By G. G. Goyal, Chartered Accountant
C. B. Thakar, Advocate
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Introduction
Various types of transactions take place in day to day commercial world. A peculiar issue which is being considered here is about the status of a transaction where the dealer received goods for repair from his customer. The dealer replaces the same with his own goods and receives charges for repair. The old one, received from customer, is retained with him for further replacement after repair. The issue is whether on receipt of money from customer towards repair, whether the dealer would be liable to tax under Sales Tax Laws or it can be considered as transaction of exchange of goods thereby not liable to sales tax, or whether it falls in the category of works contract?
Judgment of Hon. M.S.T. Tribunal
The above issue was dealt with by Maharashtra Sales Tax Tribunal in the case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).
In this matter, the appellant, M/s. Kirloskar Copeland Ltd., is a manufacturer & seller of compressors used in air-conditioners. It accepted defective compressors beyond the warranty period with certain fixed repair charges from customer & replaced them at the option of customer with another repaired compressor off the shelf. The defective compressor was then sent for repairs. The said repaired compressor was then available for replacement in lieu of defective compressor of another customer. The cycle goes on. The repairs charges received were mentioned in books as ‘repair charges’. This was treated by assessing officer as ‘sale’ of old repaired compressors and levied tax on the same.
Before Tribunal, reliance was placed on following judgments. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT
(1) Gannon Dunkerley & Co. (9 STC 353) (SC)
(2) Devi Dass Gopal Krishnan (20 STC 430) (SC)
(3) Hotel Sri Lakshmi Bhavan (33 STC 444)
(4) Vishnu Agencies (P) Ltd. (42 STC 31) (SC) & others.
Tribunal held that in a transaction of cross transfer of property in defective compressor received from customer and giving repaired compressor off the shelf, there is no consensual agreement of sale supported by price or money consideration. Holding this as not a ‘sale’ transaction, Tribunal set aside the tax.
Therefore, the situation that developed is that, such receipt of money is not liable to tax under Sales Tax Laws.
Madras High Court’s Judgment
Recently, Madras High Court had an occasion to deal with a similar issue. Reference is to the judgment of Madras High Court in Sriram Refrigeration Industries Ltd. Vs. State of Tamil Nadu (53 VST 382)(Mad).
In this case also, the dealer received defective compressors, in its Tamil Nadu office, gave another repaired compressor and also charged repair charges. The defective compressor was then transferred to Hyderabad workshop to repair and keep it in rolling stock.
The Tamil Nadu Sales Tax authorities levied Sales Tax on the same considering the transaction as works contract.
Based on above facts, the arguments on behalf of assessee, can be noted as under:
“The learned counsel appearing for the petition/ assessee contended that the Tribunal was wrong in holding that it is a deemed sale. He further contended that the Tribunal is wrong in holding that the transfer of property by way of replacement of defective parts in the compressors while undertaking repair works took place within the State of Tamil Nadu and hence, the transactions are liable to tax. He further submitted that the authorities have failed to appreciate the fact that the petitioner/assessee received defective compressors from their dealers, who had earlier received the same from their respective customers to whom the said compressors were sold by them and later, these defective compressors were despatched to the factory at Hyderabad for repair and reconditioning; that the repaired compressors were taken into the petitioner’s/assessee’s floating stock in due course on receipt from Hyderabad. But soon after the receipt of defective compressors, the reconditioned compressor was given to the authorized dealer from their floating stock and flat rate was charged as repairing charges, therefore, the assessing officer ought to have appreciated that the transactions partake the character of an exchange not exigible to tax under the provisions of the Tamil Nadu General Sales Tax Act.”
In addition, it was also argued that the transaction is not works contract as use of spares etc. is negligible and not amounting to works contract. In alternative, it was argued that it is a transaction from Andhra Pradesh and not in Tamil Nadu. Hon. High Court rejected contention and upheld the levy considering it as works contract. In its judgment, Hon. High court observed as under:
“The petitioner/assessee is the manufacturer of compressors and the said compressor is an important component in the air-conditioner/ refrigerator. The petitioner/assessee supplied refrigerators to the customers. There is no factory with repairing facility within the State of Tamil Nadu. The defective compressors were brought to the petitioner for repairs. When the defective compressor is handed over, a rectified compressor is immediately supplied by the petitioner. The petitioner, in order to have quick servicing, replaced the defective compressor by a re-conditioned compressor of the same model. The defective compressor received was subsequently transferred to the factory in Andhra Pradesh for rectification of the defects. The appellant/dealer collected repair charges for the defective compressors. The whole transaction is completed within the State. Therefore, the authorities below have taken a view that the transaction is works contract and the transfer of property in goods involved in the execution of works contract and thereby imposed sales tax on such transfers. The authorities have also held that there is no separate particulars towards labour charges and value of the property transferred. The provision of section 3B of the Act was attracted and the lower authorities correctly allowed 30 per cent deduction towards labour charges and the remaining 70 per cent was taxable at the appropriate rate. From the transaction, it is clear that the supply of defective compressor has been returned as a rectified compressor and therefore, the authorities below held that it amounted to works contract.
After the 46th Amendment, the definition of “sale” was enlarged including the transfer of property of goods involved in the execution of the works contract and thereby, imposed sales tax on such transfer and therefore, the tax on transfer of property in goods “whether as goods or in some other form” involved in the execution of works contract falls within the ambit of article 366(2A) of the Constitution of India. In this case, the defective compressor is repaired and regarding the same, the assessee also produced certain invoice wherein it is categorically stated that the repair charges were charged.”
It is further observed as under:
“26. While looking deep into the nature of transaction, it is found that the customer is never aware of the repair work being carried out in other State. The customer is not placing orders with the factory at Hyderabad for repair and return of the repaired compressor from Hyderabad to him. On the other hand, the transaction is made across the counter of the appellant by the customer, by delivering the defective compressor and receiving the repaired compressor. The point to be noted is that the parts to be replaced in the defective compressor and labour charges are arrived at and collected and even before the same compressor could be got repaired and given a replacement by a repaired compressor is made from the godown-stock. The parts to be replaced and the ‘work to be carried out’ are clearly identified as soon as the defective compressor is handed over to the appellant by the customer and charges there for are collected and the transaction is completed within the State. Thus the standard parts with particular reference to the ‘type and make’ of the compressor are determined, and thus they are only standard goods or ascertained goods. In the case of ascertained goods in a transaction of ‘sale’, the transfer of property takes place when the contract of sale or purchase is made. Accordingly, to settled position of law, the principles that apply to ‘sale’ will apply to ‘deemed sale’ as well.”
“From a reading of the above finding, it is clear that the whole transaction forms part of an implied contract for repair of the defective compressor in the State. It is only a replacement with a reconditioned compressor of the same mode instead of a defective compressor. Therefore, the authorities below are correct in coming to the conclusion that there is no contract for sale of compressors. Therefore, the transaction has to be treated only as works contract. The reconditioned compressors are handed over and the defective compressors were received by the assessee after charging repair charges and the whole transaction is within the State. After considering the nature of the transaction, all the authorities have given a categorical finding that there is a works contract and the transfer of property acquired within the State in the said contract. Further, the authorities below are correct in holding that in the absence of separate particulars towards labour charges and the value of property transferred the provisions of section 3B of the Act were attracted and allowed 30 per cent deduction towards labour charges and only the remaining turnover was chargeable to tax at the appropriate rate. The concurrent findings given by the authorities below are based on valid materials and there is no error or illegality in the order of the Tribunal warranting interference.”
Conclusion
It appears that such replacement in repair transaction will be works contract transaction. However, it is a debatable issue. It is possible to argue that replacement by a repaired compressor is normal ‘sale’ itself as there is transfer of a pre-existing repaired compressor from the assessee to the customer at a specific charge. The receipt of the defective compressor only helps the customer to bring down the take away price for the repaired compressor. In any case, in this judgment, based on finding of lower authority that the transaction is a works contract, the High court has upheld the levy as a works contract.
In the light of the above judgment, the judgment of Tribunal cited above will be correct to the extent that it is not ‘sale’ simpliciter. However, the position that it will not be covered under the Sales Tax Laws at all, cannot be a correct position. Though not as normal sale, but by way of a works contract, it will be taxable under the Sales Tax Laws.
