INTRODUCTION Under Sales Tax Laws, tax is payable on the ‘sale price’ of goods. Sale price is normally defined in respective State Acts. For example, under MVAT Act, term “sale price” is defined in section 2(25) as under.
“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged….”
There is a separate mention about discount given from the original sale price.
Discounts are generally given in the invoice itself. There may not be much difficulty in claiming reduction for such discount amount from the sale price.
However, discount can also be given after the invoices are issued. There may be discount schemes like turnover discount, early payment discount, where discount will be eligible on happening of a given event. In such cases, invoices would be at original price. The subsequent discount will be required to be given by issue of credit note.
In some of the States, there are provisions providing that discount mentioned in the invoices will be eligible
for reduction.
The issue that arises is whether such type of provisions requires strict interpretation or can be interpreted liberally so as also to include discounts given by credit note/s issued separately after the issue of invoice/s.
Recent judgment of Hon. Supreme Court in case of Southern Motors vs. State of Karnataka (Civil Appeal Nos.10955-10971 of 2016 dt.18.1.2017)
In this case, the issue before the Hon. Supreme Court was from Karnataka VAT Act, 2003. The facts leading to the litigation, as mentioned in the judgment, can be noted as under:
“3. The foundational facts, albeit not in dispute present the required preface. The appellant is a dealer in the motor vehicles and registered under the Act. Its version is that during the years in question i.e. 2007-2008 and
2008-2009, it raised tax invoices on the purchasers as per the policy of manufacturers of vehicles to maintain uniformity in the price thereof. After the sales were completed, credit notes were issued to the customers granting discounts, in order to meet the competition in the market and for allied reasons.
Consequentially, it received/retained only the net amount that is the amount shown in the invoice less the sum of discount disclosed in the credit note. Accordingly, the net amount, so received was reflected in his books of account and returns were filed …..”
The assessing authority took a view that as per the Karnataka VAT Rules, 2003, only such discount which is mentioned in the invoices is allowable. Since the discount was given post issue of invoices, it was held that it is not deductible from the sale price. Karnataka High Court upheld the claim of State Government. Before Hon. Supreme Court the main argument of the dealer was as under:
“7. The emphatic insistence on behalf of the appellant is that the combined reading of section 30 and Rule 31 demonstrates in clear terms that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover. The learned counsel have urged that as some discounts, especially those linked to targets to be achieved in a particular period are not comprehend able at the time of sale, these logically cannot be reflected in the tax invoices.
They have maintained that such discounts actualise through credit notes at the end of the prescribed period for which the target is fixed and are thus governed by section 30 of the Act and Rule 31 of the Rules. They have asserted that in no view of the matter, Rule 3(2)(c)can be conceded a primacy to curtail or abrogate Section 30 or Rule 31 of the Rules, lest the latter provisions are rendered otiose. Such an explication would also be extinctive of the concept of the well ingrained concept of turnover/trade discount which is indefensible.”
The department stuck to the stand that rule is to be applied strictly. The arguments of the sales tax department are noted as under:
“9. In refutation, the learned counsel for the respondents, has argued that a discount to qualify for deduction to compute the total and eventual taxable turnover, as contemplated in Rule 3(2)(c) of the Rules has to be essentially reflected in the tax invoice or the bill of sale issued in respect of the sales.
According to them, section 30 and Rule 31 deal with a situation where after a tax invoice is issued, it transpires that the tax charged has either exceeded or has fallen short of the tax payable for which a credit/debit note, as the case may be, would be issued. As these two provisions do not regulate the computation of a taxable turnover, there is no correlation thereof with Rule 3(2)(c) of the Rules which has been assigned an independent role to determine the tax liability. In absence of any specific provision in the parent statute granting tax exemption based on deduction founded on post sale trade discount, section 30 and Rule 31 are of no avail to the assesses, he urged. It is maintained that in any view of the matter, a taxing statute has to be construed strictly and any exemption is permissible only if the legislation permits the same. Reliance in buttress of the above has been placed on the decisions of this Court in A.V. Fernandez vs. The State of Kerala 1957 SCR 837, IFB Industries Ltd. vs. State of Kerala (2012) 4 SCC 618 and Jayam & Co. vs. Assistant Commissioner and Another (2016) 8 SCALE 70.”
The Supreme Court referred to a number of precedents on the issue. Ultimately, the Supreme Court came to conclusion that the sale price means what is actually received by the vendor. Therefore, the Supreme Court observed that rules cannot be interpreted to disallow reduction where actual discount is passed on and the amount is not receivable to the dealer. The pertinent observations of the Supreme Court are as under:
“37. On an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion 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.
The first proviso has thus to be so read down, as above, 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.”
CONCLUSION
Thus, the Hon’ble Supreme Court has decided a very important issue. The discounts are part and parcel of business activity. It will not be just to levy tax on an amount, which is neither received nor receivable as per the understanding of the parties. Therefore, the above judgment of the Hon. Supreme Court will be guiding judgment including in the forthcoming GST era.
