Auto parts replaced under warranty not taxable

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.