Allahabad HC: Free Warranty Replacements Taxable When Consideration Exists; Telco’s Revisions Dismissed

Telco Construction Equipment Company Ltd. filed two revisions challenging a Tribunal order dated 18 December 2023 concerning the levy of CST on parts replaced during the warranty period for the assessment year 2007-08. Telco manufactures and sells heavy earth-moving machinery and provides warranty support through authorised dealers. During assessment proceedings, the Assessing Authority taxed parts replaced under warranty, treating them as sales.

The first appellate authority remanded the matter, but the renewed assessment again resulted in tax @ 10% on replacement parts. Both the first appeal and the second appeal failed, prompting the present revisions.

Issue Raised: Whether replacement of parts during warranty and AMC periods amounts to a taxable sale under the CST Act when factual findings indicate consideration was indeed involved.

HC’s Ruling: The High Court upheld the Tribunal’s order, noting that the revisionist had failed to challenge crucial factual findings recorded by the first appellate authority. These findings showed that replacement parts carried specific quantities and prices, that ownership passed first to authorised service providers and later to customers, and that dealers received credit memos or cash reimbursements for both parts and service charges. The company’s own balance sheet disclosed a separate warranty provision account reflecting utilization of funds for parts and labor.

Relying on Tata Motors (2023), the Court observed that once consideration, direct or indirect, is established, warranty replacements constitute taxable sales. The existence of Annual Maintenance Contracts further supported the State’s case that transactions were not gratuitous. The Court dismissed both revisions.

To Read Full Judgment, Download PDF Given Below