M/S. Tata Motors Ltd. v. the Deputy Commissioner of Commercial Taxes (spl) & Anr.

SANJAY KISHAN KAUL, J. 1. The common question of law, which arises for consideration in these appeals, is the liability towards sales tax, in r espect of the free replacement of defective parts in motor vehicles, during the period of warranty. 2. Civil Appeal No.1821/2007, filed by one of the dealers [M/s. Prerana Motors (P) Ltd.], was taken up as the main appeal for addressing the submissions and, thus, reference to some of the relevant facts is qua that appeal. 3. M/s. Prerana Motors (P) Ltd./appellant is a dealer of Tata Motors. Sales Tax is paid on the vehicles sold. There isa warrantygiven tothe purchaser forfree replacement of parts, durin g the period of warranty. To facilitate this, the dealer is obliged to keep astock of spare 839 parts. The purchaser has an option to go to any dealer,and not be confined to the dealer from whom the purchase was made. Sales tax i s paid on the stock of spare parts purchased from Tata Motors. The defe ctive parts are sent back to Tata Motors and credit note may be given by Tata Motors for the said parts. The customer does not pa y for the replacementof the defective part, which is stated to be the crucial fact. The stand of the Revenue is that sales tax is liable to be paid even q ua the return of the spare parts, as credit note is given for the same, to the dealer. 4. In the facts of this case, the assessment order and the ap peal went against the appellant/dealer, while the Tribunal held in favour of the appellant/dealer. However, the High Court, relying upon the judgment of this Court in Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, U.P., Lucknow 1 set aside the order passed by the Tribunal, restoring the order of the assessing authority. 5. Mr. P. Chidambaram, learned senior counsel appearing for the appellant, drew our attention to the Dealership Agreement and pointed out that it is a principal-to-principal agreement, but that would not really make a difference to the controversy in question. In terms of this Agreement, inter alia a stock of spare parts has to be kept by the dealer. 6. Learned senior counsel fairly conceded that if the judgment in Mohd. Ekram Khan & Sons 2 case is applicable, then the appellant would really have no case, but that his endeavour would be to distinguish the said judgment and/or persuade this Court that some of the observations made therein were per incuriam , and that in any case the matter needs to be examined by a larger Bench. In this course of action, learned senior counsel referred to the following judgments: 7. Premier Automobiles Ltd. &Anr. Etc. v. Union of Indi a: 3 Mr. Chidambaram, learned senior counsel submitted by refer ence to pages 537 & 538 that the principle of warranty covering cars sold has been well enunciated. Accordingly, all defects on account of faulty manufacture in workmanship have to be set right and the defective parts have to be replaced, free of cost, by the manufacturer or his dealer, within a specified period of timeor a given distance travelled by the car. Free services haveto be rendered. Car manufacturers enterinto an agreement with the manufacturers of components, pro viding for a 1 (2004) 6 SCC 183 2 (supra) 3 (1972) 2 SCR 526 M/S. TATA MOTORS LTD. v. THE DY. COMMNR. OF COMM. TAXES (SPL) [SANJAY KISHAN KAUL, J.] warranty so far as the components are concerned.The whole object behindwarranty is that a consumer who hasmade a heavy invest ment, while purchasing a car,isassured of proper performance of the vehicle “in a trouble-free manner for a reasonable length of time.”It is, thus, his submission that this fundamental concept appears to have be en lost in Mohd. Ekram Khan & Sons. 4 8. Commissioner of Sales Tax v. M/s. Prem Nath Motors (P ) Ltd.: 5 Learned senior counsel drew our attention to paras 17 & 18 of this judgment, where observations have been made to the effect that a dealer sells cars along with awarranty, under which it is ag reed that it would replace the parts free of cost. When such a part is replaced, it becomes a part of the car and the property in it stands transferred to the buyer/consumer. There is no separate consideration paid for the part so transferred and, thus, the only reasonable inferenc e is that the consideration for the part or parts that might be repla ced, under the warranty, was not separately specified because it was i ncluded in the price fixed and paid for the car at the time of its sale. The price so fixed and received is, thus, a consolidated price for the car and the parts that may have to be supplied by way of replacement, in pursuance of the warranty. 9. Prem Motors v. Commissioner of Sales Tax, Madhya Pradesh 6: The Court rejected the contention of the Revenue that when spare parts are replaced by the assesseeand givento the cus tomer free of charge,that being the condition of the warranty, the assesseerecovers the price from the manufacturer and, in substance, it is a sale of the spare parts to the manufacturer and therefore liable to be taxed. It was opined that when a dealer sells automobile vehicles, he sells it with all parts in a saleable condition. The warranty given isa warranty from the manufacturer and therefore, if during the warranty period, any part is found to be defective and is to be replaced, the re sponsibility of replacement is on the manufacturer. This is neither a sale of parts by the dealer to the customer nor to the manufacturer. What is effectively done is a passing on, of the parts, from the manufacturer to the customer, but in order to avoid delays and prevent any inconvenience to the customer, he replaces the part first and gets them from the manufact urer later. The cost for the same is reimbursed by the manufacturer. 4 (supra) 5 ILR (1978) II Delhi 273 6 (1986) 61 STC 244 (MP Division Bench) 841 It may be noted that this judgment has specifically been overruled in the Mohd. Ekram Khan & Sons 7case. 10. Geo Motors v. State of Kerala 8: The reasoning of the Delhi High Court in Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd. 9 was adopted to conclude that the transaction could not be categorised as a ‘sale’ even though the dealer had purchased spare parts by giving ‘C’ Forms.Such a transaction was purely for replacement and not for sale. This judgment again has been specifically overruled in Mohd. Ekram Khan & Sons 10 case. 11. Commercial Tax Officer (Anti-Evasion), Jodhpur v. Marudhara Motors 11 : This opinion is post the judgment inthe Mohd. Ekram Khan & Sons 12 case. The learned single Judge of the Rajasthan High Court distinguished the case of the assessee dealer from the facts obtaining in Mohd. Ekram Khan & Sons 13 case. One such distinguishing factor was that in the Mohd. Ekram Khan & Sons 14 case,there was a relationship of principal to agent and not of principal to principal. The most crucial aspect observed in this case, and which is also the plea of Mr. Chidambaram, learned senior counsel, is qua the observat ions in para 6 of the Mohd. Ekram Khan & Sons 15 case. It was observed that “in a case the manufacturer may have purchased from th e open market parts for the purpose of replacement of the defectiv e parts, for such transactions, it would have paid taxes. The position is not different because the assessee had supplied the parts and had received the price.” 12. While giving relief to the assessee, the significance of lack of consideration passing, i.e., spare parts being provided free of cost was taken note of, and thus, the cost of spare parts was held to be part of the cost of the vehicle, while giving such warranty fora limited periodof time to the customer. 7(supra) 8(2001) 122 STC 285 (Kerala Division Bench) 9(supra) 10 (supra) 11 (2010) 29 VST 114 (Raj) 12 (supra) 13 (supra) 14 (supra) 15 (supra) M/S. TATA MOTORS LTD. v. THE DY . COMMNR. OF COMM. TAXES (SPL) [SANJAY KISHAN KAUL, J.] 13. Learned senior counsel, thus, contended that the aforesaid significant aspect clearly distinguishes his case from the case of Mohd. Ekram Khan & Sons 16 , i.e., the aspect of thereplacement being undisputedly free. In this behalf, he referred to Section 4(1) of The Sale of Goods Act, 1930, which reads as under: “4. Sale and agreement to sell.— (1) A contract of sale of goods is a contract whereby the se ller transfers or agrees to transfer the property in goods to the buye r for a price. There may be a contract of sale between one part- owner and another.” The submission, thus, is that for the sale of the parts of the car, aprice has to be paid, which is not so in the present case. 14. SLP (C) Nos.12806-12808/2016 : Learned counsel inter alia drew our attention to “Treitel- The Law of Contract” by G.H. Treitel, (7 th ed.), to contend that to be enforceable as a collateral contrac t, a promise must be supported by consideration. It was submitted that the contract to supply spare parts, during the warranty period was akin to a collateral contract. 15. Learned counsel appearing for the other assessee s also supported the stand taken by Mr. Chidambaram. 16. On the other hand, Mr. Basava Prabhu S. Patil, learned senior counsel appearing for the respondents in the aforesaid civil appeal, sought to contend otherwise and submittedthatthe Mohd. Ekram Khan & Sons 17 case is the binding precedent,and in this light, the matter does not need to be examined any further. 17. Learned senior counsel drew our attention to the following judgments: i. Navnit Motors Pvt. Ltd. v. State of Maharashtra 18 ii. Kataria Automobiles (P.) Ltd. v. State of Gujarat 19 iii. The Commissioner, Commercial Tax, Lko. v. S/S Maskat Motors Pvt. Ltd. 20 16 (supra) 17 (supra) 18 (2012) 47 VST 511 (Bom) 19 (2015) 51 GST 403 (Gujarat) 20 (2017) 102 VST 220 (All) 843 18. These judgments emanate from the Bombay High Court, Gujarat High Court andthe Allahabad High Court respectively, and the submission is that a consistent view, in favour of the Revenue, has been taken by these three High Courts. We may, however, notice that the view emanates only by reason of reliance upon the Mohd. Ekram Khan & Sons 21 case. 19. Learned counsel also referred to the judgment in Bharat Heavy Electricals Ltd. v. Commissioner of Customs & Centr al Excise, Indore 22 to contend that while considering the issue of excise duty in respect of components towardsthe “complaint reserve”, it was held that the same would be excisable. It was observed that while the initial price charged for the machinery may include the element of the “c omplaint reserve”, at the time of purchase, it is not known whether there will be any requirement to replace any part and, in many cases,the parts are not required to be replaced. In suchan eventuality, the price equiva lent of the “complaint reserve” is not returned to the customer. 20. We are not delving into the controversy in any further detail as we are of the opinion that the issue raised is required to be looked into by a larger Bench. The crucial point which would arise for consideration, and over which the matter needs to be debated, is as to whether, in t he case of such a warranty for the supply of free spare part s;once the replacement ismade, and the defective part is retur ned to the manufacturer, sales tax would be payable on such a transaction relating to the spare part, based on a credit note, which may be iss ued for the said purpose. This is in the context of the observations discussed aforesaid regarding the price of the car being inclusive of the cost of the spare parts, the latter beingsupplied for free,upon replace ment. Sales tax on the car is paid. Sales tax on the inventory purchased by the dealer is paid. Thus, if there is no consideration for these replaced part s, can sales tax be leviedat all? The judgment in the Mohd. Ekram Khan & Sons 23 case refers to the credit notes receivedas considerationfor the replacement; but it is a moot point whether credit notes can be treated as a mode of paymentor not. The judgment in Premier Automobiles Ltd. &Anr. Etc. 24 case is stated to contain a different factual situation, as per the observations in the Mohd. Ekram Khan & Sons 25 case. There 21 (supra) 22 (2003) 9 SCC 185 23 (supra) 24 (1972) 2 SCR 526 25 (supra) M/S. TATA MOTORS LTD. v. THE DY . COMMNR. OF COMM. TAXES (SPL) [SANJAY KISHAN KAUL, J.] are observations referred to above, again in the Mohd. Ekram Khan & Sons 26 case, of the possibility of themanufacturer having purchased, from open markets, the parts for replacement, on which taxes would be paid. In that context, it was observed that “the position is not different because the assessee had supplied the parts and received the price.” The assessee actually had purchased the parts and paid sales tax on it, but on return of the defective part to the manufacture, was given a credit note. 21. We have some reservations in respect of the observations and legal propositions laid down in the Mohd. Ekram Khan & Sons 27 case and consider it appropriate that the matter be considered by a larger Bench. 22. The papers be placed before Hon’ble the Chief Justice for necessary orders. 26 (supra) 27 (supra) Divya Pandey Matter referred to larger Bench.