Holding

A credit note issued to a dealer for replacing a defective part from the dealer's stock or purchased from the market is valuable consideration and amounts to a sale liable to sales tax, whereas a credit note issued when the dealer merely receives a part from the manufacturer does not constitute a sale.

Summary

The Supreme Court examined whether a credit note issued by an automobile manufacturer to a dealer, for replacing a defective part under a warranty, constitutes a sale liable to sales tax. It held that when the dealer uses a part from his own stock or purchases it from the market and is reimbursed by a credit note, the credit note is valuable consideration and the transaction is a sale under the sales tax statutes. However, where the dealer merely receives a part from the manufacturer to replace a defect, no sale occurs. The Court applied the principles from Mohd. Ekram Khan, overruled the contrary rulings in Prem Motors and Geo Motors, and affirmed that dealers in the first scenario must pay sales tax. Consequently, the dealers' appeals were dismissed and the revenue's appeals were allowed.

Issues considered

Whether a credit note issued by a manufacturer to a dealer for warranty replacement of a defective part is taxable as a sale under the sales tax enactments of the respective States.
Whether the judgment in Mohd. Ekram Khan & Sons v. CTT applies to the present facts involving warranty replacements.
Whether the dealer acts as a principal or an agent of the manufacturer and the impact on tax liability.
Whether the transaction constitutes a sale or merely a service/agency transaction.
Whether the credit note qualifies as "valuable consideration" within the definition of sale.

Legislation cited

Central Sales Tax Acts. 2(b), s. 2(g), s. 4, s. 5
Karnataka Value Added Tax Act, 2003s. 2(35), s. 2(36)
Rajasthan Sales Tax Act, 1994s. 2(38), s. 28, s. 30
Sale of Goods Act, 1930s. 12, s. 13, s. 59

Subjects

Sales TaxCredit NoteWarrantySale of GoodsValuable ConsiderationDealer-Manufacturer RelationshipTaxabilityContract of Sale

Judgment

1268 [2023] 10
SUPREME S.C.R.REPORTS
COURT 1268 : 2023 INSC [2023]
533 10 S.C.R.

A M/s TATA MOTORS LTD.
v.
THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES
(SPL) & ANR.
B (Civil Appeal No. 1822 of 2007)
MAY 15, 2023
[K. M. JOSEPH, B. V. NAGARATHNA AND
AHSANUDDIN AMANULLAH, JJ.]
Sales Tax – Credit Note – Warranty Agreement – Whether, a
C
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 under the sales
tax enactments of the respective States – Observations made by
D Supreme Court in Mohd. Ekram Khan case wherein three other
judgments of the Delhi High Court, Madhya Pradesh High Court
and Kerala High Court in Prem Nath Motors; Prem Motors and Geo
Motors respectively were considered and the latter two judgments
were overruled – Correctness of – Held: The judgment of in Mohd.
Ekram Khan is applicable to a situation where a manufacturer issues
E
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
F 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
G
– 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
H the purpose of the service rendered by him as a dealer under a
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dealership agreement or any other agreement akin to an agent of A
the manufacturer which is not a sale transaction – On the above
understanding of the judgment 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 – A credit note issued by a
B
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 – Appellants-dealers/assessees
liable to pay sales tax under the respective State enactments under
consideration – Sale of Goods Act, 1930 – Central Sales Tax Act. C
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 D
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 E
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 F
may be a condition, though called a warranty in the contract.
Contract – Collateral contracts and collateral warranties –
Discussed.
Answering the Reference, the Court
G
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
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1270 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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
B
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
C 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
D 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
E 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
F 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
G 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
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earlier would have purchased the same from the manufacturer of A
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
B
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, C
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
D
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 E
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 F
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 G
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
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A 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
B
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
C 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
D 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
E 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
F 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.
G [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

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dealer is discharging his warranty pursuant to the sale of the A
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 B
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 C
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 D
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 E
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 F
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 G
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
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1274 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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
B 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
C 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
D 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]
E 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
F 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
G 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
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expressions cash or deferred payment, therefore, it means A
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
B
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 C
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 D
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 E
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 F
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 G
credit note which is to be read within the definition of “price”.
[Para 46][1334-H; 1335-A-D]

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1276 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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
B
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
C 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
D
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
E 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
F 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
G 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
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consideration for the spare part used by the dealer from his stock A
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
B
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 C
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
D
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 E
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 F
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 G
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]
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A 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
B
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
C 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
D
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]
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
F 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
G 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
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customer. Thus, a contract could arise even though the promise A
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
B
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 C
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
D
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 E
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 F
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, G
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
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A 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
B 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
C 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
D 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
E 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,
F 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)
G
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

H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER 1281
OF COMMERCIAL TAXES (SPL) & ANR.

624 : [2006] 2 Suppl. SCR 673; Commissioner of A
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.
B
(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’ C
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 D
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. E
(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 F
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, G
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 H
1282 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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
B 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.
Case Law Reference
C [2004] 3 Suppl. SCR 116 affirmed Para 4
[1959] SCR 379 referred to Para 10(1)(ii)
[1995] 3 SCR 1143 referred to Para 10(I)(iii)
(1967) 3 SCR 557 held inapplicable Para 10(I)(iii)
D
[2014] 5 SCR 912 referred to Para 10(II)(iii)
[1989] 2 SCR 320 referred to Para 10(II)(iii)
[2018] 7 SCR 1191 referred to Para 10(II)(iv)
[1967] 3 SCR 876 held inapplicable Para10(II)(iv)
E
[2017] 14 SCR 301 referred to Para 10(III)(ii)
[1978] 2 SCR 433 referred to Para 12.7
[1963] 2 Suppl. SCR 459 referred to Para 12.7
[2006] 1 Suppl. SCR 421 referred to Para 12.8
F
[1985] 3 Suppl. SCR 342 referred to Para 12.8
[2009] 8 SCR 1152 referred to Para 13.6
[2011] 1 SCR 741 referred to Para 13.7

G [1950] SCR 15 referred to Para 13.7
[2002] 4 Suppl. SCR 150 referred to Para 13.8
[1996] 7 Suppl. SCR 185 relied on Para 45
[1985] 3 SCR 985 relied on Para 58
H [2006] 2 Suppl. SCR 673 relied on Para 59
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER 1283
OF COMMERCIAL TAXES (SPL) & ANR.

[2012] 12 SCR 975 relied on Para 61 A
[1987] 1 SCR 846 relied on Para 63
[1995] 3 SCR 1143 relied on Para 64
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1822
of 2007. B
From the Judgment and Order dated 19.10.2005 of the High Court
of Karnataka at Bangalore in Sales Tax Revision Petition No. 69 of
2004.
With
C
Civil Appeal Nos. 1446/2010, 3733, 3734/2023, 11724/2018, 3827/
2011, 3856/2013, 5815, 2756/2012, 3718/2023, 5969, 5967/2011, 3716-
3717/2023, 3821, 4019, 3822, 4021/2011, 3719-3723, 3735/2023, 4516,
10924/2018, 1821/2007, 9979/2018, 3004-3006/2017, 3730-3732, 3740,
3725-3727, 3724/2023, 3825-3826, 3823/2011, 6172/2009, 3824, 3820/
2011 and 3715/2023. D
Nikhil Goel, Saurabh Mishra, A.A.Gs., Ms. Ankita Chaudhary,
Dy. A.G., Santosh Kumar Bagaria, Kavin Gulati, R. K. Raizada, Dr.
Manish Singhvi, V Sridharan, S. K. Upadhayay, Pallav Sisodia, Sr. Advs.,
Punit Dutt Tyagi, P. K. Manohar, K. K. Mani, Ms. T. Archana, Rajeev
Gupta, Vinay Rajput, Kumar Ajit Singh, Ms. Subasri Jaganathan, Amar E
Dave, Ms. Ruby Singh Ahuja, Nikhil Rohatgi, Vishal Gehrana, Ms. Hancy
Maini, Jappanpreet Hura, Ms. Meghna Mishra, M/s. Karanjawala &
Co., M. P. Devanath, Ms. Pragati Neekhra, Sonal Jain, Udayan Jain,
Ms. Kajal Sharma, Bhakti Vardhan Singh, Ankit, Rahul Kaushik, Mrs.
Manik Karanjawala, Arpit Parkash, Ms. Shubhangi Agarwal, Irshad
F
Ahmad, Yashraj Singh Deora, Siddhant Singh, Abhishek Singh, Priyesh
Mohan Srivastava, Ms. Apeksha Mehta, Ms. Neha Choudhary, Ms.
Falguni Gupta, Sahil Parghi, Ms. Charanya Lakshmikumaran, Vishal
Meghwal, Ms. Yashka Bum, Milind Kumar, Sanjay Jain, Rajeev Kumar
Dubey, Kamlendra Mishra, G. N. Reddy, Hitesh Kumar Sharma,
Akhileshar Jha, Chaman Sharma, Saurabh Kumar Solanki, Amit Kumar G
Chawla, Ravish Kumar Goyal, Nitin Sharma, Naresh Kumar, V. N.
Raghupathy, Manendra Pal Gupta, Md. Apzal Ansari, Adithya Roy, Nishe
Rajen Shonker, C. K. Sasi, Abdulla Naseeh V T, Ms. Meena K Poulose,
Rahul Kaushik, Ms. Deepanwita Priyanka, Bhakti Vardhan Singh,
Aniruddha Joshi, Aniruddha Deshmukh, Siddharth Dharmadhikari,
H
1284 SUPREME COURT REPORTS [2023] 10 S.C.R.

A Aaditya Aniruddha Pande, Bharat Bagla, Sourav Singh, Yashraj Singh
Bundela, Pashupathi Nath Razdan, Tarun Gulia, Puneet Jain, Sarad Kumar
Singhania, Ms. Rashmi Singhania, Abhinav Shrivastava, Sunny
Choudhary, Shivang Rawat, Ms. Radhika Jalan, Ms. Deepti Gupta, Arun
Adlakha, Naman Gupta, D. K. Sinha, Advs. for the appearing parties.
B The Judgment of the Court was delivered by
NAGARATHNA, J.
Leave granted.
2. These Civil Appeals arise from the judgments of the High Courts
C of Karnataka, Rajasthan, Allahabad, Madhya Pradesh, Bombay, Andhra
Pradesh, Kerala and Gujarat. Since common questions of law and facts
have been raised in these appeals vide Reference Order dated 05.12.2019
made by a Bench of two judges to a Bench comprising of three judges,
the reference has been heard and is accordingly answered.

D In some of the civil appeals, the dealers–assessee are the
appellants, while in rest of the appeals the respective States are the
appellants.
Preface:
3. By order dated 05.02.2019, reference has been made to a Bench
E of three Judges which shall hereinafter be referred to as the “Reference
Order”.
The pertinent paragraphs of the Reference Order read as under:
“15. 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
F 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
G 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
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1285
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

paid. Thus, if there is no consideration for these replaced parts, A
can sales tax be levied at all? The judgment in Mohd. Ekram
Khan & Sons case [Mohd. Ekram Khan & Sons v. CTT, (2004)
6 SCC 183] 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 judgment
B
in Premier Automobiles Ltd. case [Premier Automobiles
Ltd. v. Union of India, (1972) 4 SCC (N) 1: (1972) 1 SCR 526]
is stated to contain a different factual situation, as per the
observations in Mohd. Ekram Khan & Sons case [Mohd. Ekram
Khan & Sons v. CTT, (2004) 6 SCC 183]. There are observations
referred to above, again in Mohd. Ekram Khan & Sons C
case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183],
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
D
price”. The assessee actually had purchased the parts and paid
sales tax on it, but on return of the defective part to the
manufacturer, was given a credit note.
16. We have some reservations in respect of the observations
and legal propositions laid down in Mohd. Ekram Khan & Sons
case [Mohd. Ekram Khan & Sons v. CTT, (2004) 6 SCC 183] E
and consider it appropriate that the matter be considered by a
larger Bench.”
4. The point for consideration under the Reference Order is,
whether, a credit note issued by a manufacturer to a dealer of automobiles
in consideration of the replacement of a defective part in the automobile F
sold pursuant to a warranty agreement being collateral to the sale of the
automobile is exigible to sales tax under the sales tax enactments of the
respective States. While considering the said question, the Reference
Order doubts the correctness of the observations made in Mohd. Ekram
Khan & Sons vs. CTT, (2004) 6 SCC 183 (Mohd. Ekram Khan). G
5. It may be mentioned that in the aforesaid decision three other
judgments of the Delhi High Court, Madhya Pradesh High Court and
Kerala High Court in Commissioner of Sales Tax vs. Prem Nath
Motors, (1979) 43 STC 52 (Delhi), (Prem Nath Motors); Prem
Motors, Gwalior vs. Commissioner of Sales Tax, Gwalior 1986 (61)
H
1286 SUPREME COURT REPORTS [2023] 10 S.C.R.

A STC 244 MP (Prem Motors) and Geo Motors vs. State of Kerala
(2001) 122 STC 285 (Geo Motors) respectively were considered and
the latter two judgments were overruled.
Factual Background:
6. Of the thirty-four cases before us, the factual conspectus
B involves provisions of the respective Sales Tax Act and similar questions
of law. Thus, the facts in Commercial Tax Officer vs. M/s Marudhar
Motors, C.A. No. 3856/2013 only are encapsulated for the sake of
convenience as under:
i. The assessee, M/s Marudhar Motors is a dealer of TATA
C Vehicles. Under the dealership agreement, the dealer/
assessee would provide replacement of warranty goods sold
to the customer.
ii. There exists a separate warranty agreement between the
manufacturer and the ultimate customer to whom such
D vehicles are sold by the assessee.
iii. In the normal course of business transactions involving the
sale of automobile parts, Tata Motors sells vehicles and
spare parts to Marudhara Motors by charging CST against
“C” form. Thereupon, Marudhara Motors sells these goods
E to customers through invoices collecting local sales tax at a
price not exceeding the maximum price prescribed by the
manufacturer.
iv. However, in the case of warranty claims raised by customers
due to the emergence of defects in some parts, such parts
F are replaced free of cost to the customers to avoid delay in
first securing such parts from the manufacturer, Tata Motors,
and replacing the same. The dealer, on behalf of the
manufacturer, collects a defective component or the vehicle
itself from the customer and replaces it with part/s or vehicle
G in his stock purchased from the manufacturer. This
defective component/s or vehicle received on exchange by
the dealer from the customer is returned back to the
manufacturer from whom the dealer had purchased the
same in the first place i.e., Tata Motors, who after receiving
the parts or the entire vehicle and satisfying themselves
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1287
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

about it being defective, issues credit notes, thereby crediting A
the running account of the dealer which is maintained for
sale transactions, at the price at which the good was initially
sold to the dealer.
v. Pursuant to the decision of this Court in Mohd. Ekram
Khan, the assessing authority invoked the power of B
reassessment under Section 30 of the Rajasthan Sales Tax
Act, 1994 to impose a tax on assessee’s turnover having
escaped assessment for the assessment years 2000-2001
to 2003-2004. However, for the assessment years 2004-
2005 and 2005-2006, regular assessment proceedings were
C
initiated under Section 28 of the Rajasthan Sales Tax Act,
1994.
vi. On July 22, 2006, the Deputy Commissioner (Appeals) of
Jodhpur passed an order upholding the levy of tax upon an
assessee but setting aside the levy of interest and penalty
D
imposed by the assessing authority under Section 65 of the
Act.
vii. This decision gave rise to six cross-appeals filed by the
assessee and another six appeals filed by the Revenue. The
assessee was dissatisfied with the decision to uphold the
levy of tax and filed six separate appeals for six different E
assessment years - 2000-2001, 2001-2002, 2002-2003, 2003-
2004, 2004-2005, and 2005-2006. On the other hand, the
Revenue was aggrieved by the decision to set aside the
levy of interest and penalty and filed another batch of six
appeals. F
viii. The matter was taken up by the Rajasthan Tax Board in
Ajmer, which issued a common judgment on June 18, 2007,
disposing of all twelve appeals. The Rajasthan Tax Board
set aside the decision of Deputy Commissioner (Appeals)
and thereby set aside the imposition of tax. It found the G
transaction of replacing the defective parts did not fall within
the definition of ‘sale’ as defined under Section 2(38) of
the Rajasthan Sales Tax Act. It also concluded that the
facts of the case are distinguishable from the facts in Mohd.
Ekram Khan.
H
1288 SUPREME COURT REPORTS [2023] 10 S.C.R.

A ix. The Revenue filed revision petitions under Section 86 of
the Rajasthan Sales Tax Act, 1994. The Rajasthan High
Court, while dismissing these revision petitions and affirming
the order of Rajasthan Tax Board, distinguished the facts
in the case from the facts and reasoning in Mohd. Ekram
Khan by underlining three distinguishing factors. Firstly, it
B
noted that the agreement between the manufacturer and
dealer reflected a principal-to-principal relationship, and not
a principal-agent relationship. Secondly, it was noted that
the transaction between manufacturer and dealer, pertaining
to the return of defective parts to the manufacturer and the
C issue of credit notes to the dealer, is independent of the
transaction between manufacturer and customer, pertaining
to the discharge of warranty obligation. Thirdly, it was
considered that the warranty obligation was being discharged
free of cost. It was noted that, Mohd. Ekram Khan was
decided on the premise that the dealer assessee had supplied
D
the parts and had received the price.
Gist of Cases under consideration:
7. The present appeals assail judgments rendered by eight High
Courts. While all fifteen decisions rendered by Rajasthan High Court
E are in the favour of the assessee, all decisions rendered by Kerala,
Karnataka, Bombay, Andhra Pradesh, Madhya Pradesh, and Gujarat
High Courts are in the favour of Revenue. In the case of Allahabad
High Court, one decision is in favour of Revenue while the other is in
favour of the assessee. A table of cases is drawn up as under:

F

G

H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1289
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

7.1. As is clear from the table above, fifteen out of the thirty-four A
cases before us pertain to revenue’s appeals against the decisions of the
Rajasthan High Court, relying upon the decision in C.T.O. (AE), Jodhpur
vs. M/s Marudhara Motors, Jodhpur, (2010) 29 VST 114,
(Marudhara Motors) dated 16.03.2009. In the aforementioned decision,
the Rajasthan High Court distinguished the facts and reasoning in Mohd.
B
Ekram Khan by underlining three distinguishing factors. Firstly, it noted
that the agreement between the manufacturer and dealer reflected a
principal-to-principal relationship, and not a principal-agent relationship.
Secondly, it was noted that the transaction between manufacturer and
dealer, pertaining to the return of defective parts to the manufacturer
and the issue of credit notes to the dealer, is independent of the transaction C
between manufacturer and customer, pertaining to the discharge of
warranty obligation. Thirdly, it was considered that the warranty obligation
was being discharged free of cost. It was noted that, Mohd. Ekram
Khan was decided on the premise that the dealer assessee had supplied
the parts and had received the price.
D
7.2. The other decision in favour of the assessee was rendered
by Allahabad High Court in M/s. Vikrant Automobiles vs.
Commissioner, Commercial Tax, U.P., vide order dated 06.11.2015.
The High Court dismissed the revision against the order of Customs,
Excise and Service Tax Appellate Tribunal wherein the transaction of
replacement of spare parts as part of warranty was held not to be E
assessable. The High Court held that it was ‘well recognized that in
supply of spare parts to the customer by the dealer during the period
of warranty free of charge, no sale consideration passes from the
customer to the dealer and therefore the cost of the spare parts
cannot be included in the turnover of the sale of the dealer.’ F
7.3. In a later judgment rendered by the same High Court, the
above decision was found to be of no assistance to the assessee.
Therefore, in The Commissioner, Commercial Tax Lko. vs. S/S
Maskat Motors Pvt. Ltd., decided on 08.12.2016, the said Court reversed
the finding of the Tribunal that the imposition of the tax was not justified G
because defective parts of motor vehicles have been replaced free of
cost and the manufacturer had issued credit notes. The High Court found
the above conclusion to be perverse, self-contradictory, and ‘contrary to
the charging section as well as the definition of “Sale” under the U.P.
Act and Central Act.’ Applying Mohd. Ekram Khan, the High Court
H
1290 SUPREME COURT REPORTS [2023] 10 S.C.R.

A found all elements of sale to be completed as the transaction of supply
of spare parts to consumers was concluded by the payment of valuable
consideration by the manufacturer in the form of credit notes to the
dealer. Therefore, the High Court held that the assessee has sold spare
parts for valuable consideration attracting liability to tax under the U.P.
Act.
B
7.4. The assessees have impugned four decisions of the Karnataka
High Court. All these decisions have followed the reasoning and
conclusions arrived at in the case of Dy. Commissioner of Commercial
Taxes (Assessment), Bangalore vs. Prerana Motors (P) Ltd., disposed
of on 19.10.2005. In the aforementioned case, an order against the
C Revenue, by Customs, Excise and Service Tax Appellate Tribunal was
reversed on revision under Section 23(1) of Karnataka Sales Tax Act,
1957, on the ground that the dispute is covered by the decision in Mohd.
Ekram Khan. It was reasoned that in Mohd. Ekram Khan, the assessee
was a dealer registered under the provisions of the U.P. Trade Tax
D Act,1948 and also an agent of M/s. Mahindra and Mahindra
(manufacturer). The manufacturer had a warranty agreement with the
purchasers of vehicles to replace defective parts during the warranty
period. The conclusion of Mohd. Ekram Khan was relied upon to
conclude that the transaction was taxable as the manufacturer had made
payment to its agent by issuing credit notes for the supply of defective
E parts during the warranty period.
7.5. In a similar vein, the five impugned decisions rendered by
the High Court of Kerala followed the reasoning and conclusions in the
case of M/s TVS and Sons Ltd. vs. State of Kerala, decided on
06.06.2007. Clause 23 of the Dealership Agreement states:
F
“The Dealer is not and shall not be the agent of the
Company for any purpose, and the dealer has no right or
authority to assign or create any obligation of any kind, express or
implied, on behalf of the Company to bind the Company in any
way, to accept any service or process upon the Company or to
G receive any notice of any nature whatsoever.”
7.6. Also Warranty Policy of Mahindra & Mahindra Ltd. on
‘Warranty Repair Attention’ states that the dealer should not charge the
customer for warranty repairs. It emphasizes that the repairs should be
carried out absolutely free of charge and the claims should be submitted
H to the manufacturer for reimbursement.
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1291
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

7.7. The High Court affirmed the decision of the Kerala Sales A
Tax Appellate Tribunal wherein the decision in Mohd. Ekram Khan
was applied to confirm the assessment order passed by the Revenue
against the dealer who had replaced defective parts of automobiles for
free, in the discharge of his obligations under the dealership agreement.
The Tribunal had rejected the argument that the dealer was merely
B
discharging the obligations of the manufacturer in so far as the warranty
was concerned and therefore, the transaction was not taxable.
7.8. The three impugned decisions, emanating from the Bombay
High Court, follow the decision in M/s Navnit Motors Pvt Ltd. vs. State
of Maharashtra, decided on 29.11.2011. The High Court recorded that
the Sales Tax Tribunal had declined to refer the matter to the High Court C
under Section 61 of the Bombay Sales Tax Act, 1959. It further noted
that the Tribunal, while following the law laid down in Mohd. Ekram
Khan found that the dealer was not an agent of the manufacturer, i.e.,
Maruti Udyog Ltd. Furthermore, it was observed that the title and risk in
the goods pass to the dealer once it is purchased from Maruti Udyog D
Ltd. and the delivered goods pass to him at the factory gate. Moreover,
the replacement for defective parts covered by warranty is done by the
dealer out of his stock of purchased goods. Also, the cost of parts incurred
by the dealer in carrying out a repair, or replacement of the defective
part is reimbursed by the manufacturer. The High Court rejected the
attempt of the assessee to distinguish the facts in Mohd. Ekram Khan E
as the attempt was premised on the assertion that in Mohd. Ekram
Khan, the relationship between the dealer and manufacturer involved
an agency whereas in the present case, the transaction was on a principal-
to-principal basis. The High Court affirmed the reasoning of the Tribunal
on this question by recording that the nature of the relationship as found F
in the dealership agreement contested in Mohd. Ekram Khan was the
same as that in the case at hand: principal-to-principal relationship.
Therefore, the assessee cannot seek to take benefit of a sentence recorded
in the judgment in Mohd. Ekram Khan that the dealer was an agent of
the manufacturer. The High Court further reasoned that the terms of
agreement in Mohd. Ekram Khan was similar to the case being G
considered as clause 49 of the Agreement of Dealership required the
dealer to promptly and effectively deal with any claim made by the
customer of any vehicle under the provisions of the warranty currently
in force. In terms of the warranty, the cost of parts incurred by the
dealer in carrying out repairs or replacement of defective parts is in H
1292 SUPREME COURT REPORTS [2023] 10 S.C.R.

A accordance with the procedure established by the manufacturer and
reimbursed by the manufacturer to the assessee.
7.9. Two decisions of the Madhya Pradesh High Court are assailed
in the present case by the assessees. Both orders follow the reasoning
of court in M/s. Harsh Automobiles Private Limited vs. The
B Commissioner of Commercial Tax, Indore, decided on 25.01.2018.
The High Court relied upon the dictum in Mohd. Ekram Khan and
rejected the assessee’s contention that the replacement of motor vehicle
part during the warranty period was not covered in sale and, therefore,
is not liable to tax.
C 7.10. The sole impugned decision from the Gujarat High Court,
M/s Kataria Automobiles Pvt Ltd. vs. State of Gujarat, was decided
on 20.03.2015. The High Court applied the decision of this Court in
Mohd. Ekram Khan and concluded that the transaction of replacement
of defective parts was taxable as the dealer had received payment in
the form of credit notes for the discharge of the manufacturer’s warranty
D obligation. The High Court observed that it was admitted that the dealer
was purchasing the spare parts from the open market and replacing the
defective parts during the warranty period. It also noted that the dealer
was being compensated by way of credit notes. Moreover, the
manufacturer has received the defective parts from the dealer. The High
E Court reasoned that if the said defective parts were purchased from the
open market, the manufacturer would have been obliged to pay sales
tax.
7.11. Two decisions of the Andhra Pradesh High Court are assailed
in the present case by the assessees. These cases pertain to M/s Jasper
F Industries (P) Ltd. vs. State of Andhra Pradesh, decided vide common
order dated 11.02.2011. The High Court applied the dictum in Mohd.
Ekram Khan and reasoned that it was not open to the High Court to
distinguish the judgment of the Supreme Court on a microscopic
examination of the different facts situation. Therefore, the High Court
refused to entertain the view of the Rajasthan High Court, as enunciated
G in Marudhara Motors.
Triology of Cases considered/overruled in Mohd. Ekram
Khan:
8. The three cases considered in Mohd. Ekram Khan shall be
discussed at this stage.
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1293
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

I. Commissioner of Sales Tax vs. Prem Nath Motors, A
(1979) 43 STC 52 (Delhi): (Prem Nath Motors)
(i) The aforesaid case was a sales tax reference in which the
following two questions were referred to the High Court of
Delhi:
“(I) Whether, having regard to the facts and circumstances B
of the case, the replacement of the parts during the
continuance of the warranty entered into by the
manufacturer and/or by its authorised dealer with the
purchaser would constitute a “sale” within the meaning
of Section 2(g) of the Bengal Finance (Sales Tax) Act, C
1941 as in force in Delhi which is liable to be taxed
under the provision of the Act?
(II) Whether on the facts and in view of the
circumstances of this case, if the supply of parts
transferred to the purchaser of vehicles in replacement D
in compliance with the stipulations of the warranty is
not “sale” within the meaning of clause 2(g) of the
Act, the purchase price of the parts purchased on
the strength of certificate of registration free of cost
or purchased at the concessional rate of tax under
the Central Sales Tax Act, 1956, on furnishing ‘C’ E
form, is liable to be added to the taxable turnover of
the purchasing dealer under the provisions of the
second proviso to clause (ii) of sub-section (2)
of Section 5, of the Bengal Finance (Sales Tax) Act
1941, as in force in Delhi ?” F
(Underlining by us)
(ii) In the said case, the Division Bench of the Delhi High Court
considered the order of the Financial Commissioner who had
held that the transfer of property in the parts of a car replaced
under a warranty constituted a “sale” and, as such, the G
replacement of parts as a consequence of the terms and
stipulations of the warranty must be deemed to be a
continuation of the original sale, the price of which was
included in the consolidated sale price determined and realised
at the time of transfer of goods in the shape of the car with a
H
1294 SUPREME COURT REPORTS [2023] 10 S.C.R.

A warranty. It was further observed that the replacement of
parts of the car provided free of cost by the dealer in terms
of the warranty was part of the consolidated price realised
at the time of the initial transfer and on which sales tax was
paid and the replacement of the parts would deem to be a
‘sale’ not liable to imposition of further sales tax.
B
(iii) The precise question considered in the said case was,
whether, transfer of the parts replaced in pursuance of the
warranty amounted to a sale within the meaning of the Sales
Tax Act and whether the sale price of the car which had
been subjected to the sales tax could be regarded as having
C included the cost or value of spare parts used in the
replacement, in compliance with the stipulations in the
warranty. On considering the warranty clause, it was noted
that the sale of cars was along with the warranty to replace
defective parts free of cost and the price was fixed at the
D time of the sale. After noting the distinction between the
condition and warranty in a contract of sale of goods, it
was observed that the consideration on the defective part,
that might be replaced under the warranty was not
separately specified because it was included in the price
fixed at the time of sale of the car. In other words, the
E transfer of property and the part replaced in pursuance of
stipulation of warranty is part of the original sale of the car
for the price fixed and received from the buyer or consumer.
The price so fixed and received was a consolidated price
for the car and the parts that may have been supplied by
F way of replacement in pursuance of the warranty.
Accordingly, it was observed that the Financial
Commissioner was right in holding that the price for the
replaced part was already charged and paid, on which sales
tax was already levied and collected and hence, there was
no liability to the imposition of further sales tax.
G
II. Prem Motors, Gwalior vs. Commissioner of Sales Tax,
Gwalior, 1986 (61) STC 244 MP: (Prem Motors)
(i) The question considered in the said case under Section 44
(1) of the M.P. General Sales Tax Act, 1958 is extracted as
H under:
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1295
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

“Whether in the facts and circumstances of the case, A
the Tribunal was justified in holding that the
reimbursement of Rs.33,263/- received from the
principals will not form part of the sale price as
defined under section 2 (o) of the M. P. General Sales
Tax Act, 1958?”
B
(Underlining by us)
In the said case, the revenue contended that when the
spare parts are replaced by the assessee (dealer) to the
customer free of charge, being the condition of warranty,
he recovers the price from the manufacturer and in C
substance it is the sale of the spare parts to the customer
and therefore, it is liable to tax payable by the dealer.
(ii) The Division Bench of the Madhya Pradesh High Court,
however, held that the aforesaid contention of the revenue
suffered from a basic policy issue. That the warranty for a D
sale of car is 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 that of
the manufacturer. Therefore, when the assessee (dealer)
replaces parts to the customers and either gets those parts
from the manufacturer or gets it reimbursed, it is neither a E
sale of those parts by the dealer to the customer nor to the
manufacturer, what it does only is to pass on the part from
the manufacturer to the customer but in order to avoid delay
and inconvenience to the customer, he replaces the parts
first and gets them from the manufacturer later and thus, it F
does not fall within the ambit of the definition of sale as
provided under the Act.
III. Geo Motors vs. State of Kerala, (2001) 122 STC 285:
(Geo Motors)
(i) The facts in the said case were that the petitioner (Geo G
Motors) was an agent for automobile manufacturers like
Hindustan Motors Ltd. in the State of Kerala. The new
vehicles were covered by a warranty for a specified period.
During the warranty period if spare parts had to be replaced,
the petitioner therein as the agent of the manufacture, made
H
1296 SUPREME COURT REPORTS [2023] 10 S.C.R.

A the replacement free of charge to the owners of the vehicle.
The value of such spare parts replaced by the petitioner
therein during the warranty period was reimbursed by the
manufacturer by issuing credit notes. The spare parts were
purchased in bulk and replacement was made from out of
such stock held by the petitioner. After replacement, the
B
petitioner therein would make a claim to the manufacturer
who would issue the credit notes. The manufacturer would
issue credit notes for the value together with excise duty
and sales tax, thereby, cancelling the original sale made to
the petitioner in respect of the item replaced. Therefore, it
C was contended that there was only a sale cancellation
between the manufacturer and the petitioner and that the
petitioner therein had already suffered tax at the point of a
sale and therefore, every component part of the car would
have to be taken to have suffered tax at the point of a sale
and when replacement was made it is in respect of an item
D
which has suffered a tax at the point of a sale.
According to the revenue, the replacement of the spare
parts was by purchase made from outside the State by issue
of C-forms.
E (ii) The Division Bench of the Kerala High Court held that the
transaction in question cannot be said to be a sale. That the
purchase of spare parts may have been by giving C-forms
but it was used purely for replacement and not for sale.
That credit notes are issued by the manufacturer by reducing
the sale value. In this regard, reliance was placed on Prem
F Nath Motors. Hence, a direction was issued to exempt the
turnover of the spare parts which were used for
replacement.
Mohd. Ekram Khan:

G 9. The aforesaid two cases, namely, Prem Motors and Geo Motors
were overruled in Mohd. Ekram Khan. Further, the question considered
therein was, whether, the amount received by the assessee therein for
supply of parts to the customers as a part of the warranty agreement
was liable to tax. The assessee therein was an agent of M/s Mahindra
and Mahindra (manufacturer). The manufacturer had a warranty
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1297
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

agreement with the purchasers of vehicles (the customers) to replace A
defective parts during the warranty period. The manufacturer would
make payment of a certain price on account of parts supplied by the
assessee to the customer by way of replacement of the defective part
obviously without charging the customer for the same. Credit notes were
issued by the manufacturer to the assessee as the price of the parts
B
supplied to the customers. The assessing officer was of the view that
the payment received through credit notes amounted to a sale in terms
of Section 2 (h) of the Uttar Pradesh Trade Tax Act, 1948. The Trade
Tax Tribunal, Varanasi held in favour of the assessee by stating that
there was no sale. The revenue had carried the matter before the High
Court which had held that the transactions constituted sale thereby, C
attracting levy of tax.
9.1. In the said case, reliance was placed on Prem Nath Motors,
Prem Motors and Geo Motors by the assessee. It was contended that
as part of a warranty agreement, replacement of the defective agreement
was made by the dealer and there was no sale involved. As opposed to D
this, the revenue contended that the transaction between the assessee
and manufacturer was a separate transaction. It was not the case of the
assessee therein that the manufacturer had supplied the goods to the
customers. If it had supplied parts to the customers through the assessee,
the position may have been different. The manufacturer was obligated
to make the replacement. If he did not possess the parts to meet the E
contractual obligation, he would have purchased the part from any seller
of the part and would have paid the sales tax. In the said case, the
assessee had supplied the goods for which it had received the
consideration by way of credit notes and/or other mode of payment.
This Court observed that the factual position in Prem Nath Motors F
case was different. That in Geo Motors and Prem Motors, the nature
of the transaction between the assessee and manufacturer was lost sight
of. It was observed that when the manufacturer may have purchased
from the open market, parts for the purpose of replacement of the
defective parts, it would have paid taxes. But the position is not different
because the assessee had supplied the parts and had received the price. G
That the assessee had received the payment of the price supplied to the
customer. Therefore, the transaction is subject to levy of tax. The
decisions in Geo Motors and Prem Motors were overruled.
It is in the above context that the Reference Order has been
passed doubting the aforesaid observations. H
1298 SUPREME COURT REPORTS [2023] 10 S.C.R.

A Submissions:
10. We have heard learned senior counsel and learned counsel
for the respective parties at length and shall proceed to answer the
reference.
Arguments on Behalf of Assessees in the present Appeals/
B SLPs:
I. Submissions of Sri Kavin Gulati, senior counsel for the
appellant in Civil Appeal No.1822/2007:
(i) Learned senior counsel Sri Gulati submitted that the Tata
C Motors dealership agreement, particularly clauses 1(a), 1(b),
1(e), 9, 10, 11(a), 12, 13(c), 25, and 33 indicate that the
transaction between the manufacturer and the dealer is one
of Principal and Principal. Tata Motors has already collected
and paid Sales Tax while selling the automobiles in question
to the dealers. The dealer is contractually bound to service
D the warranty obligations undertaken by the manufacturer
at the time of the sale. It was brought to our attention that
in the present appeals, the respective State’s Sales Tax
authorities had adopted varying interpretations of the
allegedly taxable transactions. While the Assessing Officer
E in Karnataka had characterized the sale as between dealer
and manufacturer; the authorities in Kerala deemed it to be
a sale by the dealer without specifying to whom the sale
was made. He clarified that during the course of the hearing,
the counsel for the State of Kerala adopted the stand that
the sale was between dealer and manufacturer.
F
(ii) On the question of law referred to this Court, it was
contended that, Mohd. Ekram Khan struck a discordant
note against the well-established principle, enunciated in
Premier Automobiles, Prem Nath Motors, Prem Motors
and Geo Motors, that the cost of warranty was included in
G the initial transaction of sale and was not taxable separately.
Therefore, it was contended that all transfers are not sales,
as a sale has a definitive connotation in sale tax law. Sales
tax is not applicable to all transfers which may happen by
means of transactions other than sale, such as gift, barter,
or exchange. Relying upon State of Madras vs. Gannon
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1299
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

Dunkerley & Co, (1959) SCR 379, [Gannon Dunkerley A
(I)], it was submitted that crucial elements of a tax-eligible
sale transaction are: i) the existence of buyer and seller, ii)
existence of an agreement between parties for transferring
title of goods, iii) such transfer should be supported by
monetary consideration, and iv) property in goods must pass
B
or be transferred. It was contended that the present facts
do not present a taxable sale because:
a. firstly, spare parts are supplied to the customers by
the dealers completely free of charge by way of
replacement of goods already sold.
C
b. secondly, customer receives the new spare part as
installed in his vehicle and returns the defective part.
c. thirdly, the substance of the transaction remains the
discharge of a warranty obligation assumed by the
manufacturer, and through him, the dealer, while D
selling the original goods. As the spare parts are
deducted from the stock of the dealer due to
convenience, credit is deservedly given by the
manufacturer to the dealer to account for the value
of the goods supplied on behalf of the manufacturer.
E
d. fourthly, any dealer of the manufacturer herein can
be approached for discharging the warranty obligation
free of charge.
e. fifthly, the department has wrongly assumed that the
supply of spare parts to the customer is a sale made F
to the manufacturer albeit the title is being transferred
to the customer on account of the dealership
agreement.
(iii) Learned senior counsel further submitted that replacement
of spare parts during the warranty period does not constitute
G
a sale. This proposition is supported by Section 12(3) of the
Sale of Goods Act, 1930 (“the Act”, for short) which states
that a warranty is a stipulation collateral to the main purpose
of the contract. Reliance was also placed upon the decision
of the Canadian Supreme Court in General Motors
Products of Canada Ltd. vs. Leo Krabvitz, (1979) SCC H
1300 SUPREME COURT REPORTS [2023] 10 S.C.R.

A Online CAN SC 2, wherein it was clarified that the
warranty claim by a purchaser was connected to his title
over the product which was acquired through the original
sale. Therefore, it was contended that the old parts were
returned to the manufacturer through the dealer for the
B reason that it was crucial to servicing of the warranty
obligation. The decision of this Court in Government of
India vs. Madras Rubber Factory Limited, (1995) 4 SCC
349, not validating the treatment of warranty as a trade
discount under excise law was also relied upon. Reliance
was also placed on Devi Dass Gopal Krishnan vs. State
C of Punjab, (1967) 3 SCR 557, (Devi Dass Gopal
Krishnan).

(iv) Learned senior counsel, Sri Gulati submitted that the
enforcement of the warranty obligation presented the
D opposite of the contract of sale, which involves the volitional
transfer of goods. A case of discharge of a warranty is the
exact opposite as both the buyer and seller agree to subsist
within the existing sale to facilitate the seller to compensate
the buyer for a breach or damage or defect caused to them.
Reliance was also placed upon Section 59 of the Act, which
E clearly stipulates that enforcement of the remedy for breach
of warranty could be actualized in diminution or extinction
of the sale price, and if he is not compensated, he may sue
for the breach of warranty. Therefore, it was contended
that a credit note is issued by the manufacturer to the dealer
F as an acknowledgment of the diminution of the original sale
price. Axiomatically, credit note is not a sale price or valuable
consideration, as the character of credit is not towards the
price of the newly replaced part, but a credit that embodies
the diminution of the price already paid for the car.
Therefore, it was submitted that, Mohd. Ekram Khan does
G
not correctly conceive and appreciate the nature of a
warranty transaction, i.e., an undertaking to ensure defect-
free functioning of the sold product for the stipulated period
of time. Therefore, the said judgment ought to be overruled
was the submission.
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1301
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

II. Submissions of Sri S.K. Bagaria, senior counsel for the A
petitioner, M/s TVS and Sons Ltd., in SLP (C) No. 14260
of 2007:
(i) Sri Bagaria, learned senior counsel submitted that the nature
of the transaction was not that of a sale, as the service was
provided free of cost to the customer by a dealer pursuant B
to a warranty clause. The property in the replaced part
passed merely as an incident of the performance of the
manufacturer’s warranty obligation, which forms a part of
the original sale of the automobile. Sri Bagaria referred to
the relevant clauses of the Dealership Agreement and
Warranty Policy to highlight two facts: (a) dealers are C
contractually obligated to provide free-of-cost warranty
services for warranty parts to the customer and (b)
defective parts are returned by the customers and become
the property of the manufacturer.
(ii) Learned senior counsel clarified that the nature of the D
transaction was as a compensation to the buyer, and the
measure thereof was equivalent to the cost of exchange of
defective parts. He cited Benjamin’s Sale of Goods Act
(10th edn., para 16.032) to underline the compensatory
principle, following which the manufacturer compensates E
the buyer for the breach that occurred by way of the defect
in the part covered by way of a warranty. Citing para 1.069,
learned senior counsel asserted that a transaction involving
contractual compensation would not amount to the sale of
a thing as the property passes merely as an incident of
performance of a contract of indemnity. F

(iii) Therefore, learned senior counsel submitted that
enforcement of a contractual right for getting a free
replacement in exchange for a defective part was neither
any purchase by the buyer nor a sale to him. According to
learned senior counsel, this proposition was crystallized in G
Gannon Dunkerley (I), Devi Dass Gopal Krishnan,
Gannon Dunkerley (II), and Kone Elevators Pvt. Ltd.
vs. State of Tamil Nadu, (2014) 7 SCC 1.
Relying upon Builders’ Association of India vs. Union
of India, (1989) 2 SCC 645, it was stressed that the H
1302 SUPREME COURT REPORTS [2023] 10 S.C.R.

A constitutional position post-46th Amendment of the Indian
Constitution whereby the States’ legislative competence to
tax the sale of goods was circumscribed by Entry 54, List
II, Schedule VII of the Constitution. That taxation under
this entry, being limited to “sale and purchase of goods”
cannot be extended to activities that are not a sale.
B
(iv) Reliance was also placed upon Commissioner of Customs
vs. Dilip Kumar & Co., (2018) 9 SCC 1 and CIT vs.
Motor & General Stores Pvt. Ltd., AIR 1968 SC 200 to
emphasize that taxing statutes ought to be specific and must
be interpreted strictly, as taxation on citizens should not be
C subject to the whims and fancies of the government.
Learned senior counsel adopted the arguments with respect
to Mohd. Ekram Khan. That the case did not apply to
facts of the present case where the warranty obligation
was being discharged free of cost and the defective goods
D were being returned to the manufacturer. Alternatively, it
was contended that the said case was not correctly decided
as the essential elements of a sale were not considered in
the said judgment.
III. Submissions of Sri V. Sridharan, learned senior counsel
E for the petitioner in SLP (C) Nos. 12806-12808/ 2016:
(i) Learned senior counsel Sri Sridharan submitted that the
petitioner in the aforementioned cases being a dealer of M/
s Maruti Suzuki India Ltd., merely fulfilled the
manufacturer’s warranty obligation. It was urged that the
F dealership agreement was a framework agreement. Taking
note of the chain of transactions, the customer is
compensated for the consideration of purchase of an
automobile from the petitioner. Therefore, there is no
contract of sale either between the petitioner and the
customer for the replacement of defective parts or between
G the petitioner and manufacturer as sale of parts replaced
for the defective parts.
(ii) Challenging the applicability of the Central Sales Tax Act,
1956 to the present case, learned counsel maintained that
there is no inter-state movement of replacement parts as
H they are fitted at the dealer’s location. There is only the
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1303
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

movement of defective parts from the dealer’s location to A
the manufacturer if located in another State.
(iii) Learned senior counsel stressed the importance of keeping
prudent commercial sense in mind while construing the
contractual obligations in the present case. In this regard,
the decision of the United Kingdom Supreme Court in Rainy B
Sky SA & Orad vs. Kookmin Bank, (2011) UKSC 50
was cited wherein it was held that the Court was entitled to
prefer the construction which is consistent with business
common sense. Therefore, it was submitted that the contract
of warranty cannot be equated with a contingent contract
of sale, with the contingency being the occurrence of a C
defect in the parts covered under the warranty. Moreover,
the construction preferred by the Revenue that there is an
agreement to sell an unspecified good in the future for which
the manufacturer will pay the consideration is an
unreasonable one. On the other hand, the decision of this D
Court in Nabha Power Ltd. vs. Punjab State Power
Corporation Ltd., (2018) 11 SCC 508was relied upon as
it laid a five-fold test for constructing a contract of warranty
as a sale. Therein, it was held that to imply a term in a
contract, the same must be (i) reasonable and equitable;
(ii) necessary to give business efficacy; (iii) passes officious E
bystander test; (iv) be capable of clear expression; and (v)
must not contradict express term of the contract. Thus, it
was contended that the construction preferred by the
Revenue was contradicting the express terms of the
contract of warranty. F
(iv) Learned senior counsel further submitted that even if the
present transaction is assumed to be that of a sale between
manufacturer and dealer, the same has to be treated as
purchase return and not be eligible to sales tax. There is no
scope for entertaining any doubt that a purchase return
G
would be relevant only when a purchase tax is levied on
the purchaser. Furthermore, the present transaction where
manufacturer-issued credits are accounted as sales return
which is a recognized accounting practice and not a tax
avoidance strategy. Therefore, it was argued that sales
return beyond statutory time limit does not lose its character H
1304 SUPREME COURT REPORTS [2023] 10 S.C.R.

A of return. The only consequence could be that selling dealer
may not be able to claim the deduction from gross turnover.
(v) Learned senior counsel also relied upon the judgment of
the Court of Appeal, New Zealand, in the case of Suzuki
New Zealand Ltd. vs. Commissioner of Inland Revenue,
B (2001) 20 NZTC 17.The said case pertained to supply of
spare parts by the car manufacturer to the purchaser directly
or through the dealer under the terms of a warranty. Here,
the parts were transferred from the overseas Suzuki Motor
Corporation to Suzuki New Zealand. Rejecting the claim
for imposition of Goods and Services Tax, the Court of
C Appeal held that there was no export of service for GST
purposes.
Arguments on Behalf of Revenue in the present Appeals/SLPs:
Submissions of Sri Pallav Sisodia, senior counsel for the State
D of Kerala in SLP (C) No.14260/2007:
(i) Learned senior counsel, Sri Pallav Sisodia submitted that
the presence of a manufacturer’s or dealer’s warranty
on the car sold by the dealer does not make any difference
to whether the transaction of replacement of defective
E goods satisfies the elements of sale or not. The learned
senior counsel listed various instances by way of
illustrations when a customer purchases a car and reasoned
that even when a customer did not purchase a car with a
warranty but had taken an insurance, his expenses on the
replacement of defective parts are reimbursed. Yet, the
F transaction is understood as a component of the taxable
turnover of the dealer as per Explanation (5) to Section 2
(xxi) of the Kerala General Sales Tax Act, 1963. Even
when the customer enforces the warranty, the dealer
obtains a discharge of warranty obligation as a valuable
G consideration for the transfer of fresh parts from the dealer
to the customer. The car dealer gets the replacement of
parts as co-warrantor from the manufacturer towards the
discharge of warranty obligation either on a principal-to-
principal basis or as an agent of the manufacturer.
Moreover, there exists a form of recompense from the
H manufacturer to the dealer. It makes no difference if the
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1305
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

recompense is in the form of a credit note or cheque or A
cash. Irrespective of the nature of the transfer of goods
between manufacturer and dealer, it is a sale for the
purposes of sales tax laws.
(ii) It was submitted that the Prem Nath Motors line of cases
was decided on fallacious reasons, and the decision in Mohd. B
Ekram Khan deserves affirmation. Therefore, the idea of
‘continuous sale’, ‘credit note as not a valuable consideration’,
or ‘sales return’ are all red herrings not supported by facts
on record.
Submissions of Sri Ravindra K. Raizada, senior counsel for C
Commissioner, Commercial Tax, State of U.P. in SLP(C) Nos.
12119/2017 and 11509/2017:
(i) Sri Raizada, learned senior counsel submitted that the
Dealership Agreement between Tata Motors and M/s
Vikrant Automobiles was on a principal-to-principal basis. D
Furthermore, the case did not involve an exchange of the
manufacturer’s spare parts with customer’s defective parts.
Instead, the dealer purchased the parts from the
manufacturer. It is clearly not a stock transfer from the
manufacturer to the dealer. The ingredients of sale in the
present case ought to be considered complete when goods E
i.e. new spare parts, are transferred to the customers and
payment is received from the manufacturer who is fulfilling
the warranty obligation as per established trade practice.
He asserted that the manufacturer maintaining a running
account of the dealer, through a credit note in respect of F
such sale of spare parts by dealer, has acknowledged such
adjustment to be made in Sale and Purchase Account of
the dealer. Thus, the warranty claims ought to be taxable
as elucidated in Mohd. Ekram Khan. On the issue of
warranty obligation emanating from the original sale, learned
senior counsel submitted that the performance of warranty G
obligations is determined through actual damage to the
defective part at the relevant time a claim is made.
Therefore, it cannot be said to have been totally accounted
for and debited in manufacturer’s Taxable Turnover of Sales
and Purchase under VAT/Trade Tax. H
1306 SUPREME COURT REPORTS [2023] 10 S.C.R.

A (ii) Accordingly, he prayed that the case of the revenue ought
to succeed in both SLPs, therefore, SLP(C) No. 12119/
2017 should be allowed, and SLP(C) No. 11509/2017, filed
by a dealer, M/s Maskat Pvt Ltd, ought to be dismissed.
Submissions of Dr. Manish Singhvi, senior counsel for the
B State of Rajasthan in Civil Appeal No. 3856/2013:
(i) Dr. Singhvi, learned senior counsel, instructed by Sri Milind
Kumar, submitted that the exact nature of the transaction
has to be seen to determine whether sales tax was leviable
or not. It was stressed that the crucial issue pertains to the
C misuse or misdeclaration of C-Forms which are issued at
concessional rate under Section 8(4) of Central Sales Tax
Act, 1956 read with Rule 12 of Central Sales Tax Rules,
1957. Any internal adjustment qua accounts or even
contracts is alien for the charging section to operate. Thus,
in the case at hand, all spare parts were sold against C-
D Forms, and have been sold again, in violation of conditions
pertaining to resale. That, spare parts were fitted during
the warranty period for a consideration given by way of
credit notes by the manufacturer. Therefore, the penalty is
bound to be imposed on Dealer/Manufacturer company.
E Submissions of Sri Nikhil Goel, Counsel for the State of
Karnataka in Civil Appeal Nos. 1822/2007, 1821/2007 and
SLP (C) Nos. 5449-5451/2014, 5447/2014:
(i) Sri Goel, learned counsel submitted that the Karnataka Value
Added Tax Act, 2003 specifically excludes those
F transactions which are not sales. Since the transaction under
dispute is not specifically excluded, the assessees have
sought to canvass that it does not satisfy the definition of
sale under Section 2(t) of the Karnataka Value Added Tax
Act, 2003. It was further submitted that the four elements
G of the sale are completed in the transaction under dispute.
The State seeks to tax sales and it does not matter if there
is an element of profit involved. The cost of the car does
not include the cost of the warranty. Therefore, he submitted
that the argument made by assessee is incorrect, when seen
in light of the decision of this court in Premier Automobiles.
H That the Supreme Court of England in Digital Satellite
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1307
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

Warranty Cover Limited vs. Financial Services A
Authority, (2013) UKSC 7 held that warranty is in the
nature of insurance. Even without such warranty, the Act
binds the manufacturer to provide working goods, failure
of which would invite an action in damages.
(ii) Learned counsel, Sri Goel, also underlined that in the B
accounting entries, the assessee was not accounting for
the sale occasioned by a warranty to be a sales return. The
concept of sale and purchase return applies to the same good,
whereas the present facts pertain to a defective good.
Furthermore, the transactions of sale occasioned by warranty
are separate from the sale of a car by the manufacturer. C
Both transactions ought to be tested independently.
Therefore, the discharge of a larger obligation by the dealer
to sell motor vehicles on which tax is already paid, does not
render the separate transaction of return of defective parts
to the manufacturer against a credit note, as not a sale. D
Submissions of Sri Aniruddha Joshi, learned counsel for State
of Maharashtra in Civil Appeal Nos. 2756/2012, 10924/2018
and 9979/2018:
(i) Sri Joshi submitted that the elements of sale for the imposition
of sales tax were satisfied in the present transaction. It E
was urged that the real nature of the transaction and the
substance thereof had to be deciphered to distinguish
between a contract of sale between the dealer and
manufacturer with that of an agency. It was submitted that
the Dealership Agreement between the dealer-assessee and F
the manufacturer is a composite document that includes
multiple contracts of sale, as understood from Section 4(1)
of the Act. These include:
a. Agreement to sell the car to the dealer;
b. Agreement to sell spare parts by manufacturer to G
the dealer;
c. Conditional Agreement to sell the spare parts by the
dealer to the manufacturer if such a condition is
fulfilled. The condition is a warranty claim being
raised by a purchaser. H
1308 SUPREME COURT REPORTS [2023] 10 S.C.R.

A d. Agreement to purchase wherein the dealer undertakes
to purchase spare parts from the manufacturer.
(ii) The counsel further submitted that all elements of sale are
complete because there is a seller and a buyer, i.e. dealer
and manufacturer; valuable consideration was paid by the
B manufacturer in the form of credit notes and the transfer
of the property of goods is taking place to the nominee of
the manufacturer, i.e. car purchaser.
It was also contended that there is no question of the
delivery of spare parts and the consequent payment by way
C of credit note being an instance of sales return. The sale of
the car is separate from the sale of spare parts, the sales in
question would be specifically applicable to the latter.
Submissions of Ms. Deepanwita Priyanka, Counsel for the
State of Gujarat in SLP (Civil) Nos. 12806-12808/ 2016:
D (i) Learned counsel submitted that the assessee’s claim for
exemption from payment of sales tax is not covered by the
exemption notification issued under Section 8(4) of Central
Sales Tax Act, 1956 on 13.05.2002. It was submitted that
the burden of proving exemption was on the assessee and
E that the benefit of any ambiguity ought to go to the State.
11. Points for consideration:
(i) Whether the judgment of this Court in Mohd. Ekram Khan
calls for reconsideration in terms of the Reference Order
dated 05.12.2019? In other words, whether the aforesaid
F case has been correctly decided or not?
(ii) What Order?
12. At the outset, it is necessary to read the relevant provisions of
the Act:
G Sections 4 and 5 of the said Act read as under:
“4. Sale and agreement to sell. –
(1) 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. There may be a
H contract of sale between one part-owner and another.
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1309
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

(2) A contract of sale may be absolute or conditional. A
(3) Where under a contract of sale the property in the
goods is transferred from the seller to the buyer, the
contract is called a sale, but where the transfer of
the property in the goods is to take place at a future
time or is subject to some condition thereafter to be B
fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time
elapses or the conditions are fulfilled subject to which
the property in the goods is to be transferred.
C
5. Contract of sale how made. –
(1) A contract of sale is made by an offer to buy or sell
goods for a price and the acceptance of such offer.
The contract may provide for the immediate delivery
of the goods or immediate payment of the price or D
both, or for the delivery or payment by instalments,
or that the delivery or payment or both shall be
postponed.
(2) Subject to the provisions of any law for the time being
in force, a contract of sale may be made in writing or E
by word of mouth, or partly in writing and partly by
word of mouth or may be implied from the conduct
of the parties.”
12.1. Section 4 defines the expression sale. In order to apply the
said definition, four essential elements are necessary, namely, (i) parties F
competent to contract; (ii) mutual assent; (iii) passing of property; and
(iv) price to be paid.
12.2. While understanding the said Section, the terms defined under
Section 2, clauses (7), (13), (11), (1) and (10) respectively are necessary
as the said clauses define the terms “goods”, “seller”, “property”, “buyer” G
and “Price”. Thus, to constitute a sale, in the legal sense, there must be
a contract in pursuance of which the transfer of property, which transfer
need not necessarily be by the owner himself, takes place on payment
of a price, though there are exceptions to this rule enshrined under
Sections 19 to 24 of the Act. The contract may be oral or in writing, or it
H
1310 SUPREME COURT REPORTS [2023] 10 S.C.R.

A may be inferred even from the conduct of the parties, but it must originate
from an offer and its acceptance. A sale must not be distinguished from
a mere agreement to sell. If under the contract of sale, title to goods has
not passed, then there is an agreement to sell and not a completed sale.
An agreement to sell becomes a sale when the time lapses, or the
B conditions are fulfilled, subject to which the property in the goods are
transferred. Thus, under the common law as well as the statute law,
relating to sale of goods, it is of the essence that there must be an
agreement, express or implied, relating to goods, to be completed by
passing of title therein and also the agreement and the sale should relate
to the same subject-matter. Thus, existence of a contract to sell is sine
C qua non for the coming into existence of a sale.
12.3. Therefore, the following elements must be present to
constitute a valid contract of sale, namely, -
(1) a contract (as required by the Act and the Contract Act);
D
(2) between two parties, (the one called the “seller” and the
other called the “buyer”);
(3) to transfer or agree to transfer the property;
(4) in goods;
E
(5) from the seller to the buyer;
(6) for a price, that is, money consideration.
12.4. It is also necessary to differentiate a contract of sale from
other contracts, as the question whether a given contract is one of sale
F
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 as to
whether it is a contract of sale or – (i) a mere guarantee for the price, or
(ii) a barter or exchange, or (iii) a bailment on trust, or (iv) a contract of
sale or return, or (v) a contract of del credere agency, or (vi) a contract
G of sale on commission, or (vii) a contract for loan on security, or (viii) a
mere wagering contract, or (ix) a contract for work and materials, or (x)
a contract for hiring, or (xi) a contract to do work as an agent, or (xii) a
licence to get mineral products from land, or (xiii) a pledge, or (xiv) a
gift.
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1311
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

12.5. In State of Madras vs. Gannon Dunkerley and Co. A
(Madras) Ltd., 1958 (9) STC 353 SC (Gannon Dunkerley and Co.-
I), it was observed that the expression sale of goods in Entry 48, List II
of Schedule VII of the Government of India Act, 1935, cannot be
construed in its popular sense but must be interpreted in its legal sense
and should be given the same meaning which it has in the Act. It was
B
further observed that in order to constitute a sale, it is necessary that
there should be an agreement between the parties for the purpose of
transferring title in the goods, which presupposes capacity to contract,
that it should be supported by money consideration, and that as a result
of the transaction property must actually pass in the goods. Unless all
these elements are present, there can be no sale. Thus, if merely title to C
the goods passes but not as a result of any contract between the parties,
express or implied, there is no sale. So also, if the consideration for the
transfer is not a money consideration but other valuable consideration, it
may then be an exchange or barter but not a sale under the Act. Also if,
under the contract of sale, title to the goods has not passed, then there is D
an agreement to sell and not a completed sale. Moreover under the law
there cannot be an agreement relating to one kind of property and a sale
as regards another. There must be an agreement between the parties
for the sale of the very goods in which eventually the property passes.
It was further observed in the aforesaid case that both under the E
common law and the statute law relating to sale of goods in England and
in India, to constitute a transaction of sale, there should be an agreement,
express or implied, relating to goods to be completed by passing of title
in those goods. It is of the essence of this concept that both the agreement
and the sale should relate to the same subject matter. Where the goods
delivered under the contract are not the goods contracted for, the F
purchaser has got a right to reject them, or to accept them and claim
damages for breach of warranty. Under the law, therefore, there cannot
be an agreement relating to one kind of property and a sale as regards
another. Thus, the expression sale of goods must relate to an agreement
between the parties for the sale of the very goods in which eventually G
the property passes.
12.6. It was further observed that the interpretation to the
expression sale of goods in Gannon Dunkerley and Co.-I was made
on the basis of the common law definition contained in Blackstone,
Benjamin on Sale, Halsbury’s Law of England, Chalmer’s Sale of Goods H
1312 SUPREME COURT REPORTS [2023] 10 S.C.R.

A Act, Corpus Juris, Williston on Sales and the Concise Oxford Dictionary.
It was necessary to interpret the language of the Constitution with
reference to the Common law, and the Court must place itself in the
position of the men who framed and adopted the Constitution and inquire
what they must have understood to be the meaning and scope of the
principle that when power is conferred to legislate on a particular topic,
B
to have regard to what is ordinarily treated as embraced within that
topic in legislative practice and particularly in the legislative practice of
the State which has conferred that power by the Constitution. Parliament
must be presumed to have had Indian legislative practice in mind and
unless the context otherwise clearly requires, not to have conferred a
C legislative power intended to be interpreted in a sense not understood by
those to whom the Act was to apply.
12.7. In M/s Vishnu Agencies (Pvt.) Ltd. vs. Commercial Tax
Officers, (1978) 1 SCC 520, while holding that even when there was a
transfer of controlled commodities in pursuance of a direction under the
D Control Order where an element of mutual assent was absent, there
was, nevertheless, sale as defined under the Act. In the said case, a
Seven-Judge Bench of this Court held that the earlier decision in M/s
New India Sugar Mills Ltd. vs. Commissioner of Sales Tax, AIR
1963 SC 1207 was not good law. Reliance was placed on the judgment
in Gannon Dunkerley and Co.-I to observe that in order to constitute
E
a sale, it is necessary that there should be an agreement between the
parties for the purpose of transferring title to the goods, which presupposes
capacity to contract and the contract must be supported by valuable
consideration and that as a result of the transaction, property must actually
pass in the goods. It was observed that, “unless all these elements are
F present, there can be no sale.”
12.8. In Sunrise Associates vs. Govt. of NCT of Delhi, (2006)
5 SCC 603, a Constitution Bench of this Court speaking through Ruma
Pal, J. observed that when there is a sale of a lottery ticket, there is no
sale of goods within the meaning of Sales Tax Acts of the different
G States but at the highest a transfer of an actionable claim. Accordingly,
the earlier decision of this Court in H. Anraj vs. Govt. of T.N., (1986)
1 SCC 414 was overruled.
13. Sections 12, 13 and 59 of the Act are relevant for the purpose
of these cases and the same read as under:
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1313
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

“12. Condition and warranty. — A
(1) A stipulation in a contract of sale with reference to
goods which are the subject thereof may be a
condition or a warranty.
(2) A condition is a stipulation essential to the main
purpose of the contract, the breach of which gives B
rise to a right to treat the contract as repudiated.
(3) A warranty is 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. C

(4) Whether a stipulation in a contract of sale is a
condition or a warranty depends in each case on the
construction of the contract. A stipulation may be a
condition, though called a warranty in the contract.
D
13. When condition to be treated as warranty. —
(1) Where a contract of sale is subject to any condition
to be fulfilled by the seller, the buyer may waive the
condition or elect to treat the breach of the condition
as a breach of warranty and not as a ground for
E
treating the contract as repudiated.
(2) Where a contract of sale is not severable and the
buyer has accepted the goods or part thereof, [***]
the breach of any condition to be fulfilled by the seller
can only be treated as a breach of warranty and not
F
as a ground for rejecting the goods and treating the
contract as repudiated, unless there is a term of the
contract, express or implied, to that effect.
(3) Nothing in this section shall affect the case of any
condition or warranty fulfilment of which is excused
by law by reason of impossibility or otherwise.” G

xxx
59. Remedy for breach of warranty. —
(1) Where there is a breach of warranty by the seller, or
where the buyer elects or is compelled to treat any H
1314 SUPREME COURT REPORTS [2023] 10 S.C.R.

A breach of a condition on the part of the seller as a
breach of warranty, the buyer is not by reason only
of such breach of warranty entitled to reject the
goods; but he may—
(a) set up against the seller the breach of warranty
B in diminution or extinction of the price; or
(b) sue the seller for damages for breach of
warranty.
(2) The fact that a buyer has set up a breach of warranty
in diminution or extinction of the price does not
C prevent him from suing for the same breach of
warranty if he has suffered further damage.”
13.1. Section 12 deals with condition and warranty. A stipulation
in a contract of sale with reference to goods which are the subject matter
thereof may be a condition or a warranty. A condition is a stipulation
D 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
E 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.
13.2. There is also a distinction between a warranty and
guarantee. As already stated, a warranty is an express or implied
F statement of something, which a party undertakes to fulfil as part of the
contract, yet collateral to the main object of it. A warranty does not go to
the root or substance of the contract. A guarantee is a contract which is
ancillary and subsidiary to some other contract or liability whereby the
promisor undertakes to be answerable to the promisee for the debt, default
or miscarriage of another person whose primary liability to the promisee
G must exist, or be contemplated. It is an additional or collateral or
conditional contract as distinguished from an original or absolute contract.
13.3. A warranty can only exist when the subject matter of the
contract of sale is ascertained and is existing so as to be capable of
being inspected at the time of the contract. It is a collateral engagement
H that the specific thing possesses certain qualities after the passing of the
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1315
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

property under the contract of sale to the buyer. A warranty may be A
express or implied. It is express if entered into a contract in express
terms or implied when deemed to be entered into a contract by implication
of law, that is, in the absence of express stipulation to the contrary.
13.4. A breach of the warranty cannot entitle the vendee to rescind
the contract and revest the property in the vendor without his consent. B
Under Section 59 of the Act, the remedies available for a breach of
warranty for a seller are prescribed. One of the remedies is the right to
return of goods; return of goods by the buyer falls into two categories,
namely, (i) where there is an obligation to return the goods and (ii) where
the buyer has the right or the power to return the goods.
C
13.5. We may discuss on collateral contracts and collateral
warranties as discerned from various legal treatises and commentaries:
(i) A contract between two persons may be accompanied by
a collateral contract between one of them and a third person
relating to the same subject matter. When a person buys D
goods from a dealer, he is given a “guarantee” in the name
of the manufacturer. Here the main contract of sale is
between the customer and the dealer but it seems that the
“guarantee” could also be regarded as a collateral
contract between the manufacturer and customer. Special
legislation applies to certain guarantees given to consumers E
in respect of goods sold or supplied to them. Where the
requirements specified in the legislation are satisfied, such
guarantees take effect as contractual obligations whether
or not the requirements of a collateral contract are satisfied;
and these requirements continue to apply to manufacturers’ F
guarantees not covered by any legislation. [Source: Chitty
on contracts, Thirty-First Edition].
(ii) A collateral contract between a third party and one of the
parties to a main contract may be associated with the main
contract. Such a contract may enable a third party to enforce G
the main contract. A “manufacturer” guarantee is an example
of such contract collateral to the main contract of purchase
of goods. When such collateral contract is expressed, it
may not be an exception to the third-party rule, because
the third party is a party to the collateral contract. It is a
H
1316 SUPREME COURT REPORTS [2023] 10 S.C.R.

A devise used or implied to impose obligations on persons not
parties to the main contract. [Source: Pollock and Mulla -
The Indian Contract Act].
(iii) Where a preliminary statement or assurance is not a term
of the principal agreement, the Courts may deem it as a
B contract or warranty, collateral to the principal agreement.
Where a necessary contractual intention is present, the
Courts would treat or would construe an assurance as a
collateral contract or warranty conferring a right to
damages. The device of a collateral warranty has been
employed where the principal contract is one to which either
C the person giving or the person receiving the assurance is
not a party vide Shanklin Pier Ltd. vs. Detel Products
Ltd., (1951) 2 KV 854. [Source: Anson’s law of contract].
(iv) Thus, a contract between two persons may be accompanied
by a collateral contract between one of them and a third
D person relating to the same subject matter. When a person
buys goods from a dealer and is given a guarantee issued
by the manufacturer, the main contract of sale is between
dealer and the purchaser or customer but the guarantee
from the manufacturer is a collateral contract between the
E manufacturer and the customer. To be enforceable as a
collateral contract, a promise must be supported by
consideration. (i) In the case of purchase of goods by the
customer from the dealer for consideration, the guarantee
from the manufacturer is collateral contract between the
manufacturer and the customer. (ii) When a customer buys
F goods from a shop and the payment involves use of cheque,
cards or credit cards issued by the bank, the main contract
is between the customer and the shopkeeper but there is
also a contract between the shop keeper and the issuer of
the credit card, by which the latter undertakes that the shop
G keeper will be paid. (iii) In the case of a hire-purchase
agreement, the primary contract is the customer entering
into a hire-purchase agreement with the finance company.
In such a case, the main contract is between the customer
and the finance company. A representation by the dealer
as to the quality of the goods used does not bind the finance
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1317
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

company but it would be enforced against the dealer as a A
collateral contract by a customer. [Source: Benjamin’s Sale
of Goods, Eighth Edition]
(v) According to Halsbury’s Laws of England, Fifth Edition-
2012, Volume 91, meaning of warranty is as under:
“64. Meaning of ‘warranty’. ‘Warranty’ means an B
agreement with reference to goods which are the subject
of a contract of sale, but collateral to the main purpose
of such a contract, the breach of which gives rise to a
claim for damages, but not to a right to reject the goods
and tret the contract as repudiated. In order to satisfy C
the definition, therefore, a warranty must, first, be an
agreement, a promise that the representation is or will
be true; and, secondly, the agreement must be collateral
to the main purpose of the contract, such purpose being
the transfer of the property in, and the possession of,
goods of the description contracted for. A warranty may D
be given in consideration of an agreement to enter into
a contract of sale of the goods to which the warranty
relates with a party other than the person giving the
warranty.”
13.6. In Rotork Controls India Pvt. Ltd. vs. Commissioner of E
Income Tax, Chennai, (2009) 13 SCC 283, a provision within the
meaning of Section 40-A of the Income Tax Act, 1961 which deals with
expenses or payment not deductible in certain circumstances came up
for consideration. In that context, it was observed that a provision is a
liability which can be measured only by using a substantial degree of F
estimation. A provision is recognised when: (a) an enterprise has a present
obligation as a result of a past event (such as a sale); (b) it is probable
that an outflow of resources will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. The
assessee therein was in the business of valve actuators which are
sophisticated goods and if any valve actuator was found defective then G
the warranty became significant. As the valve actuator is a sophisticated
good, no customer was prepared to buy the same without a warranty. In
other words, a warranty stood attached to the sale price of the product.
In that context, it was observed that obligations arising from past events
have to be recognized as provisions and these past events such as a sale H
1318 SUPREME COURT REPORTS [2023] 10 S.C.R.

A of goods are known as obligating events. It was observed on the facts
and circumstances of that case that provision for warranty was rightly
made by the appellant enterprise therein because it had incurred a present
obligation as a result of past events which resulted in an outflow of
resources.
B 13.7. In the context of levy of excise duty on the manufacturer
who is also a seller at the point of first sale, this Court in Medley
Pharmaceuticals Ltd. vs. Commissioner of Central Excise and
Customs, Daman, (2011) 2 SCC 601 at paragraph 12 referred to Firm
Ram Krishna Ramnath Agarwal vs. Municipal Committee,
Kamptee, AIR 1950 SC 11 which had in turn referred to the distinction
C
made by the Federal Court between a duty of excise and a tax on sale in
Province of Madras vs. Boddu Paidanna and Sons, AIR 1942 FC
33 wherein it was observed as under:
“9. … … Plainly, a tax levied on the first sale must, in the nature
of things, be a tax on the sale by the manufacturer or producer;
D
but it is levied upon him qua seller and not qua manufacturer or
producer. It may well be that a manufacturer or producer is
sometimes doubly hit.… If the taxpayer who pays a sales tax is
also a manufacturer or producer of commodities subject to a
central duty of excise, there may no doubt be overlapping in one
E sense; but there is no overlapping in law. The two taxes which he
is called on to pay are economically two separate and distinct
imposts. There is, in theory, nothing to prevent the Central
Legislature from imposing a duty of excise on a commodity as
soon as it comes into existence, no matter what happens to it
F afterwards, whether it be sold, consumed, destroyed or given away.
… It is the fact of manufacture which attracts the duty, even
though it may be collected later…. In the case of a sales tax, the
liability to tax arises on the occasion of a sale, and a sale has no
necessary connection with manufacture or production.”

G (emphasis supplied)
13.8. In Bharat Heavy Electricals Ltd. vs. Commissioner of
Customs and Central Excise, Indore, (2003) 9 SCC 185, the question
was, whether, excise duty is payable on the parts which are replaced
during the warranty period. It was contended that the replaced part was
H free of cost during the warranty period and the sale price of the machinery
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1319
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

sold included the price of the part which was subsequently being replaced. A
There could not be double levy of excise on the same part. It was observed
that the price charge for the machinery may include the element of
“complaint reserve”. At that time, it is not known whether there would
be any need to replace any part. In many cases, parts are not required to
be replaced. When parts are not replaced, the component of “complaint
B
reserve” is not returned to the customer. Thus, as far as the customer is
concerned, the total amount paid, including the component towards
“complaint reserve” is the price for the machinery. It was further
observed that when a manufacturer offers a warranty to replace a
defective part within a particular period and defective part is replaced
by another part, the latter is exigible to excise duty. C
Pertinent Controversy: Analysis
14. In Mohd. Ekram Khan, this Court distinguished the judgment
in Premier Automobiles by holding that the fact situation there was
different and the issues in the said case were also different by observing
that one of the issues was, whether, the expenses on account of warranty D
and statutory bonus were to be excludable while working out the ex-
works cost. It was noted therein that car manufacturers furnish warranty
covering the cars sold by entering into an agreement with the
manufacturers of components providing for a warranty so far as the
components supplied are concerned. The whole object behind the E
warranty is that the consumer who has to make a heavy investment for
the vehicle should be assured of a proper performance of the vehicle in
a trouble-free manner for a reasonable length of time. Therefore, entire
cost of warranty was to be borne by the manufacturer.
15. Referring to Prem Nath Motors, it was observed in Mohd. F
Ekram Khan that the said case dealt with transfer of property in the
part or parts replaced in pursuance of a stipulation or a warranty which
is a part of the original sale of the car for the price fixed and received
from the buyer or consumer. It was observed that the price so fixed and
received was a consolidated price for the car and the parts that may
G
have to be supplied by way of replacement in pursuance of the warranty.
It was observed by this Court that the decision in Prem Nath Motors
did not apply to the controversy in Mohd. Ekram Khan.
16. It was further observed in Mohd. Ekram Khan that in a
case where manufacturer may have purchased from the open market
H
1320 SUPREME COURT REPORTS [2023] 10 S.C.R.

A parts for the purpose of replacement of the defective parts, the
manufacturer would have to pay taxes. In such a situation, the dealer
would have supplied the parts and not received any price either from
the customer or from the manufacturer. The dealer (assessee) would
have not received the payment of the price for the parts supplied to
customers received from the manufacturer. Therefore, the transaction
B
is not subject to levy of tax. What is significant to note is that when
there is a warranty clause appended to the sale of a motor vehicle for
the replacement of a defective part on the part of the manufacturer
and if the manufacturer purchases the said part from the open market,
it would have paid the tax. In such a case the dealer (assessee) would
C have supplied the part to the customer but not received the payment of
the price from the manufacturer. In such a case, the transaction
between the dealer and the manufacturer is not one of sale. But what
is the nature of transaction when a dealer receives a credit note from
the manufacturer while discharging his obligation under a warranty
clause and uses a spare part from his own stock to replace a defective
D
part was a question which was also considered.
17. In Prem Motors, it was observed that when a dealer sells an
automobile, he sells it with all parts in a salable condition. The warranty
from the manufacturer is that if, during the warranty period, any part is
found to be defective and is to be replaced, the responsibility of
E
replacement is that of the manufacturer. For the convenience of the
customer, there is an arrangement between the manufacturer and the
dealer so that the customer may get replacement done from the dealer
which in due course is again made good by the manufacturer. The dealer/
assessee replaces parts to the customers and gets it reimbursed, it is
F neither sale of these parts by the dealer to the customer or by the
manufacturer. What he does only is to pass on the parts from the
manufacturer to the customer but in order to avoid delay and
inconvenience of the customer he replaces the parts first (from his own
stock) and gets a recompense from the manufacturer later which is not
a sale as per the definition of sale of goods.
G
18. Similarly, in Geo Motors, it was observed that when the
replacement of the spare part is done during the warranty period free of
charge, the same cannot be treated as a sale and included in the taxable
turnover, even if the purchase of such spares was effected from outside
the State by issuance of ‘C’ forms. This is because the transaction
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1321
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

between the dealer and the customer is one as an agent of automobile A
manufacturer and the spare part is given on the basis of the warranty
for replacement even though the dealer may have purchased the spare
part by giving the ‘C’ form. It is purely for replacement and not for sale.
Credit notes are also issued by the manufacturer reducing the sale value.
Therefore, the spare parts which are given for replacement have to be
B
exempted from the turnover.
19. In the Reference order, an attempt has been made to distinguish
the judgment in Mohd. Ekram Khan by contending that a car
manufacturer would enter into an agreement with the manufacturer of
components, providing for a warranty so far as the components are
C
concerned. During the period of warranty, the car manufacturer or his
dealer has to replace the defective part free of cost. The whole object
behind the 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. According to
the appellants this fundamental concept had been lost while deciding D
Mohd. Ekram Khan.
20. This Court in Mohd. Ekram Khan distinguished the factual
situation in Premier Automobiles and Prem Nath Motors. In other
words, after distinguishing the aforesaid cases, it was noted that “in a
case the manufacturer may have purchased from the open market E
parts for the purpose of replacement of the defective parts. For
such transaction, it would have paid taxes. The position is not
different because the assessee had supplied the parts and had
received the price.” In other words, in Mohd. Ekram Khan, a situation
where a manufacturer has purchased the part from the open market for F
the purpose of replacement of the defective part and for which taxes
have been paid by the manufacturer and a situation where the dealer/
assessee supplies the part from his own stock and has received the
price for the same in the form of credit note on return of the spare part
to the manufacturer have been considered to be not different to each
other, but the same. G

21. The question is, whether, this Court in Mohd. Ekram Khan
was right in equating both the factual situations and holding that in the
latter case, the dealer was liable to pay sales tax on the premise that the
transaction between the manufacturer and dealer was one of sale.
H
1322 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 22. In Mohd. Ekram Khan, the facts were that the dealer/
assessee therein had received the amount from the manufacturer for
supply of spare parts to the customer as a part of the warranty, the
manufacturer had the warranty agreement with the purchaser of
automobiles to replace defective parts during the warranty period. The
manufacturer made payment to the dealer / assessee as the price for
B
the parts which were supplied by the dealer/assessee to the purchaser
or customer. Credit notes were issued by the manufacturer to the dealer
/ assessee in respect of the price of the parts supplied to the purchaser
of the automobile.
23. The above distinct factual basis in Mohd. Ekram Khan is
C
equated to a case where a manufacturer purchases spare parts from
the open market for the purpose of replacement of defective parts and
the tax is paid by the manufacturer himself. The judgment in Mohd.
Ekram Khan proceeds on the footing that the two situations are identical.
Thus, a situation where the assessee supplies the part from his own
D stock and receives a credit note by way of recompense for the said
replacement from the manufacturer is construed to be identical to a
situation where a manufacturer buys a spare part from the open market
and replaces the defective part through the dealer (assessee) and the
dealer returns the defective part to the manufacturer. In the latter situation
there would be no recompense paid to the dealer as the dealer has acted
E
merely as an intermediary and/or an agent of the manufacturer in
replacing the defective part with a part received from the manufacturer
and returning the defective part received from the customer to the
manufacturer. In contradiction, if the dealer replaces a defective part
from his own stock and returns the defective part to the manufacturer,
F pursuant to a warranty clause appended to a sale of an automobile and,
in turn, receives a recompense for the same, can it be termed a sale is
the question to be considered.
24. In both of the above situations, firstly, a dealer is acting pursuant
to a warranty which he is bound to honour along with the manufacturer
G vis-à-vis a customer or purchaser of an automobile. Secondly, the dealer
is also acting as an intermediary and/or an agent of the manufacturer as
the warranty emanates from the manufacturer to the ultimate customer
through the dealer. The warranty clause runs along with the sale of the
automobile, firstly, from the manufacturer to the dealer on a principal to
principal basis and secondly, from the dealer to the customer. Therefore,
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1323
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

as an intermediary between the manufacturer and the customer, the A
dealer has to act on behalf of the manufacturer i.e. between the
manufacturer on the one hand and the customer on the other hand in
order to fulfil the obligation cast on the manufacturer under the warranty
clause vis-à-vis the customer.
25. While so acting as an intermediary, the dealer may replace B
the defective part in the car either by receiving a spare part from the
manufacturer directly. In such a case, (i) the manufacturer could either
dispatch the spare part from its own factory or production unit to the
dealer to replace the defective part in the automobile and seek return of
the defective part or (ii) the manufacturer can procure the spare part
C
from the producer of the same or from the open market. In both the
above situations, there is no transaction of sale between the manufacturer
and dealer. If the manufacturer of the automobile has purchased the
spare part from the open market or from the producer of the spare part,
sales tax would have been paid by the manufacturer on it and dispatched
to the dealer to replace it in place of the defective part. D
26. 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 E
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 the
F
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 G
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
H
1324 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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
B
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.
C 27. Therefore, we have to assess the nature of the transaction by
discerning the manner in which the dealer would have acted under the
scope of a warranty on the sale of an automobile. The similarity in both
kinds of situations referred to above is that the dealer is acting on behalf
of the manufacturer pursuant to a warranty and in both the situations
D does not receive any price or consideration from the customer. But, the
significant distinction in the two situations must be borne in mind. In the
first situation, the dealer merely transmits the spare part received from
the manufacturer to the customer and in turn returns the defective part
to the manufacturer and does not receive a recompense by way of cost
of the spare part but may receive a service charge under a dealership
E
agreement. On the other hand, in the second situation, the dealer would
have used a spare part from his stock to replace the defective part and
returns the defective part to the manufacturer, who then issues a credit
note to the dealer.
28. The controversy in these cases is, whether, the second of the
F
aforesaid situations would amount to a sale in the sense that the dealer is
liable to pay sales tax on the credit note issued in his favour. In other
words, whether the transaction is in the nature of a sale to attract payment
of sales tax by the dealer under the sales tax laws under consideration.
In this context, it is necessary to recapitulate as to why a credit note is
G issued by the manufacturer to the dealer. A credit note is issued with a
particular intention in mind and that is to recompense the dealer. What is
the reason for doing so? The reason is not far to see and has already
been adverted to above. The recompense in the form of credit note to
the dealer is because the dealer would not receive any price from the
customer for the replacement of the defective part while acting under
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1325
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

the warranty on behalf of the manufacturer while using the spare part A
from his own stock which belongs to him and which he had procured by
paying the necessary price including tax, either from the manufacturer
himself or from the open market. If the dealer had sold the said 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.
B
But, while acting under the warranty on behalf of the manufacturer, the
dealer does not receive any price from the customer. Hence, he is
recompensated by the manufacturer in the form of a credit note.
29. In this context, it is necessary to understand the legal import
of the expression credit note which has been cited by Sri Kavin Gulati,
C
learned senior counsel for the appellants.According to various dictionaries
and references, definitions of credit note are as follows:
(i) In P. Ramanatha Aiyar, Advanced Law Lexicon, 6 th
Edition, Volume 1 – “Credit Note” is defined as “A note
showing that an allowance is to be made for shortage
D
or defects in goods supplied and returned to sender, or
for overcharge in price. The term is also used for a
note or document that confirms the availability of funds
for future purchases (as when goods are paid for but
later returned to the supplier)”. A “sales credit note” is
defined as – “Note sent from a seller to a buyer to cancel E
(partly or in total) a charge that has already been
invoiced. The credit thus granted can be offset against
the cost of future purchases (and is, therefore, from the
seller’s point of view, better than making a cash refund”.
(ii) According to the Oxford Advance Learner’s Dictionary F
– “if, damaged items have to be returned, the
manufacturer may issue a credit note”.
(iii) According to the Cambridge Advanced Learner’s
Dictionary and Thesaurus – A credit note is an outstanding
amount, to be used when needed. “It is the document that G
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”.
(iv) According to the Collins English Dictionary – “A credit
note is a piece of paper that a shop gives when a person H
1326 SUPREME COURT REPORTS [2023] 10 S.C.R.

A returns goods that have been bought from it, which entitle
the buyer to take goods of the same value without paying
for them”.
(v) According to Black’s Law Dictionary, Fifth Edition, -
“Credit Memorandum” is “a document used by a seller
B to inform a buyer that the buyer’s account receivable is
being credited (reduced) because of errors, returns, or
allowances”.
(vi) Under the Goods and Services Tax Law – It has been
stated that after the invoice has been issued there could be
C situations where the quality of the goods or services or both
supplied is not to the satisfaction of the recipient, thereby,
necessitating a partial or total reimbursement on the invoice
value. In order to regularize these kinds of situations the
supplier is allowed to issue what is called as credit note to
D the recipient. Once the credit note has been issued, the tax
liability of the supplier will reduce. The credit note is,
therefore, a convenient and legal method by which the value
of the goods or services in the original tax invoice can be
amended or revised. The issuance of the credit note will
easily allow the supplier to decrease his tax liability in his
E returns without requiring him to undertake any tedious
process of refunds.
30. 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
F
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
G 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.
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1327
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

31. Thus, as a sequel to the aforesaid discussion, the following A
situations may be adumbrated by way of illustration. 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
B
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: - C
(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 D
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 E
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
F
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 G
manufacturer.
32. 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. H
1328 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 33. 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
B
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
C 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
D
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
E meaning of the definition of “sale” under the Sales Tax Acts is the
question. In other words, can it be construed that when the dealer has
utilised a spare part from his own stock 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 automibile of the spare
F
part and thus, a credit note being issued by the manufacturer to the
dealer?
34. It has to be borne in mind that 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
G 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
H maintained by the dealer to replace a defective part when an
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1329
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

automobile has been sold by him and the customer approaches the A
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
B
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?
The transaction that takes place when the dealer discharges his
obligation under a warranty appended to the sale transaction of the C
automobile is on behalf of the manufacturer but the manufacturer issuing
a credit note to a dealer is a “valuable consideration” paid by the
manufacturer to the dealer, when the dealer is acting under the warranty.
35. The argument of Shri Pallav Sisodia, learned senior counsel
that the purchaser or the customer seeking replacement of a defective D
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 E
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 F
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 G
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.
What is significant to note is in both of the aforesaid situations, there is
transfer of property in the goods from the dealer to the customer.
H
1330 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 36. Thus, the bifurcation of the two transactions as suggested by
learned senior counsel Sri Sisodia, 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.
B 37. 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
C behalf of the manufacturer. Hence, whether the revenue is right in
contending that the credit note issued to the dealer whilst he is discharging
his obligation under the warranty is a “sale” and the dealer is liable to
pay sales tax on the credit note is the point under consideration.
38. It is also significant to note that there is transfer of property in
D the spare part between the dealer and the customer on behalf of the
manufacturer under a warranty. Hence, whether, one can construe the
credit note as a price for the same and, therefore, subject to sales tax?
The ingredients of a sale have been discussed above and would not call
for reiteration. When the dealer is acting pursuant to a warranty, he is no
E 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
F note. Further, it must be borne in mind that 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.
39. The contention of the revenue is that the credit note is a
G 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
H the consideration flows from the manufacturer to the dealer and therefore
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1331
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

is amenable to sales tax. There are two aspects to be considered here: A
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.
40. Thus, when the transaction between the manufacturer and B
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. At the same time, whether the transaction
resulting in payment by way of a credit note to a dealer/assessee is a
sale within the definition of sale under the Sales Tax Acts of the respective
States under consideration has to be considered. C

41. For ease of reference, the definition of “sale” and “sale price”
under the Rajasthan Value Added Tax Act, 2003, which is one of the
legislations under consideration as per Section 2(35) and (36), are
extracted for easy reference:
D
“(35)” sale” with all its grammatical variations and cognate
expressions means every transfer of property in goods
by one person to another for cash, deferred payment or
other valuable consideration and includes–
(i) a transfer, otherwise than in pursuance of a E
contract, of property in goods for cash, deferred
payment or other valuable consideration;
(ii) a transfer of property in goods (whether as goods
or in some other form) involved in the execution
of a works contract; F
(iii) any delivery of goods on hire–purchase or other
system of payment by instalments;
(iv) a transfer of the right to use goods for any purpose
(whether or not for a specified period) for cash, G
deferred payment or other valuable consideration;
(v) a supply of goods by an unincorporated association
or body of persons to a member thereof for cash,
deferred payment or other valuable consideration;
and H
1332 SUPREME COURT REPORTS [2023] 10 S.C.R.

A (vi) a supply, by way of or as part of any service or in
any other manner whatsoever, of goods, being food
or any other article for human consumption or
any drink (whether or not intoxicating), where such
supply is for cash, deferred payment or other
valuable consideration,
B
and such transfer, delivery or supply shall be deemed to
be a sale and the word “purchase” or “buy” shall be
construed accordingly;
Explanation.– Notwithstanding anything contained in
C this Act, where any goods are sold in packing, the packing
material in such case shall be deemed to have been sold
with the goods;
(36) “sale price” means the amount paid or payable to a
dealer as consideration for the sale of any goods less
D any sum allowed by way of any kind of discount or rebate
according to the practice normally prevailing in the trade,
but inclusive of any statutory levy or any sum charged
for anything done by the dealer in respect of the goods
or services rendered at the time of or before the delivery
thereof, except the tax imposed under this Act;
E
Explanation I. – In the case of a sale by hire purchase
agreement, the prevailing market price of the goods on
the date on which such goods are delivered to the buyer
under such agreement, shall be deemed to be the sale
price of such goods;
F Explanation II. – Cash or trade discount at the time of
sale as evident from the invoice shall be excluded from
the sale price but any ex post facto grant of discounts or
incentives or rebates or rewards and the like shall not
be excluded;
G Explanation III. – Where according to the terms of a
contract, the cost of freight and other expenses in respect
of the transportation of goods are incurred by the dealer
for or on behalf of the buyer, such cost of freight and
other expenses shall not be included in the sale price, if
H charged separately in the invoice;”
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1333
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

42. Under Section 4 of the Act, a contract of sale of goods is a 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,
B
but only an exchange or barter. If no consideration is given, then it will
be a gift.
43. However, 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 C
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 D
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.
44. The expression “valuable consideration” is not defined either E
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
F
consideration including the sales tax component which the purchaser
pays, constitutes the price of goods. As already noted, 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 G
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.
H
1334 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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
B
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.
45. The aforesaid discussion could be illustrated better with
reference to State of T.N. vs. Sri Srinivasa Sales Circulation, (1996)
C
10 SCC 648. In the said case, the facts were that under a scheme
introduced by the assessee, ‘A’ purchased one coupon from the assessee
on payment of Rs.5. ‘A’ was to name a particular kind of goods required
by him and mentioned in the said coupon. On receipt of the coupon from
‘A’, the asssessee would forward to him by V.P.P. three more such
D coupons. ‘A’ was required to give the said three coupons to three persons
‘B’, ‘C’ and ‘D’ and keep the money so realised to himself. Each of ‘B’,
‘C’ and ‘D’ were to forward in the above manner, their respective coupons
to the assessee, who was to send to each one of them three coupons
separately by post (V.P.P.). On realisation of the three V.P.Ps. the assessee
would supply to ‘A’ the article named by him. It was held that the
E
consideration was not only money paid or promised to be paid, but it was
something more. According to the High Court of Madras, the title to the
goods did not pass to ‘A’ under a contract of sale. The transactions
were held not to be sales liable to tax. However, the State came up to
this Court contending that the respondent therein had offered the coupons
F against payment, in the scheme of circulation sales, and the article of
choice was ultimately sent to the customer for payment of a price which
was accepted by the customer; there was, thus, offer and acceptance.
All the attributes and characteristics and requirements of a sale were
present in the transaction. Though, designed by the adoption of a
circuitous method, the transaction amounted to nothing but a sale and
G
was liable to sales tax.
46. Applying the aforesaid principles and the judgment of this Court
to the case at hand, it is noted that 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
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1335
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

of a credit note. The definition of “credit note” from various dictionaries A
and Law Lexicons have been adverted to above. A perusal of the
aforesaid definitions 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
B
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 as already
noted, is relatable to a money consideration. No doubt, cash is a money
consideration but the definition of “sale” under the Central Sales Tax C
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
D
a credit note which is to be read within the definition of “price”.
47. 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
E
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 F
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
G
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 H
1336 SUPREME COURT REPORTS [2023] 10 S.C.R.

A transfer of balance from the buyer’s account to the credit of a seller is a
form of transmission of a valuable consideration.
48. 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
B 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,
C 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”
D 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, we hold that 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
E 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
F 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
G same cannot escape liability of tax under the Sales Tax Acts under
consideration.
49. The assessees herein have placed reliance on the decision of
Constitution Bench of this Court Devi Dass Gopal Krishnan. This Court
in the said case considered amendments to various sections of the Punjab
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1337
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

General Sales Tax Act, 1948 and interpreted the expression ‘other A
valuable consideration’, included in section 2(ff) defining purchase and
section 2(h), defining sale, to have a wider connotation than cash and
deferred payment. In para 25 of its decision, the court reasoned that the
said expression takes colour from the preceding expression “cash or
deferred payment.” It was reiterated that ‘other valuable consideration’
B
has to be monetary in nature. The nature of consideration in the form of
a credit note is also monetary in nature. Thus, the definition of price
includes consideration paid by way of credit note. Therefore, payment
of consideration through the mode of credit note signifies ‘other monetary
payment in the nature of a valuable consideration.’ This decision is hence
of no assistance to the assessees in the present case. C
50. Our attention was also drawn to this Court’s decision in CIT
vs. Motors and General Stores (P) Ltd., (1967) 3 SCR 876. This
Court, in that case, adjudicated the exigibility of the profits emanating
from the sale of assets by way of transfer of 5% tax-free cumulative
preference shares under the Income Tax Act. This Court noted that the D
transaction was one of exchange and the value of shares, as well as
immovable properties, were recorded solely for the purpose of computing
stamp duty. Due to the sheer variance of facts in the above case to the
present cases, we find the above decision to be of no assistance.
51. We, however, clarify that the judgment of this Court in Mohd. E
Ekram Khan must be read in the context of a case where a dealer is
utilising a spare part from his stock to replace a defective part under a
warranty and receiving a recompense in the form of a credit note from
the manufacturer. When given such an understanding of the judgment in
Mohd. Ekram Khan to the aforesaid conspectus of facts, we do not
think that the said judgment has been erroneously rendered. F

52. However, in Mohd. Ekram Khan, the judgments of the High
Court of Madhya Pradesh in Prem Motors and the High Court of Kerala
in Geo Motors were overruled. The said judgments were rightly overruled.
This is because, in those judgments, there was no consideration of the
question whether the credit note issued by the manufacturer in favour of G
the dealer was valuable consideration within the meaning of the expression
“sale” under the respective State laws and it was simply held therein
that there was no sale transaction within the meaning of the sales tax
legislation considered therein.
H
1338 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 53. But the matter does not end, 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
B
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
C becomes a sale within the meaning of the sales tax enactments under
consideration.
54. On the other hand, when a dealer acts as an agent of the
manufacturer (Principal) on the basis of an express or implied contract
of agency he may be entitled to certain remuneration under the terms
D and conditions of agency which is recognised in law. Learned senior
counsel for the respective parties have adverted to such agreements
with regard to consideration received by a dealer under the terms of an
Agency Agreement for the service rendered by the dealer pursuant to a
warranty. We are not concerned with such kind of remuneration as the
same cannot be construed as a transaction of sale. It is a service contract
E and possibly a service tax is leviable depending on the terms and conditions
of the Agency.
55. In C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,
Jodhpur, (2010) 29 VST 114, the learned Single Judge of the Rajasthan
High Court considered the controversy under the provisions of the
F Rajasthan Sales Tax Act, 1994 in the context of a dealer of automobiles
receiving credit notes issued by the manufacturer for replacement of
defective parts of the automobiles, supplied by the dealer under a warranty
agreement between the manufacturer and the ultimate customers to
whom vehicles were sold by the dealer (assessee). After referring to
G the judgment of the Supreme Court in Mohd. Ekram Khan in paragraph
20, the major points of distinction between the facts in Mohd. Ekram
Khan case and in the said case were considered in paragraph 21 and it
was observed as under:
“21. …. Since title of property in goods namely spare parts
H passes from the hands of respondent assessee to the customer
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1339
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

free of cost and such title of property in spare parts does not A
pass from assessee dealer to the manufacturer, no taxable sale
can be said to have taken place in the hands of respondent
assessee at all.”
56. Thereafter, the learned Single Judge of the Rajasthan High
Court has observed that: B
“22. In other words, where there is supply of spare parts to
the customer by the dealer there is no consideration passing as
it is free of cost and where such consideration or payment is
being received by the dealer from the manufacturer in the form
of credit notes in discharge of manufacturer’s warranty C
obligations, there is no transfer of property in goods viz. spare
parts from dealer to the manufacturer. These two transactions
viz. one between customer and dealer, and another between
dealer and manufacturer are independent and are not linked to
each other. First is sans consideration against goods and second
one is sans transfer of property in goods. The credit notes D
given by manufacturer to dealer in discharge of its warranty
obligations to customers cannot be taxed under sales tax laws
in the hands of the dealer.”
57. While considering the gamut of transactions in the context of
a warranty, bifurcation of the same, namely, one between customer and E
dealer, and another between dealer and manufacturer and the observation
that the same being “independent and are not linked to each other” is not
correct. This is because in order to ascertain whether the issuance of
the credit note by the manufacturer to the dealer is one pursuant to a
sale of spare part and therefore liable to sales tax law, as noticed above, F
it has to be viewed in the larger perspective of carrying out an obligation
under a warranty at the time of sale of the vehicle and not independently
as has been stated above. We also find that the learned single judge
incorrectly distinguished the facts of the case with Mohd. Ekram
Khan by reasoning that the dealership agreement contemplated a
principal-principal relationship between the manufacturer and the dealer. G
On the other hand, we agree with the decision of the Division Bench of
Bombay High Court in M/s Navnit Motors Pvt Ltd. vs. State of
Maharashtra, where it compared the assessee’s dealership agreement
with Maruti Udyog Ltd. with the dealership agreement of the dealer
in Mohd. Ekram Khan with Mahindra & Mahindra Ltd. The Bombay H
1340 SUPREME COURT REPORTS [2023] 10 S.C.R.

A High Court correctly found that both dealership agreements established
a Principal-to-Principal relationship and recorded that a solitary sentence
in para 1 of the decision in Mohd. Ekram Khan ought not to be construed
as the dealer was an agent of the manufacturer. Therefore, we do not
approve of the observations made in paragraph 21 and 22 of the judgment
of the learned Single Judge of the Rajasthan High Court in the aforesaid
B
case and the said judgment is liable to be overruled.
58. We further place reliance on the decision of this Court in
Govind Saran Ganga Saran vs. Commissioner of Sales Tax, AIR
1985 SC 1041 while analysing Article 265 of the Constitution while
noting as follows:
C
“The components which entered into tax are well known. The
first is the character of the imposition known by its nature
which transpires attracting the levy. The second is a clear
communication of the person on whom the levy is imposed
and which is obliged to pay the tax. The third is rate at which
D the tax is imposed and the fourth is the measure or value to
which the rate is applied for computing the tax liability”.
Obviously, all the four components of a particular concept
of tax has to be inter related having nexus with each other. Having
identified tax event, tax cannot be levied on a person unconnected
E with event, nor the measure or value to which rate of tax can be
applied can be altogether unconnected with the subject of tax,
though the contours of the same may not be identified.”
59. Reliance was placed on behalf of the Revenue on Dhampur
Sugar Mills Ltd. vs. Commissioner of Trade Tax, U.P.,
F (2006) 5 SCC 624, wherein the question was, whether, the
adjustment of the price of molasses from the amount of licence
fee would amount “to sale” within the meaning of the Uttar
Pradesh Trade Tax Act, 1948. The facts therein were that the
concerned company owned and possessed a sugar mill. A deed
G of licence was executed by the said company in favour of the
appellant therein (Dhampur Sugar Mills Ltd.) pursuant whereto
and in furtherance whereof, the appellant therein executed a
performance guarantee to ensure performance of the said deed
of licence. It was agreed to by and between the parties that a
major portion of the licence fee would be paid in the shape of
H molasses. It was contended by the appellant therein that in
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1341
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

view of the consideration for the right to use the said sugar mill A
i.e. the licence fee, the appellant therein was required to hand
over molasses to the said company for an amount equivalent
to the licence fee and such a transaction would not constitute
a sale of molasses so as to attract the provisions of the Act.
60. The precise question for consideration therein was whether B
the transaction involved a transfer of property or a transfer of a right to
use any goods or not. This Court reasoned that molasses manufactured
in the sugar mills, was the property of the appellant therein and it answers
the description of goods, that the transfer of the ownership in the goods
wherefor the company was to pay the price to the appellant therein was
not in the form of cash but to be adjusted from the amount payable by C
the appellant therein to the owner by way of consideration for use of the
mill. The expression cash, deferred payment or other valuable
consideration had to be given its true meaning and the latter two
expressions enlarge the ambit of consideration beyond cash only. It was
observed that “once an essential component of sales takes place, sales D
tax would, indisputably, be payable”. It was held that the arrangement
between the parties therein being clear and unambiguous and not with a
view to evade tax but there being transfer of goods from the appellant
therein to the company in the form of supply of molasses, the appellant
therein was entitled to a consideration which was in the form of the right
to run the sugar mill under a deed of licence. It was also observed that a E
barter or an exchange being different from a sale, payment of a licence
fee could not be a subject matter of barter or exchange. The aforesaid
judgment is squarely applicable to the facts of the present cases on the
interpretation of the expression valuable consideration in the definition
of sale in the legislations under consideration. F
61. In Commissioner of Central Excise, Mumbai vs. Fiat India
Private Limited, (2012) 9 SCC 332, this Court observed that
consideration means something which is of value in the eye of the law.
In other words, it may consist either in some right, interest, profit or
benefit accruing to one party, or some forbearance, detriment, loss or G
responsibility, given, suffered or undertaken by the other.
62. Webster’s Third New International Dictionary (unabridged)
defines, consideration thus: “Something that is legally regarded as the
equivalent or return given or suffered by one for the act or promise of
another.” H
1342 SUPREME COURT REPORTS [2023] 10 S.C.R.

A In Salmond on Jurisprudence, the word “consideration” has been
explained in the following words:
“A consideration in its widest sense is the reason, motive or
inducement, by which a man is moved to bind himself by an
agreement. It is for nothing that he consents to impose an
B obligation upon himself, or to abandon or transfer a right. It is
in consideration of such and such a fact that he agrees to bear
new burdens or to forego the benefits which the law already
allows him.”
The gist of the term “consideration” and its legal significance has
C been clearly summed up in Section 2(d) of the Indian Contract Act which
defines “consideration” thus:
“When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from doing,
D something, such act or abstinence or promise is called a
consideration to the promise.”
63. In Assistant Collector of Central Excise vs. Madras Rubber
Factory Ltd., 1986 Supp SCC 751, the question arose under the Central
Excises and Salt Act, 1944 with regard to the method of computation of
E assessable value in a cum-duty price at the factory gate and the
permissible deductions to be made from the cum-duty paid selling price
to arrive at the assessable value and then tariff rate being applicable to
the assessable value. One of the contentions regarding deduction was
with regard to TAC-warranty discount to be made for determining the
assessable value. It was observed that a warranty is not a discount on
F the tyre already sold, but relates to the goods which are being subsequently
sold to the same customers. It cannot be strictly called as discount on
the tyre being sold. It is in the nature of a benefit given to the customers
by way of compensation for the loss suffered by them in the previous
sale.
G 64. The said view was reiterated in Government of India vs.
Madras Rubber Factory Ltd., (1995) 4 SCC 349 where the question
was whether the claim put forward as TAC-warranty discount is a trade
discount within the meaning of Section 4 of Central Excises and Salt
Act, 1944. It was observed that the claim is only a claim for refund by
the buyer for the manufacturing defect in the tyre sold by the assessee
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1343
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

therein, which is being honoured by the assessee in a manner acceptable A
to both the parties. It was reiterated that it is a benefit given to the
customers by way of compensation for the loss suffered by them in the
previous sale owing to a defective tyre. It is a compensation in the nature
of a warranty allowance on a defective tyre.
65. Thus, the manufacturer gives the warranty to the consumer B
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
C
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 D
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
E
subject to sales tax. The person who pays the valuable consideration in
a sale transaction is irrelevant so long as it is paid.
66. In this context, it would be relevant to refer to the provisions
of the Indian Contract Act, 1872. Section 2 (d) of the said Act states that
when, at the desire of the promisor, the promisee or any other person
F
has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing, something, such act or abstinence
or promise is called a consideration for the promise; Section 2 (c) states
that the person making the proposal is called the “promisor”, and the
person accepting the proposal is called the “promisee”; Section 2 (a)
states that when one person signifies to another his willingness to do or G
to abstain from doing anything, with a view to obtaining the assent of
that other to such act or abstinence, he is said to make a proposal; Section
2 (b) states that when the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise; Further, promises which form the
H
1344 SUPREME COURT REPORTS [2023] 10 S.C.R.

A consideration or part of the consideration for each other, are called
reciprocal promises vide Section 2 (f) of the said Act.
67. Applying the aforesaid 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
B 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
C
automobile, pursuant to a warranty which has been given by the
manufacturer to the customer.
68. 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
D
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
E 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
F 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
G would be in an instance of there being reciprocal promises.
69. 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.
H
M/s TATA MOTORS LTD. v. THE DEPUTY COMMISSIONER OF 1345
COMMERCIAL TAXES (SPL) & ANR. [B. V. NAGARATHNA, J.]

70. In the circumstances, the reference is answered in the following A
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 B
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 C
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. D
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 E
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 F
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. G
(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,
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1346 SUPREME COURT REPORTS [2023] 10 S.C.R.

A 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.
Parties to bear their respective costs.
B

Bibhuti Bhushan Bose Reference answered.
(Assisted by : Rahul Rathi, LCRA)

C

D

E

F

G

H