24 五月 2023

Credit note issued to dealer in consideration of replacement of defective part under warranty is exigible to sales tax

The Larger Bench (3-Judge Bench) of the Supreme Court has held that 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.

The Apex Court in its judgement dated 15 May 2023 noted that when the dealer replaces the defective part, under a warranty agreement, from his own stock (or is purchased by the dealer from the open market), the dealer is recompensated by the manufacturer in the form of a credit note, which is a ‘valuable consideration’ within the meaning of the definition of ‘sale’ under both, Central Sales Tax Act as well as the State enactments.

According to the Court, 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.

The Court held that the person who pays the valuable consideration in a sale transaction is irrelevant so long as it is paid.

It may be noted that though the Supreme Court’s earlier decision in the case of Mohd. Ekram Khan was upheld by the Larger Bench of the Court here, the 3-Judge Bench in the dispute Tata Motors v. Deputy Commissioner also held that 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.

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