T. V. R. TATACHARI, CJ.

( 1 ) THE Lt. Governor, Delhi, has referred the following two questions to this Court

under Section 21 of the Bengal Finance (Sales Tax) Act, 1941, as extended to the

Union Territory of Delhi (hereinafter referred to as the sales Tax Act) :-" (I)

Whether, having regard to the facts and circumstances of the case, the replacement

of the parts during the continuance of the warranty entered into by the

manufacturer and/or by its authorised dealer with the purchaser would constitute a

"sale" within the meaning of Section 2 (g) of the Bengal Finance (Sales Tax) Act,

1941 as in force in Delhi which is liable to be taxed under the provision of the Act

(II) Whether on the facts and in view of the circumstances of this case, if the supply

of parts transferred to the purchaser of vehicles in replacement in compliance with

the stipulations of the warranty is not "sale" within this meaning of clause 2 (g) of

the Act, the purchase price of the parts purchased on the strength of certificate of

registration free of cost or purchased at the concessional rate of tax under the

Central Sales Tax Act, 1956, on furnishing c form, is liable to be added to the

taxable turnover of the purchasing dealer under the provisions of the second proviso

to clause (ii) of sub-section (2) of Section 5, of the Bengal Finance (Sales Tax) Act

1941, as in force in Delhi "the respondent herein, M/s. Prem Nath Motors (P) Ltd.

(hereinafter referred to as the dealer), is registered as a dealer under the Sales Tax

Act. It carries on the business of sale of motor cars, their spare parts and their

accessories For the period of assessment 1964-65, the dealer was assessed to sales

tax by an order under Section 11 (1) of the Sales tax Act, dated 30th August, 1968.

During the afore- said period of assessment, the dealer purchased spare parts of

motor vehicles locally on the strength of the registration certificate free of sales tax

under the Sales Tax Act. It also purchased spare parts of motor vehicles at

concessional rate of tax furnishing Form c prescribed under Section 8 of the Central

Sales Tax Act, 1956, to the selling dealers in other States in the course of Inler-State

trade of commerce. The dealer transferred the said spare parts to its Service

Department, where they were used for replacement purposes in the motor-cars sold

under a "warranty".

( 2 ) IN the period of assessment in question, the dealer included in the "gross

turnover" the value of the parts so utilised, but claimed that the value of such parts

which were replaced in the motor cars/ vehicles pursuant to the terms and

conditions of "warranty" during its operation should be deducted from his "gross

turnover". It was first contended that under the terms of the "warranty", it was

obliged to carry out replacements or repairs of defective parts, and that such

replacements or repairs did not constitute "sales". But, during the assessment

proceedings, it was conceded on behalf of the dealer that such replacements of

spare parts constituted "sales" within the meaning of the Sales-tax Act, as the goods

so utilised were purchased for purposes of re-sale either locally in Delhi free of sales

tax on the strength of the local registration certificate or imported from outside Delhi

in the course of Inter-State trade of commerce at concessional rate of the tax after

furnishing Form c prescribed under Section 8 of the Central Sales Tax Act, 1956.

The assessing authority did not, therefore, allow the deductions claimed.

( 3 ) AGAINST the said order of the assessing authority, the dealer filed an appeal

under Section 20 (1) of the Sales Tax Act. It was contended again in the appeal that

the replacements or repairs did not constitute "sales". By its order, dated 6th

December, 1969, the Appellate Authority held that the replacements were in the

nature of "sales" as admitted by the dealer, and, therefore, such replacements

constituted "sales" taxable under the Act. In that view the A Appellate Authority also

refused to allow the deductions claimed by the dealer.

( 4 ) THE dealer then preferred a Revision Petition to the Commissioner under

Section 20 (3) of the Sales Tax Act. The revision petition B was heard by the Deputy

Commissioner.

( 5 ) IT was pointed out on behalf the dealer that there is a warranty given by the

Premier Automobiles Limited, (Manufacturer of Fiat Car) to the dealer who is the

first purchaser from the manufacturing company and, again there is a warranty

stipulated between the dealer and the buyers-consumers. It was also pointed out

that according to the warranty as between the dealer and the buyers-consumers, it

applied to two periods, viz. , (i) pre-delivery period and (ii) post delivery period. It

was explained that in the pre-delivery period, if the dealer feels that any part of the

car which is to be supplied to any buyer-consumer needs replacement, it is

automatically done by the company and no price extra is charged by the company,

and hence the question of any sale having been effected does not arise. As regards

the post delivery period, it was explained that in that period, when it is brought to

the notice of the dealer by any buyer-consumer that any part or parts of the car

needs replacements and the dealer is satisfied with the claim of the buyerconsumer,

the dealer is obliged. under the terms of the warranty, to replace it

without making any charge from the buyer-consumer. It was contended that even if,

for the sake of argument, such replacement was considered to be covered by the

definition of the term sale as given in the Sales Tax Act, the question would be as

to what would be the "sale price" of such a part replaced by the dealer, as no price

was actually charged. It was argued that actually the price of the part replaced by

the dealer was already included in the aggregas consideration for the sale of the

car, which has already been subjected to sales tax, and hence there was no warrant

for imposition of any further tax.

( 6 ) BY his order, dated 14th December, 1970, the Deputy Commissioner held that

whenever the dealer entertained a claim under the warranty, it simply replaced the

parts without recovering anything from the buyers-consumers, that the

circumstances under which the said replacement was effected clearly indicated that

it could not be treated as "sale of goods",either under the Indian Sale of Goods Act,

1930, or under the Sales Tax Act, as the payment or promise of payment of price

which is one of the essential ingredients of a "sale of goods" was lacking, and the

transfer of property in the parts so replaced did not involve any valuable

consideration, and that otherwise also, when a buyer-consumer who paid the price

of the car to the dealer subsequently discovers any defective part and puts up a

claim before the dealer on account of breach, of warranty and the dealer replaces

that part, the consideration for that part, if at all it can be said to be so, had already

been included in the aggregate consideration for which the car had been sold

originally, implying thereby that there was no specific consideration for the

replacement of the part. In that view, the Deputy Commissioner decided that the

replacements of the par:s during the period of operation of warranty were not liable

to Sales Tax.

( 7 ) THE dealer, however, felt aggrieved by the said order for the reason that if the

spare parts of the motor vehicles purchased on the strength of the registration

certificate free of tax for purposes of re-sale were not sold, but used for

replacement in compliance with the terms and conditions of the warranty the

purchase price of such parts was liable to be included in the taxable turnover of the

purchasing dealer under the second proviso to clause (ii) of sub-section (2) of

Section 5 of the Sales Tax Act. It, therefore, preferred a further revision petition to

the Financial Commissioner, Delhi, under Section 20 (3) of the Sales Tax Act.

( 8 ) BY his order, dated 8th July, 1971, the Financial Commissioner held that the

transfer of property in the parts replaced under the warranty constituted a "sale"

and as such the replacement of parts as a consequence of the terms and

stipulations of the warranty must be deemed to be a continuation of the original

sale, the price of which stood included in the consolidated sale price determined and

realized at the time of the transfer of goods in the shape of the car with a warranty.

The Financial Commissioner also held that the parts supplied in replacement, free of

cost, by the dealer, in terms of the warranty, are sold along with the car for which a

consolidated price was realized at the time of the initial transfer and on which sales

tax was paid, and the replacement of the parts would be deemed to be a sale not

liable to imposition of further sales tax.

( 9 ) THE Commissioner of Sales Tax, thereupon, filed an application before the Lt

Governor under Section 21 of the Sales Tax Act paying that the two questions which

we have set out earlier in this judgment be referred to this court. The said questions

have since been referred by the Lt. Governor.

( 10 ) THE precise questions that arise for consideration are as to whether the

transfer of the parts replaced in pursuance of the warranty clause amounts to "sale"

within the meaning of Section 2 (g) of the Sales Tax Act, and whether the sale price

of a car which has been subjected to sales tax can be regarded as having included

the cost or the value of the spare parts used in the replacement in compliance with

the stipulations in the warranty. The relevant portion of the warranty stipulated

between the Premier Automobilies Limited and the dealer, as set out in the

statement of case, reads as follows:-"the Premier Automobiles Limited, hereinafter

termed the company, warrants each new FIAT sold by the company, to be free from

defects in material and workmanship under normal use and service, the Companys

obligation under this warranty being limited to making good at the companys

factory any part or parts thereof, including all equipment or trade accessories

(except electric bulbs, tyres and tubes) supplied by the Company which shall within

three hundred and sixty five (365) days after making delivery of such car of the

original purchaser/or before such car has been driven sixteen thousand (16,000)

kilometers, whichever event shall first occur, be returned to the company with

transportation charges prepaid, and which on Companys examination shall disclose

to the companys satisfaction to have been thus defective; this warranty being

expressly in lieu of all other warranties expressed or implied statutory or otherwise

and of all other obligations or liabilities on the companys part, the Company neither

assumes nor authorises any other person to assume for the company any other

liability in connection with the sale of the Companys vehicles.

( 11 ) IN the event of the original purchaser selling the car during the warranty

period, the second purchaser should inform the Service Department, Premier

Automobiles Ltd. , the name, address, date of purchase, serial and engine numbers

of the car, and the mileage covered. The name and address of the party from whom

the vehicle is purchased should also be given. This information is required (within 7

days from the date of purchase) for the purpose of continuance of the balance

period of warranty.

( 12 ) THE company accepts no liability for any loss or damage, direct or

consequential or for any accident resulting from defective material, faulty

workmanship or otherwise. This warranty shall not apply to any car which shall have

been repaired or altered without the approval of the Company or serviced by other

than the Companys authorised dealers or which has been subject to negligence,

accident, improper use or alterations whatsoever.

( 13 ) THE company reserves the right to repair defective parts under warranty

instead of replacing them whenever, in the companys opinion, such repairs can be

satisfactorily carried out.

( 14 ) WARRANTY adjustments will only be made when necessary repairs of parts

involved are handled through an Authorised Dealer of the Company.

( 15 ) THE warranty shall not apply to any particular assembly or components of the

vehicle in or to which any part not manufactured and/ or sold by Premier

Automobiles Limited, has been affixed, so as to, in the Companys judgment, affect

its suitability or reliability".

( 16 ) THE relevant portion of the warranty as between the dealer and the buyerconsumer, as set out in the order of the Deputy Commissioner, reads as follows:-

"during this period you will not be charged for Fiat replacement parts required

because of defective material or workmanship or for labour required to instal these

parts. THIS warranty will not supply1. If parts and/or labour are required due to

negligence, accident or improper use. 2. If you have your car repaired by other than

an authorised dealer during the warranty period. 3. If any parts are used that are

not made by, sold by or approved by the Premier Automobiles Ltd. , Bombay. FOR

your convenience we have arranged to have any authorised Fiat dealer in India

perform the services for your car during the warranty period, should you be touring.

You will be expected to furnish proof that your car is within the warranty period.

Therefore, we suggest you carry this "owner SERVICE POLICY" with you".

( 17 ) IT is clear from the facts narrated above that the dealer sold cars along with a

warranty under which it agreed that it would replace parts, free of cost, within a

stipulated period if the replacement was required because of defective material or

workmanship. In other words, each sale was of the car along with a warranty.

Section 2 (g) of the Sales Tax Act defines "sale" as follows:-" (G ). "sale", with its

grammatical variations and cognate expressions, means any transfer of property in

goods by one person to another for cash or for deferred payment or for any other

valuable consideration and includes a transfer of goods on hire-purchase or other

system of payment by instalments, but does not include a mortgage or

hypothecation of or a charge or pledge on goods". IN the present case, the sale was

of the cars along with a warranty to replace defective parts free of cost, and the

price was fixed and paid at the time of the sale. Section 12 of the Sale of Goods Act,

1930, draws a clear distinction between a condition and a warranty. It reads as

follows :-"12 (1 ). A stipulation in a contract of sale with reference to goods which

are the subject thereof may be a condition or a warrant (2) A condition is a

stipulation essential to the main purpose the contract, the breach of which gives rise

to a right to treat the contract as repudiated. (3)A warranty is a stipulation collatoral

to the main purpose of the contract, the breach of which gives rise to a claim for

damages but not to a right to reject the goods and treat the contract as repudiated.

(4 ). Whether a stipulation in a contract of sale is a condition or a warranty depends

in each case on the construction of the contract. A stipulation may be a condition,

though called a warranty in the contract. "the distinction between a condition and a

warranty essentially lies in that a breach of a condition gives rise to a right to treat

the contract as repudiated, while a breach of a warranty gives rise to a claim for

damages but not to a right to reject the goods and treat the contract as repudiated.

A perusal of the warranty between the dealer and the buyer/consumer set out

above shows that there was no stipulation empowering the buyer/consumer to

reject the car and repudiate the contract if any of the parts is found to be defective.

The stipulation was only that the dealer will replace the defective part/parts, free of

cost. It is thus clearly a warranty and not a condition.

( 18 ) NOW, the warranty was to replace the defective part or parts free of cost.

When a part is replaced in accordance with the stipulation or warranty, it becomes a

part of the car and the property in it stands transferred to buyer/consumer. No

separate consideration for the part so transferred is specified. No dealer can

reasonably be expected to enter into such a stipulation or warranty which might

result in the transfer of the property in the part or parts replaced without

consideration for the transfer. In the circumstances, the only reasonable inference is

that the consideration or the part or parts that might be replaced under the

warranty was not separately specified, because it was included in the price fixed and

paid for the car at the time of its sale. In other words, the transfer of the property in

the part or parts replaced in pursuance of the stipulation or warranty is a part of the

original sale of the car for the price fixed and received from the buyer consumer.

The price so fixed and received was a consolidated price for the car and the parts

that may have to be supplied by way of replacement in pursuance of the warranty.

( 19 ) IN this context, Mr. Kirpal, learned counsel for the respondent, pointed out to

the observation of the Supreme Court in para 8 of its judgment in Premier

Automobiles vs. Union of India, AIR 1972 SC 1690 [LQ/SC/1971/611] , 1693, that warranty was one of

the principal factors considered relevant by the Tariff Commission for the fixation of

a fair selling price for Fiat, Ambassador and Standard motor cars. This observation

shows, that the idea of taking the warranty into consideration infixing the price of a

car is well-known to the manufacturers and dealers of motor cars. The observation

supports, in a way the view taken by us that the consideration for the part or parts

that might be replaced under the warranty was included in the price fixed and paid

for the car at the time of its sale.

( 20 ) FOR the foregoing reasons, we are of the opinion, that the view taken by the

Financial Commissioner that the future replacement of the parts in pursuance of the

warranty have to be regarded as "sales", the price for which was already paid and

on which sales tax was already levied and collected, and that they were not liable to

the imposition of further sales-tax, is correct. We, therefore, answer the first

question in the affirmative and the second question in the negative. In the

circumstances of the case, we make no order as to costs.