Credit notes issued for warranty replacements are regarded as taxable sales under sales tax law, balancing dealer responsibilities and manufacturer reimbursements.

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.

3. Preface:
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 & Sons case (Mohd. Ekram Khan & Sons v. 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. case (Premier Automobiles Ltd. v. Union of India, 1972 (4) SCC (N) 1: 1972 (1) SCR 526) is stated to contain a different factual situation, as per the observations in Mohd. Ekram Khan & Sons case (Mohd. Ekram Khan and Sons v. CTT, ). There are observations referred to above, again in Mohd. Ekram Khan & Sons case (Mohd. Ekram Khan & Sons v. CTT, ), 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 & Sons case (Mohd. Ekram Khan & Sons v. CTT, ) 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 v. CTT, 2004 (6) SCC 183 (Mohd. Ekram Khan).

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 v. Prem Nath Motors , 1979 (43) STC 52 (Delhi), (Prem Nath Motors); Prem Motors, Gwalior v. Commissioner of Sales Tax, Gwalior 1986 (61) STC 244 MP (Prem Motors) and Geo Motors v. State of Kerala 2001 (122) STC 285 (Ge