2011 (7) TMI 1055 - HC - VAT and Sales Tax

Whether the Tribunal was justified in confirming disallowance of sales returns claimed? Held that - It is not a case of return of medicine on expiry of shelf-life and cannot be treated as fructified sales or unfructified sales. So much so, the petitioner s contention in this regard is also not acceptable. However, we feel this is a genuine problem faced by the medicine distributors in the State which probably the State has to address. Probably, return of life expired drugs may be of insignificant quantity and considering the huge margin of profit manufacturers may not feel it worthwhile to be taken up with the Government. In any case, the petitioner/manufacturer is free to take up the matter with the Government for providing sufficient safeguard under the VAT scheme which has replaced Sales Tax Act and Rules.

Summary

Issues:
1. Justification of confirming disallowance of sales returns claimed by the company.
2. Interpretation of rule 9(b)(i) of the Kerala General Sales Tax Rules regarding sales returns within three months of sale.
3. Consideration of alternate contention regarding treating the transaction as unfructified sales for tax refund.

Analysis:
1. The primary issue in this case revolves around the disallowance of sales returns claimed by the company. The company, a leading manufacturer of medicines, follows a trade practice of taking back expired stock from dealers. The company's argument is that these returned goods, destroyed by them, have already been taxed on the first sale to distributors, entitling them to a refund. However, the assessing officer disallowed the sales return claim as it did not meet the criteria under rule 9(b)(i) of the Kerala General Sales Tax Rules. This disallowance was upheld by the Tribunal, leading to the filing of revision cases.

2. The interpretation of rule 9(b)(i) is crucial in determining the eligibility for sales return deductions. The court analyzed the nature of the transactions involving the return of expired medicines after the shelf-life has ended. Given the shelf-life constraints in the pharmaceutical industry and the marketing practices involved, it was deemed unlikely that sales returns of expired medicines would occur within the stipulated three-month period. As the existing rules only allow deductions for sales returns within three months of sale, the court concluded that the company's claim for sales return deductions was rightly rejected.

3. The alternate contention raised by the company, suggesting that the transaction should be treated as unfructified sales to claim a tax refund, was also examined. The court dismissed this argument, emphasizing that the sales had indeed taken place from the manufacturer to the distributor and subsequently to the dealer. The return of expired medicines did not nullify the original sales, as the company reimbursed the value to distributors through credit notes. This practice indicated that the transactions were not unfructified sales and did not warrant a tax refund. The court acknowledged the unique challenges faced by medicine distributors in such scenarios and suggested that the company could address these concerns with the government under the VAT scheme.

In conclusion, the Kerala High Court upheld the decision to disallow the sales returns claimed by the company, citing non-compliance with the statutory provisions and rules governing such deductions. The judgment underscores the importance of adhering to the prescribed timelines and criteria for claiming sales return deductions under the sales tax regulations.