Company Incorporation

Auto Sales – Law And Amendments

Typically, the intermediary between automakers and buyers is an automobile dealer. The term "dealership" refers to a company that engages in the retail sale of cars, both new and used. Selling replacement components, providing maintenance services, and handling warranty claims are all included. Let's see in detail

Sales representatives are chosen by auto dealers to market their vehicles. Due to the expansion and increased FDI attracted by the automobile sector over the past few decades, this business model has been geared up. This corporate model has opened up new possibilities for boosting the nation’s economy. Previously a luxury item, cars have now become a necessity of life, creating space for creativity and original company start-up ideas.

Roles and Responsibilities of automobile dealers and sellers

Owning a franchise or dealership for a car can come with a lot of duties. Customers must receive a whole package, from customer satisfaction to after-sales services. Additionally, when launching a car dealership business, one must consider the legal ramifications.

Primary responsibility

  • Comparing and contrasting competing models to gain an understanding of the nature and characteristics of autos;
  • Being in close contact with customers, getting along well with them, replying to questions, and promoting marketing initiatives.
  • Maintaining reports and conducting analysis of sales management data.
  • By taking responsibility for completing new and different requests and looking for ways to add value to job accomplishments, the dealership improves its reputation.

During sales responsibilities:

  • Understanding buyer’s requirements and interests; matching requirements and interests to various models and guiding them.
  • Providing demos to the buyers and explaining to them the features of the vehicle and giving them test drives.
  • Close sales by overcoming objections; asking for sales; negotiating prices; completing sales or purchase contracts; explaining provisions; explaining and offering warranties, services, and financing; collecting payment; delivering automobiles.
  • In the case of selling used vehicles- transfer of the registration certificate and insurance claims understanding.
  • Explaining to them the various payment options available to make sure there is ease of buying.

After-sales responsibilities

  • They should provide after-sales service to customers like installation, commissioning, warranties, maintenance, etc. 
  • When a customer has a problem with the vehicle, dealers or sellers have to help solve the problem. Understanding the queries and handling them is an essential duty of the dealer.

Showroom Selling V. Online Selling

  • Research: whenever consumers buy any products they make sure that they buy it after conducting proper due diligence and comparing the prices of different models for which online proves to be handy because it becomes tiresome to visit the different showrooms and it consumes less time compared to showroom research
  • Costs: sometimes, the cost of sales is similar online and offline, so the manufacturers can directly sell to the customers avoiding intermediaries, which lessens the requirement of having showrooms. However, few customers will want to test the vehicle before buying it to check their comfort, that is where showrooms become important.
  • Inventory/ stock:  Online retailers also have lower inventory costs. Stores must have physical inventory, while online retailers can use third-party drop shipping services directly from the supplier.
  • Speedy delivery/ possession: Stores have an advantage in order fulfillment for physical products. A customer takes possession of the product inside the store, pays for it, and takes it home. An online customer has only seen images of the product and has to wait at least a day, and sometimes much longer, to take possession of it. 
  • Customer satisfaction: Stores offer greater customer satisfaction when the customer values the immediate availability of a product.
  • Discounts: One of the major points which attract customers is discounts. When compared to showroom selling, online selling gives comparatively good discount prices. 
  • After-sales-services- claims and warranties: When we buy vehicles from the showroom, it makes the process of claims and warranties easy as the customer is aware of the location of the company, but, on the other hand, when we buy vehicles online through OLX or any other services, getting in touch with the seller becomes a difficult process.

Legal aspects of auto sales with reference to the motor vehicles act

1. Registration

No one can drive nor can the owner of a vehicle permit anyone to drive the vehicle in a public place or any other place unless the vehicle is registered and the certificate of registration of the vehicle has not been suspended or canceled. 

The vehicle should carry a registration mark displayed in the prescribed manner. However, subject to conditions, the provisions of this clause will not apply to the motor vehicles in possession of vehicle dealers. However, any person driving or owner permitting to drive a vehicle without effective registration will be held liable and has to pay a fine of up to 5,000 for a first offense but not less than 2,000. There may be imprisonment of up to one year or up fine of 10,000 for a second or subsequent offense but not less than 5,000 or both.

The certificate of registration is valid for 15 years and shall be renewable for 5 years.

2. Transfer of ownership

When any person sells his vehicle, it is mandatory to get the ownership of the vehicle transferred to the name of the buyer. Vehicle ownership transfer which is generally called the RC transfer is important because it ensures that the vehicle and all legal liabilities related to it are transferred to the buyer. 

As per the official RTO vehicle transfer procedure(intrastate), the following documents will be required:

 

  • RC: The original registration certificate of the seller needs the submission to the RTO
  • Form 29 (Notice form to change ownership of a vehicle): Form 29 needs to submit along with a passport-size photograph of the seller and the buyer. The form should also sign. 
  • Form 30 (report of transfer of ownership of a motor vehicle): Form 30 needs to submit along with a passport-size photograph of the seller and the buyer. The form should have a signature. 
  • Form 28 (no objection certificate): It requires in case the vehicle has to transfer to the RTO other than the one where the vehicle has rejection. This form might not require if the vehicle transfer from one city to another within a state. But, in some states like Maharashtra, it is mandatory.

Consequences on non-transfer case analysis of Naveen Kumar Vs Vijay Kumar and others

Section 2 (30) of the Act states that it is the person in whose name the motor vehicle stands registered would be treated as the ‘owner’.

In the present case

  • The matter relates to the vehicle involved in an accident resulting in injury to one person and the death of the other person.
  • The seller of the car will give transfer forms that did not take any steps to ensure that the ownership of the car will transfer in the records of the registering authorities as by Section 50 of the Motors Vehicle Act. 
  • The original purchaser of the vehicle instead of transferring the vehicle in its name sold it to another buyer, who in turn sold it to another buyer. The vehicle changes hands multiple times whereas the original owner continues to be the registered owner in the records. The vehicle at the time of the accident was also not insured
  • The Supreme Court after analyzing the provisions under the Motor Vehicles Act, 1988 relating to ownership. Further, the responsibility is cast on the owners as also purchasers to intimate change of ownership to the registering authority. Likewise, held that the registered owner is liable to pay the compensation as he failed in his duty and continued to remain the owner.
  • In the case of the sale of vehicles, thus, the idiom ‘Buyer be aware’ does not hold true. It is, in fact, ‘Seller be aware
  • The original owner is liable for compensation claims arising from any accident involving the car even if it is now owned and driven by another person. 
  • This decision of the Supreme Court has far-reaching consequences in the case of those owners who have sold the vehicles and not intimated the purchaser to the registering authority. It will now be in the interest of the owners to check whether the purchaser has been recorded as the owner of the vehicle sold by them and if not so done by the purchaser, immediately file a copy of the transfer forms with the registering authorities
  • In the case of Pushpa alias Leela v Shakuntala ((2011) 2 SCC 240) the position clarifies by holding that where notwithstanding the sale of a vehicle. Neither the transferor nor the transferee has taken any step for a change in the name of the owner in the certificate of registration. The person in whose name the registration stands must deem to continue as the owner of the vehicle for the Act.
  • In the case of P P Mohammed, VK Rajappan ((2008) 17 SCC 624) was reiterated by the Respondents. It was submitted that the person whose name continues in the record of the registering authority as the owner of the vehicle is equally liable together with the insurer.

Insurance

As per the Motor Vehicles Act, all vehicles that operate in any public space must have a motor vehicle insurance cover. Policyholders must have at least ‘third-party liability motor insurance coverage even when opting for the basic insurance plans. The third-party cover is essential in the event of an accident by the vehicle owner or another person driving the other vehicle. As per the new amendment act of 2019, the penalty for driving without insurance has doubled from 1,000 to 2,000 for first-time offenders and is up by 4 times for second-time offenders to 4,000.

4. Change of residence

The Act requires that the owner of a motor vehicle shall, within 30 days, report the change of address to the registering authority in whose jurisdiction he has shifted his residence for recording the change of address in the certificate of registration. Failure to do so will entail prosecution. 

Issues faced by automobile dealers and sellers:

  • Lack of proper laws to govern the dealership or franchise model of the automobile industry

In such a situation where the general demand pattern skews toward few brands and the natural pull toward products is missing, the industry needs to come together and regulate the sector through laws that will allow for the right-sizing of the approach toward the dealers.

The absence of franchise protection laws, allow OEMs to deal with dealers as they wish with zero recourse. Further, based on the ironclad one-sided agreements made by OEMs and signed by the dealers. At the time of starting the business, it was blind by the glamour of the business and the brand.

  • Prohibition on dealers from acquiring competitive dealerships:

In a majority of cases, the automobile dealership operates on the principles of the single franchise. Where a particular dealer requires to sell cars/bikes from a particular manufacturer. Such restrictions expand to the after-sell services including insurance etc. 

The case is of Shamsher Kataria vs. Honda Siel Cars India Ltd. & Ors where Volkswagen India Ltd and Fiat India Ltd along with Honda Siel Cars India Ltd were sued under the following charges.

  • Placing the burden on the dealers, and service stations by restricting their procurement. Further, the sale of spare parts of one manufacturer only. Thereby violating 3(4)(b) of the act. i.e. exclusive supply agreements and tie-in agreements.
  • By not releasing the important software and hardware knowledge to the independent workshops.

The CCI while holding the companies liable for the 3(4)(b), 3(4)(c) 3(4)(d)[13] also went on to say that each OEM is 100% dominant in the after-sale market since consumers get locked-in after buying a car of a particular brand and cannot change it. Each OEM is enjoying a dominant position in the after-sale market. As the limits of the good to the particular dealers completely violate competition. Thus the CCI held the OEM in violation of Section 4(2)[14] of the act.

  • Taxation issues faced by the dealers:
  1. a) GST law provides that all closing stocks of finished goods and inputs cannot be transferred to the GST regime with full tax benefits. For no-fault, the assessee’s stocks older than one year will result in monetary loss to dealers. It is a 100% tax benefit that will allow only in cases where conditions (which are not easy)
  2. b) Demo cars are used for marketing and training as a usual business practice which is presently not considered capital goods. There are two divergent views on the same because of the specific denial of credit to motor vehicles in input tax credit provisions
  3. c) Dealing with second-hand goods (pre-owned vehicles) is a substantial part of a dealer’s business. There is no concessional rate of tax prescribed looking at the fact. That such goods would have suffered tax already at the time of first purchase.
  4. d) Free services on behalf of other dealers or manufacturers, extended warranties, and reimbursement of expenses as pure agents are contentious issues that may lead to non -compliance, disputes, and litigation.
  5. e) At present auto dealers offer incentives to potential buyers in the form of free insurance, free accessories, fuel coupon, extended warranty, etc which may be taxable in the GST regime. Valuation rules do not permit such practices unless properly documented and as such, the tax would be attracted. If not, dealers may not get an input tax credit on these activities as these would imply exempt supplies.

Things to remember while dealing in the automobile industry as a dealer or seller:

  1. Get a dealer’s certificate from the manufacturer.
  2. Ensure you understand the GST regime before giving discounts, freebies, or making a reservation
  3. Make sure all vehicles are registered in accordance with the Motor Vehicle Act
  4. For transfers of vehicles between cities, obtain NOC from the required department
  5. Interpret manufacturer agreements with legal assistance
  6. Before starting a business, learn about the competition laws.

 Conclusion:

When it comes to sales and dealerships, the industry is booming, and it is possible to launch a successful firm with significant financial and human resources. If you need more clarification, we have Legal experts from Vakilsearch, which is the number one legal service provider in India!

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