TMI Blog2023 (5) TMI 744X X X X Extracts X X X X X X X X Extracts X X X X ..... was different and the issues in the said case were also different by observing that one of the issues was, whether, the expenses on account of warranty and statutory bonus were to be excludable while working out the ex-works cost. It was noted therein that car manufacturers furnish warranty covering the cars sold by entering into an agreement with the manufacturers of components providing for a warranty so far as the components supplied are concerned. The whole object behind the warranty is that the consumer who has to make a heavy investment for the vehicle should be assured of a proper performance of the vehicle in a trouble-free manner for a reasonable length of time. Therefore, entire cost of warranty was to be borne by the manufacturer. Referring to Prem Nath Motors, it was observed in Mohd. Ekram Khan that the said case dealt with transfer of property in the part or parts replaced in pursuance of a stipulation or a warranty which is a part of the original sale of the car for the price fixed and received from the buyer or consumer. It was observed that the price so fixed and received was a consolidated price for the car and the parts that may have to be supplied by way of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacturer and dealer is viewed in the larger canvas of a dealer discharging his obligations pursuant to a warranty appended to a sale of an automobile, the same cannot be narrowly construed. At the same time, whether the transaction resulting in payment by way of a credit note to a dealer/assessee is a sale within the definition of sale under the Sales Tax Acts of the respective States under consideration has to be considered. The aforesaid discussion could be illustrated better with reference to STATE OF TAMIL NADU VERSUS SRI SRINIVASA SALES CIRCULATION (AND OTHER APPEALS) [ 1996 (10) TMI 379 - SUPREME COURT] . Applying the aforesaid principles and the judgment of this Court to the case at hand, it is 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 from various dictionaries and Law Lexicons have been adverted to above. A perusal of the aforesaid definitions would clearly indicate that a credit note issued by a manufacturer in favour of a dealer is a valuable consideration within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rer of the spare part. Thus, the dealer is the promisee. The occasion to replace the spare part is when the customer brings to the notice of the dealer a defect in a part of the automobile, pursuant to a warranty which has been given by the manufacturer to the customer. The dealer (promisee) agrees to replace a defective part which is a consideration for the promise and in turn, receives a recompense in the form of a credit note from the manufacturer. Thus, there is an agreement between the manufacturer and the dealer, and it would be in an instance of there being reciprocal promises. Conclusion: The transaction between the manufacturer and dealer while acting pursuant to a warranty in the circumstances explained above has to be construed as sale within the meaning and definition of sale under the Sales Tax Acts under consideration. - CIVIL APPEAL No. 3856/2013, CIVIL APPEAL No. 5815/2012, CIVIL APPEAL No. 2756/2012, CIVIL APPEAL No.3718 of 2023, (@ SLP(C) No. 28859/2011), CIVIL APPEAL No. 5969/2011, CIVIL APPEAL No. 5967/2011, CIVIL APPEAL Nos.3716-3717 of 2023, (@ SLP(C) Nos. 15642-15643/2011), CIVIL APPEAL No. 3821/2011, CIVIL APPEAL No. 4019/2011, CIVIL APPEAL No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingh 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. And Mr. Shivang Rawat, Adv. JUDGMENT NAGARATHNA, J. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived 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, (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 Sons vs. 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 vs. Prem Nath Motors, (1979) 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 30 of the Rajasthan Sales Tax Act, 1994 to impose a tax on assessee s turnover having escaped assessment for the assessment years 2000-2001 to 2003- 2004. However, for the assessment years 2004-2005 and 2005-2006, regular assessment proceedings were initiated under Section 28 of the Rajasthan Sales Tax Act, 1994. vi. On July 22, 2006, the Deputy Commissioner (Appeals) of Jodhpur passed an order upholding the levy of tax upon an assessee but setting aside the levy of interest and penalty imposed by the assessing authority under Section 65 of the Act. vii. This decision gave rise to six cross-appeals filed by the assessee and another six appeals filed by the Revenue. The assessee was dissatisfied with the decision to uphold the levy of tax and filed six separate appeals for six different assessment years - 2000-2001, 2001-2002, 2002-2003, 2003-2004, 2004-2005, and 2005-2006. On the other hand, the Revenue was aggrieved by the decision to set aside the levy of interest and penalty and filed another batch of six appeals. viii. The matter was taken up by the Rajasthan Tax Board in Ajmer, which issued a common judgment on June 18, 2007, disposing of all twelve appeals. The R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Allahabad 1 1 Madhya Pradesh 0 2 Gujarat 0 1 Total 16 18 7.1. As is clear from the table above, fifteen out of the thirty-four cases before us pertain to revenue s appeals against the decisions of the Rajasthan High Court, relying upon the decision in C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors, Jodhpur, (2010) 29 VST 114, (Marudhara Motors) dated 16.03.2009. In the aforementioned decision, the Rajasthan High Court distinguished the facts and reasoning in Mohd. Ekram Khan by underlining three distinguishing factors. Firstly, it noted that the agreement between the manufacturer and dealer reflected a principal-to-principal relationship, and not a principal-agent relationship. Secondly, it was noted that the transaction between manufacturer and dealer, pertaining to the return of defective parts to the manufacturer and the issue of credit notes to the dealer, is independent of the transaction between manufacturer and customer, pertaining to the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and Service Tax Appellate Tribunal was reversed on revision under Section 23(1) of Karnataka Sales Tax Act, 1957, on the ground that the dispute is covered by the decision in Mohd. Ekram Khan. It was reasoned that in Mohd. Ekram Khan, the assessee was a dealer registered under the provisions of the U.P. Trade Tax Act,1948 and also an agent of M/s. Mahindra and Mahindra (manufacturer). The manufacturer had a warranty agreement with the purchasers of vehicles to replace defective parts during the warranty period. The conclusion of Mohd. Ekram Khan was relied upon to conclude that the transaction was taxable as the manufacturer had made payment to its agent by issuing credit notes for the supply of defective parts during the warranty period. 7.5. In a similar vein, the five impugned decisions rendered by the High Court of Kerala followed the reasoning and conclusions in the case of M/s TVS and Sons Ltd. vs. State of Kerala, decided on 06.06.2007. Clause 23 of the Dealership Agreement states: The Dealer is not and shall not be the agent of the Company for any purpose, and the dealer has no right or authority to assign or create any obligation of any kind, express or implied, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the relationship as found in the dealership agreement contested in Mohd. Ekram Khan was the same as that in the case at hand: principal-to-principal relationship. Therefore, the assessee cannot seek to take benefit of a sentence recorded in the judgment in Mohd. Ekram Khan that the dealer was an agent of the manufacturer. The High Court further reasoned that the terms of agreement in Mohd. Ekram Khan was similar to the case being considered as clause 49 of the Agreement of Dealership required the dealer to promptly and effectively deal with any claim made by the customer of any vehicle under the provisions of the warranty currently in force. In terms of the warranty, the cost of parts incurred by the dealer in carrying out repairs or replacement of defective parts is in accordance with the procedure established by the manufacturer and reimbursed by the manufacturer to the assessee. 7.9. Two decisions of the Madhya Pradesh High Court are assailed in the present case by the assessees. Both orders follow the reasoning of court in M/s. Harsh Automobiles Private Limited vs. The Commissioner of Commercial Tax, Indore, decided on 25.01.2018. The High Court relied upon the dictum in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi which is liable to be taxed under the provision of the Act? (II) Whether on the facts and in view of the circumstances of this case, if the supply of parts transferred to the purchaser of vehicles in replacement in compliance with the stipulations of the warranty is not sale within the meaning of clause 2(g) of the Act, the purchase price of the parts purchased on the strength of certificate of registration free of cost or purchased at the concessional rate of tax under the Central Sales Tax Act, 1956, on furnishing 'C' form, is liable to be added to the taxable turnover of the purchasing dealer under the provisions of the second proviso to clause (ii) of sub-section (2) of Section 5, of the Bengal Finance (Sales Tax) Act 1941, as in force in Delhi ? (Underlining by us) (ii) In the said case, the Division Bench of the Delhi High Court considered the order of the Financial Commissioner who had held that the transfer of property in the parts of a car replaced under a warranty constituted a sale and, as such, the replacement of parts as a consequence of the terms and stipulations of the warranty must be deemed to be a continuation of the original sale, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bursement of Rs.33,263/- received from the principals will not form part of the sale price as defined under section 2 (o) of the M. P. General Sales Tax Act, 1958? (Underlining by us) In the said case, the revenue contended that when the spare parts are replaced by the assessee (dealer) to the customer free of charge, being the condition of warranty, he recovers the price from the manufacturer and in substance it is the sale of the spare parts to the customer and therefore, it is liable to tax payable by the dealer. (ii) The Division Bench of the Madhya Pradesh High Court, however, held that the aforesaid contention of the revenue suffered from a basic policy issue. That the warranty for a sale of car is from the manufacturer and therefore, if during the warranty period any part is found to be defective and is to be replaced, the responsibility of replacement is that of the manufacturer. Therefore, when the assessee (dealer) replaces parts to the customers and either gets those parts from the manufacturer or gets it reimbursed, it is neither a sale of those parts by the dealer to the customer nor to the manufacturer, what it does only is to pass on the part from the manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, Prem Motors and Geo Motors were overruled in Mohd. Ekram Khan. Further, the question considered therein was, whether, the amount received by the assessee therein for supply of parts to the customers as a part of the warranty agreement was liable to tax. The assessee therein was an agent of M/s Mahindra and Mahindra (manufacturer). The manufacturer had a warranty agreement with the purchasers of vehicles (the customers) to replace defective parts during the warranty period. The manufacturer would make payment of a certain price on account of parts supplied by the assessee to the customer by way of replacement of the defective part obviously without charging the customer for the same. Credit notes were issued by the manufacturer to the assessee as the price of the parts supplied to the customers. The assessing officer was of the view that the payment received through credit notes amounted to a sale in terms of Section 2 (h) of the Uttar Pradesh Trade Tax Act, 1948. The Trade Tax Tribunal, Varanasi held in favour of the assessee by stating that there was no sale. The revenue had carried the matter before the High Court which had held that the transactions constituted sale thereby, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Motors has already collected and paid Sales Tax while selling the automobiles in question to the dealers. The dealer is contractually bound to service the warranty obligations undertaken by the manufacturer at the time of the sale. It was brought to our attention that in the present appeals, the respective State s Sales Tax authorities had adopted varying interpretations of the allegedly taxable transactions. While the Assessing Officer in Karnataka had characterized the sale as between dealer and manufacturer; the authorities in Kerala deemed it to be a sale by the dealer without specifying to whom the sale was made. He clarified that during the course of the hearing, the counsel for the State of Kerala adopted the stand that the sale was between dealer and manufacturer. (ii) On the question of law referred to this Court, it was contended that, Mohd. Ekram Khan struck a discordant note against the well-established principle, enunciated in Premier Automobiles, Prem Nath Motors, Prem Motors and Geo Motors, that the cost of warranty was included in the initial transaction of sale and was not taxable separately. Therefore, it was contended that all transfers are not sales, as a sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned to the manufacturer through the dealer for the reason that it was crucial to servicing of the warranty obligation. The decision of this Court in Government of India vs. Madras Rubber Factory Limited, (1995) 4 SCC 349, not validating the treatment of warranty as a trade discount under excise law was also relied upon. Reliance was also placed on Devi Dass Gopal Krishnan vs. State of Punjab, (1967) 3 SCR 557, (Devi Dass Gopal Krishnan). (iv) Learned senior counsel, Sri Gulati submitted that the enforcement of the warranty obligation presented the opposite of the contract of sale, which involves the volitional transfer of goods. A case of discharge of a warranty is the exact opposite as both the buyer and seller agree to subsist within the existing sale to facilitate the seller to compensate the buyer for a breach or damage or defect caused to them. Reliance was also placed upon Section 59 of the Act, which clearly stipulates that enforcement of the remedy for breach of warranty could be actualized in diminution or extinction of the sale price, and if he is not compensated, he may sue for the breach of warranty. Therefore, it was contended that a credit note is issued by the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to learned senior counsel, this proposition was crystallized in Gannon Dunkerley (I), Devi Dass Gopal Krishnan, Gannon Dunkerley (II), and Kone Elevators Pvt. Ltd. vs. State of Tamil Nadu, (2014) 7 SCC 1. Relying upon Builders Association of India vs. Union of India, (1989) 2 SCC 645, it was stressed that the constitutional position post-46th Amendment of the Indian Constitution whereby the States legislative competence to tax the sale of goods was circumscribed by Entry 54, List II, Schedule VII of the Constitution. That taxation under this entry, being limited to sale and purchase of goods cannot be extended to activities that are not a sale. (iv) Reliance was also placed upon Commissioner of Customs vs. Dilip Kumar Co., (2018) 9 SCC 1 and CIT vs. Motor General Stores Pvt. Ltd., AIR 1968 SC 200 to emphasize that taxing statutes ought to be specific and must be interpreted strictly, as taxation on citizens should not be subject to the whims and fancies of the government. Learned senior counsel adopted the arguments with respect to Mohd. Ekram Khan. That the case did not apply to facts of the present case where the warranty obligation was being discharged free of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that to imply a term in a contract, the same must be (i) reasonable and equitable; (ii) necessary to give business efficacy; (iii) passes officious bystander test; (iv) be capable of clear expression; and (v) must not contradict express term of the contract. Thus, it was contended that the construction preferred by the Revenue was contradicting the express terms of the contract of warranty. (iv) Learned senior counsel further submitted that even if the present transaction is assumed to be that of a sale between manufacturer and dealer, the same has to be treated as purchase return and not be eligible to sales tax. There is no scope for entertaining any doubt that a purchase return would be relevant only when a purchase tax is levied on the purchaser. Furthermore, the present transaction where manufacturer-issued credits are accounted as sales return which is a recognized accounting practice and not a tax avoidance strategy. Therefore, it was argued that sales return beyond statutory time limit does not lose its character of return. The only consequence could be that selling dealer may not be able to claim the deduction from gross turnover. (v) Learned senior counsel also reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or sales return are all red herrings not supported by facts on record. Submissions of Sri Ravindra K. Raizada, senior counsel for Commissioner, Commercial Tax, State of U.P. in SLP(C) Nos. 12119/2017 and 11509/2017: (i) Sri Raizada, learned senior counsel submitted that the Dealership Agreement between Tata Motors and M/s Vikrant Automobiles was on a principal-to-principal basis. Furthermore, the case did not involve an exchange of the manufacturer s spare parts with customer s defective parts. Instead, the dealer purchased the parts from the manufacturer. It is clearly not a stock transfer from the manufacturer to the dealer. The ingredients of sale in the present case ought to be considered complete when goods i.e. new spare parts, are transferred to the customers and payment is received from the manufacturer who is fulfilling the warranty obligation as per established trade practice. He asserted that the manufacturer maintaining a running account of the dealer, through a credit note in respect of such sale of spare parts by dealer, has acknowledged such adjustment to be made in Sale and Purchase Account of the dealer. Thus, the warranty claims ought to be taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar does not include the cost of the warranty. Therefore, he submitted that the argument made by assessee is incorrect, when seen in light of the decision of this court in Premier Automobiles. That the Supreme Court of England in Digital Satellite Warranty Cover Limited vs. Financial Services Authority, (2013) UKSC 7 held that warranty is in the nature of insurance. Even without such warranty, the Act binds the manufacturer to provide working goods, failure of which would invite an action in damages. (ii) Learned counsel, Sri Goel, also underlined that in the accounting entries, the assessee was not accounting for the sale occasioned by a warranty to be a sales return. The concept of sale and purchase return applies to the same good, whereas the present facts pertain to a defective good. Furthermore, the transactions of sale occasioned by warranty are separate from the sale of a car by the manufacturer. Both transactions ought to be tested independently. Therefore, the discharge of a larger obligation by the dealer to sell motor vehicles on which tax is already paid, does not render the separate transaction of return of defective parts to the manufacturer against a credit note, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words, whether the aforesaid case has been correctly decided or not? (ii) What Order? 12. At the outset, it is necessary to read the relevant provisions of the Act: Sections 4 and 5 of the said Act read as under: 4. Sale and agreement to sell. (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or is subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. 5. Contract of sale how made. (1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property; (4) in goods; (5) from the seller to the buyer; (6) for a price, that is, money consideration. 12.4. It is also necessary to differentiate a contract of sale from other contracts, as the question whether a given contract is one of sale or a contract of any other description is one of substance and not of form. It depends on the real meaning and nature of the contract as to whether it is a contract of sale or (i) a mere guarantee for the price, or (ii) a barter or exchange, or (iii) a bailment on trust, or (iv) a contract of sale or return, or (v) a contract of del credere agency, or (vi) a contract of sale on commission, or (vii) a contract for loan on security, or (viii) a mere wagering contract, or (ix) a contract for work and materials, or (x) a contract for hiring, or (xi) a contract to do work as an agent, or (xii) a licence to get mineral products from land, or (xiii) a pledge, or (xiv) a gift. 12.5. In State of Madras vs. Gannon Dunkerley and Co. (Madras) Ltd., 1958 (9) STC 353 SC (Gannon Dunkerley and Co.-I), it was observed that the expression sale of goods in Entry 48, List II of Schedule VII of the Government of India Act, 1935, cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Williston on Sales and the Concise Oxford Dictionary. It was necessary to interpret the language of the Constitution with reference to the Common law, and the Court must place itself in the position of the men who framed and adopted the Constitution and inquire what they must have understood to be the meaning and scope of the principle that when power is conferred to legislate on a particular topic, to have regard to what is ordinarily treated as embraced within that topic in legislative practice and particularly in the legislative practice of the State which has conferred that power by the Constitution. Parliament must be presumed to have had Indian legislative practice in mind and unless the context otherwise clearly requires, not to have conferred a legislative power intended to be interpreted in a sense not understood by those to whom the Act was to apply. 12.7. In M/s Vishnu Agencies (Pvt.) Ltd. vs. Commercial Tax Officers, (1978) 1 SCC 520, while holding that even when there was a transfer of controlled commodities in pursuance of a direction under the Control Order where an element of mutual assent was absent, there was, nevertheless, sale as defined under the Act. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof, [***] the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect. (3) Nothing in this section shall affect the case of any condition or warranty fulfilment of which is excused by law by reason of impossibility or otherwise. xxx 59. Remedy for breach of warranty. (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may (a) set up against the seller the breach of warranty in diminution or extinction of the price; or (b) sue the seller for damages for breach of warranty. (2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage. 13.1. Section 12 deals with condition and warranty. A stipulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation to return the goods and (ii) where the buyer has the right or the power to return the goods. 13.5. We may discuss on collateral contracts and collateral warranties as discerned from various legal treatises and commentaries: (i) A contract between two persons may be accompanied by a collateral contract between one of them and a third person relating to the same subject matter. When a person buys goods from a dealer, he is given a guarantee in the name of the manufacturer. Here the main contract of sale is between the customer and the dealer but it seems that the guarantee could also be regarded as a collateral contract between the manufacturer and customer. Special legislation applies to certain guarantees given to consumers in respect of goods sold or supplied to them. Where the requirements specified in the legislation are satisfied, such guarantees take effect as contractual obligations whether or not the requirements of a collateral contract are satisfied; and these requirements continue to apply to manufacturers guarantees not covered by any legislation. [Source: Chitty on contracts, Thirty-First Edition]. (ii) A collateral contract between a third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the finance company. In such a case, the main contract is between the customer and the finance company. A representation by the dealer as to the quality of the goods used does not bind the finance company but it would be enforced against the dealer as a collateral contract by a customer. [Source: Benjamin s Sale of Goods, Eighth Edition] (v) According to Halsbury s Laws of England, Fifth Edition-2012, Volume 91, meaning of warranty is as under: 64. Meaning of warranty . Warranty means an agreement with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of such a contract, the breach of which gives rise to a claim for damages, but not to a right to reject the goods and tret the contract as repudiated. In order to satisfy the definition, therefore, a warranty must, first, be an agreement, a promise that the representation is or will be true; and, secondly, the agreement must be collateral to the main purpose of the contract, such purpose being the transfer of the property in, and the possession of, goods of the description contracted for. A warranty may be given in consideration of an agreement to enter into a contract of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a manufacturer or producer is sometimes doubly hit. If the taxpayer who pays a sales tax is also a manufacturer or producer of commodities subject to a central duty of excise, there may no doubt be overlapping in one sense; but there is no overlapping in law. The two taxes which he is called on to pay are economically two separate and distinct imposts. There is, in theory, nothing to prevent the Central Legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed or given away. It is the fact of manufacture which attracts the duty, even though it may be collected later . In the case of a sales tax, the liability to tax arises on the occasion of a sale, and a sale has no necessary connection with manufacture or production. (emphasis supplied) 13.8. In Bharat Heavy Electricals Ltd. vs. Commissioner of Customs and Central Excise, Indore, (2003) 9 SCC 185, the question was, whether, excise duty is payable on the parts which are replaced during the warranty period. It was contended that the replaced part was free of cost during the warranty period and the sale pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further observed in Mohd. Ekram Khan that in a case where manufacturer may have purchased from the open market parts for the purpose of replacement of the defective parts, the manufacturer would have to pay taxes. In such a situation, the dealer would have supplied the parts and not received any price either from the customer or from the manufacturer. The dealer (assessee) would have not received the payment of the price for the parts supplied to customers received from the manufacturer. Therefore, the transaction is not subject to levy of tax. What is significant to note is that when there is a warranty clause appended to the sale of a motor vehicle for the replacement of a defective part on the part of the manufacturer and if the manufacturer purchases the said part from the open market, it would have paid the tax. In such a case the dealer (assessee) would have supplied the part to the customer but not received the payment of the price from the manufacturer. In such a case, the transaction between the dealer and the manufacturer is not one of sale. But what is the nature of transaction when a dealer receives a credit note from the manufacturer while discharging his obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made a heavy investment, while purchasing a car, is assured of proper performance of the vehicle in a trouble-free manner for a reasonable length of time. According to the appellants this fundamental concept had been lost while deciding Mohd. Ekram Khan. 20. This Court in Mohd. Ekram Khan distinguished the factual situation in Premier Automobiles and Prem Nath Motors. In other words, after distinguishing the aforesaid cases, it was noted that in a case the manufacturer may have purchased from the open market parts for the purpose of replacement of the defective parts. For such transaction, it would have paid taxes. The position is not different because the assessee had supplied the parts and had received the price. In other words, in Mohd. Ekram Khan, a situation where a manufacturer has purchased the part from the open market for the purpose of replacement of the defective part and for which taxes have been paid by the manufacturer and a situation where the dealer/assessee supplies the part from his own stock and has received the price for the same in the form of credit note on return of the spare part to the manufacturer have been considered to be not different to each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our along with the manufacturer vis- -vis a customer or purchaser of an automobile. Secondly, the dealer is also acting as an intermediary and/or an agent of the manufacturer as the warranty emanates from the manufacturer to the ultimate customer through the dealer. The warranty clause runs along with the sale of the automobile, firstly, from the manufacturer to the dealer on a principal to principal basis and secondly, from the dealer to the customer. Therefore, as an intermediary between the manufacturer and the customer, the dealer has to act on behalf of the manufacturer i.e. between the manufacturer on the one hand and the customer on the other hand in order to fulfil the obligation cast on the manufacturer under the warranty clause vis- -vis the customer. 25. While so acting as an intermediary, the dealer may replace the defective part in the car either by receiving a spare part from the manufacturer directly. In such a case, (i) the manufacturer could either dispatch the spare part from its own factory or production unit to the dealer to replace the defective part in the automobile and seek return of the defective part or (ii) the manufacturer can procure the spare part f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the customer when he replaces a defective part pursuant to a warranty. In such a situation, on return of the defective part to the manufacturer by the dealer, he is issued a credit note by the manufacturer which is to make good the stock of the dealer. 27. Therefore, we have to assess the nature of the transaction by discerning the manner in which the dealer would have acted under the scope of a warranty on the sale of an automobile. The similarity in both kinds of situations referred to above is that the dealer is acting on behalf of the manufacturer pursuant to a warranty and in both the situations does not receive any price or consideration from the customer. But, the significant distinction in the two situations must be borne in mind. In the first situation, the dealer merely transmits the spare part received from the manufacturer to the customer and in turn returns the defective part to the manufacturer and does not receive a recompense by way of cost of the spare part but may receive a service charge under a dealership agreement. On the other hand, in the second situation, the dealer would have used a spare part from his stock to replace the defective part and returns th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as already been invoiced. The credit thus granted can be offset against the cost of future purchases (and is, therefore, from the seller s point of view, better than making a cash refund . (ii) According to the Oxford Advance Learner s Dictionary if, damaged items have to be returned, the manufacturer may issue a credit note . (iii) According to the Cambridge Advanced Learner s Dictionary and Thesaurus A credit note is an outstanding amount, to be used when needed. It is the document that a seller gives to a buyer who returns a product, which the buyer may use at a later date/time to pay for something else . (iv) According to the Collins English Dictionary A credit note is a piece of paper that a shop gives when a person returns goods that have been bought from it, which entitle the buyer to take goods of the same value without paying for them . (v) According to Black s Law Dictionary, Fifth Edition, - Credit Memorandum is a document used by a seller to inform a buyer that the buyer s account receivable is being credited (reduced) because of errors, returns, or allowances . (vi) Under the Goods and Services Tax Law It has been stated that afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... replacement and seek return of the defective part, or (ii) purchase the spare part from the manufacturer of the particular part by paying the requisite taxes and send it to the dealer and seek return of the defective part, or (iii) purchase the spare part from the open market after paying the requisite taxes and send it to the dealer for replacement of the defective part in the automobile and seek return of the defective part. or (b) may purchase the spare part from the open market by paying the requisite taxes and replace the defective part and return the same to the manufacturer, or (c) may replace the defective part from his stock maintained in his showroom and return the defective part to the manufacturer. 32. In situation (a), since the manufacturer himself has dispatched the spare part to the dealer for the purpose of replacement, there is no investment made by the dealer on the said part. The dealer merely acts on behalf of the manufacturer, pursuant to the warranty. 33. In situations (b) and (c), the dealer would have invested on the spare part either by buying it from the open market or earlier would have purchased the same from the manufacturer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso be used from the stock maintained by the dealer to replace a defective part when an automobile has been sold by him and the customer approaches the dealer during the warranty period when there is a defect in any part of the automobile. In such a situation, the dealer is acting on behalf of the manufacturer or as an intermediary between the manufacturer and the customer of the automobile and discharging his obligation under a collateral contract. Hence, it is a warranty given by the manufacturer through the dealer to the customer during the period of warranty. In such a situation, when a credit note is issued to the dealer on return of the defective part by the manufacturer is there a sale within the scope and meaning of definition of sale under the Sale Tax Legislation? The transaction that takes place when the dealer discharges his obligation under a warranty appended to the sale transaction of the automobile is on behalf of the manufacturer but the manufacturer issuing a credit note to a dealer is a valuable consideration paid by the manufacturer to the dealer, when the dealer is acting under the warranty. 35. The argument of Shri Pallav Sisodia, learned senior counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue is right in contending that the credit note issued to the dealer whilst he is discharging his obligation under the warranty is a sale and the dealer is liable to pay sales tax on the credit note is the point under consideration. 38. It is also significant to note that there is transfer of property in the spare part between the dealer and the customer on behalf of the manufacturer under a warranty. Hence, whether, one can construe the credit note as a price for the same and, therefore, subject to sales tax? The ingredients of a sale have been discussed above and would not call for reiteration. When the dealer is acting pursuant to a warranty, he is no doubt discharging his obligation not as a seller stricto sensu, but as an intermediary or an agent of the manufacturer as the case may be vis- -vis the purchaser of the automobile. But, there is transfer of property between the dealer and the customer/purchaser of the automobile on the one hand and receipt of a valuable consideration by the dealer for the same from the manufacturer on the other in the form of a credit note. Further, it must be borne in mind that credit note is issued only when a dealer discharges his ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash, deferred payment or other valuable consideration; (v) a supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; and (vi) a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply shall be deemed to be a sale and the word purchase or buy shall be construed accordingly; Explanation. Notwithstanding anything contained in this Act, where any goods are sold in packing, the packing material in such case shall be deemed to have been sold with the goods; (36) sale price means the amount paid or payable to a dealer as consideration for the sale of any goods less any sum allowed by way of any kind of discount or rebate according to the practice normally prevailing in the trade, but inclusive of any statutory levy or any sum charged for anything done by the dealer in respect of the goods or services rendered at the time of or bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration. Price is the amount of consideration which a seller charges the buyer for parting with the title to the goods. The price would include not only the price of the goods but also the expenditure incurred for transporting the goods, duties levied, etc. The entire amount of consideration including the sales tax component which the purchaser pays, constitutes the price of goods. As already noted, the expression price under the Sale of Goods Act is limited to a money consideration, cash or deferred payment but under the definition of sale under the Sales Tax legislations, the expression used is not just cash or deferred payment but also a valuable consideration. The expression valuable consideration has a wider connotation but must be read ejusdem generis to cash and deferred payment. The expression valuable consideration takes colour from the preceding expressions cash or deferred payment, therefore, it means payment in monetary terms i.e. in the nature of cash or deferred payment such as cheque, bank draft, promissory note, etc. Cash and deferred payment are relatable to the expression money . In other words, a transaction could amount to a sale if consideration is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under a warranty, he is given a monetary benefit in the form of a credit note. The definition of credit note from various dictionaries and Law Lexicons have been adverted to above. A perusal of the aforesaid definitions would 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 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 than what is enunciated under the Sale of Goods Act which is an enactment of 1930. The expression as already noted, is relatable to a money consideration. No doubt, cash is a money consideration but the definition of sale under the Central Sales Tax Act as well as under the State enactments does not imply price to mean only a money consideration in a narrower sense but in a wider sense to include different forms of money consideration such as deferred payment and also a valuable consideration which need not be restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transfer of goods, namely, spare part by a dealer to a customer while discharging his obligation under a warranty and thereby receiving a valuable consideration for the spare part used by the dealer from his stock from the manufacturer in the form of a credit note. When the entire transaction is viewed in the aforesaid perspective and in juxtaposition with the expression sale under the Central Sales Tax Act as well as the respective State enactments under consideration which is of a wider connotation than the definition of sale under the Sale of Goods Act, we hold 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. The aforesaid transaction may be juxtaposed with the transaction of sale which the custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note from the manufacturer. When given such an understanding of the judgment in Mohd. Ekram Khan to the aforesaid conspectus of facts, we do not think that the said judgment has been erroneously rendered. 52. However, in Mohd. Ekram Khan, the judgments of the High Court of Madhya Pradesh in Prem Motors and the High Court of Kerala in Geo Motors were overruled. The said judgments were rightly overruled. This is because, in those judgments, there was no consideration of the question whether the credit note issued by the manufacturer in favour of the dealer was valuable consideration within the meaning of the expression sale under the respective State laws and it was simply held therein that there was no sale transaction within the meaning of the sales tax legislation considered therein. 53. But the matter does not end, it is necessary to take into consideration that all the credit notes received by the dealer are not indicative of the value of the spare part supplied by the dealer from his own stock or when he buys it from the open market, to the customer under a warranty. It could be for rendering a service under a dealership agreement which can cover a situation when the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is supply of spare parts to the customer by the dealer there is no consideration passing as it is free of cost and where such consideration or payment is being received by the dealer from the manufacturer in the form of credit notes in discharge of manufacturer's warranty obligations, there is no transfer of property in goods viz. spare parts from dealer to the manufacturer. These two transactions viz. one between customer and dealer, and another between dealer and manufacturer are independent and are not linked to each other. First is sans consideration against goods and second one is sans transfer of property in goods. The credit notes given by manufacturer to dealer in discharge of its warranty obligations to customers cannot be taxed under sales tax laws in the hands of the dealer. 57. While considering the gamut of transactions in the context of a warranty, bifurcation of the same, namely, one between customer and dealer, and another between dealer and manufacturer and the observation that the same being independent and are not linked to each other is not correct. This is because in order to ascertain whether the issuance of the credit note by the manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue on Dhampur Sugar Mills Ltd. vs. Commissioner of Trade Tax, U.P., (2006) 5 SCC 624, wherein the question was, whether, the adjustment of the price of molasses from the amount of licence fee would amount to sale within the meaning of the Uttar Pradesh Trade Tax Act, 1948. The facts therein were that the concerned company owned and possessed a sugar mill. A deed of licence was executed by the said company in favour of the appellant therein (Dhampur Sugar Mills Ltd.) pursuant whereto and in furtherance whereof, the appellant therein executed a performance guarantee to ensure performance of the said deed of licence. It was agreed to by and between the parties that a major portion of the licence fee would be paid in the shape of molasses. It was contended by the appellant therein that in view of the consideration for the right to use the said sugar mill i.e. the licence fee, the appellant therein was required to hand over molasses to the said company for an amount equivalent to the licence fee and such a transaction would not constitute a sale of molasses so as to attract the provisions of the Act. 60. The precise question for consideration therein was whether the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is for nothing that he consents to impose an obligation upon himself, or to abandon or transfer a right. It is in consideration of such and such a fact that he agrees to bear new burdens or to forego the benefits which the law already allows him. The gist of the term consideration and its legal significance has been clearly summed up in Section 2(d) of the Indian Contract Act which defines consideration thus: When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration to the promise. 63. In Assistant Collector of Central Excise vs. Madras Rubber Factory Ltd., 1986 Supp SCC 751, the question arose under the Central Excises and Salt Act, 1944 with regard to the method of computation of assessable value in a cum-duty price at the factory gate and the permissible deductions to be made from the cum-duty paid selling price to arrive at the assessable value and then tariff rate being applicable to the assessable value. One of the contentions regarding deduction was with regard to TAC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales tax. The person who pays the valuable consideration in a sale transaction is irrelevant so long as it is paid. 66. In this context, it would be relevant to refer to the provisions of the Indian Contract Act, 1872. Section 2 (d) of the said Act states that when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise; Section 2 (c) states that the person making the proposal is called the promisor , and the person accepting the proposal is called the promisee ; Section 2 (a) states that when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal; Section 2 (b) states that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise; Further, promises which form the consideration or part of the consideration for each other, are called recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Sales Tax Acts under consideration. 70. In the circumstances, the reference is answered in the following terms: i) The judgment of this Court in Mohd. Ekram Khan is applicable to a situation where a manufacturer issues a credit note to a dealer acting under a warranty given by the manufacturer pursuant to a sale of an automobile in the following situations. The dealer replaces a defective part of the automobile by a spare part maintained in the stock of the dealer or when the same is purchased by the dealer from the open market. In such situations, the credit note issued in the name of the dealer is a valuable consideration for a transfer of property in the spare part made by the dealer to the customer and hence a sale within the meaning of the sales tax legislations of the respective States under consideration. The value in the credit note is thus exigible to sales tax under the respective sales tax enactments under consideration. ii) The judgment in Mohd. Ekram Khan does not apply to a case where the dealer has simply received a spare part from the manufacturer of the automobile so as to replace a defective part therein under a warranty collateral to the sale of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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