2017 (1) TMI 958 - SC - VAT and Sales Tax

Post sale discount - discount accorded by the credit notes from the total turnover - discount earlier allowed by assessing authority - subsequently, recognizing only discounts mentioned in the tax invoices as eligible for deduction from the total turnover in terms of Rule 3(2)(c) of the Rules, the Assessing Authority passed the rectification orders dated 21.05.2012 under Section 41(1) of the Act, disallowing the deduction of post sale discounts earlier awarded by the corresponding credit notes - whether disallowance of discount justified? Held that - the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid. Though words in a statute must, to start with, be extended their ordinary meanings, but if the literal construction thereof results in anomaly or absurdity, the courts must seek to find out the underlying intention of the legislature and in the said pursuit, can within permissible limits strain the language so as to avoid such unintended mischief - the legislature, while occasioning the amendment to the first proviso to Rule 3(2)(c) of the Rules, was either ignorant or unaware of the prevalent practice of offering trade discount in the contemporary commercial dispensations. This is more so, as trade discount continued to be an accepted item of deduction - The first proviso has thus to be so read down, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated. If taxable turnover is to be comprised of sale/purchase price, it is beyond one s comprehension as to why the trade discount should be disallowed, subject to the proof thereof, only because it was effectuated subsequent to the original sale but evidenced by contemporaneous documents and reflected in the relevant accounts. Appeal allowed - decided in favor of assessee.

Issues Involved:
1. Interpretation of Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005.
2. Eligibility of post-sale discounts for deduction from taxable turnover.
3. Interaction between Section 30 of the Karnataka Value Added Tax Act, 2003, and Rule 3(2)(c) of the Rules.
4. Requirement of reflecting discounts in tax invoices for deductions.
5. Judicial precedents on trade discounts and their deductibility.

Detailed Analysis:

1. Interpretation of Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005:
The primary issue revolves around the interpretation of Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005, which stipulates that all amounts allowed as discounts are deductible from the total turnover to determine the taxable turnover. The first proviso mandates that such discounts must be reflected in the tax invoice or bill of sale. The court emphasized that a literal interpretation of this rule would render it ineffective and unworkable, as trade discounts often depend on future events and cannot always be quantified at the time of the original sale.

2. Eligibility of Post-Sale Discounts for Deduction from Taxable Turnover:
The appellants argued that post-sale discounts granted through credit notes should be deductible from the total turnover to determine the taxable turnover. The court acknowledged that trade discounts are a common commercial practice and that their quantification often depends on variable factors that may only be ascertainable after the original sale. Therefore, denying the deduction of such discounts solely because they are not reflected in the tax invoice would be illogical and contrary to the legislative intent.

3. Interaction between Section 30 of the Karnataka Value Added Tax Act, 2003, and Rule 3(2)(c) of the Rules:
Section 30 of the Act deals with the issuance of credit and debit notes in cases where the tax charged exceeds or falls short of the tax payable. The court noted that Section 30 and Rule 3(2)(c) are part of the same scheme to determine the taxable turnover and should be read together. The court emphasized that these provisions complement each other and are not in conflict. Therefore, the requirement to reflect discounts in the tax invoice should be construed in relation to the final sale price, including the trade discount.

4. Requirement of Reflecting Discounts in Tax Invoices for Deductions:
The court held that the requirement to reflect discounts in the tax invoice or bill of sale should be interpreted in the context of the final sale price, including the trade discount. The transactions allowing discounts must be proved based on contemporaneous records, and the final sale price after deducting the trade discount must be reflected in the accounts. This interpretation aligns with the legislative intent and ensures the correct determination of the taxable turnover.

5. Judicial Precedents on Trade Discounts and Their Deductibility:
The court referred to several judicial precedents, including:
- M/s. Advani Oorlikon (P) Ltd.: Recognized that trade discounts should be deducted from the sale price for computing taxable turnover.
- IFB Industries Ltd.: Held that trade discounts need not be reflected in the invoice itself to qualify for deduction.
- Union of India vs. Bombay Tyres International: Supported the deductibility of trade discounts from the sale price.
- Jayam and Company: Emphasized that conditions for availing concessions must be strictly complied with.
- K.P. Varghese vs. Income Tax Officer: Favored an interpretation that avoids absurdity and aligns with the legislative intent.

The court concluded that the interpretation of Rule 3(2)(c) should avoid absurdity and ensure that trade discounts, though granted post-sale, are deductible if supported by contemporaneous records and reflected in the accounts. The appeals were allowed, and the contrary interpretation by the High Court was negated.

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