SKP Tax Alert
Volume 9 Issue 12 | 20 July 2016
Maharashtra Sales Tax Tribunal Judgement: VAT taxable on reimbursements received for free supply under warranty

Reimbursements received from an overseas parent company towards free supplies provided under warranty by the Indian Company to its customers would be taxable under VAT in the hands of the Indian Company, according to a recent judgment by the Maharashtra Sales Tax Tribunal in the case of B&R Industrial Automation Pvt Ltd versus the State of Maharashtra, 2016-VIL-24TRB.

Facts of the case
  • M/s B&R Industrial Automation Pvt Ltd (appellant or the company) procures spare parts such as plug in module, cables, etc. from Bernekar & Reliner Industries Elekronic GMBH (parent company) and carries out assembling activity according to the customer’s requirement and sells it accordingly.
  • The appellant sells a high-tech product and in order to assure customers on the quality of the product, the appellant extends a warranty to its customers.
  • As per the terms of the warranty, the appellant is either repairing or replacing damaged/defective parts in the product sold by it. No cost is charged for replacement of the defective parts by the appellant (i.e. replacements under warranty are free of charge).
  • The parent company reimburses the price of the parts which are supplied for free by the appellant to its customers under warranty. For this purpose, the appellant entered into a separate contract with the parent company which is independent of the warranty provided to the customer.
Issue before the Court
  • Whether reimbursement received from the parent company by the appellant would amount to consideration for free warranty supplies and accordingly, whether the activity of repair/replacement under warranty would be treated as a sale between the appellant and its customer.
Tribunal’s  Ruling
 
  • The Court noted that the time limit pertaining to the warranty was kept open between the overseas parent company and the appellant, since it was not known at what point of time sale of goods would take place between the appellant and the customer. Furthermore, the Court observed that, as far as the appellant and overseas parent company is concerned, the time limit had to be kept open, because only then it would be possible for the appellant to extend a warranty to its customers. In view of this, the Court held that there was no substance in the contention of the appellant, that there is no privity of contract between the customers and the overseas parent entity.
  • Furthermore, the Court has taken into consideration the Supreme Court (SC) ruling in the case of Mohd. Ekram Khan And Sons, 2004-136 STC 515 and the ruling of Bombay High Court (HC) in the case of Navnit Motors Pvt Ltd versus the State of Maharashtra, 2011-ST1-GJX-0737-BOM where the Court has observed that it is immaterial whether the transaction between the appellant and the overseas parent entity is that of an agency or on principal to principal basis.  Ultimately, what matters is whether the price of the goods was received and whether there is sale of goods.
  • Accordingly, the Court has held that the reimbursement received by the appellant from the overseas parent entity towards free warranty supplies would amount to consideration and accordingly, the replacement of damaged and defective goods would be treated as sale, leviable to tax.
SKP's comments
  • If a direct or indirect nexus is established for free of cost replacements/supplies under warranty (especially extended warranties) vis-à-vis reimbursements/credit notes received from the original manufacturer/supplier of goods, then it could be exposed to the levy of VAT on such free of cost warranty supplies.
  •  Thus, especially, in distributor sale purchase models, such free of cost warranty supplies which have reimbursements linked to them (though from another party) must be evaluated in detail to determine the implications of levy of VAT.
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