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?


Hon’ble Mr. Justice Sanjay Kishan Kaul

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No.1822 of 2007
M/S. TATA MOTORS LTD. ….Appellant
versus
THE DEPUTY COMMISSIONER OF
COMMERCIAL TAXES (SPL) & ANR. ….Respondents
With
C.A. No. 3004-3006/2017
C.A. No. 1821/2007
C.A. No. 2756/2012
C.A. No. 3856/2013
C.A. No. 3824/2011
C.A. No. 3827/2011
C.A. No. 3820/2011
C.A. No. 3821/2011
C.A. No. 3825-3826/2011
C.A. No. 3823/2011
C.A. No. 3822/2011
SLP(C) No. 15642-15643/2011
SLP(C) No. 25905/2013
SLP(C) No. 12806-12808/2016
SLP(C) No. 12280/2014
1
C.A. No. 5815/2012
C.A. No. 8049/2009
C.A. No. 6167/2009
C.A. No. 6171/2009
C.A. No. 6166/2009
C.A. No. 6160/2009
C.A. No. 6173/2009
C.A. No. 6161/2009
C.A. No. 6164/2009
C.A. No. 6163/2009
C.A. No. 6162/2009
C.A. No. 6165/2009
C.A. No. 5967/2011
C.A. No. 5969/2011
C.A. No. 6168/2009
SLP(C) No. 19758/2009
SLP(C) No. 19745/2009
SLP(C) No. 19754/2009
SLP(C) No. 19748/2009
SLP(C) No. 19750/2009
SLP(C) No. 19756/2009
SLP(C) No. 19757/2009
SLP(C) No. 19746/2009
SLP(C) No. 19755/2009
SLP(C) No. 19752/2009
SLP(C) No. 19753/2009
SLP(C) No. 19751/2009
C.A. No. 6172/2009
SLP(C) No. 14260/2007
SLP(C) No. 28859/2011
SLP(C) No. 31698-31702/2013
C.A. No. 4019/2011
C.A. No. 4021/2011
SLP(C) No. 5447/2014
SLP(C) No. 5449-5451/2014
C.A. No. 4516/2018
(With appln. for exemption from filing O.T)
C.A. No. 9979/2018
2
(With appln. for c/delay in filing SLP, exemption from filing c/c of
the impugned judgment, permission to file additional documents)
C.A. No. 10924/2018
(With appln. for c/delay in filing SLP)
C.A. No. 11724/2018
(With appln. for c/delay in filing SLP and exemption from filing
O.T.)
J U D G M E N T
SANJAY KISHAN KAUL, J.

  1. The common question of law, which arises for consideration in these
    appeals, is the liability towards sales tax, in respect of the free
    replacement of defective parts in motor vehicles, during the period of
    warranty.
  2. Civil Appeal No.1821/2007, filed by one of the dealers [M/s. Prerana
    Motors (P) Ltd.], was taken up as the main appeal for addressing the
    submissions and, thus, reference to some of the relevant facts is qua that
    appeal.
  3. M/s. Prerana Motors (P) Ltd./appellant is a dealer of Tata Motors. Sales Tax
    is paid on the vehicles sold. There is a warranty given to the purchaser
    3
    for free replacement of parts, during the period of warranty. To facilitate
    this, the dealer is obliged to keep a stock of spare parts. The purchaser
    has an option to go to any dealer, and not be confined to the dealer from
    whom the purchase was made. Sales tax is paid on the stock of spare
    parts purchased from Tata Motors. The defective parts are sent back to
    Tata Motors and credit note may be given by Tata Motors for the said
    parts. The customer does not pay for the replacement of the defective
    part, which is stated to be the crucial fact. The stand of the Revenue is
    that sales tax is liable to be paid even qua the return of the spare parts, as
    credit note is given for the same, to the dealer.
  4. In the facts of this case, the assessment order and the appeal went against the
    appellant/dealer, while the Tribunal held in favour of the appellant/dealer.
    However, the High Court, relying upon the judgment of this Court in
    Mohd. Ekram Khan & Sons v. Commissioner of Trade Tax, U.P.,
    Lucknow1
    set aside the order passed by the Tribunal, restoring the order
    of the assessing authority.
  5. Mr. P. Chidambaram, learned senior counsel appearing for the appellant,
    drew our attention to the Dealership Agreement and pointed out that it is
    a principal-to-principal agreement, but that would not really make a
    1 (2004) 6 SCC 183
    4
    difference to the controversy in question. In terms of this Agreement,
    inter alia a stock of spare parts has to be kept by the dealer.
  6. Learned senior counsel fairly conceded that if the judgment in Mohd.
    Ekram Khan & Sons2
    case is applicable, then the appellant would really
    have no case, but that his endeavour would be to distinguish the said
    judgment and/or persuade this Court that some of the observations made
    therein were per incuriam, and that in any case the matter needs to be
    examined by a larger Bench. In this course of action, learned senior
    counsel referred to the following judgments:
  7. Premier Automobiles Ltd. & Anr. Etc. v. Union of India:3
    Mr.
    Chidambaram, learned senior counsel submitted by reference to pages
    537 & 538 that the principle of warranty covering cars sold has been well
    enunciated. Accordingly, all defects on account of faulty manufacture in
    workmanship have to be set right and the defective parts have to be
    replaced, free of cost, by the manufacturer or his dealer, within a
    specified period of time or a given distance travelled by the car. Free
    services have to be rendered. Car manufacturers enter into an agreement
    with the manufacturers of components, providing for a warranty so far as
    2 (supra)
    3 (1972) 2 SCR 526
    5
    the components are concerned. The whole object behind 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.” It is, thus, his submission that this
    fundamental concept appears to have been lost in Mohd. Ekram Khan &
    Sons.4
  8. Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd.:5
    Learned
    senior counsel drew our attention to paras 17 & 18 of this judgment,
    where observations have been made to the effect that a dealer sells cars
    along with a warranty, under which it is agreed that it would replace the
    parts free of cost. When such a part is replaced, it becomes a part of the
    car and the property in it stands transferred to the buyer/consumer. There
    is no separate consideration paid for the part so transferred and, thus, the
    only reasonable inference is that the consideration for the part or parts
    that might be replaced, under the warranty, was not separately specified
    because it was included in the price fixed and paid for the car at the time
    of its sale. The price so fixed and received is, thus, a consolidated price
    for the car and the parts that may have to be supplied by way of
    4 (supra)
    5 ILR (1978) II Delhi 273
    6
    replacement, in pursuance of the warranty.
  9. Prem Motors v. Commissioner of Sales Tax, Madhya Pradesh6
    : The Court
    rejected the contention of the Revenue that when spare parts are replaced
    by the assessee and given to the customer free of charge, that being the
    condition of the warranty, the assessee recovers the price from the
    manufacturer and, in substance, it is a sale of the spare parts to the
    manufacturer and therefore liable to be taxed. It was opined that when a
    dealer sells automobile vehicles, he sells it with all parts in a saleable
    condition. The warranty given is a warranty 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 on the
    manufacturer. This is neither a sale of parts by the dealer to the customer
    nor to the manufacturer. What is effectively done is a passing on, of the
    parts, from the manufacturer to the customer, but in order to avoid delays
    and prevent any inconvenience to the customer, he replaces the part first
    and gets them from the manufacturer later. The cost for the same is
    reimbursed by the manufacturer.
    It may be noted that this judgment has specifically been overruled in the
    6 (1986) 61 STC 244 (MP Division Bench)
    7
    Mohd. Ekram Khan & Sons7
    case.
  10. Geo Motors v. State of Kerala8
    : The reasoning of the Delhi High Court in
    Commissioner of Sales Tax v. M/s. Prem Nath Motors (P) Ltd.9
    was
    adopted to conclude that the transaction could not be categorised as a
    ‘sale’ even though the dealer had purchased spare parts by giving ‘C’
    Forms. Such a transaction was purely for replacement and not for sale.
    This judgment again has been specifically overruled in Mohd. Ekram
    Khan & Sons10 case.
  11. Commercial Tax Officer (Anti-Evasion), Jodhpur v. Marudhara Motors11:
    This opinion is post the judgment in the Mohd. Ekram Khan & Sons12
    case. The learned single Judge of the Rajasthan High Court
    distinguished the case of the assessee dealer from the facts obtaining in
    Mohd. Ekram Khan & Sons13 case. One such distinguishing factor was
    that in the Mohd. Ekram Khan & Sons14 case, there was a relationship of
    principal to agent and not of principal to principal. The most crucial
    7 (supra)
    8 (2001) 122 STC 285 (Kerala Division Bench)
    9 (supra)
    10 (supra)
    11 (2010) 29 VST 114 (Raj)
    12 (supra)
    13 (supra)
    14 (supra)
    8
    aspect observed in this case, and which is also the plea of
    Mr. Chidambaram, learned senior counsel, is qua the observations in para
    6 of the Mohd. Ekram Khan & Sons15 case. It was observed 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
    transactions, it would have paid taxes. The position is not different
    because the assessee had supplied the parts and had received the price.”
  12. While giving relief to the assessee, the significance of lack of consideration
    passing, i.e., spare parts being provided free of cost was taken note of,
    and thus, the cost of spare parts was held to be part of the cost of the
    vehicle, while giving such warranty for a limited period of time to the
    customer.
  13. Learned senior counsel, thus, contended that the aforesaid significant aspect
    clearly distinguishes his case from the case of Mohd. Ekram Khan &
    Sons16
    , i.e., the aspect of the replacement being undisputedly free. In
    this behalf, he referred to Section 4(1) of The Sale of Goods Act, 1930,
    which reads as under:
    “4. Sale and agreement to sell.—
    (1) A contract of sale of goods is a contract whereby the seller
    15 (supra)
    16 (supra)
    9
    transfers or agrees to transfer the property in goods to the buyer
    for a price. There may be a contract of sale between one partowner and another.”
    The submission, thus, is that for the sale of the parts of the car, a
    price has to be paid, which is not so in the present case.
  14. SLP (C) Nos.12806-12808/2016: Learned counsel inter alia drew our
    attention to “Treitel- The Law of Contract” by G.H. Treitel, (7th ed.), to
    contend that to be enforceable as a collateral contract, a promise must be
    supported by consideration. It was submitted that the contract to supply
    spare parts, during the warranty period was akin to a collateral contract.
  15. Learned counsel appearing for the other assessees also supported the stand
    taken by Mr. Chidambaram.
  16. On the other hand, Mr. Basava Prabhu S. Patil, learned senior counsel
    appearing for the respondents in the aforesaid civil appeal, sought to
    contend otherwise and submitted that the Mohd. Ekram Khan & Sons17
    case is the binding precedent, and in this light, the matter does not need
    to be examined any further.
  17. Learned senior counsel drew our attention to the following judgments:
    17 (supra)
    10
    i. Navnit Motors Pvt. Ltd. v. State of Maharashtra18
    ii. Kataria Automobiles (P.) Ltd. v. State of Gujarat19
    iii. The Commissioner, Commercial Tax, Lko. v. S/S Maskat
    Motors Pvt. Ltd.20
  18. These judgments emanate from the Bombay High Court, Gujarat High Court
    and the Allahabad High Court respectively, and the submission is that a
    consistent view, in favour of the Revenue, has been taken by these three
    High Courts. We may, however, notice that the view emanates only by
    reason of reliance upon the Mohd. Ekram Khan & Sons21 case.
  19. Learned counsel also referred to the judgment in Bharat Heavy Electricals
    Ltd. v. Commissioner of Customs & Central Excise, Indore22 to contend
    that while considering the issue of excise duty in respect of components
    towards the “complaint reserve”, it was held that the same would be
    excisable. It was observed that while the initial price charged for the
    machinery may include the element of the “complaint reserve”, at the
    time of purchase, it is not known whether there will be any requirement
    to replace any part and, in many cases, the parts are not required to be
    18 (2012) 47 VST 511 (Bom)
    19 (2015) 51 GST 403 (Gujarat)
    20 (2017) 102 VST 220 (All)
    21 (supra)
    22 (2003) 9 SCC 185
    11
    replaced. In such an eventuality, the price equivalent of the “complaint
    reserve” is not returned to the customer.
  20. 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 the Mohd. Ekram Khan & Sons23 case 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
    23 (supra)
    12
    judgment in Premier Automobiles Ltd. & Anr. Etc.24 case is stated to
    contain a different factual situation, as per the observations in the Mohd.
    Ekram Khan & Sons25 case. There are observations referred to above,
    again in the Mohd. Ekram Khan & Sons26 case, of the possibility of the
    manufacturer having purchased, from open markets, the parts for
    replacement, on which taxes would be paid. In that context, it was
    observed that “the position is not different because the assessee had
    supplied the parts and received the price.” The assessee actually had
    purchased the parts and paid sales tax on it, but on return of the defective
    part to the manufacture, was given a credit note.
  21. We have some reservations in respect of the observations and legal
    propositions laid down in the Mohd. Ekram Khan & Sons27 case and
    consider it appropriate that the matter be considered by a larger Bench.
  22. The papers be placed before Hon’ble the Chief Justice for necessary orders.
    ..….….…………………….J.
    [L. Nageswara Rao]
    24 (1972) 2 SCR 526
    25 (supra)
    26 (supra)
    27 (supra)
    13
    ………………………………J.
    [Sanjay Kishan Kaul]
    New Delhi.
    February 05, 2019.
    14