1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 1/45 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR J U D G M E N T 1. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.118/2008 2. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.138/2008 3. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.139/2008 4. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.140/2008 5. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.141/2008 6. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.142/2008 7. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.143/2008 8. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.144/2008 9. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 2/45 S.B.CIVIL SALES TAX REVISION NO.145/2008 10. C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.146/2008 11.C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.147/2008 12.C.T.O. (AE), Jodhpur vs. M/s Marudhara Motors,Jodhpur S.B.CIVIL SALES TAX REVISION NO.148/2008 DATE OF JUDGMENT : 16th March, 2009 P R E S E N T HON'BLE DR.JUSTICE VINEET KOTHARI Mr.Vinit Kumar Mathur, for the Revenue. Mr.R.P.Bhatt, Sr.Advocate along with Mr.Vikas Balia & Mr.Jagat Tatia, for the assessee REPORTABLE BY THE COURT:- 1. These revision petitions have been filed by the Revenue under Section 86 of the Rajasthan Sales Tax Act, 1994 (hereinafter referred 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 3/45 to as `the Act of 1994) being aggrieved by the order of the Rajasthan Tax Board, Ajmer dated 18/6/2007, whereby, the Tax Board decided a batch of six appeals filed by the Assessee and another batch of six appeals filed by the Revenue. These cross appeals arose out of the order of first appellate authority – Deputy Commissioner (Appeals), Jodhpur dated 22/7/2006, whereby, the Deputy Commissioner (Appeals) upheld the levy of tax upon the assessee, whereas, set aside the levy of interest and penalty imposed by the assessing authority under Section 65 of the Act. So far as levy of tax was upheld, the assessee was aggrieved and, therefore, it preferred six appeals for six different assessment years namely A.Y.2000-01, 2001-02, 2002-03, 2003-04, 2004-2005 and 2005-2006. As far as levy of interest and penalty is concerned, since first appellate authority had set aside the same, the Revenue preferred another batch of six appeals and these 12 appeals came to be disposed of by common judgment of the Tax Board dated 18/6/2007. It may also be stated that the assessment order for the A.Y.2000-01 to 2003-04 were passed by the assessing authority by invoking the power of reassessment under Section 30 of the Act to impose tax on turnover having escaped assessment, whereas, for A.Y.2004-05 and 2005-06 said assessment was framed 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 4/45 under Section 28 of the Act. 2. The issue which arises for consideration by this Court in present revision petitions is as to whether the assessing authority could impose tax on the assessee, a dealer of TATA Vehicles on the value of credit notes issued by the Manufacturer M/s TATA Motors for defective parts of cars and other vehicles supplied by the assessee, a dealer of the manufacturer under a warranty agreement between the manufacturer and the ultimate customer to whom such vehicles are sold by the assessee. The sole reason on which such tax was imposed by the assessing authority for three years by invoking the reassessment power under Section 30 of the Act though the original assessment was framed without imposition of tax and for later two years in regular assessment proceedings under Section 28 of the Act is that such levy of tax was upheld by the Supreme Court in case of Mohd. Ekram Khan & Sons vs. Commissioner of Trade Tax, U.P.Lucknow – (2004) 6 SCC 183 = AIR 2004 SC 3965 = (2004) 136 STC 515 (SC). 3. Mr.Vinit Kumar Mathur, learned counsel appearing for the Revenue urged that the assessing authority as well as the first 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 5/45 appellate authority were justified in upholding imposition of tax on such consideration received by the assessee dealer from the manufacturer, M/s TATA Motors in the form of credit notes on account of replacement of defective parts of vehicles on the basis of Supreme Court decision in the case of Mohd. Ekram (supra) and Tax Board has fallen into error in setting aside such levy of tax distinguishing the case of the assessee from the one involved before the Supreme Court in Mohd. Ekram Case (supra) and, therefore, revision petitions filed by the Revenue deserve to be allowed and such levy of tax deserves to be restored along with interest and penalty imposed by the assessing authority, which was wrongly set aside by the first appellate authority as well as Tax Board. He emphatically relied upon the decision of Supreme Court in case of Mohd. Ekram (supra). 4. Per contra, Mr.R.P.Bhatt, Senior Advocate assisted by Mr.Vikas Balia submitted that judgment of Supreme Court in Mohd. Ekram's case (supra) was not applicable in the facts of the present case and, therefore, Tax Board was perfectly justified in setting aside the levy of tax as well as interest and penalty. Learned counsel for 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 6/45 the assessee submitted that as far as the question of penalty is concerned since all disclosures were made in the books of accounts of the assessee, there was no question of imposition of penalty under Section 65 of the Act upon the assessee. However, he submitted that question of interest depended upon levy of tax itself and in his submission the levy of tax itself was wrong in the facts of the present case. In other words, he prays for dismissal of revision petitions filed by the Revenue. Learned Senior Advocate Mr. Bhatt also submitted that in fact, the facts of the present case were covered by the earlier decision of the Hon'ble Supreme Court in the case of Premier Automobiles Ltd. vs. Union of India(AIR 1972 SC 1690) as also decision of three High Courts in the case of M/s GEO Motors vs. State of Kerala – (2001) 122 STC 285 (Kerala), M/s Prem Motors vs. Commissioner of Sales Tax – (1986) 61 STC 244 (Madhya Pradesh) and Commissioner of Sales Tax vs. Prem Nath Motors – (1979) 43 STC 52 (Delhi).He fairly submitted that though the decision of Kerala High Court in GEO Motors case (supra) and Madhya Pradesh High Court in Prem Motors (supra) were overruled by the Supreme Court in Mohd. Ekram's case (supra), however, the facts of Mohd. Ekram were clearly different and distinguishable from 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 7/45 the facts of present case and, therefore, the Revenue authorities had erred in applying the judgment of Hon'ble Supreme Court in Mohd. Ekram's case (supra) to the facts of the present assessee. 5. Explaining the sequence of transaction and nature of contract between the parties in respect of replacement of defective parts in the cars and other vehicles, manufacturer M/s TATA Motors and the assessee – dealer M/s Marudhara Motors, Mr. Bhatt submitted as follows:- “(a). The relationship between Tata Motors and Marudhara Motors is a Principal to Principal relationship, and not a Principal to Agent relationship. Marudhara Motors is a dealer of Tata Motors under a Contract, whereby Marudhara Motors sells Tata manufactured vehicles, spare parts and provides service support to these products and is under contractual obligations to provide product support during warranty period. (b) In view of the above contractual relationship Tata Motors sells vehicles and spare parts to Marudhara Motors by charging CST against “C” form. (c ) Thereafter Marudhara Motors is free to sell these products to customers/vehicle users through its own Invoice collecting local sales tax at a price not exceeding maximum price prescribed by the manufacturer, but under the warranty, if some parts 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 8/45 have gone defective, such parts are replaced free of cost to the customers to avoid delay in first securing such parts from the manufacturer M/s Tata Motors and replacing the same. (d) While selling vehicle manufacturer also sells a warranty bundled along with the vehicle taking upon itself certain obligations about product quality and service. These obligations are subject to a contract the terms of which are given in service manual. (e) Dealer gets the title to vehicle and the warranty bundled with it at the time of purchase of vehicle, which he passes on at the time of selling to the ultimate customer whereby the primary obligation of fulfilling warranty obligation as per the terms contained in the service manual terms rests with the manufacturer. (f) In order to discharge its warranty obligations manufacturer has a dealer network to discharge its obligation on its behalf under the contract of dealership as and when a need to serve the vehicle under warranty arise. (g) Dealer in turn on behalf of the manufacturer collects a defective component/s or the vehicle itself from the customer if its part/s or it is found to be defective and replaces it with part/s or vehicle in his stock purchased from the manufacturer. No money is charged from the customer as he has not been sold any new, part/s or vehicle. Only a defective component or vehicle has been replaced. 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 part/s or the entire vehicle and satisfying themselves about its being defective and 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 9/45 defect being in the nature of manufacturing defect compensate the purchasing dealer at this purchase price which is their selling price by crediting the running account of the dealer with them used exclusively for the purpose of transaction of sale from them to dealer for such spare part/s or vehicle/s as the case may be. As such the transaction train is as under:- 1. Sale of vehicle along with the warranty thereon with warranty by Tata Motors to Dealer (Marudhara Motors) at cost plus CST as applicable against “C” form. 2. Sale of spare parts of vehicles by Tata Motors to Marudhara Motors (Dealer) at cost plus CST as applicable against “C” form. 3. Sale of vehicle along with the warranty thereon by Marudhara Motors (Dealer) to customer (vehicle user) at selling price plus Rajasthan Sales Tax. 4. Vehicle coming back to Marudhara Motors during warranty period due to defect, Marudhara Motors replaces the defective part/s or the vehicle without charging anything from the customer out of the part/s of the vehicle in its stock. 5. Marudhara Motors returns such defective part/s or vehicle to Tata Motors sold earlier to it by Tata Motors. 6. Tata Motors pays back the purchase price to Marudhara Motors by crediting its running account for purchase of part/s or vehicle as the case may be.” 6. Learned counsel for assessee also sought to further strengthen his argument on the basis of following book entries which are made in the books of accounts of the assessee dealer and manufacturer M/s 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 10/45 TATA Motors. The same are also noted below to explain the accounting part of the transactions in question:- In the Books of Dealer M/s Marudhara Motors: (i) Vehicle Purchase Account Dr. to Tata Motors (Vehicle Purchase) (Vehicle purchased through Inv. No. ..............dated......................) (ii) Tata Motors (Vehicle Purchase) Dr. To Bank (Amount remitted to Tata Motors for vehicle purchased) (iii) Tata Motors (Parts A/c) Dr. To Bank (Money remitted to Tata Motors for supply of parts) (iv) Parts purchase A/c Dr. To Tata Motors (Parts A/c) (parts purchased through BN....... dated.........for Rs.................) (v) Tata Motors (Relevant A/c) Dr. To Purchase Return A/c (Being return of defective part/s or vehicle) Tata Motors issues a credit note to confirm the above debit entry and credits the proceed to parts/vehicle account as the case may be. In the Books of Customers The accounting entries in the Books of the customer's account 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 11/45 is as under:- (i) Vehicle Purchase Account Dr. To Marudhara Motors A/c (Vehicle purchased through Bill No. ..........dated..............for Rs............ from.................including RST) There is no entry passed by him for replacement under warranty of part/s or vehicle as it results in no transaction as only defective goods are replaced without any consideration. In the Books of manufacturer M/s Tata Motors The accounting entries passed by Tata Motors have to be as under:- (i) Marudhara Motors (Vehicle Sales) A/c Dr. To Vehicle Sales A/c To CST A/c (Vehicle sold to Marudhara Motors through Inv. No............dated.....for Rs.........and CST Rs.................) (ii) Marudhara Motors (Parts Sales) A/c Dr. To Parts Sales A/c To CST A/c (Parts sold to Marudhara Motors through Inv. No............dated.....for Rs.........) (iii) Bank A/c Dr. To Marudhara Motors (Vehicle Sales) A/c (payment received from Marudhara Motors) (iv) Bank A/c Dr. To Marudhara Motors (Parts Sales) A/c (Payment received from Marudhara Motors) 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 12/45 (v) Sales Return A/c Dr. CST A/c Dr. To Marudhara Motors parts/vehicle A/c (Part/s or vehicle found defective by Marudhara Motors returned by them and received by us found to be defective, therefore, credit given for value received and being sales return CST is debited to reverse the earlier credit to CST A/c. 7. The following clause relating to `warranty', Clause no.18 of said agreement reads as under:- “18. The Dealer agrees that the only warranty binding on the company shall be the warranty published by the Company and all implied warranties under law are hereby excluded. The dealer shall have no authority to give to his purchasers a different warranty binding upon the company. The Dealer shall meet the Company's warranty obligations to the purchasers of the said products in accordance with the sales and service procedures and advices issued or to be issued by the Company from time to time” 8. Learned counsel for the assessee thereupon stressed that the warranty for replacing the defective parts of the vehicles is a contract between the manufacturer M/s TATA Motors and the ultimate customer and the property in goods namely spare parts which are so replaced remains with the manufacturer company M/s TATA Motors and, therefore, there is no question of imposition of tax in the hands 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 13/45 of respondent assessee-dealer, who merely provides it as a matter of service to the customers to immediately replace the defective parts and such defective parts are sent back to the manufacturer as purchase returns which are either replaced by the manufacturer company or the manufacturer instead, reimburses the same in the form of credit notes issued by the manufacturer in favour of the respondent assessee and, therefore, since no property in goods is transferred by the assessee dealer in favour of the manufacturer from whom the replacement is made or for which reimbursement is received in the form of credit notes, no taxable sale of such spare parts can be said to have taken place. 9. Learned counsel also drew the attention of the court towards the following warranty clause in the owner's manual of the vehicles issued by the manufacturer M/s TATA Motors. The same is also reproduced for ready reference: “We WARRANT each Tata Indicab car and parts thereof manufactured by us to be free from defect in material and workmanship subject to the following terms and conditions- 1. This warranty shall be for 18 months from the 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 14/45 date of sale of the car irrespective of the distance covered. However, for the cars used for commercial applications (used for hire or reward viz those operating with a yellow number plate), the warranty shall be limited to 18 months or 50,000 kms, whichever occurs earlier. 2. Our obligation under this warranty shall be limited to repairing or replacing, free of charge, such parts of the car which, in our opinion, are defective, on the car being brought to us or to our dealers within the period. The parts so repaired or replaced shall also be warranted for quality and workmanship but such warranty shall be co-termius with this original warranty. 3. Any part which is found to be defective and is replaced by us under the warranty shall be our property.” 10. Learned counsel for the assessee also urged that the 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 and since the facts of the case are distinguishable from the facts obtaining before the Hon'ble Surpeme Court in Mohd. Ekram's case (supra), the assessing authority was not justified in imposing tax much less interest and penalty upon the assessee and, therefore, the Tax Board was correct in setting aside the imposition of tax and also upholding the deletion of interest and penalty by the first appellate 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 15/45 authority and revision petitions filed by the Revenue before this Court deserve dismissal. 11. I have heard learned counsels at length and given my thoughtful consideration to the impugned order of Tax Board, contentions raised by learned counsels and the judgments cited at the bar. 12. It is first considered appropriate to refer to the judgment of Hon'ble Supreme Court in the case of Mohd. Ekram (supra) which is the sheet anchor of the arguments of learned counsel for the Revenue. In para 1 of the judgment itself, the Hon'ble Court considered the question in the following terms: “The only question involved in these appeals is whether the amount received by the assessee for supply of parts to the customers as a part of the warranty agreement was liable to tax. The assessee was an agent of M/s Mahindra and Mahindra (hereinafter referred to as “the manufacturer”). The manufacturer had warranty agreement with the purchasers of vehicles (hereinafter referred to as “the 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 16/45 customers) to replace defective parts during the warranty period. As found by the taxing authorities and the High court, the manufacturer made payment for certain price as the parts were supplied by the assessee to the customers. Credit notes were issued by the manufacturer to the assessee in respect of the price of the parts supplied to the customers. The assessing officer was of the view that the payments received through credit notes amounted to a sale in terms of Section 2 (h) of the Act.” 13. In para no.5 of the judgment, the Hon'ble Court noticed the contention of Revenue in the following terms:- “In response, learned counsel for the revenue submitted that the transaction between the assessee and the manufacturer was a separate transaction. It is not the case of the assessee that the manufacturer had supplied the goods to the customers. If it had supplied parts to the customers through assessee; the position may have been different. (In the present case it is so).The manufacturer was obligated to make the replacement. If it did not possess the parts to meet the contractual obligation, it would have purchased the parts from any seller of the parts and would 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 17/45 have paid the sales tax. In the instant case, the assessee had supplied the goods for which it received the consideration by way of credit notes and/or other mode of payment. That being the position, the High Court was justified in its view about the taxability of the transactions.” 14. Then the two Judges' Bench of the Hon'ble Supreme Court proceeded to distinguish the earlier case of three Judges' Bench decision in case of Premier Automobiles in the following terms: “The decision in Premier Automobiles case (supra) is really of no assistance to the assessee. The fact situation there was different. The issues in the said case were different. One of the issues was whether the expenses on account of warranty and statutory bonus were to be excludable while working out the ex-work cost. It was held by this Court that manufacturers furnish warranty covering the cars sold. Under the warranty all defects on account of faulty manufacture have to be set right and the defective parts have to be replaced free of costs by the manufacturer or his dealer within the specified period or given distance travelled by the car. The car manufacturers enter into an agreement with the 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008 & 11 others connected matters DATE OF JUDGMENT :16th March, 2009 18/45 manufacturers of components providing for a warranty so far as the components supplied are concerned. The whole object behind the 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 reasonable length of time. Therefore, entire cost of warranty was to be borne by the manufacturer. The issue was entirely different from the one at hand and the ratio in the said case provides no answer to the present dispute. Prem Nath's case (supra), as the factual position goes to show, dealt with transfer of property in the part or parts replaced in pursuance of the stipulation of warranty as part of the original sale of car for the fixed price paid by 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. That decision also throws no light on the present controversy. Though the decision in Geo Motor's case (supra) and Prem Motor's case (supra) support the stand of the assessee, we find that basic issue as to the nature of the transaction between the assessee and the manufacturer was lost sight of. As noted above, in a case manufacturer may have purchased from the 1. C.T.O. (AE), Jodhpur vs.M/s Marudhara Motors,Jodhpur -S.B.C SALES TAX REVISION NO.118/2008