Supreme Court Rules Credit Notes Issued by Manufacturers to Dealers Are Subject to Sales Tax

In a recent landmark decision, the Supreme Court has determined that credit notes issued by manufacturers to dealers constitute valuable consideration within the definition of a sale. Consequently, such transactions are now subject to sales tax under the respective State enactments.

A three-judge bench, comprising Justice K. M. Joseph, Justice B. V. Nagarathna, and Justice Ahsanuddin Amanullah, affirmed that dealers are legally obligated to pay sales tax based on the respective State enactments. The Court further emphasized that credit notes, being a form of valuable consideration, fall within the ambit of the definition of a sale.

The case before the Court involved Marudhar Motors, a dealer of TATA Vehicles, which had entered into a dealership agreement for providing warranty replacements to customers. As part of the normal course of business, TATA Motors sold vehicles and spare parts to Marudhar Motors, who collected defective components or vehicles from customers and replaced them with parts or vehicles from their own stock purchased from the manufacturer. The defective components or vehicles were subsequently returned to TATA Motors, who examined and confirmed their defectiveness before issuing credit notes to the dealer, effectively crediting the dealer’s running account for sales transactions.

The assessing authority, invoking the power of reassessment under the Rajasthan Sales Tax Act, 1994, imposed tax on the Assessee’s turnover that had allegedly escaped assessment. The matter was subsequently brought before the High Court, which held that the transaction between the manufacturer and the dealer, involving the return of defective parts and the issuance of credit notes, was independent of the transaction between the manufacturer and the customer regarding warranty obligations.

After thorough consideration, the Larger Bench of the Supreme Court unanimously held that an automobile dealer cannot evade liability merely because they act as an intermediary on behalf of the manufacturer, pursuant to a warranty, and receive a credit note as compensation. The Court emphasized that the credit received by the dealer is, in fact, a price for the sale of a spare part.

The Bench clarified that when a dealer acts under a warranty, two aspects must be considered: the transfer of property between the dealer and the customer, and the valuable consideration received by the dealer from the manufacturer in the form of a credit note. The Court rejected the notion of bifurcating these two transactions, highlighting that they are interdependent.

Regarding the replacement of defective parts, the Court concluded that when the dealer uses spare parts from their own stock or purchases them from the open market, the credit note issued by the manufacturer is a valuable consideration for the transfer of property in the spare part from the dealer to the customer. Therefore, it qualifies as a sale within the purview of the sales tax legislations of the respective States involved.

The judgment is expected to have a significant impact on dealers and manufacturers alike, as it clarifies the taxability of credit notes issued in the context of warranty claims. The Supreme Court’s ruling ensures that sales tax will be levied on such transactions, providing clarity and uniformity in the tax treatment across different States.

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