In Civil Appeal No.1822/2007- SC - Supreme Court rules credit note issued by Manufacturer to Dealer of automobiles for replacement of defective parts exigible to Sales Tax
Justice K.M. Joseph, Justice B.V. Nagarathna & Justice Ahsanuddin Amanullah [15-05-2023]

Read Order: M/S. Tata Motors Ltd V. The Deputy Commissioner of Commercial Taxes (Spl) & Anr

Chahat Varma

New Delhi, May 17, 2023: The Supreme Court has ruled that 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, is exigible to sales tax, under the respective State's sales tax enactments.

A three-judge bench comprising of Justice K.M. Joseph, Justice B.V. Nagarathna and Justice Ahsanuddin Amanullah was hearing a reference made to it, wherein a two-judge bench had some reservations in respect of the observations and legal propositions laid down in Mohd. Ekram Khan & Sons [LQ/SC/2004/760] case.

The point under consideration in the Reference Order was whether a credit note issued by a manufacturer to a dealer of automobiles, in consideration of the replacement of a defective part, under a warranty agreement, subject to sales tax, under the respective State's sales tax enactments. The Reference Order also raised doubts about the correctness of the observations made in the case of Mohd. Ekram Khan & Sons vs. CTT.

In the present case, M/s Marudhar Motors (assessee) was a dealer of TATA Vehicles.

The court noted that when the dealer uses one of the spare parts from his stock for the replacement of a defective part in an automobile under a warranty, he is given a monetary benefit in the form of a credit note. The definition of ‘credit note’ clearly indicate that a credit note issued by a manufacturer in favour of a dealer is a valuable consideration within the meaning of the definition of ‘sale’ under both, Central Sales Tax Act as well as the respective State enactments under consideration.

The court opined that the amount shown in the account of the dealer in the form of a credit note is nothing but a price received for a sale of a spare part by the dealer which is from his stock and which belongs to him. Where there is transfer of property by the dealer to the customer while acting under a warranty and the dealer being paid by the manufacturer, when viewed in the aforesaid prism, the credit note shown in the account of the dealer is a valuable consideration pursuant to the sale that has taken place of a spare part from his stock.

“Merely because the dealer is acting as an intermediary or on behalf of the manufacturer pursuant to a warranty and receives a recompense in the form of a credit note, the same cannot escape liability of tax under the Sales Tax Acts under consideration,” further observed the court.

The court emphasized that if the dealer had sold a spare part of the automobile from his stock to any other consumer across the counter, he would have collected the requisite sales tax along with the price from that consumer but in the instant case, the consideration is received in the form of a credit note from the manufacturer which is subject to sales tax. The Court held that the person who pays the valuable consideration in a sale transaction is irrelevant so long as it is paid.

The court was of the view that judgment in Mohd. Ekram Khan, did not call for any interference.

It was held, that the judgment in Mohd. Ekram Khan applies to situations where a manufacturer issues a credit note to a dealer under a warranty agreement. If the dealer replaces a defective part with a spare part from their own stock or from the open market, the credit note is considered valuable consideration for the transfer of property in the spare part to the customer. Therefore, the value mentioned in the credit note is subject to sales tax under the relevant sales tax laws.

However, the court clarified that the judgment in Mohd. Ekram Khan will not be applicable when the dealer receives a spare part from the manufacturer solely for the purpose of replacing a defective part under a warranty agreement related to the sale of the automobile.

The court concluded that the appellants-dealer/assessee were liable to pay sales tax under the respective State enactments under consideration.