VAT Chargeable on Extended Warranty Contracts

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Manoj Kumar Chaudhary (Querist)

19 April 2010 Hi,
One of my client is providing after sales services of Electronics products. Extended Warranty Contrac Cards EWC Cards)is sold to customers on which Service Tax is collected. Now question is Whether VAT is also chargeable on EWC cards?. Furher, in warranty pariod Parts are replaced free of cost. Whereas while selling the Card, Parts value cannot be define as it is likely to be replace in future.
Pls advice whether VAT is chargeable? if so, on which ground VAT wil be charged?

CA Umesh Sharma

CA Umesh Sharma (Expert)

19 April 2010 Dear, please refer to the below mentioned warranty case law,accordingly vat is applicable for parts replaced free of cost.For EWC cards sold, as such no material value is known, VAT may not be chargeable. But when part is replaced VAT will be chargiable if following model of business as per case law i.e, Manufacturer to dealer, dealer to customer. Please refer the below mentioned supreme court case and apply to ur case accordingly. If above model is not applied for replacement, then VAT may not be leviable i.e, from manufacturer to customer directly.

IN THE SUPREME COURT OF INDIA
Civil Appeal Nos. 9618 and 9619 of 2003
Decided On: 21.07.2004
Appellants: Mohd. Ekram Khan and Sons
Vs.
Respondent: Commissioner of Trade Tax, U.P. Lucknow
JUDGMENT
Arijit Pasayat, J.
1. These two appeals relate to a common judgment rendered by a learned Single Judge of the Allahabad High Court. The appellant (hereinafter referred to as the 'assessee') was, a dealer registered under the Uttar Pradesh Trade Tax Act, 1948 (hereinafter referred to as the 'Act'), for the relevant assessment years i.e. 1990-91 and 1996-97. The only question involved in these appeals is whether the amount received by the assessee for supply of parts to the customers as a part of the warranty agreement was liable to tax. The assessee was an agent of M/s Mahindra and Mahindra (hereinafter referred to as the 'manufacturer'). The manufacturer had warranty agreement with the purchasers of vehicles (hereinafter referred to as the 'customers') to replace defective parts during the warranty period. As found by the taxing authorities and the High Court, the manufacturer made payment for certain price as the parts were supplied by the assessee to the customers. Credit notes were issued by the manufacturer to the assessee in respect of the price of the parts supplied to the customers. The assessing officer was of the view that the payments received through credit notes amounted to a sale in terms of Section 2(h) of the Act. Said provision, so far as relevant reads as follows:
"(h) 'Sale' with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration and includes-"
2. Accordingly tax was levied for the two assessment years in question.

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