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

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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

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(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

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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

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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

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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)

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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)

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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.”

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, (7 th 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

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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)

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              ...……………………………J. [Sanjay Kishan Kaul]

New Delhi. February 05, 2019.

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