1. Replacement of defective automobile parts by dealers from their own stock under manufacturer warranty — issuance of credit notes by manufacturers to dealers — exigibility to sales tax. (Para 4 , 6 )
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2023 Supreme(SC) 525
SUPREME COURT OF INDIA
K.M. JOSEPH, B.V. NAGARATHNA, AHSANUDDIN AMANULLAH, JJ.
M/s. Tata Motors Ltd. – Appellant
Versus
The Deputy Commissioner of Commercial Taxes (SPL) and Another – Respondents
Civil Appeal Nos. 1821, 1822 of 2007, Civil Appeal No. 6172 of 2009, Civil Appeal No. 1446 of 2010, Civil Appeal Nos. 3820, 3821, 3822, 3823, 3824, 3825, 3826, 3827, 4019, 4021, 5967, 5969 of 2011, Civil Appeal Nos. 2756, 5815 of 2012, Civil Appeal No. 3856 of 2013, Civil Appeal Nos. 3004-3006 of 2017, Civil Appeal Nos. 4516, 9979, 10924, 11724 of 2018, Civil Appeal Nos. 3715, 3716-3717, 3718, 3719-3723, 3724, 3725-3727, 3730-3732, 3733, 3734, 3735, 3740 of 2023, SLP (C) No. 14260 of 2007, SLP (C) Nos. 15642-15643, 28859 of 2011, SLP (C) Nos. 25905, 31698-31702 of 2013, SLP (C) Nos. 5447, 5449-5451, 12280 of 2014, SLP (C) Nos. 12806-12808 of 2016, SLP (C) No. 11509, 12119 of 2017
Decided On : 15-05-2023
Advocates appeared:
For the Appellant(s) : Mr. Kavin Gulati, Sr. Adv. Mr. Avi Tandon, Adv. Mr. Rohit Amit Sthalekar, Adv. Mr. Vishal Gehrana, Adv. Mr. Japppanpreet Hura, Adv. Mr. M. P. Devanath, AOR Ms. Pragati Neekhra, AOR Mr. Sonal Jain, AOR Mr. R. K. Raizada, Sr. Adv. Mr. Bhakti Vardhan Singh, AOR Mr. Ankit, Adv. Mr. Rahul Kaushik, AOR Mrs. Manik Karanjawala, AOR Mr. Irshad Ahmad, AOR Mr. Yashraj Singh Deora, AOR Mr. Priyesh Mohan Srivastava, Adv. Mr. Abhishek Singh, Adv. Mr. Punit Dutt Tyagi, AOR Mr. P. K. Manohar, AOR Mr. K. K. Mani, AOR Ms. T.archana, Adv. Mr. Rajeev Gupta, Adv. Mr. Vinay Rajput, Adv. M/S. Karanjawala & Co., AOR Mr. V Sridharan, Sr. Adv. Ms. Apeksha Mehta, Adv. Mr. Sahil Parghi, Adv. Ms. Neha Choudhary, Adv. Mr. Gopal Machiraju, Adv. Ms. Falguni Gupta, Adv. Ms. Umang Motiyani, Adv. Ms. Charanya Lakshmikumaran, AOR Dr. Manish Singhvi, Sr. Adv. Ms. Shubhangi Agarwal, Adv. Mr. Milind Kumar, AOR
For the Respondent(s): Mr. Nikhil Goel, A.A.G. Mr. V. N. Raghupathy, AOR Mr. Manendra Pal Gupta, Adv. Mr. Adithya Roy, Adv. Mrs. Ansha Varma, Adv. Mr. Sanjay Jain, AOR Mr. Kamlendra Mishra, AOR Mr. G. N. Reddy, AOR Mr. Pallav Shishodia, Sr. Adv. Mr. C. K. Sasi, AOR Mr. Abdulla Naseeh V T, Adv. Ms. Meena K Poulose, Adv. Mr. Rahul Kaushik, AOR Ms. Deepanwita Priyanka, AOR Mr. Bhakti Vardhan Singh, AOR Mr. Aniruddha Joshi, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Bharat Bagla, Adv. Mr. Sourav Singh, Adv. Ms. Ruby Singh Ahuja, Adv. Mr. Vishal Gehrana, Adv. Ms. Hanry Maisi, Adv. Mr. Jappanpreet Hora, Adv. Ms. Meghna Mishra, Adv. For M/S. Karanjawala & Co., AOR Mr. Saurabh Mishra, A.A.G. Mr. Pashupathi Nath Razdan, AOR Mr. Tarun Gulia, Adv. Ms. Maitreyee Jagat Joshi, Adv. Mr. Astik Gupta, Adv. Ms. Ayushi Mittal, Adv. Mr. Vipul Abhishek, Adv. Mr. Kuldeep Kumar Shukla, Adv. Mr. Nishe Rajen Shonker, AOR Ms. Rashmi Singhania, AOR Mr. Sarad Kumar Singhania, Adv. Mr. S. K. Upadhayay, Sr. Adv. Mr. Hitesh Kumar Sharma, Adv. Mr. Akhileshwar Jha, Adv. Mr. Amit Kumar Chawla, Adv. Mr. Ravish Kumar Goyal, Adv. Mr. Nitin Sharma, Adv. Mr. Chaman Sharma, Adv. Mr. Naresh Kumar, AOR Mr. Alok Sangwan, Adv. Mr. Sumit Kumar Sharma, Adv. Ms. Ankita Choudhary, AAG Mr. Abhinav Shrivastava, Adv. Mr. Sunny Choudhary, AOR Ms. Radhika S. Adv. Mr. Shivang Rawat, Adv.
For the Appellant(s) : Mr. Kavin Gulati, Sr. Adv. Mr. Avi Tandon, Adv. Mr. Rohit Amit Sthalekar, Adv. Mr. Vishal Gehrana, Adv. Mr. Japppanpreet Hura, Adv. Mr. M. P. Devanath, AOR Ms. Pragati Neekhra, AOR Mr. Sonal Jain, AOR Mr. R. K. Raizada, Sr. Adv. Mr. Bhakti Vardhan Singh, AOR Mr. Ankit, Adv. Mr. Rahul Kaushik, AOR Mrs. Manik Karanjawala, AOR Mr. Irshad Ahmad, AOR Mr. Yashraj Singh Deora, AOR Mr. Priyesh Mohan Srivastava, Adv. Mr. Abhishek Singh, Adv. Mr. Punit Dutt Tyagi, AOR Mr. P. K. Manohar, AOR Mr. K. K. Mani, AOR Ms. T.archana, Adv. Mr. Rajeev Gupta, Adv. Mr. Vinay Rajput, Adv. M/S. Karanjawala & Co., AOR Mr. V Sridharan, Sr. Adv. Ms. Apeksha Mehta, Adv. Mr. Sahil Parghi, Adv. Ms. Neha Choudhary, Adv. Mr. Gopal Machiraju, Adv. Ms. Falguni Gupta, Adv. Ms. Umang Motiyani, Adv. Ms. Charanya Lakshmikumaran, AOR Dr. Manish Singhvi, Sr. Adv. Ms. Shubhangi Agarwal, Adv. Mr. Milind Kumar, AOR
For the Respondent(s): Mr. Nikhil Goel, A.A.G. Mr. V. N. Raghupathy, AOR Mr. Manendra Pal Gupta, Adv. Mr. Adithya Roy, Adv. Mrs. Ansha Varma, Adv. Mr. Sanjay Jain, AOR Mr. Kamlendra Mishra, AOR Mr. G. N. Reddy, AOR Mr. Pallav Shishodia, Sr. Adv. Mr. C. K. Sasi, AOR Mr. Abdulla Naseeh V T, Adv. Ms. Meena K Poulose, Adv. Mr. Rahul Kaushik, AOR Ms. Deepanwita Priyanka, AOR Mr. Bhakti Vardhan Singh, AOR Mr. Aniruddha Joshi, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Bharat Bagla, Adv. Mr. Sourav Singh, Adv. Ms. Ruby Singh Ahuja, Adv. Mr. Vishal Gehrana, Adv. Ms. Hanry Maisi, Adv. Mr. Jappanpreet Hora, Adv. Ms. Meghna Mishra, Adv. For M/S. Karanjawala & Co., AOR Mr. Saurabh Mishra, A.A.G. Mr. Pashupathi Nath Razdan, AOR Mr. Tarun Gulia, Adv. Ms. Maitreyee Jagat Joshi, Adv. Mr. Astik Gupta, Adv. Ms. Ayushi Mittal, Adv. Mr. Vipul Abhishek, Adv. Mr. Kuldeep Kumar Shukla, Adv. Mr. Nishe Rajen Shonker, AOR Ms. Rashmi Singhania, AOR Mr. Sarad Kumar Singhania, Adv. Mr. S. K. Upadhayay, Sr. Adv. Mr. Hitesh Kumar Sharma, Adv. Mr. Akhileshwar Jha, Adv. Mr. Amit Kumar Chawla, Adv. Mr. Ravish Kumar Goyal, Adv. Mr. Nitin Sharma, Adv. Mr. Chaman Sharma, Adv. Mr. Naresh Kumar, AOR Mr. Alok Sangwan, Adv. Mr. Sumit Kumar Sharma, Adv. Ms. Ankita Choudhary, AAG Mr. Abhinav Shrivastava, Adv. Mr. Sunny Choudhary, AOR Ms. Radhika S. Adv. Mr. Shivang Rawat, Adv.
The Court held that credit notes issued by a manufacturer to a dealer for replacing defective parts from the dealer's own stock under warranty constitute "valuable consideration" for a transfer of property, thus qualifying as a taxable "sale" under respective State Sales Tax enactments.
Headnote:(A) Sales Tax Act - Whether a credit note issued for replacing defective parts under warranty is subject to sales tax - Explores principal-agent relationship between dealer and manufacturer and implications under the definition of 'sale' according to tax legislations. (Para 70)
(B) Credit Note - Considered as valuable consideration in transactions for purposes of sales tax liability. Sales tax applicable when property is transferred from dealer to customer under warranty. (Para 70)
Facts of the case:
Numerous appeals arise from judgments of various High Courts regarding whether the issuance of credit notes for spare parts replaced free under warranty obligations constitutes taxable sales. Manufacturers and dealers' roles under dealership agreements considered. (Paras 1-6)
Findings of Court:
Credit notes issued by manufacturers to dealers when spare parts are supplied from the dealer's stock constitute 'sale' under tax laws; dealers liable to pay sales tax on such transactions. (Para 70)
Issues: Is a credit note for replaced spare parts under warranty considered ‘sale’ for taxation? The court also addresses the nature of dealer-manufacturer relationships and the implications for sales tax. (Para 70)
Ratio Decidendi: Court affirms that a credit note issued represents valuable consideration, making the transaction subject to sales tax when spare parts are replaced from the dealer's stock under warranty obligations. (Para 70)
Result: Appeals filed by dealers dismissed; appeals by revenue allowed.
Legal Category Hierarchy
Table of Contents
2. Whether credit notes constitute valuable consideration for a taxable sale or merely recompense for discharging a collateral warranty obligation free of cost to the customer. (Para 10 , 11 )
3. Credit notes provide monetary benefit to dealers for parts sourced from stock, constituting valuable consideration for the transfer of property to the customer under warranty. (Para 26 , 28 , 33 , 38 , 44 , 46 , 48 )
4. Transfer of spare parts from dealer stock to customers under warranty, recompensed by manufacturer credit notes, constitutes a sale for valuable consideration under sales tax laws. (Para 48 , 69 , 70 )
5. Appeals by dealers dismissed and appeals by revenue allowed — credit notes for replacement parts from dealer stock held exigible to sales tax. (Para 70 )
6. Does the replacement of a defective part from a dealer's stock under warranty constitute a sale?
Yes, when a dealer uses their own stock to replace a part and receives a credit note from the manufacturer, it is a transfer of property for valuable consideration, making it a taxable sale under sales tax legislation. (Para 48 , 69 , 70 )
7. Is a credit note considered valuable consideration under sales tax legislation?
Yes, a credit note is a monetary benefit and a form of money consideration, falling within the wider definition of valuable consideration under sales tax enactments compared to the narrower definition of price in the Sale of Goods Act. (Para 44 , 46 , 48 )
8. When is the replacement of a part under warranty not a taxable sale for the dealer?
It is not a sale when the dealer merely acts as an intermediary, receiving the spare part directly from the manufacturer to replace the defective part without utilizing their own stock. (Para 25 , 32 , 70 )
9. How does the definition of sale in sales tax laws differ from the Sale of Goods Act?
While the Sale of Goods Act requires a money price, sales tax laws include any transfer for cash, deferred payment, or other valuable consideration, thereby broadening the scope of taxable transactions. (Para 42 , 43 , 44 )
JUDGMENT :
B.V. NAGARATHNA, J.
1. Leave granted.
2. These Civil Appeals arise from the judgments of the High Courts of Karnataka, Rajasthan, Allahabad, Madhya Pradesh, Bombay, Andhra Pradesh, Kerala and Gujarat. Since common questions of law and facts have been raised in these appeals vide Reference Order dated 05.12.2019 made by a Bench of two judges to a Bench comprising of three judges, the reference has been heard and is accordingly answered.
In some of the civil appeals, the dealers-assessee are the appellants, while in rest of the appeals the respective States are the appellants.
Preface:
3. By order dated 05.02.2019, reference has been made to a Bench of three Judges which shall hereinafter be referred to as the “Reference Order.”
The pertinent paragraphs of the Reference Order read as under:
“15. We are not delving into the controversy in any further detail as we are of the opinion that the issue raised is required to be looked into by a larger Bench. The crucial point which would arise for consideration and over which the matter needs to be debated, is as to whether, in the case of such a warranty for the supply of free spare parts; once the replacement is made, and the defective part is returned to the manufacturer, sales tax would be payable on such a transaction relating to the spare part, based on a credit note, which may be issued for the said purpose. This is in the context of the observations discussed aforesaid regarding the price of the car being inclusive of the cost of the spare parts, the latter being supplied for free, upon replacement. Sales tax on the car is paid. Sales tax on the inventory purchased by the dealer is paid. Thus, if there is no consideration for these replaced parts, can sales tax be levied at all? The judgment in Mohd. Ekram Khan and Sons vs. CTT , (2004) 6 SCC 183, refers to the credit notes received as consideration for the replacement; but it is a moot point whether credit notes can be treated as a mode of payment or not. The judgment in Premier Automobiles Ltd. vs. Union of India , (1972) 4 SCC 1 : (1972) 1 SCR 526 is stated to contain a different factual situation, as per the observations in Mohd. Ekram Khan and Sons vs. CTT , (2004) 6 SCC 183. There are observations referred to above, again in Mohd. Ekram Khan and Sons vs. CTT , (2004) 6 SCC 183, of the possibility of the manufacturer having purchased, from open markets, the parts for replacement, on which taxes would be paid. In that context, it was observed that “the position is not different because the assessee had supplied the parts and received the price.” The assessee actually had purchased the parts and paid sales tax on it, but on return of the defective part to the manufacturer, was given a credit note.
16. We have some reservations in respect of the observations and legal propositions laid down in Mohd. Ekram Khan and Sons vs. CTT , (2004) 6 SCC 183 and consider it appropriate that the matter be considered by a larger Bench.”
4. The point for consideration under the Reference Order is, whether, a credit note issued by a manufacturer to a dealer of automobiles in consideration of the replacement of a defective part in the automobile sold pursuant to a warranty agreement being collateral to the sale of the automobile is exigible to sales tax under the sales tax enactments of the respective States. While considering the said question, the Reference Order doubts the correctness of the observations made in Mohd. Ekram Khan and Sons vs. CTT , (2004) 6 SCC 183.
5. It may be mentioned that in the aforesaid decision three other judgments of the Delhi High Court, Madhya Pradesh High Court and Kerala High Court in Commissioner of Sales Tax vs. Prem Nath Motors , (1979) 43 STC 52 (Delhi), Prem Motors, Gwalior vs. Commissioner of Sales Tax, Gwalior , 1986 (61) STC 244 and Geo Motors vs. State of Kerala , (2001) 122 STC 285 respectively were considered and the latter two judgments were overruled.
Factual Background:
6. Of the thirty-four cas
