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Commissioner of Sales Tax Vs. Prem Nath Motors (P) Ltd. - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtDelhi High Court
Decided On
Case NumberSales Tax Reference No. 19 of 1974
Judge
Reported inILR1978Delhi273; [1979]43STC52(Delhi)
ActsBengal Finance (Sales Tax) Act, 1941 - Sections 21
AppellantCommissioner of Sales Tax
RespondentPrem Nath Motors (P) Ltd.
Advocates: I.M. Sehgal and; B. Kirpal, Advs
Excerpt:
.....(sales tax) act (1941) - section 21--replacement of parts of motor cars during the continuance of 'warranty'period--constitutes a sale--whether taxable--condition to warranty distinguished.; in the present case the respondent a dealer, which carries on the sale of motor cars and their spare parts, purchased spare parts of motor vehicles on the strength of the registration certificate free of sales tax. under the sales tax act for the year 1964-65 the dealer was assessed to sales tax by an order under section 11(1) of the sales tax. the assessed-dealer also purchased spare parts of motor vehicles at concessional rate of tax furnishing form 'c' prescribed under section 8 of the sales tax act. the dealer transferred the said spare parts to its service department where the same were used for..........of the term 'sale' as given in the sales tax act, the question would be as to what would be the 'sale price' of such a part replaced by the dealer, as no price was actually charged. it was argued that actually the price of the part replaced by the dealer was already included in the aggrega's consideration for the sale of the car, which has already been subjected to sales tax, and hence there was no warrant for imposition of any further tax. (6) by his order, dated 14th december, 1970, the deputy commissioner held that whenever the dealer entertained a claim under the warranty, it simply replaced the parts without recovering anything from the buyers-consumers, that the circumstances under which the said replacement was effected clearly indicated that it could not be treated as 'sale of.....
Judgment:

T.V.R. Tatachari, C.J.

(1) The Lt. Governor, Delhi, has referred the following two questions to this Court under Section 21 of the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union Territory of Delhi (hereinafter referred to as the 'Sales Tax Act') :-

'(I)Whether, having regard to the facts and circumstances 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, 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 in compliance with the stipulations of the warranty is not 'sale' withinthe 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 furnish- Ing 'C' 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 ?'

THErespondent herein, M/s. Prem Nath Motors (P) Ltd. (hereinafter referred to as the 'dealer'), is registered as a dealer under the Sales Tax Act. It carries on the business of sale of motor cars, their spare parts and their accessories For the period of assessment 1964-65, the dealer was assessed to sales tax by an order under Section 11(1) of the Sales tax Act, dated 30th August, 1968. During the afore- said period of assessment, the dealer purchased spare parts of motor vehicles locally on the strength of the registration certificate free of sales tax under the Sales Tax Act. It also purchased spare parts of motor vehicles at concessional rate of tax furnishing Form 'C' prescribed under Section 8 of the Central Sales Tax Act, 1956, to the selling dealers in other States in the course of Inler-State trade of commerce. The dealer transferred the said spare parts to its Service Department, where they were used for replacement purposes in the motor-cars sold under a 'warranty'.

(2) In the period of assessment in question, the dealer included in the 'gross turnover' the value of the parts so utilised, but claimed that the value of such parts which were replaced in the motor cars/ vehicles pursuant to the terms and conditions of 'warranty' during its operation should be deducted from his 'gross turnover'. It was first contended that under the terms of the 'warranty', it was obliged to carry out replacements or repairs of defective parts, and that such replacements or repairs did not constitute 'sales'. But, during the assessment proceedings, it was conceded on behalf of the dealer that such replacements of spare parts constituted 'sales' within the meaning of the Sales-tax Act, as the goods so utilised were purchased for purposes of re-sale either locally in Delhi free of sales tax on the strength of the local registration certificate or imported from outside Delhi in the course of Inter-State trade of commerce at concessional rate of the tax after furnishing Form 'C' prescribed under Section 8 of the Central Sales Tax Act, 1956. The assessing authority did not, thereforee, allow the deductions claimed.

(3) Against the said order of the assessing authority, the dealer filed an appeal under Section 20 (1) of the Sales Tax Act. It was contended again in the appeal that the replacements or repairs did not constitute 'sales'. By its order, dated 6th December, 1969, the Appellate Authority held that the replacements were in the nature of 'sales' as admitted by the dealer, and, thereforee, such replacements constituted 'sales' taxable under the Act. In that view the A Appellate Authority also refused to allow the deductions claimed by the dealer.

(4) The dealer then preferred a Revision Petition to the Commissioner under Section 20(3) of the Sales Tax Act. The revision petition B was heard by the Deputy Commissioner.

(5) It was pointed out on behalf the dealer that there is a warranty given by the Premier Automobiles Limited, (Manufacturer of Fiat Car) to the dealer who is the first purchaser from the manufacturing company and, again there is a warranty stipulated between the dealer and the buyers-consumers. It was also pointed out that according to the warranty as between the dealer and the buyers-consumers, it applied to two periods, viz., (i) pre-delivery period and (ii) post delivery period. It was explained that in the pre-delivery period, if the dealer feels that any part of the car which is to be supplied to any buyer-consumer needs replacement, it is automatically done by the company and no price extra is charged by the company, and hence the question of any sale having been effected does not arise. As regards the post delivery period, it was explained that in that period, when it is brought to the notice of the dealer by any buyer-consumer that any part or parts of the car needs replacements and the dealer is satisfied with the claim of the buyer-consumer, the dealer is obliged. under the terms of the warranty, to replace it without making any charge from the buyer-consumer. It was contended that even if, for the sake of argument, such replacement was considered to be covered by the definition of the term 'sale' as given in the Sales Tax Act, the question would be as to what would be the 'sale price' of such a part replaced by the dealer, as no price was actually charged. It was argued that actually the price of the part replaced by the dealer was already included in the aggrega's consideration for the sale of the car, which has already been subjected to sales tax, and hence there was no warrant for imposition of any further tax.

(6) By his order, dated 14th December, 1970, the Deputy Commissioner held that whenever the dealer entertained a claim under the warranty, it simply replaced the parts without recovering anything from the buyers-consumers, that the circumstances under which the said replacement was effected clearly indicated that it could not be treated as 'sale of goods',either under the Indian Sale of Goods Act, 1930, or under the Sales Tax Act, as the payment or promise of payment of price which is one of the essential ingredients of a 'sale of goods' was lacking, and the transfer of property in the parts so replaced did not involve any valuable consideration, and that otherwise also, when a buyer-consumer who paid the price of the car to the dealer subsequently discovers any defective part and puts up a claim before the dealer on account of breach, of warranty and the dealer replaces that part, the consideration for that part, if at all it can be said to be so, had already been included in the aggregate consideration for which the car had been sold originally, implying thereby that there was no specific consideration for the replacement of the part. In that view, the Deputy Commissioner decided that the replacements of the par:s during the period of operation of warranty were not liable to Sales Tax.

(7) The dealer, however, felt aggrieved by the said order for the reason that if the spare parts of the motor vehicles purchased on the strength of the registration certificate free of tax for purposes of re-sale were not sold, but used for replacement in compliance with the terms and conditions of the warranty the purchase price of such parts was liable to be included in the taxable turnover of the purchasing dealer under the second proviso to clause (ii) of sub-section (2) of Section 5 of the Sales Tax Act. It, thereforee, preferred a further revision petition to the Financial Commissioner, Delhi, under Section 20(3) of the Sales Tax Act.

(8) By his order, dated 8th July, 1971, the Financial Commissioner held that the transfer of property in the parts replaced under the warranty constituted a 'sale' and as such the 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 stood included in the consolidated sale price determined and realized at the time of the transfer of goods in the shape of the car with a warranty. The Financial Commissioner also held that the parts supplied in replacement, free of cost, by the dealer, in terms of the warranty, are sold along with the car for which a consolidated price was realized at the time of the initial transfer and on which sales tax was paid, and the replacement of the parts would be deemed to be a 'sale' not liable to imposition of further sales tax.

(9) The Commissioner of Sales Tax, thereupon, filed an application before the Lt Governor under Section 21 of the Sales Tax Act paying that the two questions which we have set out earlier in this judgment be referred to this court. The said questions have since been referred by the Lt. Governor.

(10) The precise questions that arise for consideration are as to whether the transfer of the parts replaced in pursuance of the warranty clause amounts to 'sale' within the meaning of Section 2(g) of the Sales Tax Act, and whether the sale price of a car which has been subjected to sales tax can be regarded as having included the cost or the value of the spare parts used in the replacement in compliance with the stipulations in the warranty. The relevant portion of the warranty stipulated between the Premier Automobilies Limited and the dealer, as set out in the statement of case, reads as follows:-

'THEPremier Automobiles Limited, hereinafter termed the company, warrants each new Fiat sold by the company, to be free from defects in material and workmanship under normal use and service, the Company's obligation under this warranty being limited to making good at the company's factory any part or parts thereof, including all equipment or trade accessories (except electric bulbs, tyres and tubes) supplied by the Company which shall within three hundred and sixty five (365) days after making delivery of such car of the original purchaser/or before such car has been driven sixteen thousand (16,000) kilometers, whichever event shall first occur, be returned to the company with transportation charges prepaid, and which on Company's examination shall disclose to the company's satisfaction to have been thus defective; this warranty being expressly in lieu of all other warranties expressed or implied statutory or otherwise and of all other obligations or liabilities on the company's part, the Company neither assumes nor authorises any other person to assume for the company any other liability in connection with the sale of the Company's vehicles.

(11) In the event of the original purchaser selling the car during the warranty period, the second purchaser should inform the Service Department, Premier Automobiles Ltd., the name, address, date of purchase, Seriall and engine numbers of the car, and the mileage covered. The name and address of the party from whom the vehicle is purchased should also be given. This information is required (within 7 days from the date of purchase) for the purpose of continuance of the balance period of warranty.

(12) The company accepts no liability for any loss or damage, direct or consequential or for any accident resulting from defective material, faulty workmanship or otherwise. This warranty shall not apply to any car which shall have been repaired or altered without the approval of the Company or serviced by other than the Company's authorised dealers or which has been subject to negligence, accident, improper use or alterations whatsoever.

(13) The company reserves the right to repair defective parts under warranty instead of replacing them whenever, in the company's opinion, such repairs can be satisfactorily carried out.

(14) Warranty adjustments will only be made when necessary repairs of parts involved are handled through an Authorised Dealer of the Company.

(15) The warranty shall not apply to any particular assembly or components of the vehicle in or to which any part not manufactured and/ or sold by Premier Automobiles Limited, has been affixed, so as to, in the Company's judgment, affect its suitability or reliability'.

(16) The relevant portion of the warranty as between the dealer and the buyer-consumer, as set out in the order of the Deputy Commissioner, reads as follows:-

'DURINGthis period you will not be charged for Fiat replacement parts required because of defective material or workmanship or for labour required to instal these parts.

THISwarranty will not supply

1.If parts and/or labour are required due to negligence, accident or improper use.

2.If you have your car repaired by other than an authorised dealer during the warranty period.

3.If any parts are used that are not made by, sold by or approved by the Premier Automobiles Ltd., Bombay.

FORyour convenience we have arranged to have any authorised Fiat dealer in India perform the services for your car during the warranty period, should you be touring. You will be expected to furnish proof that your car is within the warranty period. thereforee, we suggest you carry this 'owner Service POLICY' with you'.

(17) It is clear from the facts narrated above that the dealer sold cars along with a warranty under which it agreed that it would replace parts, free of cost, within a stipulated period if the replacement was required because of defective material or workmanship. In other words, each sale was of the car along with a warranty. Section 2(g) of the Sales Tax Act defines 'sale' as follows:-

'(G).'Sale', with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration and includes a transfer of goods on hire-purchase or other system of payment by Installments, but does not include a mortgage or hypothecation of or a charge or pledge on goods'.

INthe present case, the sale was of the cars along with a warranty to replace defective parts free of cost, and the price was fixed and paid at the time of the sale. Section 12 of the Sale of Goods Act, 1930, draws a clear distinction between a condition and a warranty. It reads as follows :-

'12(1).A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warrant

(2)A condition is a stipulation essential to the main purpose the contract, the breach of which gives rise to a right to treat the contract as repudiated.

(3)Awarranty is a stipulation collatoral 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.

(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.'

THEdistinction between a condition and a warranty essentially lies in that a breach of a condition gives rise to a right to treat the contract as repudiated, while a breach of a warranty gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. A perusal of the warranty between the dealer and the buyer/consumer set out above shows that there was no stipulation empowering the buyer/consumer to reject the car and repudiate the contract if any of the parts is found to be defective. The stipulation was only that the dealer will replace the defective part/parts, free of cost. It is thus clearly a warranty and not a condition.

(18) Now, the warranty was to replace the defective part or parts free of cost. When a part is replaced in accordance with the stipulation or warranty, it becomes a part of the car and the property in it stands transferred to buyer/consumer. No separate consideration for the part so transferred is specified. No dealer can reasonably be expected to enter into such a stipulation or warranty which might result in the transfer of the property in the part or parts replaced without consideration for the transfer. In the circumstances, the only reasonable inference is that the consideration or the part or parts that might be replaced under the warranty was not separately specified, because it was included in the price fixed and paid for the car at the time of its sale. In other words, the transfer of the property in the part or parts replaced in pursuance of the stipulation or warranty is a part of the original sale of the car for the price fixed and received from the buyer consumer. The price so fixed and received was a consolidated price for the car and the parts that may have to be supplied by way of replacement in pursuance of the warranty.

(19) In this context, Mr. Kirpal, learned counsel for the respondent pointed out to the observation of the Supreme Court in para 8 of its judgment in Premier Automobiles vs . Union of India : AIR1972SC1690 , 1693, that warranty was one of the principal factors considered relevant by the Tariff Commission for the fixation of a fair selling price for Fiat, Ambassador and Standard motor cars. This observation shows, that the idea of taking the warranty into consideration infixing the price of a car is well-known to the manufacturers and dealers of motor cars. The observation supports, in a way the view taken by us that the consideration for the part or parts that might be replaced under the warranty was included in the price fixed and paid for the car at the time of its sale.

(20) For the foregoing reasons, we are of the opinion, that the view taken by the Financial Commissioner that the future replacement of the parts in pursuance of the warranty have to be regarded as 'sales', the price for which was already paid and on which sales tax was already levied and collected, and that they were not liable to the imposition of further sales-tax, is correct. We, thereforee, answer the first question in the affirmative and the second question in the negative. In the circumstances of the case, we make no order as to costs.


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