the car doesnot include the cost of the warranty. Therefore, he submittedthat the argument made by assessee is incorrect, when seenin light of the decision of this court in Premier Automobiles.HThat the Supreme Court of England in Digital Satellite

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Warranty Cover Limited vs. Financial ServicesAuthority, (2013) UKSC 7 held that warranty is in thenature of insurance. Even without such warranty, the Actbinds the manufacturer to provide working goods, failureof which would invite an action in damages.

(ii) Learned counsel, Sri Goel, also underlined that in theBaccounting entries, the assessee was not accounting forthe sale occasioned by a warranty to be a sales return. Theconcept of sale and purchase return applies to the same good,whereas the present facts pertain to a defective good.Furthermore, the transactions of sale occasioned by warrantyCare separate from the sale of a car by the manufacturer.Both transactions ought to be tested independently.Therefore, the discharge of a larger obligation by the dealerto sell motor vehicles on which tax is already paid, does notrender the separate transaction of return of defective partsto the manufacturer against a credit note, as not a sale.D

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Submissions of Sri Aniruddha Joshi, learned counsel for Stateof Maharashtra in Civil Appeal Nos. 2756/2012, 10924/2018and 9979/2018:

(i) Sri Joshi submitted that the elements of sale for the impositionof sales tax were satisfied in the present transaction. ItEwas urged that the real nature of the transaction and thesubstance thereof had to be deciphered to distinguishbetween a contract of sale between the dealer andmanufacturer with that of an agency. It was submitted thatthe Dealership Agreement between the dealer-assessee andFthe manufacturer is a composite document that includesmultiple contracts of sale, as understood from Section 4(1)of the Act. These include:

a.Agreement to sell the car to the dealer; G

b.Agreement to sell spare parts by manufacturer tothe dealer;

c.Conditional Agreement to sell the spare parts by thedealer to the manufacturer if such a condition isfulfilled. The condition is a warranty claim beingraised by a purchaser.

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d.Agreement to purchase wherein the dealer undertakesto purchase spare parts from the manufacturer.

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(ii) The counsel further submitted that all elements of sale arecomplete because there is a seller and a buyer, i.e. dealerand manufacturer; valuable consideration was paid by theBmanufacturer in the form of credit notes and the transferof the property of goods is taking place to the nominee ofthe manufacturer, i.e. car purchaser.

It was also contended that there is no question of thedelivery of spare parts and the consequent payment by wayCof credit note being an instance of sales return. The sale ofthe car is separate from the sale of spare parts, the sales inquestion would be specifically applicable to the latter.

Submissions of Ms. Deepanwita Priyanka, Counsel for theState of Gujarat in SLP (Civil) Nos. 12806-12808/ 2016:

D(i)Learned counsel submitted that the assessee’s claim forexemption from payment of sales tax is not covered by theexemption notification issued under Section 8(4) of CentralSales Tax Act, 1956 on 13.05.2002. It was submitted thatthe burden of proving exemption was on the assessee andEthat 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 Khancalls for reconsideration in terms of the Reference Orderdated 05.12.2019? In other words, whether the aforesaidFcase has been correctly decided or not?

(ii) What Order?

12. At the outset, it is necessary to read the relevant provisions ofthe Act:

GSections 4 and 5 of the said Act read as under:

“4. Sale and agreement to sell. –

(1) A contract of sale of goods is a contract wherebythe seller transfers or agrees to transfer the propertyin goods to the buyer for a price. There may be aHcontract of sale between one part-owner and another.

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(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in thegoods is transferred from the seller to the buyer, thecontract is called a sale, but where the transfer ofthe property in the goods is to take place at a futuretime or is subject to some condition thereafter to beBfulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the timeelapses or the conditions are fulfilled subject to whichthe property in the goods is to be transferred.

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5. Contract of sale how made. –

(1) A contract of sale is made by an offer to buy or sellgoods for a price and the acceptance of such offer.The contract may provide for the immediate deliveryof the goods or immediate payment of the price orboth, or for the delivery or payment by instalments,or that the delivery or payment or both shall bepostponed.

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(2) Subject to the provisions of any law for the time beingin force, a contract of sale may be made in writing orby word of mouth, or partly in writing and partly byword of mouth or may be implied from the conductof the parties.”

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12.1. Section 4 defines the expression sale. In order to apply thesaid definition, four essential elements are necessary, namely, (i) partiescompetent to contract; (ii) mutual assent; (iii) passing of property; and(iv) price to be paid.

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12.2. While understanding the said Section, the terms defined underSection 2, clauses (7), (13), (11), (1) and (10) respectively are necessaryas the said clauses define the terms “goods”, “seller”, “property”, “buyer”and “Price”. Thus, to constitute a sale, in the legal sense, there must bea contract in pursuance of which the transfer of property, which transferneed not necessarily be by the owner himself, takes place on paymentof a price, though there are exceptions to this rule enshrined underSections 19 to 24 of the Act. The contract may be oral or in writing, or it G

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Amay be inferred even from the conduct of the parties, but it must originatefrom an offer and its acceptance. A sale must not be distinguished froma mere agreement to sell. If under the contract of sale, title to goods hasnot 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 theBconditions are fulfilled, subject to which the property in the goods aretransferred. 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 anagreement, express or implied, relating to goods, to be completed bypassing of title therein and also the agreement and the sale should relateto the same subject-matter. Thus, existence of a contract to sell is sineCqua non for the coming into existence of a sale.

12.3. Therefore, the following elements must be present toconstitute a valid contract of sale, namely, -

(1) a contract (as required by the Act and the Contract Act); D

(2) between two parties, (the one called the “seller” and theother called the “buyer”);

(3) to transfer or agree to transfer the property;

(4) in goods;

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(5) from the seller to the buyer;

(6) for a price, that is, money consideration.

12.4. It is also necessary to differentiate a contract of sale from

other contracts, as the question whether a given contract is one of saleFor a contract of any other description is one of substance and not ofform. It depends on the real meaning and nature of the contract as towhether it is a contract of sale or – (i) a mere guarantee for the price, or(ii) a barter or exchange, or (iii) a bailment on trust, or (iv) a contract ofsale or return, or (v) a contract of del credere agency, or (vi) a contractGof sale on commission, or (vii) a contract for loan on security, or (viii) amere wagering contract, or (ix) a contract for work and materials, or (x)a contract for hiring, or (xi) a contract to do work as an agent, or (xii) alicence to get mineral products from land, or (xiii) a pledge, or (xiv) agift.

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12.5. In State of Madras vs. Gannon Dunkerley and Co.(Madras) Ltd., 1958 (9) STC 353 SC (Gannon Dunkerley and Co.-I), it was observed that the expression sale of goods in Entry 48, List IIof Schedule VII of the Government of India Act, 1935, cannot beconstrued in its popular sense but must be interpreted in its legal senseand should be given the same meaning which it has in the Act. It wasfurther observed that in order to constitute a sale, it is necessary thatthere should be an agreement between the parties for the purpose oftransferring title in the goods, which presupposes capacity to contract,that it should be supported by money consideration, and that as a resultof the transaction property must actually pass in the goods. Unless allthese elements are present, there can be no sale. Thus, if merely title tothe goods passes but not as a result of any contract between the parties,express or implied, there is no sale. So also, if the consideration for thetransfer is not a money consideration but other valuable consideration, itmay then be an exchange or barter but not a sale under the Act. Also if,under the contract of sale, title to the goods has not passed, then there isan agreement to sell and not a completed sale. Moreover under the lawthere cannot be an agreement relating to one kind of property and a saleas regards another. There must be an agreement between the partiesfor the sale of the very goods in which eventually the property passes.

It was further observed in the aforesaid case that both under thecommon law and the statute law relating to sale of goods in England andin India, to constitute a transaction of sale, there should be an agreement,express or implied, relating to goods to be completed by passing of titlein those goods. It is of the essence of this concept that both the agreementand the sale should relate to the same subject matter. Where the goodsdelivered under the contract are not the goods contracted for, thepurchaser has got a right to reject them, or to accept them and claimdamages for breach of warranty. Under the law, therefore, there cannotbe an agreement relating to one kind of property and a sale as regardsanother. Thus, the expression sale of goods must relate to an agreementbetween the parties for the sale of the very goods in which eventuallythe property passes.

12.6. It was further observed that the interpretation to theexpression sale of goods in Gannon Dunkerley and Co.-I was madeon the basis of the common law definition contained in Blackstone,Benjamin on Sale, Halsbury’s Law of England, Chalmer’s Sale of Goods

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AAct, Corpus Juris, Williston on Sales and the Concise Oxford Dictionary.It was necessary to interpret the language of the Constitution withreference to the Common law, and the Court must place itself in theposition of the men who framed and adopted the Constitution and inquirewhat they must have understood to be the meaning and scope of theprinciple that when power is conferred to legislate on a particular topic,Bto have regard to what is ordinarily treated as embraced within thattopic in legislative practice and particularly in the legislative practice ofthe State which has conferred that power by the Constitution. Parliamentmust be presumed to have had Indian legislative practice in mind andunless the context otherwise clearly requires, not to have conferred aClegislative power intended to be interpreted in a sense not understood bythose to whom the Act was to apply.

12.7. In M/s Vishnu Agencies (Pvt.) Ltd. vs. Commercial TaxOfficers, (1978) 1 SCC 520, while holding that even when there was atransfer of controlled commodities in pursuance of a direction under theDControl Order where an element of mutual assent was absent, therewas, nevertheless, sale as defined under the Act. In the said case, aSeven-Judge Bench of this Court held that the earlier decision in M/sNew India Sugar Mills Ltd. vs. Commissioner of Sales Tax, AIR1963 SC 1207 was not good law. Reliance was placed on the judgmentin Gannon Dunkerley and Co.-I to observe that in order to constituteEa sale, it is necessary that there should be an agreement between theparties for the purpose of transferring title to the goods, which presupposescapacity to contract and the contract must be supported by valuableconsideration and that as a result of the transaction, property must actuallypass in the goods. It was observed that, “unless all these elements areFpresent, there can be no sale.”

12.8. In Sunrise Associates vs. Govt. of NCT of Delhi, (2006)5 SCC 603, a Constitution Bench of this Court speaking through RumaPal, J. observed that when there is a sale of a lottery ticket, there is nosale of goods within the meaning of Sales Tax Acts of the differentGStates but at the highest a transfer of an actionable claim. Accordingly,the earlier decision of this Court in H. Anraj vs. Govt. of T.N., (1986)1 SCC 414 was overruled.

13. Sections 12, 13 and 59 of the Act are relevant for the purposeof these cases and the same read as under:H

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“12. Condition and warranty. —

(1) A stipulation in a contract of sale with reference togoods which are the subject thereof may be acondition or a warranty.

(2) A condition is a stipulation essential to the mainBpurpose of the contract, the breach of which givesrise to a right to treat the contract as repudiated.

(3) A warranty is a stipulation collateral to the mainpurpose of the contract, the breach of which givesrise to a claim for damages but not to a right to rejectCthe goods and treat the contract as repudiated.

(4) Whether a stipulation in a contract of sale is acondition or a warranty depends in each case on theconstruction of the contract. A stipulation may be acondition, though called a warranty in the contract.

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13. When condition to be treated as warranty. —

(1) Where a contract of sale is subject to any conditionto be fulfilled by the seller, the buyer may waive thecondition or elect to treat the breach of the conditionas a breach of warranty and not as a ground forEtreating the contract as repudiated.

(2) Where a contract of sale is not severable and thebuyer has accepted the goods or part thereof, [***]the breach of any condition to be fulfilled by the sellercan only be treated as a breach of warranty and notas a ground for rejecting the goods and treating thecontract as repudiated, unless there is a term of thecontract, express or implied, to that effect.

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(3) Nothing in this section shall affect the case of anycondition or warranty fulfilment of which is excusedby law by reason of impossibility or otherwise.”

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59. Remedy for breach of warranty. —

(1) Where there is a breach of warranty by the seller, orwhere the buyer elects or is compelled to treat anyH

breach of a condition on the part of the seller as abreach of warranty, the buyer is not by reason onlyof such breach of warranty entitled to reject thegoods; but he may—

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(b) sue the seller for damages for breach ofwarranty.

(2) The fact that a buyer has set up a breach of warrantyin diminution or extinction of the price does notprevent him from suing for the same breach ofwarranty if he has suffered further damage.”

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13.1. Section 12 deals with condition and warranty. A stipulationin a contract of sale with reference to goods which are the subject matterthereof may be a condition or a warranty. A condition is a stipulationDessential to the main purpose of the contract, the breach of which givesrise to a right to treat the contract as repudiated. A warranty is, on theother hand, 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 rightto reject the goods and treat the contract as repudiated. Whether aEstipulation in a contract of sale is a condition or a warranty depends ineach case on the construction of the contract. However, a stipulationmay be a condition, though called a warranty in the contract.

13.2. There is also a distinction between a warranty andguarantee. As already stated, a warranty is an express or impliedFstatement of something, which a party undertakes to fulfil as part of thecontract, yet collateral to the main object of it. A warranty does not go tothe root or substance of the contract. A guarantee is a contract which isancillary and subsidiary to some other contract or liability whereby thepromisor undertakes to be answerable to the promisee for the debt, defaultor miscarriage of another person whose primary liability to the promiseeGmust exist, or be contemplated. It is an additional or collateral orconditional contract as distinguished from an original or absolute contract.

13.3. A warranty can only exist when the subject matter of thecontract of sale is ascertained and is existing so as to be capable ofbeing inspected at the time of the contract. It is a collateral engagementHthat the specific thing possesses certain qualities after the passing of the

property under the contract of sale to the buyer. A warranty may beexpress or implied. It is express if entered into a contract in expressterms or implied when deemed to be entered into a contract by implicationof law, that is, in the absence of express stipulation to the contrary.

13.4. A breach of the warranty cannot entitle the vendee to rescindthe contract and revest the property in the vendor without his consent.Under Section 59 of the Act, the remedies available for a breach ofwarranty for a seller are prescribed. One of the remedies is the right toreturn of goods; return of goods by the buyer falls into two categories,namely, (i) where there is an obligation to return the goods and (ii) wherethe buyer has the right or the power to return the goods.

13.5. We may discuss on collateral contracts and collateralwarranties as discerned from various legal treatises and commentaries:

(i) A contract between two persons may be accompanied bya collateral contract between one of them and a third personrelating to the same subject matter. When a person buysgoods from a dealer, he is given a “guarantee” in the nameof the manufacturer. Here the main contract of sale isbetween the customer and the dealer but it seems that the“guarantee” could also be regarded as a collateralcontract between the manufacturer and customer. Speciallegislation applies to certain guarantees given to consumersin respect of goods sold or supplied to them. Where therequirements specified in the legislation are satisfied, suchguarantees take effect as contractual obligations whetheror not the requirements of a collateral contract are satisfied;and these requirements continue to apply to manufacturers’guarantees not covered by any legislation. [Source: Chittyon contracts, Thirty-First Edition].

(ii) A collateral contract between a third party and one of theparties to a main contract may be associated with the maincontract. Such a contract may enable a third party to enforcethe main contract. A “manufacturer” guarantee is an exampleof such contract collateral to the main contract of purchaseof goods. When such collateral contract is expressed, itmay not be an exception to the third-party rule, becausethe third party is a party to the collateral contract. It is a A

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1316SUPREME COURT REPORTS

devise used or implied to impose obligations on persons notparties to the main contract. [Source: Pollock and Mulla -The Indian Contract Act].

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(iii) Where a preliminary statement or assurance is not a termof the principal agreement, the Courts may deem it as acontract or warranty, collateral to the principal agreement.Where a necessary contractual intention is present, theCourts would treat or would construe an assurance as acollateral contract or warranty conferring a right todamages. The device of a collateral warranty has beenemployed where the principal contract is one to which eitherthe person giving or the person receiving the assurance isnot a party vide Shanklin Pier Ltd. vs. Detel ProductsLtd., (1951) 2 KV 854. [Source: Anson’s law of contract].

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(iv) Thus, a contract between two persons may be accompaniedby a collateral contract between one of them and a thirdDperson relating to the same subject matter. When a personbuys goods from a dealer and is given a guarantee issuedby the manufacturer, the main contract of sale is betweendealer and the purchaser or customer but the guaranteefrom the manufacturer is a collateral contract between theEmanufacturer and the customer. To be enforceable as acollateral contract, a promise must be supported byconsideration. (i) In the case of purchase of goods by thecustomer from the dealer for consideration, the guaranteefrom the manufacturer is collateral contract between themanufacturer and the customer. (ii) When a customer buysFgoods from a shop and the payment involves use of cheque,cards or credit cards issued by the bank, the main contractis between the customer and the shopkeeper but there isalso a contract between the shop keeper and the issuer ofthe credit card, by which the latter undertakes that the shopGkeeper will be paid. (iii) In the case of a hire-purchaseagreement, the primary contract is the customer enteringinto a hire-purchase agreement with the finance company.In such a case, the main contract is between the customerand the finance company. A representation by the dealeras to the quality of the goods used does not bind the finance H

company but it would be enforced against the dealer as acollateral contract by a customer. [Source: Benjamin’s Saleof Goods, Eighth Edition]

(v) According to Halsbury’s Laws of England, Fifth Edition-2012, Volume 91, meaning of warranty is as under:

“64. Meaning of ‘warranty’. ‘Warranty’ means anagreement with reference to goods which are the subjectof a contract of sale, but collateral to the main purposeof such a contract, the breach of which gives rise to aclaim for damages, but not to a right to reject the goodsand tret the contract as repudiated. In order to satisfythe definition, therefore, a warranty must, first, be anagreement, a promise that the representation is or willbe true; and, secondly, the agreement must be collateralto the main purpose of the contract, such purpose beingthe transfer of the property in, and the possession of,goods of the description contracted for. A warranty maybe given in consideration of an agreement to enter intoa contract of sale of the goods to which the warrantyrelates with a party other than the person giving thewarranty.”

13.6. In Rotork Controls India Pvt. Ltd. vs. Commissioner ofIncome Tax, Chennai, (2009) 13 SCC 283, a provision within themeaning of Section 40-A of the Income Tax Act, 1961 which deals withexpenses or payment not deductible in certain circumstances came upfor consideration. In that context, it was observed that a provision is aliability which can be measured only by using a substantial degree ofestimation. A provision is recognised when: (a) an enterprise has a presentobligation as a result of a past event (such as a sale); (b) it is probablethat an outflow of resources will be required to settle the obligation; and(c) a reliable estimate can be made of the amount of the obligation. Theassessee therein was in the business of valve actuators which aresophisticated goods and if any valve actuator was found defective thenthe warranty became significant. As the valve actuator is a sophisticatedgood, no customer was prepared to buy the same without a warranty. Inother words, a warranty stood attached to the sale price of the product.In that context, it was observed that obligations arising from past eventshave to be recognized as provisions and these past events such as a sale

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Aof goods are known as obligating events. It was observed on the factsand circumstances of that case that provision for warranty was rightlymade by the appellant enterprise therein because it had incurred a presentobligation as a result of past events which resulted in an outflow ofresources.

B13.7. In the context of levy of excise duty on the manufacturerwho is also a seller at the point of first sale, this Court in MedleyPharmaceuticals Ltd. vs. Commissioner of Central Excise andCustoms, Daman, (2011) 2 SCC 601 at paragraph 12 referred to FirmRam Krishna Ramnath Agarwal vs. Municipal Committee,Kamptee, AIR 1950 SC 11 which had in turn referred to the distinctionCmade by the Federal Court between a duty of excise and a tax on sale inProvince 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 natureof things, be a tax on the sale by the manufacturer or producer;Dbut it is levied upon him qua seller and not qua manufacturer orproducer. It may well be that a manufacturer or producer issometimes doubly hit.… If the taxpayer who pays a sales tax isalso a manufacturer or producer of commodities subject to acentral duty of excise, there may no doubt be overlapping in oneEsense; but there is no overlapping in law. The two taxes which heis called on to pay are economically two separate and distinctimposts. There is, in theory, nothing to prevent the CentralLegislature from imposing a duty of excise on a commodity assoon as it comes into existence, no matter what happens to itFafterwards, whether it be sold, consumed, destroyed or given away.… It is the fact of manufacture which attracts the duty, eventhough it may be collected later…. In the case of a sales tax, theliability to tax arises on the occasion of a sale, and a sale has nonecessary connection with manufacture or production.”

(emphasis supplied)

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13.8. In Bharat Heavy Electricals Ltd. vs. Commissioner ofCustoms and Central Excise, Indore, (2003) 9 SCC 185, the questionwas, whether, excise duty is payable on the parts which are replacedduring the warranty period. It was contended that the replaced part wasHfree of cost during the warranty period and the sale price of the machinery

sold included the price of the part which was subsequently being replaced.There could not be double levy of excise on the same part. It was observedthat the price charge for the machinery may include the element of“complaint reserve”. At that time, it is not known whether there wouldbe any need to replace any part. In many cases, parts are not required tobe replaced. When parts are not replaced, the component of “complaintreserve” is not returned to the customer. Thus, as far as the customer isconcerned, the total amount paid, including the component towards“complaint reserve” is the price for the machinery. It was furtherobserved that when a manufacturer offers a warranty to replace adefective part within a particular period and defective part is replacedby another part, the latter is exigible to excise duty.

Pertinent Controversy: Analysis

Pertinent Controversy: Analysis

14. In Mohd. Ekram Khan, this Court distinguished the judgmentin Premier Automobiles by holding that the fact situation there wasdifferent and the issues in the said case were also different by observingthat one of the issues was, whether, the expenses on account of warrantyand statutory bonus were to be excludable while working out the ex-works cost. It was noted therein that car manufacturers furnish warrantycovering the cars sold by entering into an agreement with themanufacturers of componentsproviding for a warranty so far as thecomponents supplied are concerned. The whole object behind thewarranty is that the consumer who has to make a heavy investment forthe vehicle should be assured of a proper performance of the vehicle ina trouble-free manner for a reasonable length of time. Therefore, entirecost 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 thepart or parts replaced in pursuance of a stipulation or a warranty whichis a part of the original sale of the car for the price fixed and receivedfrom the buyer or consumer. It was observed that the price so fixed andreceived was a consolidated price for the car and the parts that mayhave to be supplied by way of replacement in pursuance of the warranty.It was observed by this Court that the decision in Prem Nath Motorsdid not apply to the controversy in Mohd. Ekram Khan.

16. It was further observed in Mohd. Ekram Khan that in acase where manufacturer may have purchased from the open market

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Aparts for the purpose of replacement of the defective parts, themanufacturer would have to pay taxes. In such a situation, the dealerwould have supplied the parts and not received any price either fromthe customer or from the manufacturer. The dealer (assessee) wouldhave not received the payment of the price for the parts supplied tocustomers received from the manufacturer. Therefore, the transactionBis not subject to levy of tax. What is significant to note is that whenthere is a warranty clause appended to the sale of a motor vehicle forthe replacement of a defective part on the part of the manufacturerand if the manufacturer purchases the said part from the open market,it would have paid the tax. In such a case the dealer (assessee) wouldChave supplied the part to the customer but not received the payment ofthe price from the manufacturer. In such a case, the transactionbetween the dealer and the manufacturer is not one of sale. But whatis the nature of transaction when a dealer receives a credit note fromthe manufacturer while discharging his obligation under a warrantyclause and uses a spare part from his own stock to replace a defectiveDpart was a question which was also considered.

17. In Prem Motors, it was observed that when a dealer sells anautomobile, he sells it with all parts in a salable condition. The warrantyfrom the manufacturer is that if, during the warranty period, any part isfound to be defective and is to be replaced, the responsibility ofEreplacement is that of the manufacturer. For the convenience of thecustomer, there is an arrangement between the manufacturer and thedealer so that the customer may get replacement done from the dealerwhich in due course is again made good by the manufacturer. The dealer/assessee replaces parts to the customers and gets it reimbursed, it isFneither sale of these parts by the dealer to the customer or by themanufacturer. What he does only is to pass on the parts from themanufacturer to the customer but in order to avoid delay andinconvenience of the customer he replaces the parts first (from his ownstock) and gets a recompense from the manufacturer later which is nota sale as per the definition of sale of goods.G

18. Similarly, in Geo Motors, it was observed that when thereplacement of the spare part is done during the warranty period free ofcharge, the same cannot be treated as a sale and included in the taxableturnover, even if the purchase of such spares was effected from outsidethe State by issuance of ‘C’ forms. This is because the transactionH

between the dealer and the customer is one as an agent of automobilemanufacturer and the spare part is given on the basis of the warrantyfor replacement even though the dealer may have purchased the sparepart 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 beexempted from the turnover.

19. In the Reference order, an attempt has been made to distinguishthe judgment in Mohd. Ekram Khan by contending that a carmanufacturer would enter into an agreement with the manufacturer ofcomponents, providing for a warranty so far as the components areconcerned. During the period of warranty, the car manufacturer or hisdealer has to replace the defective part free of cost. The whole objectbehind the warranty is that a consumer who has made a heavy investment,while purchasing a car, is assured of proper performance of the vehiclein a trouble-free manner for a reasonable length of time. According tothe appellants this fundamental concept had been lost while decidingMohd. Ekram Khan.

20. This Court in Mohd. Ekram Khan distinguished the factualsituation in Premier Automobiles and Prem Nath Motors. In otherwords, after distinguishing the aforesaid cases, it was noted that “in acase the manufacturer may have purchased from the open marketparts for the purpose of replacement of the defective parts. Forsuch transaction, it would have paid taxes. The position is notdifferent because the assessee had supplied the parts and hadreceived the price.” In other words, in Mohd. Ekram Khan, a situationwhere a manufacturer has purchased the part from the open market forthe purpose of replacement of the defective part and for which taxeshave been paid by the manufacturer and a situation where the dealer/assessee supplies the part from his own stock and has received theprice for the same in the form of credit note on return of the spare partto the manufacturer have been considered to be not different to eachother, but the same.

21. The question is, whether, this Court in Mohd. Ekram Khanwas right in equating both the factual situations and holding that in thelatter case, the dealer was liable to pay sales tax on the premise that thetransaction between the manufacturer and dealer was one of sale.

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A22. In Mohd. Ekram Khan, the facts were that the dealer/assessee therein had received the amount from the manufacturer forsupply of spare parts to the customer as a part of the warranty, themanufacturer had the warranty agreement with the purchaser ofautomobiles to replace defective parts during the warranty period. Themanufacturer made payment to the dealer / assessee as the price forBthe parts which were supplied by the dealer/assessee to the purchaseror customer. Credit notes were issued by the manufacturer to the dealer/ assessee in respect of the price of the parts supplied to the purchaserof the automobile.23. The above distinct factual basis in Mohd. Ekram Khan isCequated to a case where a manufacturer purchases spare parts fromthe open market for the purpose of replacement of defective parts andthe tax is paid by the manufacturer himself. The judgment in Mohd.Ekram Khan proceeds on the footing that the two situations are identical.Thus, a situation where the assessee supplies the part from his ownDstock and receives a credit note by way of recompense for the saidreplacement from the manufacturer is construed to be identical to asituation where a manufacturer buys a spare part from the open marketand replaces the defective part through the dealer (assessee) and thedealer returns the defective part to the manufacturer. In the latter situationthere would be no recompense paid to the dealer as the dealer has actedEmerely as an intermediary and/or an agent of the manufacturer inreplacing the defective part with a part received from the manufacturerand returning the defective part received from the customer to themanufacturer. In contradiction, if the dealer replaces a defective partfrom his own stock and returns the defective part to the manufacturer,Fpursuant 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 isthe question to be considered.

24. In both of the above situations, firstly, a dealer is acting pursuantto a warranty which he is bound to honour along with the manufacturerGvis-à-vis a customer or purchaser of an automobile. Secondly, the dealeris also acting as an intermediary and/or an agent of the manufacturer asthe warranty emanates from the manufacturer to the ultimate customerthrough the dealer. The warranty clause runs along with the sale of theautomobile, firstly, from the manufacturer to the dealer on a principal toprincipal basis and secondly, from the dealer to the customer. Therefore,H

as an intermediary between the manufacturer and the customer, thedealer has to act on behalf of the manufacturer i.e. between themanufacturer on the one hand and the customer on the other hand inorder to fulfil the obligation cast on the manufacturer under the warrantyclause vis-à-vis the customer.

25. While so acting as an intermediary, the dealer may replacethe defective part in the car either by receiving a spare part from themanufacturer directly. In such a case, (i) the manufacturer could eitherdispatch the spare part from its own factory or production unit to thedealer to replace the defective part in the automobile and seek return ofthe defective part or (ii) the manufacturer can procure the spare partfrom the producer of the same or from the open market. In both theabove situations, there is no transaction of sale between the manufacturerand dealer. If the manufacturer of the automobile has purchased thespare part from the open market or from the producer of the spare part,sales tax would have been paid by the manufacturer on it and dispatchedto the dealer to replace it in place of the defective part.

26. But there can also be a situation when the dealer would replacethe defective part in the automobile pursuant to a warranty from his ownstock of spare parts which he would have purchased either from themanufacturer or from the open market or the manufacturer of the sparepart. In the aforesaid three situations, the dealer would have paid salestax while purchasing the said stock. When the defective part is replacedby the dealer from a spare part from his stock, the dealer is no doubtacting pursuant to the warranty on behalf of the manufacturer but issourcing the spare part from his own stock. Simply put, the dealer is not“selling” the spare part to a customer while acting on behalf of themanufacturer but replacing the defective part free of cost by actingunder the warranty. But what is to be borne in mind is that the replacementof the spare part is from the stock of the dealer who would have earlierbought 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 beensold, the dealer would have earned a return on his investment and possiblywith a reasonable profit also and would have also collected the salestax. But when the dealer replaces a defective part with a spare partfrom his stock pursuant to a warranty, he does not receive anything inreturn from the customer for the spare part used from his own stock. Itis in such a situation that the manufacturer issues a credit note to

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Arecompense the dealer for his investment on the spare part in his stockwhich was used to replace a defective part pursuant to a warranty in thesale of automobile as nothing would have been received in return fromthe customer. This is because if the spare part from the stock of thedealer had been sold to any other customer, across the counter and notpursuant to any warranty, he would have received a return on hisBinvestment. But such a return is not received by the dealer from thecustomer when he replaces a defective part pursuant to a warranty. Insuch a situation, on return of the defective part to the manufacturer bythe dealer, he is issued a credit note by the manufacturer which is tomake good the stock of the dealer.C27. Therefore, we have to assess the nature of the transaction bydiscerning the manner in which the dealer would have acted under thescope of a warranty on the sale of an automobile. The similarity in bothkinds of situations referred to above is that the dealer is acting on behalfof the manufacturer pursuant to a warranty and in both the situationsDdoes not receive any price or consideration from the customer. But, thesignificant distinction in the two situations must be borne in mind. In thefirst situation, the dealer merely transmits the spare part received fromthe manufacturer to the customer and in turn returns the defective partto the manufacturer and does not receive a recompense by way of costof the spare part but may receive a service charge under a dealershipEagreement. On the other hand, in the second situation, the dealer wouldhave used a spare part from his stock to replace the defective part andreturns the defective part to the manufacturer, who then issues a creditnote to the dealer.

28. The controversy in these cases is, whether, the second of theFaforesaid situations would amount to a sale in the sense that the dealer isliable to pay sales tax on the credit note issued in his favour. In otherwords, whether the transaction is in the nature of a sale to attract paymentof sales tax by the dealer under the sales tax laws under consideration.In this context, it is necessary to recapitulate as to why a credit note isGissued by the manufacturer to the dealer. A credit note is issued with aparticular intention in mind and that is to recompense the dealer. What isthe reason for doing so? The reason is not far to see and has alreadybeen adverted to above. The recompense in the form of credit note tothe dealer is because the dealer would not receive any price from thecustomer for the replacement of the defective part while acting underH

the warranty on behalf of the manufacturer while using the spare partfrom his own stock which belongs to him and which he had procured bypaying the necessary price including tax, either from the manufacturerhimself or from the open market. If the dealer had sold the said sparepart which he used to replace a defective part pursuant to a warrantyclause, he would have received a return for his investment plus a profit.But, while acting under the warranty on behalf of the manufacturer, thedealer does not receive any price from the customer. Hence, he isrecompensated by the manufacturer in the form of a credit note.

29. In this context, it is necessary to understand the legal importof the expression credit note which has been cited by Sri Kavin Gulati,learned senior counsel for the appellants.According to various dictionariesand references, definitions of credit note are as follows:

(i) In P. Ramanatha Aiyar, Advanced Law Lexicon, 6[th]Edition, Volume 1 – “Credit Note” is defined as “A noteshowing that an allowance is to be made for shortageor defects in goods supplied and returned to sender, orfor overcharge in price. The term is also used for anote or document that confirms the availability of fundsfor future purchases (as when goods are paid for butlater returned to the supplier)”. A “sales credit note” isdefined as – “Note sent from a seller to a buyer to cancel(partly or in total) a charge that has already beeninvoiced. The credit thus granted can be offset againstthe cost of future purchases (and is, therefore, from theseller’s point of view, better than making a cash refund”.

(ii) According to the Oxford Advance Learner’s Dictionary– “if, damaged items have to be returned, themanufacturer may issue a credit note”.

(iii) According to the Cambridge Advanced Learner’sDictionary and Thesaurus – A credit note is an outstandingamount, to be used when needed. “It is the document thata seller gives to a buyer who returns a product, whichthe buyer may use at a later date/time to pay forsomething else”.

(iv) According to the Collins English Dictionary – “A creditnote is a piece of paper that a shop gives when a person A

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returns goods that have been bought from it, which entitlethe buyer to take goods of the same value without payingfor them”.

(v) According to Black’s Law Dictionary, Fifth Edition, -“Credit Memorandum” is “a document used by a sellerBto inform a buyer that the buyer’s account receivable isbeing credited (reduced) because of errors, returns, orallowances”.

(vi) Under the Goods and Services Tax Law – It has beenstated that after the invoice has been issued there could beCsituations where the quality of the goods or services or bothsupplied is not to the satisfaction of the recipient, thereby,necessitating a partial or total reimbursement on the invoicevalue. In order to regularize these kinds of situations thesupplier is allowed to issue what is called as credit note toDthe recipient. Once the credit note has been issued, the taxliability of the supplier will reduce. The credit note is,therefore, a convenient and legal method by which the valueof the goods or services in the original tax invoice can beamended or revised. The issuance of the credit note willeasily allow the supplier to decrease his tax liability in hisEreturns without requiring him to undertake any tediousprocess of refunds.

30. Therefore, the entire controversy must be viewed in theperspective of a composite transaction and not in isolation as the dealer(assessee) would be acting under a warranty with there being aFmanufacturer on one end and the purchaser or customer of an automobileat the other end and the dealer acting on behalf of the manufacturer oran intermediary between the said customer and manufacturer. The saidtransaction cannot be viewed in a myopic sense by truncating or excludingthe role or action of a dealer under the warranty and viewing it onlyGfrom the perspective of a transaction simpliciter between manufacturerand a dealer. Such an approach is not only skewed from a commercialperspective but also jurisprudentially or in the legal sense. There neednot be a reiteration of the significance of a warranty in a transaction ofa sale of goods already discussed above.

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31. Thus, as a sequel to the aforesaid discussion, the followingsituations may be adumbrated by way of illustration. When a dealer–assessee sells an automobile to a customer containing a warranty forthe replacement of a defective part of the automobile in terms of thewarranty and when the customer during the period of warrantyapproaches the dealer for the replacement of a defective part, the dealercould resort to the following: - B

(a) request the manufacturer to supply the defective part ofthe automobile for replacement. In such a situation, themanufacturer of the automobile could do any of thefollowing: - C

(i) send the spare part from his factory either as amanufacturer of the same to the dealer forreplacement and seek return of the defective part,or

(ii) purchase the spare part from the manufacturer ofDthe particular part by paying the requisite taxes andsend it to the dealer and seek return of the defectivepart, or

(iii) purchase the spare part from the open market afterpaying the requisite taxes and send it to the dealerEfor replacement of the defective part in theautomobile and seek return of the defective part.

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(b) may purchase the spare part from the open market bypaying the requisite taxes and replace the defective partand return the same to the manufacturer, F

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(c) may replace the defective part from his stock maintainedin his showroom and return the defective part to theGmanufacturer.

32. In situation (a), since the manufacturer himself has dispatchedthe spare part to the dealer for the purpose of replacement, there is noinvestment made by the dealer on the said part. The dealer merely actson behalf of the manufacturer, pursuant to the warranty.

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A33. In situations (b) and (c), the dealer would have invested onthe spare part either by buying it from the open market or earlier wouldhave purchased the same from the manufacturer of the automobile orfrom the manufacturer of the particular part by paying the requisite priceand taxes. The dealer has every right to sell such a part and seek areturn on his investment and possibly a profit also. But when the same isBused for the purpose of replacement of a defective part pursuant to awarranty, the dealer does not “sell” the part to the customer who hasapproached the dealer with the defective part. The dealer does notreceive any consideration in the form of a price from the customer buton the basis of the warranty, the dealer is obliged to replace the defectiveCpart with a new part. The dealer then sends the defective part to themanufacturer of the automobile, who had given the warranty. Themanufacturer, from whom the automobile has been purchased, then issuesa credit note which may be equivalent to the value of the spare part usedby the dealer. This credit note is in order to recompense the dealer forhis investment made on the spare part which was “not sold” by him toDthe customer so as to earn any return but has been utilised to replace adefective part of the automobile as an obligation under a warranty givenat the time of the sale of the automobile on behalf of the manufacturer.In such a situation, whether, the recompense made to the dealer can betermed to be a “sale” between manufacturer and the dealer within theEmeaning of the definition of “sale” under the Sales Tax Acts is thequestion. In other words, can it be construed that when the dealer hasutilised a spare part from his own stock to undertake an obligation pursuantto a warranty for the sale of an automobile on behalf of the manufacturerto the customer and by acting as an intermediary, there would be a“sale” between a dealer and manufacturer of the automibile of the spareFpart and thus, a credit note being issued by the manufacturer to thedealer?

34. It has to be borne in mind that there is no transfer of propertybetween the manufacturer and the dealer when the spare part fromthe stock of the dealer is used for the purpose of replacement ofGdefective part in the automobile. The spare part used from the stockof a dealer is the property of the dealer which could have been eithersold to any other customer and seek a return on his investment, inwhich case, the customer would have paid the requisite taxes to thedealer. Alternatively, the spare part could also be used from the stockHmaintained by the dealer to replace a defective part when an

automobile has been sold by him and the customer approaches thedealer during the warranty period when there is a defect in any part ofthe automobile. In such a situation, the dealer is acting on behalf of themanufacturer or as an intermediary between the manufacturer andthe customer of the automobile and discharging his obligation under acollateral contract. Hence, it is a warranty given by the manufacturerthrough the dealer to the customer during the period of warranty. Insuch a situation, when a credit note is issued to the dealer on return ofthe defective part by the manufacturer is there a sale within the scopeand meaning of definition of “sale” under the Sale Tax Legislation?The transaction that takes place when the dealer discharges hisobligation under a warranty appended to the sale transaction of theautomobile is on behalf of the manufacturer but the manufacturer issuinga credit note to a dealer is a “valuable consideration” paid by themanufacturer to the dealer, when the dealer is acting under the warranty.

35. The argument of Shri Pallav Sisodia, learned senior counselthat the purchaser or the customer seeking replacement of a defectivepart is distinct and disjunct from the earlier sale of the automobile by thedealer to the customer, cannot be accepted. This is for the simple reasonthat the dealer discharges his warranty obligation pursuant to the earliersale of the automobile made by him to the customer which transactionof sale is accompanied by a collateral contract in the form of a warranty.

There cannot be a warranty unless there is a sale of goods in the firstplace. That is why a warranty is termed as a contract collateral to themain contract of sale. But for the warranty which is a contract collateralto the main contract of sale of an automobile, the dealer would not havereplaced the defective part with a spare part from his stock without anyconsideration from customer. This is obvious because when the defectivepart is replaced by another part, no consideration passes from customerto the dealer. This could be contrasted with a situation where the dealerwould have sold the same part to any other customer and received aprice on the sale as well as collected the tax on the said sale. Since, thedealer does not receive any consideration from the customer whoapproaches the dealer during the warranty period for replacement of adefective part and the dealer does so from his own stock of the spareparts, he receives a credit note from the manufacturer of the automobile.What is significant to note is in both of the aforesaid situations, there istransfer of property in the goods from the dealer to the customer.

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A36. Thus, the bifurcation of the two transactions as suggested bylearned senior counsel Sri Sisodia, i.e., one, between the dealer and thecustomer for the sale of the automobile and the second, between themanufacturer and the dealer, when the dealer is discharging his warrantypursuant to the sale of the automobile, cannot be accepted.B37. But the issuance of a credit note to a dealer by a manufactureris only when the dealer replaces a spare part from his stock in theautomobile to the customer or has purchased the spare part from theopen market for the said purpose and returns the defective part to themanufacturer which is pursuant to the warranty appended as a collateralagreement to the earlier sale of the automobile and the dealer acting onCbehalf of the manufacturer. Hence, whether the revenue is right incontending that the credit note issued to the dealer whilst he is discharginghis obligation under the warranty is a “sale” and the dealer is liable topay sales tax on the credit note is the point under consideration.

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38. It is also significant to note that there is transfer of property inDthe spare part between the dealer and the customer on behalf of themanufacturer under a warranty. Hence, whether, one can construe thecredit note as a price for the same and, therefore, subject to sales tax?The ingredients of a sale have been discussed above and would not callfor reiteration. When the dealer is acting pursuant to a warranty, he is noEdoubt discharging his obligation not as a seller stricto sensu, but as anintermediary or an agent of the manufacturer as the case may be vis-à-vis the purchaser of the automobile. But, there is transfer of propertybetween the dealer and the customer/purchaser of the automobile onthe one hand and receipt of a valuable consideration by the dealer forthe same from the manufacturer on the other in the form of a creditFnote. Further, it must be borne in mind that credit note is issued onlywhen a dealer discharges his obligation under the warranty and may berequired to return the defective part to the manufacturer while seeking arecompense in the form of a credit note.

39. The contention of the revenue is that the credit note is aGvaluable consideration in the account of the dealer while the dealer isdischarging his obligation pursuant to the warranty and therefore exigibleto sale tax. This is based on the premise that the dealer “sells” the partwhile acting on behalf of the manufacturer while replacing a defectivepart under a warranty and discharging his warranty obligation for whichthe consideration flows from the manufacturer to the dealer and thereforeH

is amenable to sales tax. There are two aspects to be considered here:firstly, there is transfer of property in the spare part between the dealerand the customer and secondly, for the said transfer, the manufacturerissues a credit note to the dealer which is in substance on behalf of thecustomer owing to the warranty with the customer.

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40. Thus, when the transaction between the manufacturer anddealer is viewed in the larger canvas of a dealer discharging his obligationspursuant to a warranty appended to a sale of an automobile, the samecannot be narrowly construed. At the same time, whether the transactionresulting in payment by way of a credit note to a dealer/assessee is asale within the definition of sale under the Sales Tax Acts of the respectiveStates under consideration has to be considered.

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41. For ease of reference, the definition of “sale” and “sale price”under the Rajasthan Value Added Tax Act, 2003, which is one of thelegislations under consideration as per Section 2(35) and (36), areextracted for easy reference:

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“(35)” sale” with all its grammatical variations and cognateexpressions means every transfer of property in goodsby one person to another for cash, deferred payment orother valuable consideration and includes–

(i) a transfer, otherwise than in pursuance of acontract, of property in goods for cash, deferredpayment or other valuable consideration; E

(ii) a transfer of property in goods (whether as goodsor in some other form) involved in the executionof a works contract; F

(iii) any delivery of goods on hire–purchase or othersystem 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,Gdeferred payment or other valuable consideration;

(v) a supply of goods by an unincorporated associationor body of persons to a member thereof for cash,deferred payment or other valuable consideration;and H

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(vi) a supply, by way of or as part of any service or inany other manner whatsoever, of goods, being foodor any other article for human consumption orany drink (whether or not intoxicating), where suchsupply is for cash, deferred payment or othervaluable consideration,

and such transfer, delivery or supply shall be deemed tobe a sale and the word “purchase” or “buy” shall beconstrued accordingly; Explanation.– Notwithstanding anything contained inthis Act, where any goods are sold in packing, the packingmaterial in such case shall be deemed to have been soldwith the goods;

(36) “sale price” means the amount paid or payable to adealer as consideration for the sale of any goods lessany sum allowed by way of any kind of discount or rebateaccording to the practice normally prevailing in the trade,but inclusive of any statutory levy or any sum chargedfor anything done by the dealer in respect of the goodsor services rendered at the time of or before the deliverythereof, except the tax imposed under this Act; Explanation I. – In the case of a sale by hire purchaseagreement, the prevailing market price of the goods onthe date on which such goods are delivered to the buyerunder such agreement, shall be deemed to be the saleprice of such goods; Explanation II. – Cash or trade discount at the time ofsale as evident from the invoice shall be excluded fromthe sale price but any ex post facto grant of discounts orincentives or rebates or rewards and the like shall notbe excluded; Explanation III. – Where according to the terms of acontract, the cost of freight and other expenses in respectof the transportation of goods are incurred by the dealerfor or on behalf of the buyer, such cost of freight andother expenses shall not be included in the sale price, ifcharged separately in the invoice;”

42. Under Section 4 of the Act, a contract of sale of goods is acontract whereby the seller transfers or agrees to transfer the propertyin goods to the buyer for a price. The expression “price” is defined inSection 2(10) of the said Act to mean a money consideration for sale ofgoods, i.e., whether the sale is for cash or credit, it must be in terms ofmoney. If any consideration other than money is given, it is not a sale,but only an exchange or barter. If no consideration is given, then it willbe a gift.

43. However, under Section 2(g) of the Central Sales Tax Act orthe Sales Tax Act of the respective states under consideration, sale,with its grammatical variations and cognate expressions, means anytransfer of property in goods by one person to another for cash ordeferred payment or for any other valuable consideration. The definitionof sale under the Sales Tax legislations are in consonance with Article366(29-A) as per the Constitution 46[th] Amendment Act, 1982. Theexpression “dealer” is defined in Section 2(b) of the Central Sales TaxAct and, accordingly, under the respective State Acts to mean any personwho carries on (whether regularly or otherwise) the business of buying,selling, supplying or distributing goods, directly or indirectly, for cash orfor deferred payment, or for commission, remuneration or other valuableconsideration.

44. The expression “valuable consideration” is not defined eitherunder the Central Sales Tax or under the respective State Acts underconsideration. “Price” is the amount of consideration which a sellercharges the buyer for parting with the title to the goods. The price wouldinclude not only the price of the goods but also the expenditure incurredfor transporting the goods, duties levied, etc. The entire amount ofconsideration including the sales tax component which the purchaserpays, constitutes the price of goods. As already noted, the expression“price” under the Sale of Goods Act is limited to a money consideration,cash or deferred payment but under the definition of “sale” under theSales Tax legislations, the expression used is not just cash or deferredpayment but also a valuable consideration. The expression valuableconsideration has a wider connotation but must be read ejusdem generisto cash and deferred payment. The expression valuable considerationtakes colour from the preceding expressions cash or deferred payment,therefore, it means payment in monetary terms i.e. in the nature of cashor deferred payment such as cheque, bank draft, promissory note, etc.

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ACash and deferred payment are relatable to the expression “money”. Inother words, a transaction could amount to a sale if consideration is interms of money. Thus, money is a genus of which cash or deferredpayment in the form of cheque, bank draft, promissory note, etc. arespecies. Money has a wider connotation to include a valuable considerationin the form of money or a payment in monetary terms which is the priceBfor the transfer of property paid. Thus, a valuable consideration is also aspecies of money which is the consideration for the transfer of goodsunder the sales tax enactments.

45. The aforesaid discussion could be illustrated better withreference to State of T.N. vs. Sri Srinivasa Sales Circulation, (1996)C10 SCC 648. In the said case, the facts were that under a schemeintroduced by the assessee, ‘A’ purchased one coupon from the assesseeon payment of Rs.5. ‘A’ was to name a particular kind of goods requiredby him and mentioned in the said coupon. On receipt of the coupon from‘A’, the asssessee would forward to him by V.P.P. three more suchDcoupons. ‘A’ was required to give the said three coupons to three persons‘B’, ‘C’ and ‘D’ and keep the money so realised to himself. Each of ‘B’,‘C’ and ‘D’ were to forward in the above manner, their respective couponsto the assessee, who was to send to each one of them three couponsseparately by post (V.P.P.). On realisation of the three V.P.Ps. the assesseewould supply to ‘A’ the article named by him. It was held that theEconsideration was not only money paid or promised to be paid, but it wassomething more. According to the High Court of Madras, the title to thegoods did not pass to ‘A’ under a contract of sale. The transactionswere held not to be sales liable to tax. However, the State came up tothis Court contending that the respondent therein had offered the couponsFagainst payment, in the scheme of circulation sales, and the article ofchoice was ultimately sent to the customer for payment of a price whichwas accepted by the customer; there was, thus, offer and acceptance.All the attributes and characteristics and requirements of a sale werepresent in the transaction. Though, designed by the adoption of acircuitous method, the transaction amounted to nothing but a sale andGwas liable to sales tax.

46. Applying the aforesaid principles and the judgment of this Courtto the case at hand, it is noted that when the dealer uses one of the spareparts from his stock for the replacement of a defective part in anautomobile under a warranty, he is given a monetary benefit in the formH

of a credit note. The definition of “credit note” from various dictionariesand Law Lexicons have been adverted to above. A perusal of theaforesaid definitions would clearly indicate that a credit note issued by amanufacturer in favour of a dealer is a valuable consideration within themeaning of the definition of “sale” under both, Central Sales Tax Act aswell as the respective State enactments under consideration. The objectand purpose of including the expression valuable consideration withinthe definition of sale apart from cash and deferred payment is to enlargethe scope of the expression price than what is enunciated under the Saleof Goods Act which is an enactment of 1930. The expression as alreadynoted, is relatable to a money consideration. No doubt, cash is a moneyconsideration but the definition of “sale” under the Central Sales TaxAct as well as under the State enactments does not imply price to meanonly a money consideration in a narrower sense but in a wider sense toinclude different forms of money consideration such as deferred paymentand also a valuable consideration which need not be restricted to cash ordeferred payment only but a valuable consideration which would includea credit note which is to be read within the definition of “price”.

47. Benjamin’s Sale of Goods, Eighth Edition, states that theconsideration in a contract of sale of goods must in English law, be aprice in money, either paid of promised. By money is meant legal tender;it does not mean money’s worth. Payment need not, however, be madein cash: a method of payment that enables the seller to obtain moneysuch as the use by the buyer of a credit card or a debit card or digitalcash or cheque or banker’s draft or trading cheque also comes withinthe expression “payment of price”. It is only a method of payment or aform of payment. It is also irrelevant that the money payment comes,not from the buyer of the goods or to whom the property in the goodsare transferred, but from the card issuer. Thus, there can be variousmethods of payment i.e., by cash, by negotiable instrument, by credit orcharge card or by stored value card or sometimes referred to as digitalcash card or electronic purses, internet payments on which that “value”is stored electronically. There can also be payment by direct debits toeffect payment of goods supplied particularly when there are recurringpayments of variable amounts. The seller can obtain through the bankingsystem in direct debit forms to the buyer’s bank. A converse to thesystem of direct debit is the credit note issued by a buyer in favour of aseller which is a recompense or monetary benefit showed in the buyer’saccounts. Thus, the use of the banking system by instructing the bank to AB

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Atransfer of balance from the buyer’s account to the credit of a seller is aform of transmission of a valuable consideration.

48. A credit note is a valuable consideration which is essentially adocument to inform a buyer that the buyer’s account is being creditedbecause of errors, returns or allowances. On discharging his obligationBunder the warranty appended to a sale of an automobile, a dealer receivesa credit note. This would be a receipt in the account of the dealer and aliability in the returns of the manufacturer which may ultimately enablethe manufacturer to decrease his tax liability. Consequently, the dealerof the automobile in whose account a credit is shown would be ultimatelya recipient of a valuable consideration on account of a transfer of goods,Cnamely, spare part by a dealer to a customer while discharging hisobligation under a warranty and thereby receiving a valuable considerationfor the spare part used by the dealer from his stock from the manufacturerin the form of a credit note. When the entire transaction is viewed in theaforesaid perspective and in juxtaposition with the expression “sale”Dunder the Central Sales Tax Act as well as the respective Stateenactments under consideration which is of a wider connotation thanthe definition of sale under the Sale of Goods Act, we hold that theamount shown in the account of the dealer in the form of a credit note isnothing but a price received for a sale of a spare part by the dealerwhich is from his stock and which belongs to him. Where there is transferEof property by the dealer to the customer while acting under a warrantyand the dealer being paid by the manufacturer, when viewed in theaforesaid prism, the credit note shown in the account of the dealer is avaluable consideration pursuant to the sale that has taken place of aspare part from his stock. The aforesaid transaction may be juxtaposedFwith the transaction of sale which the customer who would buy a sparepart de hors a warranty. In such an event, the dealer would havecollected the sales tax along with the price of the spare part and wouldhave remitted the same to the revenue. Merely because the dealer isacting as an intermediary or on behalf of the manufacturer pursuant to awarranty and receives a recompense in the form of a credit note, theGsame cannot escape liability of tax under the Sales Tax Acts underconsideration.

49. The assessees herein have placed reliance on the decision ofConstitution Bench of this Court Devi Dass Gopal Krishnan. This Courtin the said case considered amendments to various sections of the PunjabH

General Sales Tax Act, 1948 and interpreted the expression ‘othervaluable consideration’, included in section 2(ff) defining purchase andsection 2(h), defining sale, to have a wider connotation than cash anddeferred payment. In para 25 of its decision, the court reasoned that thesaid expression takes colour from the preceding expression “cash ordeferred payment.” It was reiterated that ‘other valuable consideration’has to be monetary in nature. The nature of consideration in the form ofa credit note is also monetary in nature. Thus, the definition of priceincludes consideration paid by way of credit note. Therefore, paymentof consideration through the mode of credit note signifies ‘other monetarypayment in the nature of a valuable consideration.’ This decision is henceof no assistance to the assessees in the present case.

50. Our attention was also drawn to this Court’s decision in CITvs. Motors and General Stores (P) Ltd., (1967) 3 SCR 876. ThisCourt, in that case, adjudicated the exigibility of the profits emanatingfrom the sale of assets by way of transfer of 5% tax-free cumulativepreference shares under the Income Tax Act. This Court noted that thetransaction was one of exchange and the value of shares, as well asimmovable properties, were recorded solely for the purpose of computingstamp duty. Due to the sheer variance of facts in the above case to thepresent 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 isutilising a spare part from his stock to replace a defective part under awarranty and receiving a recompense in the form of a credit note fromthe manufacturer. When given such an understanding of the judgment inMohd. Ekram Khan to the aforesaid conspectus of facts, we do notthink that the said judgment has been erroneously rendered.

52. However, in Mohd. Ekram Khan, the judgments of the HighCourt of Madhya Pradesh in Prem Motors and the High Court of Keralain Geo Motors were overruled. The said judgments were rightly overruled.This is because, in those judgments, there was no consideration of thequestion whether the credit note issued by the manufacturer in favour ofthe dealer was valuable consideration within the meaning of the expression“sale” under the respective State laws and it was simply held thereinthat there was no sale transaction within the meaning of the sales taxlegislation considered therein.

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A53. But the matter does not end, it is necessary to take intoconsideration that all the credit notes received by the dealer are notindicative of the value of the spare part supplied by the dealer from hisown stock or when he buys it from the open market, to the customerunder a warranty. It could be for rendering a service under a dealershipagreement which can cover a situation when the manufacturer sendsBthe spare part to the dealer to replace a defective part and receives aconsideration for the said service. In such a case, there is no recompensefor spare part. It is only when a credit note is issued for a spare partused by a dealer from his own stock or when he has purchased it fromthe open market or from another manufacturer of a spare part that itCbecomes a sale within the meaning of the sales tax enactments underconsideration.

54. On the other hand, when a dealer acts as an agent of themanufacturer (Principal) on the basis of an express or implied contractof agency he may be entitled to certain remuneration under the termsDand conditions of agency which is recognised in law. Learned seniorcounsel for the respective parties have adverted to such agreementswith regard to consideration received by a dealer under the terms of anAgency Agreement for the service rendered by the dealer pursuant to awarranty. We are not concerned with such kind of remuneration as thesame cannot be construed as a transaction of sale. It is a service contractEand possibly a service tax is leviable depending on the terms and conditionsof the Agency.

55. In C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur, (2010) 29 VST 114, the learned Single Judge of the RajasthanHigh Court considered the controversy under the provisions of theFRajasthan Sales Tax Act, 1994 in the context of a dealer of automobilesreceiving credit notes issued by the manufacturer for replacement ofdefective parts of the automobiles, supplied by the dealer under a warrantyagreement between the manufacturer and the ultimate customers towhom vehicles were sold by the dealer (assessee). After referring toGthe judgment of the Supreme Court in Mohd. Ekram Khan in paragraph20, the major points of distinction between the facts in Mohd. EkramKhan case and in the said case were considered in paragraph 21 and itwas observed as under:

“21. …. Since title of property in goods namely spare partspasses from the hands of respondent assessee to the customer H

free of cost and such title of property in spare parts does notpass from assessee dealer to the manufacturer, no taxable salecan be said to have taken place in the hands of respondentassessee at all.”

56. Thereafter, the learned Single Judge of the Rajasthan HighCourt has observed that:

“22. In other words, where there is supply of spare parts tothe customer by the dealer there is no consideration passing asit is free of cost and where such consideration or payment isbeing received by the dealer from the manufacturer in the formof credit notes in discharge of manufacturer’s warrantyobligations, there is no transfer of property in goods viz. spareparts from dealer to the manufacturer. These two transactionsviz. one between customer and dealer, and another betweendealer and manufacturer are independent and are not linked toeach other. First is sans consideration against goods and secondone is sans transfer of property in goods. The credit notesgiven by manufacturer to dealer in discharge of its warrantyobligations to customers cannot be taxed under sales tax lawsin the hands of the dealer.”

57. While considering the gamut of transactions in the context ofa warranty, bifurcation of the same, namely, one between customer anddealer, and another between dealer and manufacturer and the observationthat the same being “independent and are not linked to each other” is notcorrect. This is because in order to ascertain whether the issuance ofthe credit note by the manufacturer to the dealer is one pursuant to asale of spare part and therefore liable to sales tax law, as noticed above,it has to be viewed in the larger perspective of carrying out an obligationunder a warranty at the time of sale of the vehicle and not independentlyas has been stated above. We also find that the learned single judgeincorrectly distinguished the facts of the case with Mohd. EkramKhan by reasoning that the dealership agreement contemplated aprincipal-principal relationship between the manufacturer and the dealer.On the other hand, we agree with the decision of the Division Bench ofBombay High Court in M/s Navnit Motors Pvt Ltd. vs. State ofMaharashtra, where it compared the assessee’s dealership agreementwith Maruti Udyog Ltd. with the dealership agreement of the dealerin Mohd. Ekram Khan with Mahindra & Mahindra Ltd. The Bombay

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AHigh Court correctly found that both dealership agreements establisheda Principal-to-Principal relationship and recorded that a solitary sentencein para 1 of the decision in Mohd. Ekram Khan ought not to be construedas the dealer was an agent of the manufacturer. Therefore, we do notapprove of the observations made in paragraph 21 and 22 of the judgmentof the learned Single Judge of the Rajasthan High Court in the aforesaidBcase and the said judgment is liable to be overruled.

58. We further place reliance on the decision of this Court inGovind Saran Ganga Saran vs. Commissioner of Sales Tax, AIR1985 SC 1041 while analysing Article 265 of the Constitution whilenoting as follows:C

“The components which entered into tax are well known. Thefirst is the character of the imposition known by its naturewhich transpires attracting the levy. The second is a clearcommunication of the person on whom the levy is imposedand which is obliged to pay the tax. The third is rate at whichDthe tax is imposed and the fourth is the measure or value towhich the rate is applied for computing the tax liability”.

Obviously, all the four components of a particular conceptof tax has to be inter related having nexus with each other. Havingidentified tax event, tax cannot be levied on a person unconnectedwith event, nor the measure or value to which rate of tax can beapplied can be altogether unconnected with the subject of tax,though the contours of the same may not be identified.”

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59. Reliance was placed on behalf of the Revenue on DhampurSugar Mills Ltd. vs. Commissioner of Trade Tax, U.P.,(2006) 5 SCC 624, wherein the question was, whether, theadjustment of the price of molasses from the amount of licencefee would amount “to sale” within the meaning of the UttarPradesh Trade Tax Act, 1948. The facts therein were that theconcerned company owned and possessed a sugar mill. A deedof licence was executed by the said company in favour of theappellant therein (Dhampur Sugar Mills Ltd.) pursuant wheretoand in furtherance whereof, the appellant therein executed aperformance guarantee to ensure performance of the said deedof licence. It was agreed to by and between the parties that amajor portion of the licence fee would be paid in the shape ofmolasses. It was contended by the appellant therein that in F

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view of the consideration for the right to use the said sugar milli.e. the licence fee, the appellant therein was required to handover molasses to the said company for an amount equivalentto the licence fee and such a transaction would not constitutea sale of molasses so as to attract the provisions of the Act.

60. The precise question for consideration therein was whetherthe transaction involved a transfer of property or a transfer of a right touse any goods or not. This Court reasoned that molasses manufacturedin the sugar mills, was the property of the appellant therein and it answersthe description of goods, that the transfer of the ownership in the goodswherefor the company was to pay the price to the appellant therein wasnot in the form of cash but to be adjusted from the amount payable bythe appellant therein to the owner by way of consideration for use of themill. The expression cash, deferred payment or other valuableconsideration had to be given its true meaning and the latter twoexpressions enlarge the ambit of consideration beyond cash only. It wasobserved that “once an essential component of sales takes place, salestax would, indisputably, be payable”. It was held that the arrangementbetween the parties therein being clear and unambiguous and not with aview to evade tax but there being transfer of goods from the appellanttherein to the company in the form of supply of molasses, the appellanttherein was entitled to a consideration which was in the form of the rightto run the sugar mill under a deed of licence. It was also observed that abarter or an exchange being different from a sale, payment of a licencefee could not be a subject matter of barter or exchange. The aforesaidjudgment is squarely applicable to the facts of the present cases on theinterpretation of the expression valuable consideration in the definitionof sale in the legislations under consideration.

61. In Commissioner of Central Excise, Mumbai vs. Fiat IndiaPrivate Limited, (2012) 9 SCC 332, this Court observed thatconsideration means something which is of value in the eye of the law.In other words, it may consist either in some right, interest, profit orbenefit accruing to one party, or some forbearance, detriment, loss orresponsibility, given, suffered or undertaken by the other.

62. Webster’s Third New International Dictionary (unabridged)defines, consideration thus: “Something that is legally regarded as theequivalent or return given or suffered by one for the act or promise ofanother.”

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AIn Salmond on Jurisprudence, the word “consideration” has beenexplained in the following words:

“A consideration in its widest sense is the reason, motive orinducement, by which a man is moved to bind himself by anagreement. It is for nothing that he consents to impose anBobligation upon himself, or to abandon or transfer a right. It isin consideration of such and such a fact that he agrees to bearnew burdens or to forego the benefits which the law alreadyallows him.”

The gist of the term “consideration” and its legal significance hasCbeen clearly summed up in Section 2(d) of the Indian Contract Act whichdefines “consideration” thus:

“When, at the desire of the promisor, the promisee or anyother person has done or abstained from doing, or does orabstains from doing, or promises to do or to abstain from doing,something, such act or abstinence or promise is called aconsideration to the promise.”

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63. In Assistant Collector of Central Excise vs. Madras RubberFactory Ltd., 1986 Supp SCC 751, the question arose under the CentralExcises and Salt Act, 1944 with regard to the method of computation ofEassessable value in a cum-duty price at the factory gate and thepermissible deductions to be made from the cum-duty paid selling priceto arrive at the assessable value and then tariff rate being applicable tothe assessable value. One of the contentions regarding deduction waswith regard to TAC-warranty discount to be made for determining theassessable value. It was observed that a warranty is not a discount onFthe tyre already sold, but relates to the goods which are being subsequentlysold to the same customers. It cannot be strictly called as discount onthe tyre being sold. It is in the nature of a benefit given to the customersby way of compensation for the loss suffered by them in the previoussale.

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64. The said view was reiterated in Government of India vs.Madras Rubber Factory Ltd., (1995) 4 SCC 349 where the questionwas whether the claim put forward as TAC-warranty discount is a tradediscount within the meaning of Section 4 of Central Excises and SaltAct, 1944. It was observed that the claim is only a claim for refund bythe buyer for the manufacturing defect in the tyre sold by the assessee H

therein, which is being honoured by the assessee in a manner acceptableto both the parties. It was reiterated that it is a benefit given to thecustomers by way of compensation for the loss suffered by them in theprevious sale owing to a defective tyre. It is a compensation in the natureof a warranty allowance on a defective tyre.

65. Thus, the manufacturer gives the warranty to the consumerby making a representation with regard to the automobile. It is in thenature of a promise which the dealer assessee carries out on behalf ofthe manufacturer. There is transfer of property in the spare part fromthe stock of the dealer to the customer for which the manufacturer paysby way of a credit note. The said promise is carried out and a valuableconsideration is received by the dealer through credit notes. In substance,when the dealer receives a credit note, it is a sale within the meaning ofthe definition under the respective sales tax legislation under consideration,pursuant to the warranty for which the manufacturer compensates thedealer by issuance of a credit note. The value of the credit note is avaluable consideration received which is in the nature of a benefit fromthe manufacturer which is exigible to tax. If the dealer had sold a sparepart of the automobile from his stock to any other consumer across thecounter, he would have collected the requisite sales tax along with theprice from that consumer but in the instant case, the consideration isreceived in the form of a credit note from the manufacturer which issubject to sales tax. The person who pays the valuable consideration ina sale transaction is irrelevant so long as it is paid.

66. In this context, it would be relevant to refer to the provisionsof the Indian Contract Act, 1872. Section 2 (d) of the said Act states thatwhen, at the desire of the promisor, the promisee or any other personhas done or abstained from doing, or does or abstains from doing, orpromises to do or to abstain from doing, something, such act or abstinenceor promise is called a consideration for the promise; Section 2 (c) statesthat the person making the proposal is called the “promisor”, and theperson accepting the proposal is called the “promisee”; Section 2 (a)states that when one person signifies to another his willingness to do orto abstain from doing anything, with a view to obtaining the assent ofthat other to such act or abstinence, he is said to make a proposal; Section2 (b) states that when the person to whom the proposal is made signifieshis assent thereto, the proposal is said to be accepted. A proposal, whenaccepted, becomes a promise; Further, promises which form the

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Aconsideration or part of the consideration for each other, are calledreciprocal promises vide Section 2 (f) of the said Act.

67. Applying the aforesaid definitions of the Indian Contract Act,1872 to the facts of the present case, it would mean that as between themanufacturer of the automobile, the dealer and the customer, theBmanufacturer is the promisor who makes the proposal to recompensatethe dealer when pursuant to a warranty clause, the dealer replaces aspare part from out of his own stock or by buying the same from theopen market or from the manufacturer of the spare part. Thus, the dealeris the promisee. The occasion to replace the spare part is when thecustomer brings to the notice of the dealer a defect in a part of theCautomobile, pursuant to a warranty which has been given by themanufacturer to the customer.

68. Section 2(d) of the said Act in fact enables the promisee (thedealer) to provide consideration by conferring a benefit on a third party(customer) at the promisor’s (the manufacturer’s) request pursuant to aDwarranty between the manufacturer and customer. Thus, a contractcould arise even though the promise is for doing or abstaining from doingsomething for the benefit of a third party. In other words, if the promisee(the dealer) replaces a defective part of an automobile sold to a thirdparty, i.e., the customer, he would receive a credit note from theEmanufacturer. This is because the manufacturer would have proposedto the dealer to recompensate the dealer for the above act which proposalwould have been accepted by the dealer and, thus, the manufacturerwho has made the proposal is the promisor and the dealer who hasaccepted the proposal is the promisee. Further, when at the desire of theFpromisor (the manufacturer), the promise (the dealer) does some act orpromises to do an act, such act or promise is called consideration for thepromise. Therefore, the dealer (promisee) agrees to replace a defectivepart which is a consideration for the promise and in turn, receives arecompense in the form of a credit note from the manufacturer. Thus,there is an agreement between the manufacturer and the dealer, and itGwould be in an instance of there being reciprocal promises.

69. In view of the above, the transaction between the manufacturerand dealer while acting pursuant to a warranty in the circumstancesexplained above has to be construed as sale within the meaning anddefinition of sale under the Sales Tax Acts under consideration.H

70. In the circumstances, the reference is answered in the followingterms:

i)The judgment of this Court in Mohd. Ekram Khan isapplicable to a situation where a manufacturer issues a creditnote to a dealer acting under a warranty given by themanufacturer pursuant to a sale of an automobile in thefollowing situations. The dealer replaces a defective partof the automobile by a spare part maintained in the stock ofthe dealer orwhen the same is purchased by the dealerfrom the open market. In such situations, the credit noteissued in the name of the dealer is a valuable considerationfor a transfer of property in the spare part made by thedealer to the customer and hence a sale within the meaningof the sales tax legislations of the respective States underconsideration. The value in the credit note is thus exigibleto sales tax under the respective sales tax enactments underconsideration.

ii)The judgment in Mohd. Ekram Khan does not apply to acase where the dealer has simply received a spare partfrom the manufacturer of the automobile so as to replace adefective part therein under a warranty collateral to thesale of the automobile. In such a situation also, the dealermay receive a consideration for the purpose of the servicerendered by him as a dealer under a dealership agreementor any other agreement akin to an agent of the manufacturerwhich is not a sale transaction.

On the above understanding of the judgment of thisCourt in Mohd. Ekram Khan, we are of the view that thesame does not call for any interference.

In light of the above, in our view, overruling of thejudgments in the case of Prem Motors and Geo Motors inMohd. Ekram Khan, is just and proper.

(iii) It is reiterated that a credit note issued by a manufacturerto the dealer, in the situations explained above, is a valuableconsideration within the meaning of the definition of saleand hence, exigible to sales tax under the respective Stateenactments of the States under consideration. In the result,

A

B

C

D

E

F

G

H

1346SUPREME COURT REPORTS

Aappellants-dealer/assessee are liable to pay sales tax underthe respective State enactments under consideration.

(iv) In view of the above, the appeals filed by the dealers aredismissed. The appeals filed by the revenue are allowed.

Parties to bear their respective costs.

B

Bibhuti Bhushan Bose

(Assisted by : Rahul Rathi, LCRA)

Reference answered.

C

D

E

F

G

H