REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.1822/2007

M/S. TATA MOTORS LTD. …. APPELLANT(S)

VERSUS

THE DEPUTY COMMISSIONER OF

COMMERCIAL TAXES(SPL) & ANR. …. RESPONDENT(S)

WITH

CIVIL APPEAL No. 1446/2010

CIVIL APPEAL No.3733 of 2023

(@ SLP(C) No. 11509/2017)

CIVIL APPEAL No.3734 of 2023

(@SLP(C) No. 12119/2017)

CIVIL APPEAL No. 11724/2018

CIVIL APPEAL No. 3827/2011

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

2

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. 3822/2011

CIVIL APPEAL No. 4021/2011

CIVIL APPEAL Nos.3719 -3723 of 2023

(@ SLP(C) Nos. 31698-31702/2013)

CIVIL APPEAL No.3735 of 2023

(@ SLP(C) No. 25905/2013)

CIVIL APPEAL No. 4516/2018

CIVIL APPEAL No. 10924/2018

CIVIL APPEAL No. 1821/2007

CIVIL APPEAL No. 9979/2018

CIVIL APPEAL Nos. 3004-3006/2017

CIVIL APPEAL Nos.3730 -3732 of 2023

(@ SLP(C) Nos. 12806-12808/2016)

CIVIL APPEAL No.3740 of 2023

(@ SLP(C) No. 12280/2014)

CIVIL APPEAL Nos.3725 -3727_of 2023

(@ SLP(C) Nos. 5449-5451/2014)

CIVIL APPEAL No.3724 of 2023

(@ SLP(C) No. 5447/2014)

3

CIVIL APPEAL Nos. 3825-3826/2011

CIVIL APPEAL No. 3823/2011

CIVIL APPEAL No. 6172/2009

CIVIL APPEAL No. 3824/2011

CIVIL APPEAL No. 3820/2011

CIVIL APPEAL No.3715_ of 2023

(@ SLP(C) No. 14260/2007)

J U D G M E N T

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 05.12.2019 made by a Bench of two judges

to a Bench comprising of three judges, the reference has been

heard and is accordingly answered.

4

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 & 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

5

contain a different factual situation, as per the

observations in Mohd. Ekram Khan & Sons

case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6

SCC 183]. There are observations referred to above,

again in Mohd. Ekram Khan & Sons case [Mohd.

Ekram Khan & Sons v. CTT, (2004) 6 SCC 183], of

the possibility of the m anufacturer 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, (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. CT T,

(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

6

and Kerala High Court in Commissioner of Sales Tax vs. Prem

Nath Motors, (1979) 43 STC 52 (Delhi), (Prem Nath Motors);

Prem Motors, Gwalior vs. Commissioner of Sales Tax, Gwalior

1986 (61) STC 244 MP (Prem Motors) and Geo Motors vs. State

of Kerala (2001) 122 STC 285 (Geo Motors) respectively were

considered and the latter two judgments were overruled.

Factual Background:

6. Of the thirty-four cases before us, the factual conspectus

involves provisions of the respective Sales Tax Act and similar

questions of law. Thus, the facts in Commercial Tax Officer vs.

M/s Marudhar Motors, C.A. No. 3856/2013 only are

encapsulated for the sake of convenience as under:

i. The assessee, M/s Marudhar Motors is a dealer of TATA

Vehicles. Under the dealership agreement, the dealer/assessee

would provide replacement of warranty goods sold to the

customer.

ii. There exists a separate warranty agreement between the

manufacturer and the ultimate customer to whom such

vehicles are sold by the assessee.

iii. In the normal course of business transactions involving the

sale of automobile parts, Tata Motors sells vehicles and spare

parts to Marudhara Motors by charging CST against "C" form.

Thereupon, Marudhara Motors sells these goods to customers

7

through invoices collecting local sales tax at a price not

exceeding the maximum price prescribed by the manufacturer.

iv. However, in the case of warranty claims raised by customers

due to the emergence of defects in some parts, such parts are

replaced free of cost to the customers to avoid delay in first

securing such parts from the manufacturer, Tata Motors, and

replacing the same. The dealer, on behalf of the manufacturer,

collects a defective component or the vehicle itself from the

customer and replaces it with part/s or vehicle in his stock

purchased from the manufacturer. This defective component/s

or vehicle received on exchange by the d ealer from the

customer is returned back to the manufacturer from whom the

dealer had purchased the same in the first place i.e., Tata

Motors, who after receiving the parts or the entire vehicle and

satisfying themselves about it being defective, issues credit

notes, thereby crediting the running account of the dealer

which is maintained for sale transactions, at the price at which

the good was initially sold to the dealer.

v. Pursuant to the decision of this Court in Mohd. Ekram Khan,

the assessing authority invoked the power of reassessment

under Section 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-

8

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 Rajasthan Tax Board set

aside the decision of Deputy Commiss ioner (Appeals) and

thereby set aside the imposition of tax. It found the transaction

of replacing the defective parts did not fall within the definition

of ‘sale’ as defined under Section 2(38) of the Rajasthan Sales

9

Tax Act. It also concluded that the facts of the case are

distinguishable from the facts in Mohd. Ekram Khan .

ix. The Revenue filed revision petitions under Section 86 of the

Rajasthan Sales Tax Act, 1994. The Rajasthan High Court,

while dismissing these revision petitions and affirming the

order of Rajasthan Tax Board, distinguished the facts in the

case from 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 discharge of

warranty obligation. Thirdly, it was considered that the

warranty obligation was being discharged free of cost. It was

noted that, Mohd. Ekram Khan was decided on the premise

that the dealer assessee had supplied the parts and had

received the price.

Gist of Cases under consideration:

7. The present appeals assail judgments rendered by eight High

Courts. While all fifteen decisions rendered by Rajasthan High

10

Court are in the favour of the assessee, all decisions rendered by

Kerala, Karnataka, Bombay, Andhra Pradesh, Madhya Pradesh,

and Gujarat High Courts are in the favour of Revenue. In the case

of Allahabad High Court, one decision is in favour of Revenue while

the other is in favour of the assessee. A table of cases is drawn up

as under:

High Court Number of Appeals

by the Revenue

Number of

Appeals by the

Assessee

Rajasthan 15 0

Kerala 0 5

Karnataka 0 4

Bombay 0 3

Andhra Pradesh 0 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

11

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 discharge of warranty obligation.

Thirdly, it was considered that the warranty obligation was being

discharged free of cost. It was noted that, Mohd. Ekram Khan was

decided on the premise that the dealer assessee had supplied the

parts and had received the price.

7.2. The other decision in favour of the assessee was rendered by

Allahabad High Court in M/s. Vikrant A utomobiles vs.

Commissioner, Commercial Tax, U.P. , vide order dated

06.11.2015. The High Court dismissed the revision against the

order of Customs, Excise and Service Tax Appellate Tribunal

wherein the transaction of replacement of spare parts as part of

warranty was held not to be assessable. The High Court held that it

was ‘well recognized that in supply of spare parts to the customer by

the dealer during the period of warranty free of charge, no sale

consideration passes from the customer to the dealer and therefore

12

the cost of the spare parts cannot be included in the turnover of the

sale of the dealer.’

7.3. In a later judgment rendered by the same High Court, the

above decision was found to be of no assistance to the assessee.

Therefore, in The Commissioner, Commercial Tax Lko. vs. S/S

Maskat Motors Pvt. Ltd., decided on 08.12.2016, the said Court

reversed the finding of the Tribunal that the imposition of the tax

was not justified because defective parts of motor vehicles have

been replaced free of cost and the manufacturer had issued credit

notes. The High Court found the above conclusion to be perverse,

self-contradictory, and ‘contrary to the charging section as well as

the definition of "Sale" under the U.P. Act and Central Act.’

Applying Mohd. Ekram Khan, the High Court found all elements

of sale to be completed as the transaction of supply of spare parts

to consumers was concluded by the payment of valuable

consideration by the manufacturer in the form of credit notes to

the dealer. Therefore, the High Court held that the assessee has

sold spare parts for valuable consideration attracting liability to tax

under the U.P. Act.

7.4. The assessees have impugned four decisions of the Karnataka

High Court. All these decisions have followed the reasoning and

conclusions arrived at in the case of Dy. Commissioner of

13

Commercial Taxes (Assessment), Bangalore vs. Prerana Motors

(P) Ltd., disposed of on 19.10.2005. In the aforementioned case, an

order against the Revenue, by Customs, Excise 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, on behalf of the Company to bind the

Company in any way, to accept any service or

14

process upon the Comp any or to receive any

notice of any nature whatsoever.”

7.6. Also Warranty Policy of Mahindra & Mahindra Ltd. on

‘Warranty Repair Attention’ states that the dealer should not

charge the customer for warranty repairs. It emphasizes that the

repairs should be carried out absolutely free of charge and the

claims should be submitted to the manufacturer for

reimbursement.

7.7. The High Court affirmed the decision of the Kerala Sales Tax

Appellate Tribunal wherein the decision in Mohd. Ekram Khan

was applied to confirm the assessment order passed by the

Revenue against the dealer who had replaced defective parts of

automobiles for free, in the discharge of his obligations under the

dealership agreement. The Tribunal had rejected the argument that

the dealer was merely discharging the obligations of the

manufacturer in so far as the warranty was concerned and

therefore, the transaction was not taxable.

7.8. The three impugned decisions, emanating from the Bombay

High Court, follow the decision in M/s Navnit Motors Pvt Ltd. vs.

State of Maharashtra, decided on 29.11.2011. The High Court

recorded that the Sales Tax Tribunal had declined to refer the

matter to the High Court under Section 61 of the Bombay Sales

15

Tax Act, 1959. It further noted that the Tribunal, while following

the law laid down in Mohd. Ekram Khan found that the dealer

was not an agent of the manufacturer, i.e., Maruti Udyog Ltd.

Furthermore, it was observed that the title and risk in the goods

pass to the dealer once it is purchased from Maruti Udyog Ltd. and

the delivered goods pass to him at the factory gate. Moreover, the

replacement for defective parts covered by warranty is done by the

dealer out of his stock of purchased goods. Also, the cost of parts

incurred by the dealer in carrying out a repair, or replacement of

the defective part is reimbursed by the manufacturer. The High

Court rejected the attempt of the assessee to distinguish the facts

in Mohd. Ekram Khan as the attempt was premised on the

assertion that in Mohd. Ekram Khan , the relationship between

the dealer and manufacturer involved an agency whereas in the

present case, the transaction was on a principal-to-principal basis.

The High Court affirmed the reasoning of the Tribunal on this

question by recording that the nature 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

16

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 Mohd.

Ekram Khan and rejected the assessee’s contention that the

replacement of motor vehicle part during the warranty period was

not covered in sale and, therefore, is not liable to tax.

7.10. The sole impugned decision from the Gujarat High Court, M/s

Kataria Automobiles Pvt Ltd. vs. State of Gujarat, was decided

on 20.03.2015. The High Court applied the decision of this Court

in Mohd. Ekram Khan and concluded that the transaction of

replacement of defective parts was taxable as the dealer had

received payment in the form of credit notes for the discharge of the

17

manufacturer’s warranty obligation. The High Court observed that

it was admitted that the dealer was purchasing the spare parts

from the open market and replacing the defective parts during the

warranty period. It also noted that the dealer was being

compensated by way of credit notes. Moreover, the manufacturer

has received the defective parts from the dealer. The High Court

reasoned that if the said defective parts were purchased from the

open market, the manufacturer would have been obliged to pay

sales tax.

7.11. Two decisions of the Andhra Pradesh High Court are assailed

in the present case by the assessees. These cases pertain to M/s

Jasper Industries (P) Ltd. vs. State of Andhra Pradesh, decided

vide common order dated 11.02.2011. The High Court applied the

dictum in Mohd. Ekram Khan and reasoned that it was not open

to the High Court to distinguish the judgment of the Supreme

Court on a microscopic examination of the different facts situation.

Therefore, the High Court refused to entertain the view of the

Rajasthan High Court, as enunciated in Marudhara Motors.

Triology of Cases considered/overruled in Mohd. Ekram Khan:

8. The three cases considered in Mohd. Ekram Khan shall be

discussed at this stage.

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I. Commissioner of Sales Tax vs. Prem Nath Motors, (1979)

43 STC 52 (Delhi): (Prem Nath Motors)

(i) The aforesaid case was a sales tax reference in which the

following two questions were referred to the High Court of

Delhi:

"(I) Whether, having regard to the facts and

circumstances of the case, the replacement

of the parts during the continuance of the

warranty entered into by the manufacturer

and/or by its authorised dealer with the

purchaser would constitute a "sale" within

the meaning of Section 2(g) of the Bengal

Finance (Sales Tax) Act, 1941 as in force in

Delhi 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

19

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 th e terms and

stipulations of the warranty must be deemed to be a

continuation of the original sale, the price of which was

included in the consolidated sale price determined and realised

at the time of transfer of goods in the shape of the car with a

warranty. It was further observed that the replacement of

parts of the car provided free of cost by the dealer in terms of

the warranty was part of the consolidated price realised at the

time of the initial transfer and on which sales tax was paid and

the replacement of the parts would deem to be a ‘sale’ not

liable to imposition of further sales tax.

(iii) The precise question considered in the said case was, whether,

transfer of the parts replaced in pursuance of the warranty

amounted to a sale within the meaning of the Sales Tax Act

and whether the sale price of the car which had been subjected

to the sales tax could be regarded as having included the cost

or value of spare parts used in the replacement, in compliance

with the stipulations in the warranty. On considering the

warranty clause, it was noted that the sale of cars was along

with the warranty to replace defective parts free of cost and the

price was fixed at the time of the sale. After noting the

20

distinction between the condition and warranty in a contract of

sale of goods, it was observed that the consideration on the

defective part, that might be replaced under the warranty was

not separately specified because it was included in the price

fixed at the time of sale of the car. In other words, the transfer

of property and the part replaced in pursuance of stipulation of

warranty is part of the original sale of the car for the price

fixed and received from the buyer or consumer. The price so

fixed and received was a consolidated price for the car and the

parts that may have been supplied by way of replacement in

pursuance of the warranty. Accordingly, it was observed that

the Financial Commissioner was right in holding that the price

for the replaced part was already charged and paid, on which

sales tax was already levied and collected and hence, there was

no liability to the imposition of further sales tax.

II. Prem Motors, Gwalior vs. Commissioner of Sales Tax,

Gwalior, 1986 (61) STC 244 MP: (Prem Motors)

(i) The question considered in the said case under Section 44 (1)

of the M.P. General Sales Tax Act, 1958 is extracted as under:

“Whether in the facts and circumstances of the

case, the Tribunal was justified in holding that

the reimbursement 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)

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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 manufacturer

to the customer but in order to avoid delay and inconvenience

to the customer, he replaces the parts first and gets them from

the manufacturer later and thus, it does not fall within the

ambit of the definition of sale as provided under the Act.

22

III. Geo Motors vs. State of Kerala, (2001) 122 STC 285: (Geo

Motors)

(i) The facts in the said case were that the petitioner (Geo Motors)

was an agent for automobile manufacturers like Hindustan

Motors Ltd. in the State of Kerala. The new vehicles were

covered by a warranty for a specified period. During the

warranty period if spare parts had to be replaced, the

petitioner therein as the agent of the manufacture, made the

replacement free of charge to the owners of the vehicle. The

value of such spare parts replaced by the petitioner therein

during the warranty period was reimbursed by the

manufacturer by issuing credit notes. The spare parts were

purchased in bulk and replacement was made from out of

such stock held by the petitioner. After replacement, the

petitioner therein would make a claim to the manufacturer

who would issue the credit notes. The manufacturer would

issue credit notes for the value together with excise duty and

sales tax, thereby, cancelling the original sale made to the

petitioner in respect of the item replaced. Therefore, it was

contended that there was only a sale cancellation between the

manufacturer and the petitioner and that the petitioner therein

had already suffered tax at the point of a sale and therefore,

every component part of the car would have to be taken to

23

have suffered tax at the point of a sale and when replacement

was made it is in respect of an item which has suffered a tax at

the point of a sale.

According to the revenue, the replacement of the spare

parts was by purchase made from outside the State by issue of

C-forms.

(ii) The Division Bench of the Kerala High Court held that the

transaction in question cannot be said to be a sale. That the

purchase of spare parts may have been by giving C-forms but

it was used purely for replacement and not for sale. That

credit notes are issued by the manufacturer by reducing the

sale value. In this regard, reliance was placed on Prem Nath

Motors. Hence, a direction was issued to exempt the turnover

of the spare parts which were used for replacement.

Mohd. Ekram Khan:

9. The aforesaid two cases, namely, 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

24

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, attracting levy of tax.

9.1. In the said case, reliance was placed on Prem Nath Motors,

Prem Motors and Geo Motors by the assessee. It was contended

that as part of a warranty agreement, replacement of the defective

agreement was made by the dealer and there was no sale

involved. As opposed to this, the revenue contended that the

transaction between the assessee and manufacturer was a separate

transaction. It was not the case of the assessee therein that the

manufacturer had supplied the goods to the customers. If it had

supplied parts to the customers through the assessee, the position

may have been different. The manufacturer was obligated to make

25

the replacement. If he did not possess the parts to mee t the

contractual obligation, he would have purchased the part from any

seller of the part and would have paid the sales tax. In the said

case, the assessee had supplied the goods for which it had received

the consideration by way of credit notes and/or o ther mode of

payment. This Court observed that the factual position in Prem

Nath Motors case was different. That in Geo Motors and Prem

Motors, the nature of the transaction between the assessee and

manufacturer was lost sight of. It was observed that when the

manufacturer may have purchased from the open market, parts for

the purpose of replacement of the defective parts, it would have

paid taxes. But the position is not different because the assessee

had supplied the parts and had received the price. That the

assessee had received the payment of the price supplied to the

customer. Therefore, the transaction is subject to levy of tax. The

decisions in Geo Motors and Prem Motors were overruled.

It is in the above context that the Reference Order has been

passed doubting the aforesaid observations.

Submissions:

10. We have heard learned senior counsel and learned counsel

for the respective parties at length and shall proceed to answer the

reference.

26

Arguments on Behalf of Assessees in the present

Appeals/SLPs:

I. Submissions of Sri Kavin Gulati, senior counsel for the

appellant in Civil Appeal No.1822/2007:

(i) Learned senior counsel Sri Gulati submitted that the Tata

Motors dealership agreement, particularly clauses 1(a), 1(b),

1(e), 9, 10, 11(a), 12, 13(c), 25, and 33 indicate that the

transaction between the manufacturer and the dealer is one of

Principal and Principal. Tata 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.

27

(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 sale has

a definitive connotation in sale tax law. Sales tax is not

applicable to all transfers which may happen by means of

transactions other than sale, such as gift, barter, or exchange.

Relying upon State of Madras vs. Gannon Dunkerley & Co,

(1959) SCR 379, [Gannon Dunkerley (I)] , it was submitted

that crucial elements of a tax-eligible sale transaction are: i)

the existence of buyer and seller, ii) existence of an agreement

between parties for transferring title of goods, iii) such transfer

should be supported by monetary consideration, and iv)

property in goods must pass or be tra nsferred. It was

contended that the present facts do not present a taxable sale

because:

a. firstly, spare parts are supplied to the customers by the

dealers completely free of charge by way of replacement of

goods already sold.

28

b. secondly, customer receives the new spare part as

installed in his vehicle and returns the defective part.

c. thirdly, the substance of the transaction remains the

discharge of a warranty obligation assumed by the

manufacturer, and through him, the dealer, while selling

the original goods. As the spare parts are deducted from

the stock of the dealer due to convenience, credit is

deservedly given by the manufacturer to the dealer to

account for the value of the goods supplied on behalf of

the manufacturer.

d. fourthly, any dealer of the manufacturer herein can be

approached for discharging the warranty obligation free of

charge.

e. fifthly, the department has wrongly assumed that the

supply of spare parts to the customer is a sale made to the

manufacturer albeit the title is being transferred to the

customer on account of the dealership agreement.

(iii) Learned senior counsel further submitted that replacement of

spare parts during the warranty period does not constitute a

sale. This proposition is supported by Section 12(3) of the Sale

of Goods Act, 1930 (“the Act”, for short) which states that a

warranty is a stipulation collateral to the main purpose of the

contract. Reliance was also placed upon the decision of the

29

Canadian Supreme Court in General Motors Products of

Canada Ltd. vs. Leo Krabvitz, (1979) SCC Online CAN SC

2, wherein it was clarified that the warranty claim by a

purchaser was connected to his title over the product which

was acquired through the original sale. Therefore, it was

contended that the old parts were returne d 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

30

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 manufacturer to the dealer as an

acknowledgment of the diminution of the original sale price.

Axiomatically, credit note is not a sale price or valuable

consideration, as the character of credit is not towards the

price of the newly replaced part, but a credit that embodies the

diminution of the price already paid for the car. Therefore, it

was submitted that, Mohd. Ekram Khan does not correctly

conceive and appreciate the nature of a warranty transaction,

i.e., an undertaking to ensure defect-free functioning of the

sold product for the stipulated period of time. Therefore, the

said judgment ought to be overruled was the submission.

II. Submissions of Sri S.K. Bagaria, senior counsel for the

petitioner, M/s TVS and Sons Ltd., in SLP (C) No. 14260 of

2007:

(i) Sri Bagaria, learned senior counsel submitted that the nature

of the transaction was not that of a sale, as the service was

provided free of cost to the customer by a dealer pursuant to a

warranty clause. The property in the replaced part passed

merely as an incident of the performance of the manufacturer’s

warranty obligation, which forms a part of the original sale of

31

the automobile. Sri Bagaria referred to the relevant clauses of

the Dealership Agreement and Warranty Policy to highlight two

facts: (a) dealers are contractually obligated to provide free-of-

cost warranty services for warranty parts to the customer and

(b) defective parts are returned by the customers and become

the property of the manufacturer.

(ii) Learned senior counsel clarified that the nature of the

transaction was as a compensation to the buyer, and the

measure thereof was equivalent to the cost of exchange of

defective parts. He cited Benjamin’s Sale of Goods Act (10

th

edn., para 16.032) to underline the compensatory principle,

following which the manufacturer compensates the buyer for

the breach that occurred by way of the defect in the part

covered by way of a warranty. Citing para 1.069, learned

senior counsel asserted that a transaction involving

contractual compensation would not amount to the sale of a

thing as the property passes merely as an incident of

performance of a contract of indemnity.

(iii) Therefore, learned senior counsel submitted that enforcement

of a contractual right for getting a free replacement in

exchange for a defective part was neither any purchase by the

buyer nor a sale to him. According to learned senior counsel,

this proposition was crystallized in Gannon Dunkerley (I),

32

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 cost and the defective goods were being

returned to the manufacturer. Alternatively, it was contended

33

that the said case was not correctly decided as the essential

elements of a sale were not considered in the said judgment.

III. Submissions of Sri V. Sridharan, learn ed senior counsel

for the petitioner in SLP (C) Nos. 12806-12808/ 2016:

(i) Learned senior counsel Sri Sridharan submitted that the

petitioner in the aforementioned cases being a dealer of M/s

Maruti Suzuki India Ltd., merely fulfilled the manufacturer’s

warranty obligation. It was urged that the dealership

agreement was a framework agreement. Taking note of the

chain of transactions, the customer is compensated for the

consideration of purchase of an automobile from the petitioner.

Therefore, there is no contract of sale either between the

petitioner and the customer for the replacement of defective

parts or between the petitioner and manufacturer as sale of

parts replaced for the defective parts.

(ii) Challenging the applicability of the Central Sales Tax Act, 1956

to the present case, learned counsel maintained that there is

no inter-state movement of replacement parts as they are fitted

at the dealer’s location. There is only the movement of defective

parts from the dealer’s location to the manufacturer if located

in another State.

(iii) Learned senior counsel stressed the importance of keeping

prudent commercial sense in mind while construing the

34

contractual obligations in the present case. In this regard, the

decision of the United Kingdom Supreme Court in Rainy Sky

SA & Orad vs. Kookmin Bank, (2011) UKSC 50 was cited

wherein it was held that the Court was entitled to prefer the

construction which is consistent with business common sense.

Therefore, it was submitted that the contract of warranty

cannot be equated with a contingent contract of sale, with the

contingency being the occurrence of a defect in the parts

covered under the warranty. Moreover, the construction

preferred by the Revenue that there is an agreement to sell an

unspecified good in the future for which the manufacturer will

pay the consideration is an unreasonable one. On the other

hand, the decision of this Court in Nabha Power Ltd. vs.

Punjab State Power Corporation Ltd., (2018) 11 SCC 508

was relied upon as it laid a five-fold test for constructing a

contract of warranty as a sale. Therein, it was held 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 c lear

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.

35

(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 relied upon the judgment of the

Court of Appeal, New Zealand, in the case of Suzuki New

Zealand Ltd. vs. Commissioner of Inland Revenue, (2001)

20 NZTC 17. The said case pertained to supply of spare parts

by the car manufacturer to the purchaser directly or through

the dealer under the terms of a warranty. Here, the parts were

transferred from the overseas Suzuki Motor Corporation to

Suzuki New Zealand. Rejecting the claim for imposition of

Goods and Services Tax, the Court of Appeal held that there

was no export of service for GST purposes.

36

Arguments on Behalf of Revenue in the present Appeals/SLPs:

Submissions of Sri Pallav Sisodia, senior counsel for the State

of Kerala in SLP (C) No.14260/2007:

(i) Learned senior counsel, Sri Pallav Sisodia submitted that the

presence of a manufacturer’s or dealer’s warranty on the car

sold by the dealer does not make any difference to whether the

transaction of replacement of defective goods satisfies the

elements of sale or not. The learned senior counsel listed

various instances by way of illustrations when a customer

purchases a car and reasoned that even when a customer did

not purchase a car with a warranty but had taken an

insurance, his expenses on the replacement of defective parts

are reimbursed. Yet, the transaction is understood as a

component of the taxable turnover of the dealer as per

Explanation (5) to Section 2 (xxi) of the Kerala General Sales

Tax Act, 1963. Even when the customer enforces the warranty,

the dealer obtains a discharge of warranty obligation as a

valuable consideration for the transfer of fresh parts from the

dealer to the customer. The car dealer gets the replacement of

parts as co-warrantor from the manufacturer towards the

discharge of warranty obligation either on a principal-to-

principal basis or as an agent of the manufacturer. Moreover,

37

there exists a form of recompense from the manufacturer to

the dealer. It makes no difference if the recompense is in the

form of a credit note or cheque or cash. Irrespective of the

nature of the transfer of goods between manufacturer and

dealer, it is a sale for the purposes of sales tax laws.

(ii) It was submitted that the Prem Nath Motors line of cases was

decided on fallacious reasons, and the decision in Mohd.

Ekram Khan deserves affirmation. Therefore, the idea of

‘continuous sale’, ‘credit note as not a valuable consideration’,

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

38

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 as elucidated in Mohd.

Ekram Khan. On the issue of warranty obligation emanating

from the original sale, learned senior counsel submitted that

the performance of warranty obligations is determined through

actual damage to the defective part at the relevant time a claim

is made. Therefore, it cannot be said to have been totally

accounted for and debited in manufacturer’s Taxable Turnover

of Sales and Purchase under VAT/Trade Tax.

(ii) Accordingly, he prayed that the case of the revenue ought to

succeed in both SLPs, therefore, SLP(C) No. 12119/2017

should be allowed, and SLP(C) No. 11509/2017, filed by a

dealer, M/s Maskat Pvt Ltd, ought to be dismissed.

39

Submissions of Dr. Manish Singhvi, senior counsel for the

State of Rajasthan in Civil Appeal No. 3856/2013:

(i) Dr. Singhvi, learned senior counsel, instructed by Sri Milind

Kumar, submitted that the exact nature of the transaction has

to be seen to determine whether sales tax was leviable or not.

It was stressed that the crucial issue pertains to the misuse or

misdeclaration of C-Forms which are issued at concessional

rate under Section 8(4) of Central Sales Tax Act, 1956 read

with Rule 12 of Central Sales Tax Rules, 1957. Any internal

adjustment qua accounts or even contracts is alien for the

charging section to operate. Thus, in the case at hand, all

spare parts were sold against C-Forms, and have been sold

again, in violation of conditions pertaining to resale. That,

spare parts were fitted during the warranty period for a

consideration given by way of credit notes by the

manufacturer. Therefore, the penalty is bound to be imposed

on Dealer/Manufacturer company.

Submissions of Sri Nikhil Goel, Counsel for the State of

Karnataka in Civil Appeal Nos. 1822/2007, 1821/2007 and

SLP (C) Nos. 5449-5451/2014, 5447/2014:

(i) Sri Goel, learned counsel submitted that the Karnataka Value

Added Tax Act, 2003 specifically excludes those transactions

40

which are not sales. Since the transaction under dispute is not

specifically excluded, the assessees have sought to canvass

that it does not satisfy the definition of sale under Section 2(t)

of the Karnataka Value Added Tax Act, 2003. It was further

submitted that the four elements of the sale are completed in

the transaction under dispute. The State seeks to tax sales

and it does not matter if there is an element of profit involved.

The cost of the car 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

41

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, as not a sale.

Submissions of Sri Aniruddha Joshi, learned counsel for

State of Maharashtra in Civil Appeal Nos. 2756/2012,

10924/2018 and 9979/2018:

(i) Sri Joshi submitted that the elements of sale for the imposition

of sales tax were satisfied in the present transaction. It was

urged that the real nature of the transaction and the

substance thereof had to be deciphered to distinguish between

a contract of sale between the dealer and manufacturer with

that of an agency. It was submitted that the Dealership

Agreement between the dealer-assessee and the manufacturer

is a composite document that includes multiple contracts of

sale, as understood from Section 4(1) of the Act. These include:

a. Agreement to sell the car to the dealer;

b. Agreement to sell spare parts by manufacturer to the

dealer;

42

c. Conditional Agreement to sell the spare parts by the dealer

to the manufacturer if such a condition is fulfilled. The

condition is a warranty claim being raised by a purchaser.

d. Agreement to purchase wherein the dealer undertakes to

purchase spare parts from the manufacturer.

(ii) The counsel further submitted that all elements of sale are

complete because there is a seller and a buyer, i.e. dealer and

manufacturer; valuable consideration was paid by the

manufacturer in the form of credit notes and the transfer of

the property of goods is taking place to the nominee of the

manufacturer, i.e. car purchaser.

It was also contended that there is no question of the delivery

of spare parts and the consequent payment by way of credit note

being an instance of sales return. The sale of the car is separate

from the sale of spare parts, the sales in question would be

specifically applicable to the latter.

Submissions of Ms. Deepanwita Priyanka, Counsel for the

State of Gujarat in SLP (Civil) Nos. 12806-12808/ 2016:

(i) Learned counsel submitted that the assessee’s claim for

exemption from payment of sales tax is not covered by the

exemption notification issued under Section 8(4) of Central

Sales Tax Act, 1956 on 13.05.2002. It was submitted that the

43

burden of proving exemption was on the assessee and that the

benefit of any ambiguity ought to go to the State.

11. Points for consideration:

(i) Whether the judgment of this Court in Mohd. Ekram Khan

calls for reconsideration in terms of the Reference Order dated

05.12.2019? In other 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.

44

(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 for the immediate delivery of

the goods or immediate payment of the

price or both, or for the delivery or

payment by instalments, or that the

delivery or payment or both shall be

postponed.

(2) Subject to the provisions of any law for

the time being in force, a contract of sale

may be made in writing or by word of

mouth, or partly in writing and partly by

word of mouth or may be implied from

the conduct of the parties.”

12.1. Section 4 defines the expression sale. In order to apply the

said definition, four essential elements are necessary, namely, (i)

parties competent to contract; (ii) mutual assent; (iii) passing of

property; and (iv) price to be paid.

12.2. While understanding the said Section, the terms defined

under Section 2, clauses (7), (13), (11), (1) and (10) respectively are

necessary as the said clauses define the terms “goods”, “seller”,

“property”, “buyer” and “Price”. Thus, to constitute a sale, in the

legal sense, there must be a contract in pursuance of which the

transfer of property, which transfer need not necessarily be by the

45

owner himself, takes place on payment of a price, though there are

exceptions to this rule enshrined under Sections 19 to 24 of the

Act. The contract may be oral or in writing, or it may be inferred

even from the conduct of the parties, but it must originate from an

offer and its acceptance. A sale must not be distinguished from a

mere agreement to sell. If under the contract of sale, title to goods

has not passed, then there is an agreement to sell and not a

completed sale. An agreement to sell becomes a sale when the time

lapses, or the conditions are fulfilled, subject to which the property

in the goods are transferred. Thus, under the common law as well

as the statute law, relating to sale of goods, it is of the essence that

there must be an agreement, express or implied, relating to goods,

to be completed by passing of title therein and also the agreement

and the sale should relate to the same subject-matter. Thus,

existence of a contract to sell is sine qua non for the coming into

existence of a sale.

12.3. Therefore, the following elements must be present to

constitute a valid contract of sale, namely, -

(1) a contract (as required by the Act and the Contract Act);

(2) between two parties, (the one called the “seller” and the

other called the “buyer”);

(3) to transfer or agree to transfer the property;

46

(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 construed in its popular sense but must be interpreted

in its legal sense and should be given the same meaning which it

47

has in the Act. It was further observed that in order to constitute a

sale, it is necessary that there should be an agreement between the

parties for the purpose of transferring title in the goods, which

presupposes capacity to contract, that it should be supported by

money consideration, and that as a result of the transaction

property must actually pass in the goods. Unless all these elements

are present, there can be no sale. Thus, if merely title to the goods

passes but not as a result of any contract between the parties,

express or implied, there is no sale. So also, if the consideration for

the transfer is not a money consideration but other valuable

consideration, it may then be an exchange or barter but not a sale

under the Act. Also if, under the contract of sale, title to the goods

has not passed, then there is an agreement to sell and not a

completed sale. Moreover under the law there cannot be an

agreement relating to one kind of property and a sale as regards

another. There must be an agreement between the parties for the

sale of the very goods in which eventually the property passes.

It was further observed in the aforesaid case that both under

the common law and the statute law relating to sale of goods in

England and in India, to constitute a transaction of sale, there

should be an agreement, express or implied, relating to goods to be

completed by passing of title in those goods. It is of the essence of

this concept that both the agreement and the sale should relate to

48

the same subject matter. Where the goods delivered under the

contract are not the goods contracted for, the purchaser has got a

right to reject them, or to accept them and claim damages for

breach of warranty. Under the law, therefore, there cannot be an

agreement relating to one kind of property and a sale as regards

another. Thus, the expression sale of goods must r elate to an

agreement between the parties for the sale of the very goods in

which eventually the property passes.

12.6. It was further observed that the interpretation to the

expression sale of goods in Gannon Dunkerley and Co. -I was

made on the basis of the common law definition contained in

Blackstone, Benjamin on Sale, Halsbury’s Law of England,

Chalmer’s Sale of Goods Act, Corpus Juris, 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

49

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 the said case, a Seven-Judge Bench of this Court held

that the earlier decision in M/s New India Sugar Mills Ltd. vs.

Commissioner of Sales Tax, AIR 1963 SC 1207 was not good

law. Reliance was placed on the judgment in Gannon Dunkerley

and Co.-I to observe that in order to constitute a sale, it is

necessary that there should be an agreement between the parties

for the purpose of transferring title to the goods, which

presupposes capacity to contract and the contract must be

supported by valuable consideration and that as a result of the

transaction, property must actually pass in the goods. It was

observed that, “unless all these elements are present, there can be

no sale.”

12.8. In Sunrise Associates vs. Govt. of NCT of Delhi, (2006) 5

SCC 603, a Constitution Bench of this Court speaking through

50

Ruma Pal, J. observed that when there is a sale of a lottery ticket,

there is no sale of goods within the meaning of Sales Tax Acts of

the different States but at the highest a transfer of an actionable

claim. Accordingly, the earlier decision of this Court in H. Anraj vs.

Govt. of T.N., (1986) 1 SCC 414 was overruled.

13. Sections 12, 13 and 59 of the Act are relevant for the purpose

of these cases and the same read as under:

“12. Condition and warranty. —

(1) A stipulation in a contract of sale with

reference to goods which are the subject

thereof may be a condition or a warranty.

(2) A condition is a stipulation essential to the

main purpose of the contract, the breach of

which gives rise to a right to treat the

contract as repudiated.

(3) A warranty is a stipulation collateral to the

main purpose of the contract, the breach of

which gives rise to a claim for damages but

not to a right to reject the goods and treat

the contract as repudiated.

(4) Whether a stipulation in a contract of sale is

a condition or a warranty depends in each

case on the construction of the contract. A

stipulation may be a condition, though

called a warranty in the contract.

13. When condition to be treated as

warranty. —

(1) Where a contract of sale is subject to any

condition to be fulfilled by the seller, the

buyer may waive the condition or elect to

treat the breach of the condition as a breach

of warranty and not as a ground for treating

the contract as repudiated.

51

(2) Where a contract of sale is not severable

and the buyer has accepted the goods or

part thereof, [***] 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 stipulation

in a contract of sale with reference to goods which are the subject

matter thereof may be a condition or a warranty. A condition is a

52

stipulation essential to the main purpose of the contract, the

breach of which gives rise to a right to treat the contract as

repudiated. A warranty is, on the other hand, a stipulation

collateral to the main purpose of the contract, the breach of which

gives rise to a claim for damages but not to a right to reject the

goods and treat the contract as repudiated. Whether a stipulation

in a contract of sale is a condition or a warranty depends in each

case on the construction of the contract. However, a stipulation

may be a condition, though called a warranty in the contract.

13.2. There is also a distinction between a warranty and

guarantee. As already stated, a warranty is an express or implied

statement of something, which a party undertakes to fulfil as part

of the contract, yet collateral to the main object of it. A warranty

does not go to the root or substance of the contract. A guarantee is

a contract which is ancillary and subsidiary to some other contract

or liability whereby the promisor undertakes to be answerable to

the promisee for the debt, default or miscarriage of another person

whose primary liability to the promisee must exist, or be

contemplated. It is an additional or collateral or conditional

contract as distinguished from an original or absolute contract.

13.3. A warranty can only exist when the subject matter of the

contract of sale is ascertained and is existing so as to be capable of

53

being inspected at the time of the contract. It is a collateral

engagement that the specific thing possesses certain qualities after

the passing of the property under the contract of sale to the

buyer. A warranty may be express or implied. It is express if

entered into a contract in express terms or implied when deemed to

be entered into a contract by implication of law, that is, in the

absence of express stipulation to the contrary.

13.4. A breach of the warranty cannot entitle the vendee to rescind

the contract and revest the property in the vendor without his

consent. Under Section 59 of the Act, the remedies available for a

breach of warranty for a seller are prescribed. One of the remedies

is the right to return of goods; return of goods by the buyer falls

into two categories, namely, (i) where there is an obligation 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 co llateral 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

54

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 and one of the

parties to a main contract may be associated with the main

contract. Such a contract may enable a third party to enforce

the main contract. A “manufacturer” guarantee is an example

of such contract collateral to the main contract of purchase of

goods. When such collateral contract is expressed, it may not

be an exception to the third-party rule, because the third party

is a party to the collateral contract. It is a devise used or

implied to impose obligations on persons not parties to the

main contract. [Source: Pollock and Mulla - The Indian

Contract Act].

55

(iii) Where a preliminary statement or assurance is not a term of

the principal agreement, the Courts may deem it as a contract

or warranty, collateral to the principal agreement. Where a

necessary contractual intention is present, the Courts would

treat or would construe an assurance as a collateral contract

or warranty conferring a right to damages. The device of a

collateral warranty has been employed where the principal

contract is one to which either the person giving or the person

receiving the assurance is not a party vide Shanklin Pier Ltd.

vs. Detel Products Ltd., (1951) 2 KV 854. [Source: Anson’s

law of contract].

(iv) Thus, 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 and is given a guarantee issued by the

manufacturer, the main contract of sale is between dealer and

the purchaser or customer but the guarantee from the

manufacturer is a collateral contract between the

manufacturer and the customer. To be enforceable as a

collateral contract, a promise must be supported by

consideration. (i) In the case of purchase of goods by the

customer from the dealer for consideration, the guarantee from

the manufacturer is collateral contract between the

56

manufacturer and the customer. (ii) When a customer buys

goods from a shop and the payment invo lves use of cheque,

cards or credit cards issued by the bank, the main contract is

between the customer and the shopkeeper but there is also a

contract between the shop keeper and the issuer of the credit

card, by which the latter undertakes that the shop keeper will

be paid. (iii) In the case of a hire-purchase agreement, the

primary contract is the customer entering into a hire-purchase

agreement 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

57

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 sale of the goods to which the

warranty relates with a party other than the

person giving the warranty.”

13.6. In Rotork Controls India Pvt. Ltd. vs. Commissioner of

Income Tax, Chennai, (2009) 13 SCC 283, a provision within the

meaning of Section 40-A of the Income Tax Act, 1961 which deals

with expenses or payment not deductible in certain circumstances

came up for consideration. In that context, it was observed that a

provision is a liability which can be measured only by using a

substantial degree of estimation. A provision is recognised when:

(a) an enterprise has a present obligation as a result of a past event

(such as a sale); (b) it is probable that an outflow of resources will

be required to settle the obligation; and (c) a reliable estimate can

be made of the amount of the obligation. The assessee therein was

in the business of valve actuators which are sophisticated goods

and if any valve actuator was found defective then the warranty

became significant. As the valve actuator is a sophisticated good,

no customer was prepared to buy the same without a warranty. In

other words, a warranty stood attached to the sale price of the

product. In that context, it was observed that obligations arising

from past events have to be recognized as provisions and these

past events such as a sale of goods are known as obligating events.

58

It was observed on the facts and circumstances of that case that

provision for warranty was rightly made by the appellant enterprise

therein because it had incurred a present obligation as a result of

past events which resulted in an outflow of resources.

13.7. In the context of levy of excise duty on the manufacturer who

is also a seller at the point of first sale, this Court in Medley

Pharmaceuticals Ltd. vs. Commissioner of Central Excise and

Customs, Daman, (2011) 2 SCC 601 at paragraph 12 referred to

Firm Ram Krishna Ramnath Agarwal vs. Municipal

Committee, Kamptee, AIR 1950 SC 11 which had in turn

referred to the distinction made by the Federal Court between a

duty of excise and a tax on sale in Province of Madras vs. Boddu

Paidanna and Sons, AIR 1942 FC 33 wherein it was observed as

under:

“9. … … Plainly, a tax levied on the first sale

must, in the nature of things, be a tax on the

sale by the manufacturer or producer; but it is

levied upon him qua seller and not qua

manufacturer or producer. It may well be that 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

59

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 price of the machinery sold included the price of the part

which was subsequently being replaced. There could not be double

levy of excise on the same part. It was observed that the price

charge for the machinery may include the element of “complaint

reserve”. At that time, it is not known whether there would be any

need to replace any part. In many cases, parts are not required to

be replaced. When parts are not replaced, the component of

“complaint reserve” is not returned to the customer. Thus, as far as

the customer is concerned, the total amount paid, including the

component towards “complaint reserve” is the price for the

machinery. It was further observed that when a manufacturer

offers a warranty to replace a defective part within a particular

60

period and defective part is replaced by another part, the latter is

exigible to excise duty.

Pertinent Controversy: Analysis

14. In Mohd. Ekram Khan, this Court distinguished the

judgment in Premier Automobiles by holding that the fact

situation there 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.

15. 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

61

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

replacement in pursuance of the warranty. It was observed by this

Court that the decision in Prem Nath Motors did not apply to the

controversy in Mohd. Ekram Khan.

16. It was 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

62

credit note from the manufacturer while discharging his obligation

under a warranty clause and uses a spare part from his own stock

to replace a defective part was a question which was also

considered.

17. In Prem Motors, it was observed that when a dealer sells an

automobile, he sells it with all parts in a salable condition. The

warranty from the manufacturer is that 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. For the

convenience of the customer, there is an arrangement between the

manufacturer and the dealer so that the customer may ge t

replacement done from the dealer which in due course is again

made good by the manufacturer. The dealer/assessee replaces

parts to the customers and gets it reimbursed, it is neither sale of

these parts by the dealer to the customer or by the manufacturer.

What he does only is to pass on the parts from the manufacturer to

the customer but in order to avoid delay and inconvenience of the

customer he replaces the parts first (from his own stock) and gets a

recompense from the manufacturer later which is not a sale as per

the definition of sale of goods.

18. Similarly, in Geo Motors, it was observed that when the

replacement of the spare part is done during the warranty period

63

free of charge, the same cannot be treated as a sale and included in

the taxable turnover, even if the purchase of such spares was

effected from outside the State by issuance of ‘C’ forms. This is

because the transaction between the dealer and the customer is

one as an agent of automobile manufacturer and the spare part is

given on the basis of the warranty for replacement even though the

dealer may have purchased the spare part by giving the ‘C’ form. It

is purely for replacement and not for sale. Credit notes are also

issued by the manufacturer reducing the sale value. Therefore, the

spare parts which are given for replacement have to be exempted

from the turnover.

19. In the Reference order, an attempt has been made to

distinguish the judgment in Mohd. Ekram Khan by contending

that a car manufacturer would enter into an agreement with the

manufacturer of components, providing for a warranty so far as the

components are concerned. During the period of warranty, the car

manufacturer or his dealer has to replace the defective part free of

cost. The whole object behind the warranty is that a consumer who

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.

64

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 other, but the same.

21. The question is, whether, this Court in Mohd. Ekram Kha n

was right in equating both the factual situations and holding that

in the latter case, the dealer was liable to pay sales tax on the

premise that the transaction between the manufacturer and dealer

was one of sale.

22. In Mohd. Ekram Khan, the facts were th at the

dealer/assessee therein had received the amount from the

65

manufacturer for supply of spare parts to the customer as a part of

the warranty, the manufacturer had the warranty agreement with

the purchaser of automobiles to replace defective parts during the

warranty period. The manufacturer made payment to the dealer /

assessee as the price for the parts which were supplied by the

dealer/assessee to the purchaser or customer. Credit notes were

issued by the manufacturer to the dealer / assessee in respect of

the price of the parts supplied to the purchaser of the automobile.

23. The above distinct factual basis in Mohd. Ekram Khan is

equated to a case where a manufacturer purchases spare parts

from the open market for the purpose of replacement of defective

parts and the tax is paid by the manufacturer himself. The

judgment in Mohd. Ekram Khan proceeds on the footing that the

two situations are identical. Thus, a situation where the assessee

supplies the part from his own stock and receives a credit note by

way of recompense for the said replacement from the manufacturer

is construed to be identical to a situation where a manufacturer

buys a spare part from the open market and replaces the defective

part through the dealer (assessee) and the dealer return s the

defective part to the manufacturer. In the latter situation there

would be no recompense paid to the dealer as the dealer has acted

merely as an intermediary and/or an agent of the manufacturer in

replacing the defective part with a part received fro m the

66

manufacturer and returning the defective part received from the

customer to the manufacturer. In contradiction, if the dealer

replaces a defective part from his own stock and returns the

defective part to the manufacturer, pursuant to a warranty clause

appended to a sale of an automobile and, in turn, receives a

recompense for the same, can it be termed a sale is the question to

be considered.

24. In both of the above situations, firstly, a dealer is acting

pursuant to a warranty which he is bound to honour along with

the manufacturer vis-à-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-à-vis the

customer.

67

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 from the producer of the

same or from the open market. In both the above situations, there

is no transaction of sale between the manufacturer and dealer. If

the manufacturer of the automobile has purchased the spare part

from the open market or from the producer of the spare part, sales

tax would have been paid by the manufacturer on it and

dispatched to the dealer to replace it in place of the defective part.

26. But there can also be a situation when the dealer would

replace the defective part in the automobile pursuant to a warranty

from his own stock of spare parts which he would have purchased

either from the manufacturer or from the open market or the

manufacturer of the spare part. In the aforesaid three situations,

the dealer would have paid sales tax while purchasing the said

stock. When the defective part is replaced by the dealer from a

spare part from his stock, the dealer is no doubt acting pursuant to

the warranty on behalf of the manufacturer but is sourcing the

spare part from his own stock. Simply put, the dealer is not

68

“selling” the spare part to a customer while acting on behalf of the

manufacturer but replacing the defective part free of cost by acting

under the warranty. But what is to be borne in mind is that the

replacement of the spare part is from the stock of the dealer who

would have earlier bought the same by paying the requisite tax on

the same. If the said part, instead of being replaced pursuant to the

warranty free of cost had been sold, the dealer would have earned a

return on his investment and possibly with a reasonable profit also

and would have also collected the sales tax. But when the dealer

replaces a defective part with a spare part from his stock pursuant

to a warranty, he does not receive anything in return from the

customer for the spare part used from his own stock. It is in such a

situation that the manufacturer issues a credit note to recompense

the dealer for his investment on the spare part in his stock which

was used to replace a defective part pursuant to a warranty in the

sale of automobile as nothing would have been received in return

from the customer. This is because if the spare part from the stock

of the dealer had been sold to any other customer, across the

counter and not pursuant to any warranty, he would have received

a return on his investment. But such a return is not received by

the dealer from 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

69

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 pa rt 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 the defective part to the manufacturer,

who then issues a credit note to the dealer.

28. The controversy in these cases is, whether, the second of the

aforesaid situations would amount to a sale in the sense that the

dealer is liable to pay sales tax on the credit note issued in his

favour. In other words, whether the transaction is in the nature of

70

a sale to attract payment of sales tax by the dealer under the sales

tax laws under consideration. In this context, it is necessary to

recapitulate as to why a credit note is issued by the manufacturer

to the dealer. A credit note is issued with a particular intention in

mind and that is to recompense the dealer. What is the reason for

doing so? The reason is not far to see and has already been

adverted to above. The recompense in the form of credit note to the

dealer is because the dealer would not receive any price from the

customer for the replacement of the defective part while acting

under the warranty on behalf of the manufacturer while using the

spare part from his own stock which belongs to him and which he

had procured by paying the necessary price including tax, either

from the manufacturer himself or from the open market. If the

dealer had sold the said spare part which he used to replace a

defective part pursuant to a warranty clause, he would have

received a return for his investment plus a profit. But, while acting

under the warranty on behalf of the manufacturer, the dealer does

not receive any price from the customer. Hence, he is

recompensated by the manufacturer in the form of a credit note.

29. In this context, it is necessary to understand the legal import

of the expression credit note which has been cited by Sri Kavin

Gulati, learned senior counsel for the appellants. According to

71

various dictionaries and references, definitions of credit note are as

follows:

(i) In P. Ramanatha Aiy ar, Advanced Law Lexicon, 6

th

Edition, Volume 1 – “Credit Note” is defined as “A note

showing that an allowance is to be made for shortage or defects

in goods supplied and returned to sender, or for overcharge in

price. The term is also used for a note or document that confirms

the availability of funds for future purchases (as when goods

are paid for but later returned to the supplier)”. A “sales credit

note” is defined as – “Note sent from a seller to a buyer to cancel

(partly or in total) a charge that has 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”.

72

(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 after the invoice has been issued there could be situations

where the quality of the goods or services or both supplied is

not to the satisfaction of the recipient, thereby, necessitating a

partial or total reimbursement on the invoice value. In order to

regularize these kinds of situations the supplier is allowed to

issue what is called as credit note to the recipient. Once the

credit note has been issued, the tax liability of the supplier will

reduce. The credit note is, therefore, a convenient and legal

method by which the value of the goods or services in the

original tax invoice can be amended or revised. The issuance of

the credit note will easily allow the supplier to decrease his tax

liability in his returns without requiring him to undertake any

tedious process of refunds.

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30. Therefore, the entire controversy must be viewed in the

perspective of a composite transaction and not in isolation as the

dealer (assessee) would be acting under a warranty with there

being a manufacturer on one end and the purchaser or customer of

an automobile at the other end and the dealer acting on behalf of

the manufacturer or an intermediary between the said customer

and manufacturer. The said transaction cannot be viewed in a

myopic sense by truncating or excluding the role or action of a

dealer under the warranty and viewing it only from the perspective

of a transaction simpliciter between manufacturer and a dealer.

Such an approach is not only skewed from a commercial

perspective but also jurisprudentially or in the legal sense. There

need not be a reiteration of the significance of a warranty in a

transaction of a sale of goods already discussed above.

31. Thus, as a sequel to the aforesaid discussion, the following

situations may be adumbrated by way of illustration. When a

dealer–assessee sells an automobile to a customer containing a

warranty for the replacement of a defective part of the automobile

in terms of the warranty and when the customer during the period

of warranty approaches the dealer for the replacement of a

defective part, the dealer could resort to the following: -

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(a) request the manufacturer to supply the defective part of the

automobile for replacement. In such a situation, the

manufacturer of the automobile could do any of the following: -

(i) send the spare part from his factory either as a

manufacturer of the same to the deale r for

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

75

(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 the

automobile or from the manufacturer of the particular part by

paying the requisite price and taxes. The dealer has every right to

sell such a part and seek a return on his investment and possibly a

profit also. But when the same is used for the purpose of

replacement of a defective part pursuant to a warranty, the dealer

does not “sell” the part to the customer who has approached the

dealer with the defective part. The dealer does not receive any

consideration in the form of a price from the customer but on the

basis of the warranty, the dealer is obliged to replace the defective

part with a new part. The dealer then sends the defective part to

the manufacturer of the automobile, who had given the warranty.

The manufacturer, from whom the automobile has been

76

purchased, then issues a credit note which may be equivalent to

the value of the spare part used by the dealer. This credit note is in

order to recompense the dealer for his investment made on the

spare part which was “not sold” by him to the customer so as to

earn any return but has been utilised to replace a defective part of

the automobile as an obligation under a warranty given at the time

of the sale of the automobile on behalf of the manufacturer. In

such a situation, whether, the recompense made to the dealer can

be termed to be a “sale” between manufacturer and the dealer

within the meaning of the definition of “sale” under the Sales Tax

Acts is the question. In other words, can it be construed that when

the dealer has utilised a spare part from his own stock to

undertake an obligation pursuant to a warranty for the sale of an

automobile on behalf of the manufacturer to the customer and by

acting as an intermediary, there would be a “sale” between a dealer

and manufacturer of the automibile of the spare part and thus, a

credit note being issued by the manufacturer to the dealer?

34. It has to be borne in mind that there is no transfer of

property between the manufacturer and the dealer when the spare

part from the stock of the dealer is used for the purpose of

replacement of defective part in the automobile. The spare part

used from the stock of a dealer is the property of the dealer which

could have been either sold to any other customer and seek a

77

return on his investment, in which case, the customer would have

paid the requisite taxes to the dealer. Alternatively, the spare part

could also 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

that the purchaser or the customer seeking replacement of a

defective part is distinct and disjunct from the earlier sale of the

78

automobile by the dealer to the customer, cannot be accepted. This

is for the simple reason that the dealer discharges his warranty

obligation pursuant to the earlier sale of the automobile made by

him to the customer which transaction of sale is accompanied by a

collateral contract in the form of a warranty. There cannot be a

warranty unless there is a sale of goods in the first place. That is

why a warranty is termed as a contract collateral to the main

contract of sale. But for the warranty which is a contract collateral

to the main contract of sale of an automobile, the dealer would not

have replaced the defective part with a spare part from his stock

without any consideration from customer. This is obvious because

when the defective part is replaced by another part, no

consideration passes from customer to the dealer. This could be

contrasted with a situation where the dealer would have sold the

same part to any other customer and received a price on the sale

as well as collected the tax on the said sale. Since, the dealer does

not receive any consideration from the customer who approaches

the dealer during the warranty period for replacement of a defective

part and the dealer does so from his own stock of the spare parts,

he receives a credit note from the manufacturer of the automobile.

What is significant to note is in both of the aforesaid situations,

there is transfer of property in the goods from the dealer to the

customer.

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36. Thus, the bifurcation of the two transactions as suggested by

learned senior counsel Sri Sisodia, i.e., one, between the dealer and

the customer for the sale of the automobile and the second,

between the manufacturer and the dealer, when the dealer is

discharging his warranty pursuant to the sale of the automobile,

cannot be accepted.

37. But the issuance of a credit note to a dealer by a

manufacturer is only when the dealer replaces a spare part from

his stock in the automobile to the customer or has purchased the

spare part from the open market for the said purpose and returns

the defective part to the manufacturer which is pursuant to the

warranty appended as a collateral agreement to the earlier sale of

the automobile and the dealer acting on behalf of the

manufacturer. Hence, whether the 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

80

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-à-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 obligation under the warranty and

may be required to return the defective part to the manufacturer

while seeking a recompense in the form of a credit note.

39. The contention of the revenue is that the credit note is a

valuable consideration in the account of the dealer while the dealer

is discharging his obligation pursuant to the warranty and

therefore exigible to sale tax. This is based on the premise that the

dealer “sells” the part while acting on behalf of the manufacturer

while replacing a defective part under a warranty and discharging

his warranty obligation for which the consideration flows from the

manufacturer to the dealer and therefore is amenable to sales tax.

There are two aspects to be considered here: firstly, there is

transfer of property in the spare part between the dealer and the

customer and secondly, for the said transfer, the manufacturer

81

issues a credit note to the dealer which is in substance on behalf of

the customer owing to the warranty with the customer.

40. Thus, when the transaction between 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 und er

consideration has to be considered.

41. For ease of reference, the definition of “sale” and “sale price”

under the Rajasthan Value Added Tax Act, 2003, which is one of

the legislations under consideration as per Section 2(35) and (36),

are extracted for easy reference:

“(35)“sale” with all its grammatical variations

and cognate expressions means every

transfer of property in goods by one person

to another for cash, deferred payment or

other valuable consideration and includes–

(i) a transfer, otherwise than in pursuance

of a contract, of property in goods for

cash, deferred payment or other

valuable consideration;

(ii) a transfer of property in goods (whether

as goods or in some other form)

involved in the execution of a works

contract;

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(iii) any delivery of goods on hire–purchase

or other system of payment by

instalments;

(iv) a transfer of the right to use goods for

any purpose (whether or not for a

specified period) for 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 charg ed for

anything done by the dealer in respect of

the goods or services rendered at the time of

or before the delivery thereof, except the tax

imposed under this Act;

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Explanation I. – In the case of a sale by

hire purchase agreement, the prevailing

market price of the goods on the date on

which such goods are delivered to the buyer

under such agreement, shall be deemed to

be the sale price of such goods;

Explanation II. – Cash or trade discount at

the time of sale as evident from the invoice

shall be excluded from the sale price but

any ex post facto grant of discounts or

incentives or rebates or rewards and the like

shall not be excluded;

Explanation III. – Where according to the

terms of a contract, the cost of freight and

other expenses in respect of the

transportation of goods are incurred by the

dealer for or on behalf of the buyer, such

cost of freight and other expenses shall not

be included in the sale price, if charged

separately in the invoice;”

42. Under Section 4 of the Act, 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. The expression “price” is

defined in Section 2(10) of the said Act to mean a money

consideration for sale of goods, i.e., whether the sale is for cash or

credit, it must be in terms of money. If any consideration other

than money is given, it is not a sale, but only an exchange or

barter. If no consideration is given, then it will be a gift.

43. However, under Section 2(g) of the Central Sales Tax Act or

the Sales Tax Act of the respective states under consideration, sale,

with its grammatical variations and cognate expressions, means

84

any transfer of property in goods by one person to another for cash

or deferred payment or for any other valuable consideration. The

definition of sale under the Sales Tax legislations are in

consonance with Article 366(29-A) as per the Constitution 46

th

Amendment Act, 1982. The expression “dealer” is defined in

Section 2(b) of the Central Sales Tax Act and, accordingly, under

the respective State Acts to mean any person who carries on

(whether regularly or otherwise) the business of buying, selling,

supplying or distributing goods, directly or indirectly, for cash or

for deferred payment, or for commission, remuneration or other

valuable consideration.

44. The expression “valuable consideration” is not defined either

under the Central Sales Tax or under the respective State Acts

under consideration. “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 pric e 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 defe rred

85

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 terms of

money. Thus, money is a genus of which cash or deferred payment

in the form of cheque, bank draft, promissory note, etc. are species.

Money has a wider connotation to include a valuable consideration

in the form of money or a payment in monetary terms which is the

price for the transfer of property paid. Thus, a valuable

consideration is also a species of money which is the consideration

for the transfer of goods under the sales tax enactments.

45. The aforesaid discussion could be illustrated better with

reference to State of T.N. vs. Sri Srinivasa Sales Circulation,

(1996) 10 SCC 648. In the said case, the facts were that under a

scheme introduced by the assessee, ‘A’ purchased one coupon from

the assessee on payment of Rs.5. ‘A’ was to name a particular kind

of goods required by him and mentioned in the said coupon. On

receipt of the coupon from ‘A’, the asssessee would forward to him

86

by V.P.P. three more such coupons. ‘A’ was required to give the

said three coupons to three persons ‘B’, ‘C’ and ‘D’ and keep the

money so realised to himself. Each of ‘B’, ‘C’ and ‘D’ were to forward

in the above manner, their respective coupons to the assessee, who

was to send to each one of them three coupons separately by post

(V.P.P.). On realisation of the three V.P.Ps. the assessee would

supply to ‘A’ the article named by him. It was held that the

consideration was not only money paid or promised to be paid, but

it was something more. According to the High Court of Madras, the

title to the goods did not pass to ‘A’ under a contract of sale. The

transactions were held not to be sales liable to tax. However, the

State came up to this Court contending that the respondent therein

had offered the coupons against payment, in the scheme of

circulation sales, and the article of choice was ultimately sent to

the customer for payment of a price which was accepted by the

customer; there was, thus, offer and acceptance. All the attributes

and characteristics and requirements of a sale were present in the

transaction. Though, designed by the adoption of a circuitous

method, the transaction amounted to nothing but a sale and was

liable to sales tax.

46. 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

87

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 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 restricted to

cash or deferred payment only but a valuable consideration which

would include a credit note which is to be read within the definition

of “price”.

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47. Benjamin’s Sale of Goods, Eighth Edition, states that the

consideration in a contract of sale of goods must in English law, be

a price in money, either paid of promised. By money is meant legal

tender; it does not mean money’s worth. Payment need not,

however, be made in cash: a method of payment that enables the

seller to obtain money such as the use by the buyer of a credit card

or a debit card or digital cash or cheque or banker’s draft or trading

cheque also comes within the expression “payment of price”. It is

only a method of payment or a form of payment. It is also irrelevant

that the money payment comes, not from the buyer of the goods or

to whom the property in the goods are transferred, but from the

card issuer. Thus, there can be various methods of payment i.e., by

cash, by negotiable instrument, by credit or charge card or by

stored value card or sometimes referred to as digital cash card or

electronic purses, internet payments on which that “value” is

stored electronically. There can also be payment by direct debits to

effect payment of goods supplied particularly when there are

recurring payments of variable amounts. The seller can obtain

through the banking system in direct debit forms to the buyer’s

bank. A converse to the system of direct debit is the credit note

issued by a buyer in favour of a seller which is a recompense or

monetary benefit showed in the buyer’s accounts. Thus, the use of

the banking system by instructing the bank to transfer of balance

89

from the buyer’s account to the credit of a seller is a form of

transmission of a valuable consideration.

48. A credit note is a valuable consideration which is essentially a

document to inform a buyer that the buyer’s account is being

credited because of errors, returns or allowances. On discharging

his obligation under the warranty appended to a sale of an

automobile, a dealer receives a credit note. This would be a receipt

in the account of the dealer and a liability in the returns of the

manufacturer which may ultimately enable the manufacturer to

decrease his tax liability. Consequently, the dealer of the

automobile in whose account a credit is shown would be ultimately

a recipient of a valuable consideration on account of 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

90

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 afor esaid

transaction may be juxtaposed with the transaction of sale which

the customer who would buy a spare part de hors a warranty. In

such an event, the dealer would have collected the sales tax along

with the price of the spare part and would have remitted the same

to the revenue. 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.

49. The assessees herein have placed reliance on the decision of

Constitution Bench of this Court Devi Dass Gopal Krishnan. This

Court in the said case considered amendments to various sections

of the Punjab General Sales Tax Act, 1948 and interpreted the

expression ‘other valuable consideration’, included in section 2(ff)

defining purchase and section 2(h), defining sale, to have a wider

connotation than cash and deferred payment. In para 25 of its

decision, the court reasoned that the said expression takes colour

91

from the preceding expression “cash or deferred payment.” It was

reiterated that ‘other valuable consideration’ has to be monetary in

nature. The nature of consideration in the form of a credit note is

also monetary in nature. Thus, the definition of price includes

consideration paid by way of credit note. Therefore, payment of

consideration through the mode of credit note signifies ‘other

monetary payment in the nature of a valuable consideration.’ This

decision is hence of no assistance to the assessees in the present

case.

50. Our attention was also drawn to this Court’s decision in CIT

vs. Motors and General Stores (P) Ltd., (1967) 3 SCR 876. This

Court, in that case, adjudicated the exigibility of the profits

emanating from the sale of assets by way of transfer of 5% tax-free

cumulative preference shares under the Income Tax Act. This

Court noted that the transaction was one of exchange and the

value of shares, as well as immovable properties, were recorded

solely for the purpose of computing stamp duty. Due to the sheer

variance of facts in the above case to the present cases, we find the

above decision to be of no assistance.

51. We, however, clarify that the judgment of this Court in Mohd.

Ekram Khan must be read in the context of a case where a dealer

is utilising a spare part from his stock to replace a defective part

92

under a warranty and receiving a recompens e in the form of a

credit 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 manufacturer sends the spare part to the dealer to replace a

93

defective part and receives a consideration for the said service. In

such a case, there is no recompense for spare part. It is only when

a credit note is issued for a spare part used by a dealer from his

own stock or when he has purchased it from the open market or

from another manufacturer of a spare part that it becomes a sale

within the meaning of the sales tax enactments under

consideration.

54. On the other hand, when a dealer acts as an agent of the

manufacturer (Principal) on the basis of an express or implied

contract of agency he may be entitled to certain remuneration

under the terms and conditions of agency which is recognised in

law. Learned senior counsel for the respective parties have adverted

to such agreements with regard to consideration received by a

dealer under the terms of an Agency Agreement for the service

rendered by the dealer pursuant to a warranty. We are not

concerned with such kind of remuneration as the same cannot be

construed as a transaction of sale. It is a service contract and

possibly a service tax is leviable depending on the terms and

conditions of the Agency.

55. In C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,

Jodhpur, (2010) 29 VST 114, the learned Single Judge of the

Rajasthan High Court considered the controversy under the

94

provisions of the Rajasthan Sales Tax Act, 1994 in the context of a

dealer of automobiles receiving credit notes issued by the

manufacturer for replacement of defective parts of the automobiles,

supplied by the dealer under a warranty agreement between the

manufacturer and the ultimate customers to whom vehicles were

sold by the dealer (assessee). After referring to the judgment of the

Supreme Court in Mohd. Ekram Khan in paragraph 20, the major

points of distinction between the facts in Mohd. Ekram Khan case

and in the said case were considered in paragraph 21 and it was

observed as under:

“21. …. Since title of property in goods namely

spare parts passes from the hands of respondent

assessee to the customer free of cost and such

title of property in spare parts does not pass

from assessee dealer to the manufacturer, no

taxable sale can be said to have taken place in

the hands of respondent assessee at all.”

56. Thereafter, the learned Single Judge of the Rajasthan High

Court has observed that:

“22. In other words, where 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.

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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 to the

dealer is one pursuant to a sale of spare part and therefore liable to

sales tax law, as noticed above, it has to be viewed in the larger

perspective of carrying out an obligation under a warranty at the

time of sale of the vehicle and not independently as has been stated

above. We also find that the learned single judge incorrectly

distinguished the facts of the case with Mohd. Ekram Khan by

reasoning that the dealership agreement contemplated a principal-

principal relationship between the manufacturer and the dealer.

On the other hand, we agree with the decision of the Division

Bench of Bombay High Court in M/s Navnit Motors Pvt Ltd. vs.

State of Maharashtra , where it compared the assessee’s

dealership agreement with Maruti Udyog Ltd. with the dealership

agreement of the dealer in Mohd. Ekram Khan with Mahindra &

96

Mahindra Ltd. The Bombay High Court correctly found that both

dealership agreements established a Principal-to-Principal

relationship and recorded that a solitary sentence in para 1 of the

decision in Mohd. Ekram Khan ought not to be construed as the

dealer was an agent of the manufacturer. Therefore, we do not

approve of the observations made in paragraph 21 and 22 of the

judgment of the learned Single Judge of the Rajasthan High Court

in the aforesaid case and the said judgment is liable to be

overruled.

58. We further place reliance on the decision of this Court in

Govind Saran Ganga Saran vs. Comm issioner of Sales Tax,

AIR 1985 SC 1041 while analysing Article 265 of the Constitution

while noting as follows:

“The components which entered into tax are well

known. The first is the character of the

imposition known by its nature which transpires

attracting the levy. The second is a clear

communication of the person on whom the levy

is imposed and which is obliged to pay the tax.

The third is rate at which the tax is imposed and

the fourth is the measure or value to which the

rate is applied for computing the tax liability”.

Obviously, all the four components of a

particular concept of tax has to be inter related

having nexus with each other. Having identified

tax event, tax cannot be levied on a person

unconnected with event, nor the measure or

value to which rate of tax can be applied can be

altogether unconnected with the subject of tax,

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though the contours of the same may not be

identified.”

59. Reliance was placed on behalf of the 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 transaction involved a transfer of property or a transfer of a

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right to use any goods or not. This Court reasoned that molasses

manufactured in the sugar mills, was the property of the appellant

therein and it answers the description of goods, that the transfer of

the ownership in the goods wherefor the company was to pay the

price to the appellant therein was not in the form of cash but to be

adjusted from the amount payable by the appellant therein to the

owner by way of consideration for use of the mill. The expression

cash, deferred payment or other valuable consideration had to be

given its true meaning and the latter two expressions enlarge the

ambit of consideration beyond cash on ly. It was observed that

“once an essential component of sales takes place, sales tax would,

indisputably, be payable”. It was held that the arrangement

between the parties therein being clear and unambiguous and not

with a view to evade tax but there being transfer of goods from the

appellant therein to the company in the form of supply of molasses,

the appellant therein was entitled to a consideration which was in

the form of the right to run the sugar mill under a deed of licence.

It was also observed that a barter or an exchange being different

from a sale, payment of a licence fee could not be a subject matter

of barter or exchange. The aforesaid judgment is squarely

applicable to the facts of the present cases on the interpretation of

the expression valuable consideration in the definition of sale in the

legislations under consideration.

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61. In Commissioner of Central Excise, Mumbai vs. Fiat India

Private Limited, (2012) 9 SCC 332 , this Court observed that

consideration means something which is of value in the eye of the

law. In other words, it may consist either in some right, interest,

profit or benefit accruing to one party, or some forbearance,

detriment, loss or responsibility, given, suffered or undertaken by

the other.

62. Webster's Third New International Dictionary (unabridged)

defines, consideration thus: “Something that is legally regarded as

the equivalent or return given or suffered by one for the act or

promise of another.”

In Salmond on Jurisprudence, the word “consideration” has

been explained in the following words:

“A consideration in its widest sense is the

reason, motive or inducement, by which a man

is moved to bind himself by an agreement. It 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

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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 -

warranty discount to be made for determining the assessable value.

It was observed that a warranty is not a discount on the tyre

already sold, but relates to the goods which are being subsequently

sold to the same customers. It cannot be strictly called as discount

on the tyre being sold. It is in the nature of a benefit given to the

customers by way of compensation for the loss suffered by them in

the previous sale.

64. The said view was reiterated in Government of India vs.

Madras Rubber Factory Ltd., (1995) 4 SCC 349 where the

question was whether the claim put forward as TAC -warranty

discount is a trade discount within the meaning of Section 4 of

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Central Excises and Salt Act, 1944. It was observed that the claim

is only a claim for refund by the buyer for the manufacturing defect

in the tyre sold by the assessee therein, which is being honoured

by the assessee in a manner acceptable to both the parties. It was

reiterated that it is a benefit given to the customers by way of

compensation for the loss suffered by them in the previous sale

owing to a defective tyre. It is a compensation in the nature of a

warranty allowance on a defective tyre.

65. Thus, the manufacturer gives the warranty to the consumer

by making a representation with regard to the automobile. It is in

the nature of a promise which the dealer assessee carries out on

behalf of the manufacturer. There is transfer of property in the

spare part from the stock of the dealer to the customer for which

the manufacturer pays by way of a credit note. The said promise is

carried out and a valuable consideration is received by the dealer

through credit notes. In substance, when the dealer receives a

credit note, it is a sale within the meaning of the definition under

the respective sales tax legislation under consideration, pursuant

to the warranty for which the manufacturer compensates the

dealer by issuance of a credit note. The value of the credit note is a

valuable consideration received which is in the nature of a benefit

from the manufacturer which is exigible to tax. If the dealer had

sold a spare part of the automobile from his stock to any other

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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

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 reciprocal promises vide Section 2 (f) of the said Act.

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67. Applying the aforesaid definitions of the Indian Contract Act,

1872 to the facts of the present case, it would mean that as

between the manufacturer of the automobile, the dealer and the

customer, the manufacturer is the promisor who makes the

proposal to recompensate the dealer when pursuant to a warranty

clause, the dealer replaces a spare part from out of his own stock

or by buying the same from the open market or from the

manufacturer 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.

68. Section 2(d) of the said Act in fact enables the promisee (the

dealer) to provide consideration by conferring a benefit on a third

party (customer) at the promisor’s (the manufacturer’s) request

pursuant to a warranty between the manufacturer and customer.

Thus, a contract could arise even though the promise is for doing

or abstaining from doing something for the benefit of a third party.

In other words, if the promisee (the dealer) replaces a defective part

of an automobile sold to a third party, i.e., the customer, he would

receive a credit note from the manufacturer. This is because the

manufacturer would have proposed to the dealer to recompensate

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the dealer for the above act which proposal would have been

accepted by the dealer and, thus, the manufacturer who has made

the proposal is the promisor and the dealer who has accepted the

proposal is the promisee. Further, when at the desire of the

promisor (the manufacturer), the promise (the dealer) does some

act or promises to do an act, such act or promise is called

consideration for the promise. Therefore, 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.

69. In view of the above, the t ransaction 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.

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

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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 the

automobile. In such a situation also, the dealer may receive a

consideration for the purpose of the service rendered by him as

a dealer under a dealership agreement or any other agreement

akin to an agent of the manufacturer which is not a sale

transaction.

On the above understanding of the judgment of this Court

in Mohd. Ekram Khan, we are of the view that the same does

not call for any interference.

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In light of the above, in our view, overruling of the

judgments in the case of Prem Motors and Geo Motors in

Mohd. Ekram Khan, is just and proper.

(iii) It is reiterated that a credit note issued by a manufacturer to

the dealer, in the situations explained above, is a valuable

consideration within the meaning of the definition of sale and

hence, exigible to sales tax under the respective State

enactments of the States under consideration. In the result,

appellants-dealer/assessee are liable to pay sales tax under

the respective State enactments under consideration.

(iv) In view of the above, the appeals filed by the dealers are

dismissed. The appeals filed by the revenue are allowed.

Parties to bear their respective costs.

………………..J.

[K.M. JOSEPH]

…….……………….J.

[B.V. NAGARATHNA]

……………….………………….J.

[AHSANUDDIN AMANULLAH]

New Delhi;

15

th May, 2023.