Supreme Court: The 3-judge bench of KM Joseph, BV Nagarathna and Ahsanuddin Amanullah, JJ has held that a credit note issued by a manufacturer to a dealer of automobiles in consideration of the replacement of a defective part, using spare parts from dealer’s own stock or from an open market, in the automobile sold pursuant to a warranty agreement being collateral to the sale of the automobile, attracts sales tax.
Understanding the Issue
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:-
(a) request the manufacturer to supply the defective part of the automobile for replacement. The manufacturer of the automobile may send the spare part from his factory or purchase the spare part from the manufacturer or 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.
(b) may purchase the spare part from the open market by paying the requisite taxes and replace the defective part and return the same to the manufacturer, or
(c) may replace the defective part from his stock maintained in his showroom and return the defective part to the manufacturer.
Now, as in situation (a), 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 issue in the case at hand revolves around situations (b) and (c) wherein 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 purchased, then issues a credit note which may be equivalent to the value of the spare part used by the dealer.
In these circumstances, the Court was called upon to decide if it can be construed that when the dealer has utilised a spare part, from his own stock or from an open market, 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 automobile of the spare part and thus, a credit note being issued by the manufacturer to the dealer.
What is a Credit Note?
Oxford Advance Learner’s Dictionary – “if, damaged items have to be returned, the manufacturer may issue a credit note”.
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”.
Hence, it can be noted that 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.
For the purpose of the matter at hand, when the dealer uses one of the spare parts from his stock for the replacement of a defective part in an automobile under a warranty, he is given a monetary benefit in the form of a credit note. 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.
Further, the amount shown in the account of the dealer in the form of a credit note is nothing, but a price received for a sale of a spare part by the dealer which is from his stock and which belongs to him.
What is “price”?
As the amount shown in the account of the dealer in the form of a credit note is nothing, but a price received for a sale of a spare part by the dealer which is from his stock and which belongs to him, it is important to consider the definition of “price”.
Under Section 4 of the Sale of Goods Act, 1930, 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.”
Hence, the entire amount of consideration including the sales tax component which the purchaser pays, constitutes the price of goods. “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.
What is a “Valuable Consideration”?
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 any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration.
The expression “valuable consideration” is not defined either under the Central Sales Tax or under the respective State Acts under consideration. However, though the expression valuable consideration has a wider connotation, it must be read ejusdem generis to cash and deferred payment and therefore, should mean payment in monetary terms i.e. in the nature of cash or deferred payment such as cheque, bank draft, promissory note, etc. Hence, a transaction could amount to a sale if consideration is in terms of money.
Why such “credit note” should be exigible to sales tax?
The Court held that 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.
The Court explained that 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.
To look at it from another angle,
“If the dealer had sold a spare part of the automobile from his stock to any other consumer across the counter, he would have collected the requisite sales tax along with the price from that consumer but in the instant case, the consideration is received in the form of a credit note from the manufacturer which is subject to sales tax. The person who pays the valuable consideration in a sale transaction is irrelevant so long as it is paid.”
Hence, 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.
[Tata Motors Ltd. v. CCT, 2023 SCC OnLine SC 638, decided on 19-05-2023]
Judgment authored by Justice BV Nagarathna
Justice BV Nagarathna: Igniting hope for the first ever woman Chief Justice of India
Advocates who appeared in this case :
For Appellant(s): Senior Advocates Kavin Gulati, R.K. Raizada, V Sridharan and Dr. Manish Singhvi and Advocates Avi Tandon, Rohit Amit Sthalekar, Vishal Gehrana, Japppanpreet Hura, M.P. Devanath, Pragati Neekhra, Sonal Jain, Bhakti Vardhan Singh, Ankit, Rahul Kaushik, Manik Karanjawala, Irshad Ahmad, Yashraj Singh Deora, Priyesh Mohan Srivastava, Abhishek Singh, Punit Dutt Tyagi, P.K. Manohar, K.K. Mani, T. Archana, Rajeev Gupta, Vinay Rajput, Karanjawala & Co., Apeksha Mehta, Sahil Parghi, Neha Choudhary, Gopal Machiraju, Falguni Gupta, Umang Motiyani, Charanya Lakshmikumaran, Shubhangi Agarwal, Milind Kumar, AOR;
For Respondent(s): AAG Nikhil Goel, A.A.G Saurabh Mishra, AAG Ankita Choudhary Senior Advocates Pallav Shishodia, S.K. Upadhayay and Advocates V. N. Raghupathy, Manendra Pal Gupta, Adithya Roy, Ansha Varma, Sanjay Jain, Kamlendra Mishra,G. N. Reddy, C.K. Sasi, Abdulla Naseeh V T, Meena K Poulose, Rahul Kaushik, Deepanwita Priyanka, Bhakti Vardhan Singh, Aniruddha Joshi, Siddharth Dharmadhikari, Aaditya Aniruddha Pande, Bharat Bagla, Sourav Singh, Ruby Singh Ahuja, Vishal Gehrana, Hanry Maisi, Jappanpreet Hora, Meghna Mishra, Karanjawala & Co., Pashupathi Nath Razdan, Tarun Gulia, Maitreyee Jagat Joshi, Astik Gupta, Ayushi Mittal, Vipul Abhishek, Kuldeep Kumar Shukla, Nishe Rajen Shonker, Rashmi Singhania, Sarad Kumar Singhania, Hitesh Kumar Sharma, Akhileshwar Jha, Amit Kumar Chawla, Ravish Kumar Goyal, Nitin Sharma, Chaman Sharma, Naresh Kumar, Alok Sangwan, Sumit Kumar Sharma, Abhinav Shrivastava, Sunny Choudhary, Radhika S. Shivang Rawat.
