2018 (2) TMI 314 - SC - VAT and Sales Tax

Valuation - allowability - quantity discounts allowed to its distributors - appellant claims the discount as a deduction from the total turnover while arriving at the taxable turnover under the Karnataka Value Added Tax Act 2003 - disallowance on the ground that the discount was not relatable to the sales effected by the relevant tax invoices. Held that - The liability to pay tax is on the taxable turnover. Taxable turnover is arrived at after making permissible deductions from the total turnover. Among them are all amounts allowed as discounts. Such a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case. The expression the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as such discount is not happily worded. The words in respect of the sales relating to such discount cannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount. This is a matter of ascertainment - The assessee must establish from its accounts that the discount relates specifically to the sales with reference to which it is allowed. In the first part of the proviso, Rule 3(2)(c) recognizes trade practice or, as the case may be, the contact or agreement of the dealer. The latter part which provides a methodology for ascertainment does not override the earlier part. Both must be construed together. It must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions. Similar issue decided in the case of M/s. Southern Motors Versus State of Karnataka And Others 2017 (1) TMI 958 - SUPREME COURT , where it was held that 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. In computing the taxable turnover for the relevant years, the appellant would be entitled to a deduction of the trade discount - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Disallowance of quantity discount by the Deputy Commissioner of Commercial Taxes.
2. Appellate authority's decision to allow the discount.
3. Revision of the appellate authority's order by the Additional Commissioner.
4. High Court's dismissal of the appellant's appeals.
5. Interpretation of Rule 3(2)(c) of the Karnataka Value Added Tax Rules 2005.
6. Liability to pay tax on taxable turnover.
7. Supreme Court's analysis and judgment on the matter.

Detailed Analysis:

1. Disallowance of Quantity Discount:
The appellant, a manufacturer of home appliances, provided discounts to its distributors, which were claimed as deductions from the total turnover under the Karnataka Value Added Tax Act 2003. The Deputy Commissioner of Commercial Taxes disallowed the quantity discount, stating it was not related to the sales effected by the relevant tax invoices, thus not allowable under Rule 3(2)(c) of the Karnataka Value Added Tax Rules 2005.

2. Appellate Authority's Decision:
The Joint Commissioner of Commercial Taxes (Appeals – 1) overturned the Deputy Commissioner's decision, allowing the quarterly scheme discount as a deduction. The appellate authority held that since the appellant realized the consideration from the purchaser after deducting the discount and VAT was charged on the net amount shown in the tax invoice, the discount was allowable.

3. Revision by Additional Commissioner:
The Additional Commissioner revised the appellate authority's order, arguing that the quarterly discount was based on the performance of the previous quarter and not on the sales under the same invoices, thus not eligible for deduction.

4. High Court's Dismissal:
The High Court of Karnataka dismissed the appellant's appeals, agreeing with the Additional Commissioner that the discount was not related to the sales transaction for which the invoice was raised, thus not allowable.

5. Interpretation of Rule 3(2)(c):
The appellant argued that the discount was part of a regular trade practice and should be deducted from the gross sale price to determine the taxable turnover. The respondents contended that under Rule 3(2)(c), a discount is deductible only if it is shown in the tax invoice for the sales relating to such discount. The Supreme Court noted that Rule 3(2)(c) allows deductions for discounts if they are in accordance with regular trade practice or specific agreements and reflected in the tax invoice or bill of sale.

6. Liability to Pay Tax on Taxable Turnover:
The Supreme Court emphasized that the liability to pay tax is on the taxable turnover, which is the net amount after permissible deductions from the total turnover. The Court noted that the expression "the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as such discount" should not be construed to mean that the discount must be shown on the original tax invoice. Instead, the assessee must establish from its accounts that the discount relates specifically to the sales.

7. Supreme Court's Judgment:
The Supreme Court referred to the decision in Southern Motors v State of Karnataka, which held that a trade discount should not be disallowed merely because it is not shown in the original invoice. The Court concluded that the judgment of the High Court was unsustainable. The appeals were allowed, and the judgment of the High Court was set aside. The Court directed that in computing the taxable turnover, the appellant would be entitled to a deduction of the trade discount, following the parameters laid down in Southern Motors and as explained in the judgment. There was no order as to costs.

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