The Lahore High Court has ruled that the auto parts replaced under the warranty given by the manufacturers are not taxable as the cost of the replacements is incorporated in the original price of the vehicle that already includes the sales tax.
A two-judge bench headed by Justice Shams Mahmood Mirza reached this conclusion, allowing a sales tax reference by M/s Honda Atlas Cars (Pakistan) Ltd against a judgement of the Appellate Tribunal Inland Revenue of the Federal Board of Revenue (FBR).
The applicant, a car manufacturer, received a show cause from the additional collector (Legal), Large Taxpayers Unit, Lahore, alleging evasion of sales tax under different heads, including the “supply” of auto parts against the warranty claims.
The tribunal upheld the stance of the department, dismissing an appeal of the manufacturer.
The manufacturer, through a counsel, argued that the cars made by the applicant are sold with warranty for replacing defective parts within a specified time and that such parts are supplied free of charge and no separate amount is charged or recovered from the customer.
The company’s counsel explained that the costs of the parts replaced under the warranty are included in the cost of the vehicle. In other words, he said, the warranty is included in and attached to the sale price of the vehicle.
As consideration is missing in such a transaction, it does not come within the purview of “taxable supply”, he added.
The lawyers for the government and the FBR supported the judgement of the tribunal, which declared that warranty replacements are distinguishable supplies on which sales tax is payable.
Justice Mirza, the author of the LHC judgement, relied on the judgements of Indian jurisdiction and observed that the warranty assured the customers of replacement of defective parts within the agreed period or the mileage, free of charge.
In the present situation, the judge noted that the auto parts are supplied free of charge to the customers by the applicant/the car manufacturer under warranty and at the time of such replacement no separate consideration is charged for the reason that consideration of such parts formed an integral part of the price of the contract which is received at the time of sale.
“It is thus axiomatic that sales tax charged and paid on the contractual consideration at the time of supply of motor vehicle included such tax on auto parts to be replaced under the warranty,” the judge maintained.
The judge held that in the absence of monetary consideration in such a transaction, it does not fall under the definition of “supply” as contained in the Sales Tax Act 1990 at the relevant time. Justice Mirza concluded that the replacement of auto parts under the warranty did not form part of the supply of taxable goods and the reliance taken by the respondents on the definition of “taxable supply” is not apt.
The judge concluded that the tribunal and the forums below did not dwell upon the question of replacement of auto parts by the applicant in correct legal perspective and erroneously held that the supply of auto parts under the replacement warranty was a distinguishable transaction without making any effort to say what that means.