M/s Tata Motors Ltd. vs The Deputy Commissioner of Commercial Taxes (Spl) & Anr.

Contract – Contract of sale – Elements to constitute a valid contract of sale – Discussed.

Contract – Contract of sale differentiated from other contracts – 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. Contract – Contract of sale – Condition and warranty – Held: 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 – 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.

Contract – Collateral contracts and collateral warranties – Discussed.

Answering the Reference, the Court

HELD: 1. 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. [Para 30][1326-F-H]

2. 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. 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 dealer 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 (c) may replace the defective part from his stock maintained in his showroom and return the defective part to the manufacturer. [Para 31] [1327-A-G]

3. 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. [Para 32][1327-G-H]

4. 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 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. [Para 33][1328-A-F]

5. 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 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? [Para 34][1328-G-H; 1329-A-C]

6. The argument that the purchaser or the customer seeking replacement of a defective part is distinct and disjunct from the earlier sale of the 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. In both of the aforesaid situations, there is transfer of property in the goods from the dealer to the customer. [Para 35][1329-D-H]

7. The bifurcation of the two transactions 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. [Para 36][1330-A-B]

8. 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. [Para 37][1330-B-C]

9. 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. 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, 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. [Para 38][1330-D-F]

10. 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 issues a credit note to the dealer which is in substance on behalf of the customer owing to the warranty with the customer. [Para 39][1330-G-H; 1331-A]

11. 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. [Para 40][1331-B-C]

12. 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 definition of sale under the Sales Tax legislations are in consonance with Article 366(29-A) as per the Constitution 46th 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. [Para 43][1333-C-D]

13. 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 price of goods. 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 deferred 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. [Para 44][1333-E-H; 1334-A-B]

14. 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 perusal of the definition of “credit note” from various dictionaries and Law Lexicons 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 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”. [Para 46][1334-H; 1335-A-D]

15. 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 from the buyer’s account to the credit of a seller is a form of transmission of a valuable consideration. [Para 47][1335-E-H]

16. 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, 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. 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 aforesaid 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. [Para 48][1336-B-G]

17. 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 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. [Para 53][1338-A-C]

18. 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 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. [Para 65] [1343-B-E]

19.1. Applying the 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. [Para 67][1344-B-C]

19.2. 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 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. [Para 68][1344-D-G]

20. In view of the above, the transaction 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. [Para 69][1344-H]

21. 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 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, the same does not call for any interference. In light of the above, overruling of the judgments in the case of Prem Motors and Geo Motors in Mohd. Ekram Khan, is just and proper.

(iii) 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. [Para 70][1345-A-H; 1346-A]

Devi Dass Gopal Krishnan v. State of Punjab (1967) 3 SCR 557; CIT v. Motor & General Stores Pvt. Ltd. AIR 1968 SC 200 : [1967] 3 SCR 876 – held inapplicable.

M/s Navnit Motors Pvt Ltd. v. State of Maharashtra, decided on 29.11.2011 of Bombay High Court –

approved.

Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183 : [2004] 3 Suppl. SCR 116 – affirmed.

State of T.N. v. Sri Srinivasa Sales Circulation (1996)

10 SCC 648 : [1996] 7 Suppl. SCR 185; Govind Saran Ganga Saran v. Commissioner of Sales Tax, AIR 1985 SC 1041 : [1985] 3 SCR 985; Dhampur Sugar Mills Ltd. v. Commissioner of Trade Tax, U.P., (2006) 5 SCC

624 : [2006] 2 Suppl. SCR 673; Commissioner of Central Excise, Mumbai v. Fiat India Private Limited, (2012) 9 SCC 332 : [2012] 12 SCR 975; Assistant Collector of Central Excise v. Madras Rubber Factory Ltd., 1986 Supp SCC 751 : [1987] 1 SCR 846 and Government of India v. Madras Rubber Factory Ltd. (1995) 4 SCC 349 : [1995] 3 SCR 1143 – relied on.

State of Madras v. Gannon Dunkerley & Co. (1959) SCR 379; Government of India v. Madras Rubber Factory Limited (1995) 4 SCC 349: [1995]

3 SCR 1143; Kone Elevators Pvt. Ltd. v. State of Tamil Nadu (2014) 7 SCC 1:[2014] 5 SCR 912; Builders’ Association of India v. Union of India (1989) 2 SCC 645:[1989] 2 SCR 320; Commissioner of Customs v. Dilip Kumar & Co. (2018) 9 SCC 1:[2018] 7 SCR 1191; Nabha Power Ltd. v. Punjab State Power Corporation Ltd. (2018) 11 SCC 508:[2017] 14 SCR 301; M/s Vishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officers (1978) 1 SCC 520:[ 1978] 2 SCR 433 (12.7) M/s New India Sugar Mills Ltd. v. Commissioner of Sales Tax AIR 1963 SC 1207: [1963] 2 Suppl. SCR 459; Sunrise Associates v. Govt. of NCT of Delhi (2006) 5 SCC 603: [2006] 1 Suppl. SCR 421; H. Anraj v. Govt. of T.N. (1986) 1 SCC 414: [1985] 3 Suppl. SCR 342; Shanklin Pier Ltd. v. Detel Products Ltd. (1951) 2 KV 854; Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, Chennai (2009) 13 SCC 283: [2009] 8 SCR 1152; Medley Pharmaceuticals Ltd. v. Commissioner of Central Excise and Customs, Daman (2011) 2 SCC 601: [2011] 1 SCR 741; Firm Ram Krishna Ramnath Agarwal v. Municipal Committee, Kamptee AIR 1950 SC 11: [1950] SCR 15; Province of Madras v. Boddu Paidanna and Sons AIR 1942 FC 33; Bharat Heavy Electricals Ltd. v. Commissioner of Customs and Central Excise, Indore (2003) 9 SCC 185: [2002] 4 Suppl. SCR 150; Commissioner of Sales Tax v. Prem Nath Motors (1979)

43 STC 52 (Delhi); Prem Motors, Gwalior v.

Commissioner of Sales Tax, Gwalior 1986 (61) STC

244 MP; Geo Motors v. State of Kerala (2001) 122 STC 285; Jodhpur v. M/s Marudhara Motors, Jodhpur (2010) 29 VST 114 and State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd. 1958 (9) STC 353 – referred to.

Rainy Sky SA & Orad v. Kookmin Bank (2011) UKSC 50; Suzuki New Zealand Ltd. v. Commissioner of Inland Revenue (2001) 20 NZTC 17; Digital Satellite Warranty Cover Limited v. Financial Services Authority (2013) UKSC 7 – referred to.