Sales Tax Applicable on Issuance of Credit Note for In-warranty Replacement
by Rein Heads | May 23, 2023
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Sales Tax Applicable on Issuance of Credit Note for In-warranty Replacement
- The Hon’ble Supreme Court in the case of Mohd. Ekram Khan (2004) held that Sales Tax is applicable on credit note issued by a manufacturer to a dealer for replacement of a defective part under a warranty agreement
- Various appeals were filed before the Apex Court from the judgements of various High Courts both, following and distinguishing the ruling in Mohd. Ekram Khan
- As the questions of law raised and facts involved are common, a three-judge bench of the Supreme Court Bench has analysed the issue based on the facts presented in the case of Commercial Tax Officer Vs. M/s Marudhar Motors (‘the Dealer’) which are summarized as under:
- The Dealer entered into a dealership agreement with TATA Motors (‘the Appellant’/ ‘the Manufacturer’) to facilitate the replacement of parts during warranty period to the customers
- In the event of a customer claiming warranty due to the emergence of defects in certain parts, the Dealer replaces those parts on Free of cost to the customer, either from its own stock or procuring from the open market, to avoid delays in securing replacements from the Manufacturer
- Subsequently, the Manufacturer issue credit notes thereby crediting the running account of the Dealer
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| Issues before the Court |
- Whether the credit note issued by the Manufacturer to the Dealer, in consideration of the replacement of a defective part under a warranty agreement, subject to Sales Tax?”
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| Discussion & Ruling |
The Supreme Court held that a credit note issued by the Manufacturer to the Dealer, for replacement of defective part is exigible to Sales Tax based on the following:
- As per the definition of ‘sale’ under the Central Sales Tax Act, 1956 (‘the CST Act’) and State enactments, ‘valuable consideration’ has wider connotation. The object and purpose of including the expression ‘valuable consideration’ within the definition of ‘sale’ (apart from cash and deferred payment) is to enlarge the scope of the expression ‘price’
- Nature of consideration in the form of a credit note is also monetary in nature. Further, ‘valuable consideration’ is not only money paid or promised to be paid but something more, and in this case its credit note
- During a warranty claim, there is a transfer of property in the spare part from the stock of the Dealer to the customer for which the Manufacturer pays by way of issuance of credit note. The credit shown in the account of the Dealer is a valuable consideration pursuant to sale of spare parts from the stock of the Dealer
- If the Dealer had sold spare parts from their own stock/ after procurement from the market to any other consumer (which are not covered under a warranty), they would have collected the necessary Sales Tax on the value of such spare parts. The person who pays the valuable consideration in a sale transaction is irrelevant so long it is paid
- The fact that the Dealer is acting as an intermediary on behalf of the Manufacturer in relation to a warranty and receives compensation in the form of a credit note does not exempt them from tax liability under the Sales Tax Acts being considered.
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*Tata Motors Ltd vs. The Deputy Commissioner of Commercial Taxes (SPL) & ANR., Civil Appeal No. 1822/2007 : Order Dated 15.05.2023 (Supreme Court) |
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