Deduction from sales tax on Trade Discounts given by raising credit notes and not in Original Invoice

PJ/Case Study/2011-12/47

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]

Introduction:-

What if supplier has been prompted to give discount to his buyer either on the basis of good turnover by him or timely payment, but the discount is not given in the month itself but after a specific period of performance, will the tax deduction on the discount shall be available?

In the case under study, the issue raised before the Supreme Court was that whether the exemption to trade discounts from sales tax under State Sales tax Act (in this case Kerala General Sales Tax Act, 1963) will be available even if discount is not given in the original invoice but was given afterwards by raising credit notes.

Relevant Legal Provisions:-

- Definition of ‘Turnover’ under Section 2(xxvii) of the Kerala General Sales Tax Act, 1963: -

(xxvii) “Turnover” means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration.

Explanation 2 – Subject to such conditions and restrictions, if any, as may be prescribed in this behalf, -

(i) xxx

(ii) any cash or other discount on the price allowed in respect of any sale and any amount refunded in respect of any sale and any amount refunded in respect of articles returned by customers shall not be included in the turnover.

- Rule 9(a) of the Kerala General Sales Tax Rules, 1963: -

Rule 9: Determination of taxable turnover. –In determining the taxable turnover, the amounts specified in the following clauses shall subject to the conditions specified therein, be deducted from the total turnover of the dealer: -

(a) All amounts allowed as discount, provided that such discount is allowed in accordance with the regular practice in the trade and provided also that the accounts show that the purchaser has paid only the sum originally charged less the discount.

M/s IFB Industries Ltd v/s State of Kerala
[2012-TIOL-22-SC-CT]

Brief Facts:-

- Appellant-assessee is a manufacturer of home appliances. It has a scheme of trade discounts for its dealers under which the dealer, on achieving a pre-set target gets certain discount on the price for which it purchased the articles from the manufacturer, the appellant. As the discount is subject to achieving the sale target the dealer would naturally qualify for it in the later part of the financial year/assessment period, that is to say, long after the sales took place between the appellant and its dealer. For the sales taking place between the appellant and its dealer after the sale target is achieved, the dealer would of course get the articles on the discounted price but for the sales that took place before the sale target was achieved, the appellant would issue credit notes in favour of the dealer. Appellant’s case related to assessment periods 2001-02 and 2002-03.

- The Assessing Authority, in principle, accepted the appellant’s claim for deduction of the amount of discount given by it to its dealers through credit note under Rule 9(a) of the Rules. Dealing with assessment periods 2001-02, the Assessing Authority in its Order dated 27.01.2006 observed that the dealer had given discount to the tune of Rs. 58, 15, 485/- and as the discount was allowable in ordinary course of business, that turnover was allowed as exempted.

- For computation, the Assessing Authority started with the figure of ‘Taxable turnover as per account (Home Applicances) Vth Schedule Items’ that was Rs. 11, 62, 36, 424.23. He then added to it the amounts of

(i) Turnover under AMC,
(ii) Sales Return,
(iii) Stock Transfer,
(iv) Second sale,
(v) Tax collected and
(vi) Scheme Discount amounting to Rs. 58, 15, 485/-

And arrived at the figure of ‘total turnover proposed’ that came to Rs. 14, 27, 69, 607/-. From the total turnover, he then deducted the amounts of (i) AMC, (ii) Sales Return, (iii) Second sale, (iv) Tax collected and (v) Scheme Discount being Rs. 58, 15, 485/- and thus, finally arrived at the figure of Rs. 11, 95, 56, 460/- as the ‘taxable turnover proposed’. Similar order was passed for assessment year 2002-03.

- Appellant-assessee objected to the computation made by the Assessing Authority. Their contention was that though in principle allowing deduction for the trade discount the Assessing Authority actually denied any deduction by subtracting the amount of trade discount only after first adding it to the turnover. In the computation made by the Assessing Authority the amount of trade discount, thus, got neutralized and the appellant did not actually get any deduction of the trade discount from its turnover.

- Appellant filed appeal against Assessment Order wherein objection was raised by the that the computation made by the Assessing Authority by first adding up the amount of trade discount and only then deducting it from the turnover denied it the exemption of trade discount which the Assessing Authority has himself allowed in the earlier part of his order.

- The Appellate Authority accepted the appellant’s stand and observed in its order dated 28.04.2006 that in effect the appellant’s claim was disallowed even though it was allowed in the Assessment order. He, accordingly, directed the Assessing Authority to verify whether it was a computation mistake and to modify the order accordingly.

- Against the order of the Appellate Authority, Revenue filed appeal before the Tribunal.

- The Tribunal allowed the appeal of Revenue by holding that since there was no assessment on trade discount, the direction of the Assessing Authority to verify whether there was a mistake in this computation was without any basis.

- Appellant filed a Rectification of mistake application but it was rejected by the Tribunal.

- The matter reached the High Court for dispute over computation. Appellant confined its revision to the computation made by the Assessing Authority as they safely believed that the Assessing Authority had in principle accepted its claim for deduction of the trade discount from the taxable turnover, confined its revision to the computation made by the Assessing Authority.

- The High Court examined the basic question whether the discount under the scheme of the appellant was at all qualified for deduction under Rule 9(a) of the Rules. In a brief order dated 26.06.2009, without referring to any earlier precedents of the Apex Court or the High Court, the High Court observed that from a plain reading of Rule 9(a) it appeared that what is allowable as discount in the computation of taxable turnover is the trade discount given in the bills. According to the High Court, what is insisted in the Rule is that the purchaser should have paid the price charge, less the discount. And this certainly meant that the discount should be shown in the original invoice and tax should be charged only on the net amount exclusive of discount so that the buyer gets the deduction towards discount.

On the claim of appellant regarding deduction of their trade discount from the taxable turnover, the High Court observed that

“Petitioner (Appellant herein) is a manufacturer engaged in supply of goods in wholesale to distributors and dealers. Sales are therefore first sales and discount if any given can only be trade margin to dealers. If tax is not to be charged on the dealer margin, then discount should be given in the invoice itself. If the petitioner has made sales in this way, then necessarily deduction should have been claimed in the monthly return itself as the taxable turnover does not cover discount/trade margin given in the invoice. On the other hands, in the Tribunal’s order, what is refereed to as scheme discount which is nothing but incentives given by manufacturers and wholesalers to dealers, may be doe seasonal sales or may be for annual sales. Such incentives are normally given by the credit note at the end of the season or at the end of the year. These incentives given through credit notes are outside the scope of discount covered by Rule 9(a) of the KGST Rules.”

It was held that assessment in appellant’s case was not properly made and the impugned orders were set aside and matter remitted to the Assessing Authority for passing fresh assessment orders in the light of its Order and after examining the quarterly returns and the annual returns submitted by the appellant. The High Court held that discount in question was not trade discount at all and it was not eligible for deduction in terms of Rule 9 (a).

- Appellant filed appeal before the Supreme Court on the contention that though the order of the High Court is an order of remand, for all intent and purposes it puts an end to their claim of deduction of trade discount from its taxable turnover.

- Thereafter, similar view was taken by the High Court in the case of Godrej and Boyce Mfg Co. Ltd. In the case of India Cements Ltd (appellant herein in another SLP) the assessment for the assessment periods 2003-04 and 2004-05, the Revenue considered the decision of the High Court in M/s IFB Industries Ltd (appellant herein). The Assessing Authority therefore turned down the claim of India Cements Ltd for exemption of different kinds of discount, namely, special discount, annual discount, turnover discount, target discount etc given by means of credit notes. Referring to the decision of the High Court in M/s IFB Industries Ltd’s case, the claim of India Cements Ltd for deduction of the trade discount amount from their taxable turnover was rejected by holding that, discounts given through credit notes were nothing but incentives and did not come under Rule 9(a) of the Rules.

- The Assessment orders were challenged before the High Court. The Single judge of the High Court declined to entertain the writ petitions filed directly against the assessment orders and left it open to appellant to seek remedies before the statutory authorities.

- Aggrieved appellant filed appeals before the Division Bench of the High Court. The High Court declined to reconsider its order passed in the case of appellant by observing that challenge to decision of the High Court lay before the Supreme Court. The assessment disallowing discount on credit notes was upheld. Thus, the High Court (Division Bench) held that unless the discount was shown in the invoice itself, it would not qualify for deduction and further that any discount that was given by means of credit note issued subsequent to the sale of the article was in reality an incentive and not trade discount eligible for exemption under Rule 9 (a) of the Rules.

- Accordingly, appellant are before the Apex Court.

Appellant’s Contention:-

Appellant contended that their claim was rejected practically unheard and without any considerations of the earlier precedents on the point relied upon by them in support of their claim.

Issue: -

The issue raised in this case is that

How far deductions are allowable under Rule 9(a) of the Kerala General Sales Tax Rules, 1963 for trade discounts?

Reasoning of the Supreme Court:-

- The Supreme Court noted that the appellant’s objection regarding computation would have any basis only in case it is shown that the original figure of Rs. 11, 62, 36, 424.23 taken by the Assessing Authority as ‘Taxable turnover’ was inclusive of the amount of the scheme discount being the sum of Rs. 58, 15, 485/-. For unless the amount of scheme discount was a factor of ‘Taxable turnover’ there would be no question of deducting it from taxable turnover. Only in case the appellant could show that the figure of Rs. 11, 62, 36, 424.23 also included the amount of Rs. 58, 15, 485/- as the trade discount there would be any question of deducting it from the larger figure.

- It was noted that in appeal also it was never stated that the figure of Rs. 14, 27, 69, 607/- forming the basis of the computation included the amount of trade discount of Rs. 58, 15, 485/-.

- The Supreme Court referred to the definition of ‘turnover’ under Section 2(xxvii) of the Kerala General Sales tax Act, 1963 to understand the kinds of discount that are exempted in terms of Rule 9(a). It was observed that the very definition of “turnover” recognizes discounts other than cash discount and provides that those other discounts too like the cash discount shall not be included in the turn over.

- The Court then referred to provisions of Rule 9(a) which provides for ‘determination of taxable turnover’ and noted that the Rule does not speak of invoices but stipulates that the discount must be shown in the accounts. On plain reading of the provision it is clear that the exemption is allowable subject to 2 conditions: - first, the discount is given in accordance with the regular practice in the trade and secondly, the accounts should show that the purchaser has paid only the sum originally charged less than discount.

- The Court found nothing in Rule 9(a) to read it in the restrictive manner to mean that a discount in order to qualify for exemption under its provision must be shown in the invoice itself. It was held that the view taken by the High Court is not sustainable. It was held that the earlier decisions of the Supreme Court and some High Courts fortify the view of the Supreme Court.

- The Supreme Court relied upon the judgment given in Deputy Commissioner of sales Tax (Law) Board of Revenue (Taxes) v/s M/s Advani Oorlikon (P) Ltd [(1980) 1 SCC 360] wherein it was held that cash discounts and trade discounts are wholly distinct and separate concepts and are not to be confused with one another. The said case was under Central Sales Tax Act which mentioned only cash discount as being deductible from sale price. The Court nevertheless held that any trade discount must also be similarly deducted for determining the sale price of goods.

- The Court relied upon the judgment given in Deputy Commissioner of sales Tax (Law) Board of Revenue (Taxes), Ernakulam v/s Motor Industries Co, Ernakulam [(1983) 2 SCC 108] which was on Rule 9 (a) of the Kerala General Sales Tax Rules and the discount admissible to exemption under that provision. The Supreme Court, however, clarified that in terms of the Rule, as it stood at that time, exemption was allowable on trade discount given not only in accordance with regular practice in the trade but also in accordance with the terms of the contract or agreement entered into a particular case. The Supreme Court had upheld that decision of the High Court allowing exemption to the dealer.

- Further reliance was placed on decision in Union of India and Others v/s Bombay Tyres International (P) Ltd [(2005) 3 SCC 787] wherein the Supreme Court had succinctly described ‘trade discount; and held it to be deductible from the same price.

- The decision given by the Andhra Pradesh High Court in Godavari Fertilizers and Chemicals Ltd v/s Commissioner of Commercial Taxes [(2004) 138 STC 133] was considered. It was held therein that a discount given by means of credit notes issued subsequent to the sale is as much a trade discount admissible to deduction in determining the turnover of a dealer.

- The Supreme Court also relied upon the judgment of the Kerala High Court in Kalpana Lamps and Components Ltd v/s State of Kerala [(2006) 143 STC 666] wherein it was stated that with regard to special discount, the Authorities have to look into whether as a matter of fact, the petitioner received only the sum originally charged less the discount. It is the look out of the traders to see that the trade increase and it is for that purpose the trade discount is given. Hence, a person may not be able to clearly prove as to why the special discount was given. But if there has been a consistent practice of giving special discount, that has to be accepted by the assessing authority.

- The Supreme Court thus held that the impugned orders of the Kerala High Court are not sustainable. Impugned orders set aside. Cases remitted to Assessing Authorities with direction to make assessments and pass fresh orders in accordance with law and in the light of this judgment. The claim of exemption of appellant’s will not be rejected by the Assessing Authority merely because the discount amounts were not shown in the sale invoices.

Decision of the Supreme Court:-

Appeals allowed.

Conclusion:-

The Supreme Court rightly re-confirmed the view held earlier that a restrictive interpretation cannot be taken of an exemption provision. When trade discount has been granted exemption from sales tax then merely because the discount was given later on by raising credit notes and not in the original invoice, the substantive benefit of exemption cannot be denied to the assessee.

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01 March 2012

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PJ/CASE STUDY/2011-12/47
01 March 2012