Replacing defective parts of vehicles under warranty is not a taxable supply

LAHORE: A car manufacturer has proved that replacing defective parts of vehicles under warranty was not a taxable supply under the Sales Tax Act, said sources.

The Large Tax Office (LTO) Lahore had issued a show-cause notice alleging evasion of sales tax as no payment of sales tax was made on supply of auto parts against warranty claims.

The adjudication officer, in follow up to the notice, passed an order-in-original holding the manufacturer liable to pay sales tax together with penalty.

The manufacturer, on the other hand, was of the view that the cars manufactured by it are sold with the warranty for replacing defective parts within a specified time free of charge and no separate amount would be charged from the customer.

The manufacturer further added that the costs of such parts replaced under the warranty are included in the cost of vehicle. No separate consideration was charged as it was integral part of price of the contract received at the time of sale.

The taxpayer continued that sales tax charged and paid on contractual consideration at the time of supply of motor vehicle included such tax on auto parts to be replaced under warranty. Therefore, the absent consideration in such transaction does not fall under the definition of supply as contained in the law.

It may be noted that the warranty period against any particular vehicle sold is usually one year or 20,000 kilometres, whichever occurs earlier. In case of defect, the original part is returned to the company, which is later on sold as an item of scrap on which sales tax is paid under the relevant provisions of law. There is no possibility that a particular item is sold twice, as the original component is replaced and the substituted component forms the part of the composite vehicle.

However, the department was of the view that the replacement parts constituted a distinguishable supply on which tax was required to be charged and deposited at the time of replacement. No relationship of the replaced part can be made with the defective but original part, they stressed. But it didn’t dispute the claim that such replacements were part of the in-built cost of the vehicle.

The manufacturer maintained that the warranty replacements were not taxable goods, which was upheld by the appellate forums later on.

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