2017 (2) TMI 1021 - HC - VAT and Sales Tax

Valuation - discount - whether the turnover discount, target discount, additional discount, special discount etc are allowable deductions from sale price or purchase price as the case may be provided the value of goods paid by buyer is the amount less such discount? - whether 5th proviso to Section 11(3) have any bearing on the factual issues arising in the case? Held that - Prior to amendment, there was no ambiguity to the above provision in so far as it was made clear that input tax credit shall not be available in respect of tax paid on the turnover subsequently allowed as discount. But it is relevant to note that though the statute had incorporated an amendment to proviso to Section 11(3) as per Finance Act, 2008, it has not touched on the issue regarding the turnover to be considered as far as the liability to pay tax is concerned. The amendment by the Finance Act, 2008 only clarifies the fact that the amount covered under credit notes issued by a supplier that do not affect the input tax credit already availed shall not be reckoned for the purpose of assessment under the Act. This provision according to me cannot be extended to the assessment of turnover for the purpose of payment of tax. Of course, it could be said that there is some ambiguity to the provision. But in so far as the liability to pay tax is on the turnover and discount given is part of the turnover, I do not think that a different view is possible to be taken in the matter. Petition dismissed - decided against petitioner.

Issues Involved:
1. Legality of Exts.P5 and P5(a) assessment orders under KVAT Act, 2003 for the assessment years 2009-10 and 2010-11.
2. Inclusion of discounts received in credit notes in the taxable turnover.
3. Application of Explanation VII to Section 2(lii) of KVAT Act.
4. Relevance of the 5th proviso to Section 11(3) of the KVAT Act.
5. Applicability of previous judgments and guidelines.

Issue-wise Detailed Analysis:

1. Legality of Exts.P5 and P5(a) Assessment Orders:
The petitioner challenged Exts.P5 and P5(a) assessment orders under the KVAT Act, 2003, for the assessment years 2009-10 and 2010-11, completed under Section 25(1) of the Act. The petitioner argued that the orders were appealable but required adjudication due to a legal issue. The assessing authority issued notices under Section 25(1) observing that the sales turnover of goods was below the cost of purchase, leading to the finalization of assessments for the said years. The petitioner contended that the assessments were against the specific guidelines prescribed by the Court, asserting that tax should be levied based on law stated in the statute and not on accounting principles.

2. Inclusion of Discounts Received in Credit Notes in Taxable Turnover:
The petitioner argued that discounts received through credit notes should not form part of the taxable turnover. It was contended that turnover discount, target discount, additional discount, and special discount are allowable deductions from the sale price or purchase price, provided the value of goods paid by the buyer is the amount less such discount. The petitioner claimed that the inclusion of these discounts in the taxable turnover and the estimation of gross profit deviating from the actual gross profit was illegal. The petitioner sought a declaration that the discounts received from suppliers through credit notes should not form part of the taxable turnover, especially when the turnover of discount suffered tax in the hands of the seller.

3. Application of Explanation VII to Section 2(lii) of KVAT Act:
The assessing authority, relying on the judgment in Cement House v. State of Kerala, observed that since the assessee sold goods at a lower price than the purchase price, Explanation VII to Section 2(lii) of the KVAT Act was applicable. The authority concluded that discounts subsequently received would form part of the taxable turnover. The learned Government Pleader supported this view, citing judgments in State of Kerala v. Syed Muhammed and Tenny Devassy v. State of Kerala, which held that any reimbursement of price received by a dealer is liable to be included in his turnover. The Court noted that the amounts received by the petitioner, though called discounts, were reimbursements of the loss suffered due to selling goods below the purchase price, thus attracting Explanation VII to Section 2(lii).

4. Relevance of the 5th Proviso to Section 11(3) of the KVAT Act:
The petitioner relied on the 5th proviso to Section 11(3) to argue that discounts received should not be part of the taxable turnover. The proviso states that input tax credit shall not be available for tax paid on turnover subsequently allowed as discount and shall be disallowed if claimed on such turnover. However, the Court observed that the amendment brought by the Finance Act, 2008, to the 5th proviso clarified that amounts covered under credit notes issued by a supplier that do not affect the input tax credit already availed shall not be reckoned for assessment purposes. The Court concluded that this provision could not be extended to the assessment of turnover for tax liability, as the liability to pay tax is on the turnover, and discounts given are part of the turnover.

5. Applicability of Previous Judgments and Guidelines:
The petitioner cited the judgment in WP(C) No. 27088/14, where the Court considered the availment of input tax credit by dealers and whether discounts received through credit notes could be added to the sales turnover. The Court outlined three factual situations and the corresponding actions for assessing authorities. However, the Court in the present case held that the amendment to the 5th proviso to Section 11(3) did not alter the liability to pay tax on turnover, as established in previous judgments like Cement House and Syed Muhammed. The Court dismissed the writ petition but allowed the petitioner to file an appeal before the competent appellate authority, with the recovery proceedings kept in abeyance for three weeks to enable the filing of the appeal.

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