2014 (12) TMI 1073 - HC - VAT and Sales Tax

Valuation - inclusion of amount of discount given on sale of petroleum products - Gujarat Value Added Tax - Interpretation of the expression the amount of sale price received or receivable by a dealer in respect of any sale of goods - what would be the amount of sale price received or receivable by ONGC from OMC - Whether the Tribunal erred in confirming the demand with respect to the amount of discount given by the appellant to the OMCs on sale of its products instead of calculating the turnover on the finally determined prices Held that - ONGC was under an obligation to implement the policy of the Central Government and carry out such directives as may be issued from time to time in public interest - ONGC was bound by the price mechanism created by the Central Government from time to time - it is only such price which the ONGC actually collected from OMCs during the period under consideration - originally invoiced price or the subsequently discounted price would form the basis for sale price of the goods released or realizable - it is the final price which the ONGC received from the OMCs which alone can form part of the taxable turnover - under the price control mechanism, ONGC was under an obligation to sale its specified petroleum products at the rate fixed by the Government of India - To ensure that such petroleum products are available to the consumer at affordable price, the Government of India devised a mechanism where such products would be sold by ONGC and other oil companies to the OMCs at a price less than the market price or may even be less than its procurement price. Such mechanism operates even today and operated during the entire period under consideration - to ensure that the prescribed petroleum products reach the end consumers at affordable cost, the same had to be sold at lower than the market price or at times even lower than the production or procurement cost - Instead of subsidizing this component of loss by the Government, under the said circular dated 30.10.2003, it was envisaged that the 1/3rd of the under recoveries would be borne by the OMCs by cross subsidization through other retail products - The balance of 2/3rd under recoveries would be equally shared amongst OMCs and the upstream sector i.e ONGC and GAIL - It was provided that the contribution from ONGC and GAIL would come in terms of appropriate discounts on the price of crude oil, LPG and kerosene supplied by them to OMCs. It is the final price which the ONGC received from the OMCs which alone can form part of the taxable turnover - under the price control mechanism, ONGC was under an obligation to sale its specified petroleum products at the rate fixed by the Government of India - To ensure that such petroleum products are available to the consumer at affordable price, the Government of India devised a mechanism where such products would be sold by ONGC and other oil companies to the OMCs at a price less than the market price or may even be less than its procurement price. Such component the ONGC and other oil companies had to bear from their other profit making products by cross subsidizing the sale of specified petroleum products - This was in substitution of earlier price control mechanism where Government of India would bear the burden by subsidizing such products - In essence, ONGC could charge only such rate from OMCs as Government of India directed - The precise computation of the rate required complex considerations of economic and other aspects - Various factors such as cost of production for procurement of all products, the international price of the product, the local demand and ofcourse, the other economic considerations such as the ability of the various stake holders to absorb the loss, would enter into consideration - Since all these parameters would not be known before hand, the Government of India would announce provisional prices for such products - the broad formula adopted for such purpose was the crude price in international market minus the last discount which would prevail for a quarter. At the end of the quarter after taking into consideration all the relevant factors, Government of India would declare the final price - Since for the petroleum products already supplied by ONGC to OMCs during such quarter, the invoices would have been raised on the basis of provisional discount, the adjustment would have to be done on the basis of final discount declared by the Government of India - Though in most cases, the final discount may be higher than the provisional discount earlier declared, it is entirely possible that in some cases, such final discount may be lower than the provisional price - ONGC would eventually therefore, adjust its accounts with OMCs by raising either the debit note or credit note as may be required. Merely because for computation of royalty payable to the State, it is the full and not discounted price which is taken into account would not alter the situation - the royalty is paid to a State for exploitation of the natural resources located in the State - The Government of India had specifically provided that for the purpose of computing the royalty, it would be the full and not the discounted rate which would be taken into consideration - The appellate authority and the Tribunal were unduly influenced by this factor. The observations of the Tribunal that The OMCs are liable to pay the sale price to the appellant as per the invoices raised against them - They might have paid less sale price only because of the fact that they were given compensation for their agreeing not to increase the price of crude oil, PDS kerosene and domestic LPG to the consumers with the increase of international oil prices , are based on no materials and only on conjectures and in any case, not in any manner relevant - the observation that Such a practice adopted by the appellant under the mandate of the Central Government is virtually amounting to restrictive trade practice and an artificial determination of sale price which is prohibited under the Competitions Act , with respect, was not borne out from any material on record thus, the order of the Tribunal is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the discount given by ONGC to Oil Marketing Companies (OMCs) should be included in the taxable turnover.
2. Interpretation of "sale price" and "turnover of sales" under the Gujarat Sales Tax Act and VAT Act.
3. Applicability of trade discount principles to the discounts given by ONGC.
4. Impact of Government directives on the pricing mechanism of petroleum products.

Detailed Analysis:

1. Inclusion of Discount in Taxable Turnover:
The core issue was whether the discount provided by ONGC to OMCs, as directed by the Government of India, should be included in the taxable turnover. ONGC argued that the discount should not form part of the taxable turnover as it was mandated by the Government and not a voluntary trade discount. The Tribunal initially upheld the Revenue's view that the discount should be included in the taxable turnover. However, the High Court reversed this decision, stating that the final price received by ONGC, as fixed by the Government, should be considered the taxable turnover.

2. Interpretation of "Sale Price" and "Turnover of Sales":
The terms "sale price" and "turnover of sales" are defined under sections 2(24) and 2(33) of the VAT Act. The High Court emphasized that the "sale price" is the amount of valuable consideration received or receivable by a dealer. ONGC contended that the final price, after adjusting the Government-mandated discount, was the actual sale price. The Court agreed, noting that the initial invoiced price was provisional and subject to adjustment based on Government directives.

3. Applicability of Trade Discount Principles:
ONGC argued that the discount given was akin to a trade discount, which should not be included in the sale price. The High Court referred to several precedents, including the Supreme Court's decisions in IFB Industries Limited v. State of Kerala and Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes), Ernakulam v. M/s. Advani Oorlikon (P) Ltd., to support the view that trade discounts do not form part of the sale price. The Court concluded that the discount given by ONGC, even though mandated by the Government, functioned similarly to a trade discount.

4. Impact of Government Directives on Pricing Mechanism:
The Government of India's policy required ONGC to sell petroleum products at controlled prices to ensure affordability for consumers. The High Court noted that this controlled pricing mechanism was not a voluntary trade practice but a Government mandate. The Court highlighted that the final price fixed by the Government, after considering various economic factors, was the only price receivable by ONGC. Therefore, the discount mandated by the Government should not be included in the taxable turnover.

Conclusion:
The High Court concluded that the final price received by ONGC, as determined by the Government of India, should be considered the sale price for computing the taxable turnover. The Tribunal's decision to include the discount in the taxable turnover was reversed. The appeals were allowed in favor of ONGC, and the demand for tax on the discounted amount was set aside.