Madras High Court
The State Of Tamil Nadu vs Tvl.Modi Olivetti Ltd on 6 November, 2024
Bench: R.Suresh Kumar, C.Saravanan
T.C.No.41 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 06.11.2024
CORAM
THE HON'BLE MR.JUSTICE R.SURESH KUMAR
AND
THE HON'BLE MR.JUSTICE C.SARAVANAN
Tax Case No.41 of 2021
The State of Tamil Nadu
Rep.by the Deputy Commissioner (CT)
Chennai (Central) Division, Chennai-6. .... Appellant
Vs.
Tvl.Modi Olivetti Ltd
No.1, Krishnamma Road
Chennai 600 034. .... Respondent
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Tax Case filed under Section 38 of the TNGST Act, 1959 against the order
of the Sales Tax Appellate Tribunal (Additional Bench) Chennai in T.A.No.58 of
2021 dated 10.10.2002.
For Appellant : Mr.V.Prasanth Kiran
Government Advocate
ORDER
(Order of the Court was made by C.SARAVANAN, J.)
This Tax Case is directed against the order dated 10.10.2002 passed by
the Sales Tax Appellate Tribunal (Additional Bench), Chennai in T.A.No.58 of
2002.
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2. The said appeal was filed by the respondent herein, wherein part of the
appeal filed by the respondent was allowed and part of the appeal was
dismissed. To the extent the appeal of the respondent was allowed, the Revenue
viz., the Commercial Taxes Department is in appeal before this Court.
3. The short point that arises for consideration in this Tax Case is whether
the respondent can be subjected to purchase tax under Section 7-A of the Tamil
Nadu General Sales Tax Act, 1959 during the Assessment Year 1994-1995 on the
defective parts that were collected from the customers by providing maintenance
services to the customers / clients on behalf of the head office.
4. The business model was the re- placement of defective parts with new
parts supplied by the head office of the respondent and charges the customers /
clients the net price of the spare parts less residual value of defective parts.
5. The original authority, while passing the Assessment Order dated
28.6.1996 concluded that the respondent had not included the value of defective
parts retrieved from the customers / clients after replacing them with new spare
parts.
6. In the assessment order, the assessing officer has observed that the
discarded / defective materials received from the customers for valuable
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consideration, original sale of which were effected by their head office in New
Delhi directly and that the respondent did not offer tax on the discarded /
defective parts.
7. In the impugned order, the Tribunal has concluded that the defective
spare parts are not purchased by the respondent and therefore it cannot be
construed that the respondent satisfied the situation in clause (c) of Section 7-A
of the Act. There is also a categorical finding given by the tribunal that the
retrieval of the defective parts was part of the annual maintenance charges
incurred by the respondent at its branch.
8. In fact, recently, the Hon’ble Supreme Court in Tata Motors Ltd v.
The Deputy Commissioner of Commercial Taxes 2023 SCC Online SC 638
had an occasion to deal with replacements under annual maintenance contract /
warranties. In para 56, the Hon’ble Supreme Court observed as under:-
56. But there can also be a situation when the dealer
would replace the defective part in the automobile pursuant
to a warranty from his own stock of spare parts which he
would have purchased either from the manufacturer or
from the open market or the manufacturer of the spare
part. In the aforesaid three situations, the dealer would
have paid sales tax while purchasing the said stock. When
the defective part is replaced by the dealer from a
spare part from his stock, the dealer is no doubt
acting pursuant to the warranty on behalf of the
manufacturer but is sourcing the spare part from his
own stock. Simply put, the dealer is not “selling” the
spare part to a customer while acting on behalf of
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the manufacturer but replacing the defective part
free of cost by acting under the warranty. But what
is to be borne in mind is that the replacement of the
spare part is from the stock of the dealer who would
have earlier bought the same by paying the requisite
tax on the same. If the said part, instead of being
replaced pursuant to the warranty free of cost had
been sold, the dealer would have earned a return on
his investment and possibly with a reasonable profit
also and would have also collected the sales tax. But
when the dealer replaces a defective part with a
spare part from his stock pursuant to a warranty, he
does not receive anything in return from the
customer for the spare part used from his own
stock. It is in such a situation that the manufacturer
issues a credit note to recompense the dealer for his
investment on the spare part in his stock which was
used to replace a defective part pursuant to a
warranty in the sale of automobile as nothing would
have been received in return from the customer. This
is because if the spare part from the stock of the dealer
had been sold to any other customer, across the counter
and not pursuant to any warranty, he would have received
a return on his investment. But such a return is not
received by the dealer from the customer when he
replaces a defective part pursuant to a warranty. In
such a situation, on return of the defective part to
the manufacturer by the dealer, he is issued a credit
note by the manufacturer which is to make good the
stock of the dealer.
9. Considering the issue further, in para 58, the Hon’ble Supreme Court
further observed that if the dealer had sold the spare part which he used to
replace a defective part pursuant to a warranty clause, he would have received a
return for his investment plus a profit. But, while acting under the warranty on
behalf of the manufacturer, the dealer does not receive any price from the
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customer. Hence, he is recompensated by the manufacturer in the form of a
credit note.
10. The Hon’ble Supreme Court, in para 60 observed as under:-
60. Therefore, 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. There need not be a
reiteration of the significance of a warranty in a transaction
of a sale of goods already discussed above.
11. Ultimately, the Hon’ble Supreme Court, in para No.102 has concluded
as follows:-
102. 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
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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, we are of the view that the same
does not call for any interference.
In light of the above, in our view, overruling of the
judgments in the case of Prem Motors and Geo
Motors in Mohd. Ekram Khan, is just and proper.
(iii) It is reiterated that 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.
(iv) In view of the above, the appeals filed by the dealers are
dismissed. The appeals filed by the revenue are allowed.
12. It is the contention of the Commercial Taxes Department that the
respondent / assessee was liable to pay purchase tax under Section 7-A of the
Act. During the period in dispute, Section 7-A(1) of the Act reads as under:-
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"Section 7-A. Levy of purchase Tax. – (1) 1 [Subject to
the provisions of subsection (1) of section 3, every dealer]
who in the course of his business purchases from a
registered dealer or from any other person, any goods, (the
sale or purchase of which is liable to tax under this Act) in
circumstances in which [no tax is payable under (sections 3
or 4,) as the case may be, *[not being a circumstance in
which goods liable to tax under **[sub-section (2), (2-A) or
(2-C) of section 3 or section 4, were purchased at a point
other than the taxable point specified in the First, the Fifth,
the Eleventh or the Second Schedule], respectively, and
either, –
(a) *[consumes or uses such goods in or for the
manufacture of other goods for sale or otherwise; or]
(b) disposes of such goods in any manner other than by
way of sale in the State, [….]*
(c) 3 [despatches or carries them] to a place outside the
State except as a direct result of sale or purchase in the
course of inter-State trade or commerce, [or]**
(e) installs and uses such goods in the factory for the
manufacture of any goods. shall pay tax on the turnover
relating to the purchase aforesaid at the rate mentioned
in 2 [sections 3 or 4], as the may be."
13. A reading of sub-section (1) to Section 7-A of the Act as extracted
above makes it clear that the question of subjecting the respondent to purchase
tax would arise only if there was a purchase of defective spare parts by the
respondent from the customers / clients, question of involving Section 7-A of the
TNGST Act, 1959 will apply.
14. Section 7-A of TNGST Act, 1959 will apply to every dealer who in the
course of his business purchases good liable to tax either from a “registered
dealer” or from “any other person” in the circumstances in which no tax payable
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was paid under Section 3 or Section 4 of TNGST Act, 1959 where such goods
purchased are;
a. consumed or used such goods in or for the manufacture of
other goods for sale or otherwise, or
b. disposed in any manner other than by way of sale in the
State, or
c. dispatched or carried them to a place outside the State
except as a direct sale or purchase in the course of inter-
State trade or commerce,
15. In the present case, it cannot be said that the respondent was
purchasing the defective spare parts from the customers / clients. All that, the
respondent did was to replace the old defective parts with the new parts and
gave a discounts on the replaced new parts to the customers.
16. Since there was no purchase of defective parts, question of levying
purchase tax at the rate mentioned in Section 3 or Section 4 of TNGST Act, 1959
under Section 7-A of TNGST Act, 1959 does not arise.
17. As such, we find no merit in the challenge to the impugned order of
the Tribunal. Therefore, the Tax Case is dismissed. No costs.
(R.S.K.,J.) (C.S.N.,J.)
06.11.2024
Index : Yes/No
Internet : Yes/No
KST
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To
The Sales Tax Appellate Tribunal
Additional Bench, Chennai.
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R.SURESH KUMAR, J.
and
C.SARAVANAN, J.
KST
06.11.2024
https://www.mhc.tn.gov.in/judis
