VAT - accepting defective compressors outside warranty period with certain fixed repair charges and replacing them at option of customer with any other repaired compressor does not tantamount to sale so as to attract Sales tax: HC
By TIOL News Service
MUMBAI, MAY 23, 2014: THE Applicant is the Additional Commissioner of Sales Tax, VAT-III, Mumbai. The Respondent is engaged in the business of manufacturing and selling compressors of various models and capacities used in air-conditioners. They are also engaged in accepting defective compressors outside the warranty period with certain fixed repair charges and replacing them at the option of the customer with any other repaired compressor, off the shelf.
When a customer has a defective compressor outside the warranty period, he approaches the Respondent with the same for repairs. At such time, the customer is informed about the repairing charges and the amount of time it would take for repairing the defective compressor which is normally about 60 days. The customer is then given an option by the Respondent either (i) to wait for 60 days to receive back his defective compressor after repairs; or (ii) to take a repaired compressor of the same capacity, size and model off the shelf of the Respondent, after paying the repair charges.
If the customer opts for the latter, he is then given an acknowledgment receipt for the defective compressor and a delivery note cum debit advice in relation to the repaired compressor.
According to the compressor model, repair charges (which are uniform all over India) are levied at the time of replacement of the repaired compressor in exchange for the old defective compressor. The defective compressor so received is then sent to contractors for repairing. The repairing contract is given to specific repairers to repair the defective compressor in accordance with the directions given by the Respondent.
Once the defective compressor is repaired and the same is received by the Respondent from the repairer, the same is sent to the Sales Office Branch of the Respondent which is then available for replacement in lieu of a defective compressor of another customer. This cycle goes on. The cost of repairs received is mentioned in the books of accounts as 'repair charges' and not as 'sale' of the repaired compressor.
During the course of the assessment proceedings, the AO issued a notice to the Respondent for treating the repair charges as a sale of the old repaired compressors.
Before the Assessing Officer, the Respondent claimed that there was no sale of old repaired compressors but an exchange of the same for the defective compressors at the option of the customer. It was further contended that the Respondent received repair charges for repairing the defective compressor. The Assessing Officer negated this contention and held that there was a sale of old compressors within the meaning of section 2(28) of the BST Act and that the repair charges received by the applicant was the sale price. He therefore levied sales tax on a gross turnover of Rs.2,02,55,207/-.
The appeal against this order was dismissed by the Joint Commissioner of Sales Tax (Appeals), Pune Division, Pune.
In Second Appeal filed by the respondent, the MSTT allowed the Appeal inter alia holding that a transaction of cross transfer of property between a defective compressor and repaired compressor off the shelf of the Respondent did not amount to a sale of the repaired compressor by the Respondent to its customer as there was no consensual agreement of sale supported by price or money consideration. This being the case, the MSTT held that there was no taxable event for levy of sales tax on Rs.2,02,55,207/- which was in the nature of labour charges or repair charges.
Since the reference application was rejected by the MSTT, the department is before the High Court.
The High Court referred to the definition of “sale” appearing in section 2(28) of the BST Act and 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 to the goods which pre-supposes the capacity to contract; supported by monetary consideration; and the title in the property actually passes in the goods. And that unless all these elements are present there can be no sale.
After adverting to the Supreme Court decisions in the case of State of Madras v/s Gannon Dunkerley and Co. (Madras) Ltd., 2002-TIOL-493-SC-CT-LB. & Devi Dass Gopal Krishnan and others v/s State of Punjab (1967) 20 STC 430 (SC), the High Court observed -
++ In order to constitute a sale, it is necessary that; (i) there has to be a transfer of title to the goods which is supported by monetary consideration; and (ii) the words 'valuable consideration' take colour from the preceding expression 'cash or deferred payment' which would mean some other monetary payment in the nature of cash or deferred payment.
++ In the present case, we find that there is no sale at all.
++ The MSTT, after considering all the evidence in this regard, came to the conclusion that in the present case, there was a transaction of cross transfer of property between the defective compressor and the repaired compressor and therefore, there was no consensual agreement of sale supported by price or other monetary consideration. We are in full agreement with the findings of the MSTT on this aspect. What is paid is only the repair charges and not the price for purchasing the repaired compressor. This is clear from the fact that even if the customer opted not to take a repaired compressor off the shelf of the Respondent, it would still have to pay the same repair charges for repairing its own compressor and wait for 60 days to receive the same from the Respondent, after repairs. This puts it beyond the realm of doubt that what is charged to the customer by the Respondent is only repair charges and not a price for the sale of the repaired compressor.
The Counsel for the Revenue submitted that repair charges are fixed and uniform all over India and, therefore, that was the price at which the repaired compressor was being sold by the Respondent to the customer.
To this submission, the High Court observed -
"14. We do not agree. If the repair charges was really the price of the sale of the repaired compressor, there would be no question of the customer having to return his defective compressor and thereafter take the repaired compressor off the shelf of the Respondent. In the scenario suggested by Ms Helekar, all that the customer has to do is simplicitor pay the repair charges and take the repaired compressor off the shelf of the Respondent. That is not the case. It is an admitted position that the defective compressor is handed over to the Respondent alongwith the repair charges and in lieu thereof the customer is handed over a repaired compressor. We therefore find no merit in this contention."
Holding that the order of the Maharashtra Sales Tax Tribunal (MSTT) does not suffer from any error whatsoever, the Sales Tax Application was dismissed.
(See 2014-TIOL-801-HC-MUM-VAT)
