MAYA APPLIANCES (P) LTD NOW KNOWN AS PREETHI KITCHEN APPLIANCES PVT. LTD. versus ADDL.COMMISSIONER OF COMMERCIAL TAXES & ORS on 6 February 2018

250

SUPREME COURT REPORTS

[2018] 2 S.C.R.

AM/S MAYA APPLIANCES (P) LTD NOW KNOWN AS PREETHIKITCHEN APPLIANCES PVT. LTD.

v.

ADDL.COMMISSIONER OF COMMERCIAL TAXES & ORS

B(Civil Appeal Nos. 357-367 of 2018)

FEBRUARY 06, 2018

[DIPAK MISRA, CJI, A. M. KHANWILKAR ANDDR. D. Y. CHANDRACHUD, JJ.]

Karnataka Value Added Tax Rules, 2005 – r.3(2)(c) – ClaimCfor deduction of trade discount from the total turnover – Appellant’scase that it offers a quantity discount to its distributors dependingon their performance during the previous quarter – According toappellant, the discount is offered in the regular course of businessand the amount which it receives towards sales consideration isonly the net amount exclusive of discount, on which VAT is collectedD– Appellant claimed the discount as a deduction from the totalturnover while arriving at the taxable turnover under the Act –High Court rejected the case of appellant on the ground that thediscount is given in respect of the performance of the previousquarter and not in respect of the sales transaction for which invoiceEis raised – On appeal, held: Having regard to the constructionplaced on r.3(2) of the Rules in the case of Southern Motors v. Stateof Karnataka, the judgment of the High Court is unsustainable –The liability to pay tax is on the taxable turnover – Taxable turnoveris arrived at after making permissible deductions from the totalturnover – Among them are “all amounts allowed as discounts” –FSuch a discount must, however, be in accord with the regular tradepractice of the dealer or the contract or agreement entered into in aparticular case – The expression “the tax invoice or bill of saleissued in respect of the sales relating to such discount shows theamount allowed as such discount” is not happily worded – The Gwords “in respect of the sales relating to such discount” cannot beconstrued to mean that the discount would be inadmissible as adeduction unless the tax invoice pertaining to the goods originallyissued shows the discount – This is a matter of ascertainment – Theassessee must establish from its accounts that the discount relatesspecifically to the sales with reference to which it is allowed – In theH

first part of the proviso, r.3(2)(c) recognizes trade practice or, asthe case may be, the contract or agreement of the dealer – Thelatter part which provides a methodology for ascertainment doesnot override the earlier part – Both must be construed together –Above all, it must be remembered that taxable turnover is turnovernet of deductions – Alltrade discounts are allowable as permissibledeductions – Accordingly, appellant entitled to deduction of a tradediscount – Karnataka Value Added Tax Act, 2003 – ss.2(35) and 3.

The appellant manufactures home appliances. Accordingto the appellant, based on a regular trade practice, it allowsdiscounts to its distributors. These discounts may take the formof a scheme discount or, as the case may be, a quantity discount.The appellant claimed discount as a deduction from the totalturnover while arriving at the taxable turnover under theKarnataka Value Added Tax Act, 2003. The assessing authorityheld that the quantity discount offered by the appellant could notbe allowed under Rule 3(2)(c) of the Karnataka Value Added TaxRules, 2005. The first appellate authority set aside the order.However, under s.64(1) of the Act, the Additional Commissionerrevised the order of the first appellate authority holding that thequarterly discount given by the appellant was in respect of theperformance of the previous quarter and not in respect of thesales offered under the same invoices. Appeals dismissed by theHigh Court. Hence, the present appeals.

Allowing the appeals, the Court

Conclusion

Allowing the appeals, the Court

HELD: 1. The definitions of ‘Turnover’ and ‘Taxableturnover’ under s.2(36) and s.2(34) of the Karnataka Value AddedTax Act 2003 respectively indicate that turnover is defined tomean the aggregate amount for which goods are sold, distributed,delivered or otherwise disposed of. The taxable turnover iscomputed after making such deductions from the total turnoverand in such manner as may be prescribed (‘total turnover’ isdefined by Section 2(35) to mean the aggregate turnover in allgoods of a dealer at all places of business in the States). In arrivingat the taxable turnover, the statute contemplates deductions, asprescribed, are to be made from the total turnover. The liabilityto pay tax is on the taxable turnover. Taxable turnover is the netamount that remains upon making deductions as prescribed fromthe turnover. [Para 8][257-B-D]

A

B

C

D

E

F

G

H

A

A2. Rule 3 of the Karnataka Value Added Tax Rules, 2005provide for the determination of turnover. Clause (1) of Rule 3provide for the determination of the total turnover of a dealer.Clause (2) provide for the determination of the taxable turnover.Taxable turnover is arrived at by making the deductions whichare stipulated in clause (2) from the total turnover. [Para 9][257-BD-E]

3. In the case of Southern Motors v. State of Karnataka,provisions of r.3(2)(c) were considered. While relying on theearlier decisions of Supreme Court, it was held that a tradediscount ought not to be disallowed merely on the ground that itCis not payable at the time of each invoice or deducted from theinvoice price. Having regard to the construction placed on theprovisions of Rule 3(2)(c) of the Rules in Southern Motors case,the judgment of the High Court in the present case is accordinglyunsustainable. [Paras 10, 11][257-G-H; 258-A; 259-G-H]D

4. The liability to pay tax is on the taxable turnover. Taxableturnover is arrived at after making permissible deductions fromthe total turnover. Among them are “all amounts allowed asdiscounts.” Such a discount must, however, be in accord with theregular trade practice of the dealer or the contract or agreementEentered into in a particular case. The expression “the tax invoiceor bill of sale issued in respect of the sales relating to suchdiscount shows the amount allowed as such discount” is not happily worded. The words “in respect of the sales relating to suchdiscount” cannot be construed to mean that the discount wouldbe inadmissible as a deduction unless the tax invoice pertainingFto the goods originally issued shows the discount. This is a matterof ascertainment. The assessee must establish from its accountsthat the discount relates specifically to the sales with referenceto 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 contract orGagreement of the dealer. The latter part which provides amethodology for ascertainment does not override the earlier part.Both must be construed together. Above all, it must beremembered that taxable turnover is turnover net of deductions.Alltrade discounts are allowable as permissible deductions. [Para12][260-A-D]H

A

Union of India v. Bombay Tyre International Ltd (2005)3 SCC 787; Government of India v. Madras RubberFactory Ltd (1995) 4 SCC 349 : [1995] 3 SCR 1143 –referred to.

B

Southern Motors v. State of Karnataka (2017) 3 SCC467 – relied on.

Case Law Reference(2005) 3 SCC 787referred toPara 6[1995] 3 SCR 1143referred toPara 6C(2017) 3 SCC 467relied onPara 11

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 357-367 of 2018.

From the Judgment and Order dated 19.03.2014 of the High Courtof Karnataka at Bangalore in STA No. 120 of 2012 & STA Nos. 1-10 of2013.

D

K. K. Mani, Ms. T. Archana, Advs. for the Appellant.

Devadatt Kamat, AAG, V. N. Raghupathy, Aditya Bhat, RajeshInamdar, Parikshit P. Angadi, Advs. for the Respondents.

E

The Judgment of the Court was delivered by

DR. D. Y. CHANDRACHUD, J. 1. The appellant manufactureshome appliances such as mixer grinders, wet grinders and gas stoves.According to the appellant, based on a regular trade practice, it allowsdiscounts to its distributors. These discounts may take the form of ascheme discount or, as the case may be, a quantity discount. The appellantclaims the discount as a deduction from the total turnover while arrivingat the taxable turnover under the Karnataka Value Added Tax Act2003(‘the Act’).

F

G

2. On 29 May 2010, the Deputy Commissioner of CommercialTaxes,Bengaluru disallowed the quantity discount accorded by theappellant to its distributors on the ground that the discount was notrelatable to the sales effected by the relevant tax invoices. The assessingauthority held that the quantity discount offered by the appellant could H

Anot be allowed under Rule 3(2)(c) of the Karnataka Value Added TaxRules 2005 (‘the Rules’). The period in question was 1 April 2006 to 31March 2007, 1 April 2007 to 31 March 2008 and 1 April 2008 to 31March 2009.

3. On appeal, the Joint Commissioner of Commercial TaxesB(Appeals – 1),Bengaluru set aside the order of the assessing authority,holding that the quarterly scheme discount given by the appellant was anallowable deduction since the appellant had realized the considerationfrom the purchaser towards the sale of goods after deducting the amountof discount and, VAT was charged only on the net amount shown in thetax invoice after allowing the benefit of discount.C

4. The order of the first appellate authority dated 12 October2010 was revised under Section 64 (1) of the Act by the AdditionalCommissioner on the ground that the quarterly discount given by theappellant was in respect of the performance of the previous quarter andnot in respect of the sales offered under the same invoices.D5. The appellant instituted Sales Tax Appeals before the HighCourt of Karnataka. By a judgment dated 19 March 2014, a DivisionBench of the Karnataka High Court dismissed the appeals.

6. The case of the appellant is that it offers a quantity discount toEits distributors depending on their performance during the previous quarter.This is part of a marketing/sales strategy under which the appellant allowsa certain percentage as a quarterly discount to its dealers on the basis ofthe sales turnover generated by a dealer in every quarter of the financialyear. The discount is given by the appellant to its dealers in the salesinvoices raised in the subsequent quarter. The amount of the discount isFdeducted from the gross sale price and VAT is collected and remitted onthe net sale price. According to the appellant, the discount is offered inthe regular course of business and the amount which it receives towardssales consideration is only the net amount exclusive of discount, on whichVAT is collected. Sales tax is leviable on the sale consideration received/Greceivable. Section 2 (36) defines the expression ‘turnover’ as theaggregate amount for which the goods are sold and the term ‘aggregate’means the net amount for which the goods are sold. The appellant claimsthat allowing a discount on the basis of the quarterly performance of itsdealers is only a measure adopted by it for the computation of thediscount. However, the discount is given in a sales bill and VAT is collected H

H

on the net sale consideration after the deduction of the discount. TheHigh Court, it has been submitted, erred in rejecting the case of theappellant on the ground that the discount is given in respect of theperformance of the previous quarter and not in respect of the salestransaction for which the invoice is raised. The High Court, it has beensubmitted, has failed to notice that Section 2(36) mandates that turnoverbe computed as the aggregate amount for which goods are sold. It hasbeen urged that deductions on account of trade discounts are given underagreement; or under terms of sale or by established practice and shouldnot be disallowed only because they are not payable at the time of eachinvoice or deducted, from the invoice price (Union of India v BombayTyre International Ltd[1]). Moreover, periodical discounts such as halfyearly discounts cannot, by their very nature, be shown on the face ofeach invoice as the discount is known only at the end of the relevantperiod. Since the discount is known and understood at the time of theremoval of goods, though quantified later, it was held to be eligible fordeduction as held in Government of India v Madras Rubber FactoryLtd[2].In sum and substance, the case of the appellant is that the saleprice received by it is the net amount exclusive of discount. It is understoodat the time of the sale itself that the customer would be entitled to adiscount, the quantum being computed at the end of the quarter. Hence,the real sale price charged by the appellant for parting with the goods isthe net amount exclusive of discount and hence the trade discount givenby the appellant cannot form a part of the sales turnover. Finally, it hasbeen urged that a literal construction of Rule 3 (2)(c) would render itunworkable and practically impossible to implement.

7. On the other hand, it has been urged on behalf of the respondentsthat under Rule 3 (2)(c) an amount which has been allowed as discountis permissible as a deduction in computing the taxable turnover only ifthe tax invoice issued in respect of the sales relating to such discountshows the amount allowed as discount. The taxable event is the sale andthe sale price has to be determined on the basis of the tax invoice orsales bill issued at the time of sale from the seller to the purchaser. Thesale price cannot be altered or modified subsequent to the date of issuanceof the tax invoice or sales bill. According to the respondents, Rule 3(2)(c) makes it mandatory that only a discount reflected in the salesinvoice is eligible for deduction. Admittedly, the discounts shown in the 1 (2005) 3 SCC 787

2 (1995) 4 SCC 349

AB

CDE

F

G

H

Ainvoices of the appellant were not for sale but for the performance ofthe previous period of three to six months before the date of the invoice.In the submission of the respondents, a harmonious reading of Section 3,the charging section, along with the definition of ‘taxable turnover’ inSection 2(34), ‘total turnover’ in Section 2(35) and ‘turnover’ in Section2 (36) read with Rule 3(2)(c) would show that a performance-basedBdiscount, issued at a much later date after assessing the performance ofthe dealer for a given period would not fall within the purview of eligiblediscount. In order to arrive at the taxable turnover under Rule 3(2)(c),the discount has to be shown in respect of the sales in the tax invoice orthe bill of sale.C

8. Section 3 of the Act provides for the levy of tax. It providesthat the tax shall be levied on every sale of goods in the State by aregistered dealer or a dealer liable to be registered in accordance withthe provisions of the Act. Every such dealer is under Section 4 liable topay tax on his taxable turnover. The expression ‘turnover’ is defined inDSection 2(36) thus:

“2(36). ‘Turnover’ means the aggregate amount for which goodsare sold or distributed or delivered or otherwise disposed of in anyof the ways referred to in clause (29) by a dealer, either directlyor through another, on his own account or on account of others,Ewhether for cash or for deferred payment or other valuableconsideration, and includes the aggregate amount for which goodsare purchased from a person not registered under the Act and thevalue of goods transferred or despatchedoutside the Stateotherwise than by way of sale, and subject to such conditions andrestrictions as may be prescribed the amount for which goods areFsold shall include any sums charged for anything done by the dealerin respect of the goods sold at the time of or before the deliverythereof.

Explanation: The value of the goods transferred ordespatchedoutside the State otherwise than by way of sale, shallGbe the amount for which the goods are ordinarily sold by the dealeror the prevailing market price of such goods where the dealerdoes not ordinarily sell the goods.”

The expression ‘taxable turnover’ is defined in Section 2(34) asfollows:H

MAYA APPLIANCES (P) LTD v. ADDL.COMMISSIONER OFCOMMERCIAL TAXES [DR. D. Y. CHANDRACHUD, J.]

“2(34) ‘Taxable turnover’ means the turnover on which a dealershall be liable to pay tax as determined after making such deductionsfrom his total turnover and in such manner as may be prescribed,but shall not include the turnover of purchase or sale in the courseof interstate trade or commerce or in the course of export of thegoods out of the territory of India or in the course of import of thegoods into the territory of India and the value of goods transferredor despatched outside the State otherwise than by way of sale.”

The above definitions indicate that turnover is defined to meanthe aggregate amount for which goods are sold, distributed, delivered orotherwise disposed of. The taxable turnover is computed after makingsuch deductions from the total turnover and in such manner as may beprescribed (‘total turnover’ is defined by Section 2(35) to mean theaggregate turnover in all goods of a dealer at all places of business in theStates). In arriving at the taxable turnover, the statute contemplatesdeductions, as prescribed, are to be made from the total turnover. Theliability to pay tax is on the taxable turnover. Taxable turnover is the netamount that remains upon making deductions as prescribed from theturnover.

9. Rule 3 of the Rules provide for the determination of turnover.Clause (1) of Rule 3 provide for the determination of the total turnoverof a dealer. Clause (2) provide for the determination of the taxableturnover. Taxable turnover is arrived at by making the deductions whichare stipulated in clause (2) from the total turnover. Rule 3(2)(c) providesas follows:

“(2) The taxable turnover shall be determined by allowing thefollowing deductions from the total turnover:-

(c) All amounts allowed as discount:’

PROVIDED that such discount is allowed in accordance withthe regular practice of the dealer or is in accordance with theterms of any contract or agreement entered into in a particularcase [3][and the tax invoice or bill of sale issued in respect of thesales relating to such discount shows the amount allowed asdiscount:.”

10. In Southern Motors v State of Karnataka[4], a Bench of 3 Inserted vide Noti. No. FD 124 CSL 2006, dt. 27-5-2006, w.e.f. 1-4-2006. 4 (2017) 3 SCC 467

A

B

C

D

E

F

G

H

Atwo learned judges of this Court considered the provisions of Rule3(2)(c)of the Rules. In that case, the appellant who was a registereddealer with a business in motor vehicles issued tax invoices to itspurchasers. After the sales were completed, credit notes were issuedtothe customers granting them discounts.As a result, the appellantretained only the net amount of the invoice less the discount reflected inBthe credit notes. During the course of the assessment,the appellant wassubjected to orders of rectification, disallowing the deduction of post-sale discounts. This Court held thus:

“28. It is a matter of common experience that in the presentcontemporary competitive market, trade discounts not only areCdependent on variable factors but also might be strategically notdisclosable at the time of the original sale/purchase so as to becoevally reflected in the tax invoice or the bill of sale, as the casemay be. The actual quantification of the trade discount, dependingon the nature of the trade and the related stipulations in any contractDwith regard thereto, may be deferred till the happening of acontemplated event, so much so that the benefit thereof isextended at a point of time subsequent to that of the original sale/purchase. That by itself, subject to proof of such regular tradepractice and the contract/agreement entered into between theparties, would not render the trade discount otherwise legal andEacceptable, either non est or fictitious for evading tax liability. Inthe above factual premise, the interpretation as sought to beprovided by the Revenue would evidently reduce Section3(2)(c) to a dead letter, ineffective and unworkable andwould defeat the objective of permitting deductions fromFthe total turnover on account of trade discount.” (Id at page485)

(emphasis supplied)

Relying on the earlier decisions of this Court, it was held that atrade discount ought not to be disallowed merely on the ground that it isGnot payable at the time of each invoice or deducted from the invoiceprice. In the of view of this Court :

“29…Perceptionally, if taxable turnover is to be comprised of sale/purchase price, it is beyond one’s comprehension as to why thetrade discount should be disallowed, subject to the proof thereof,only because it was effectuated subsequent to the original saleH

but evidenced by contemporaneous documents and reflected inthe relevant accounts.” (Id at page 485)

The Legislature, the Court held, would not be unaware of theprevalent practice of offering trade discounts in commercial dispensations.In the view of the Court:

“38…To insist on the quantification of trade discount for deductionat the time of sale itself, by incorporating the same in the taxinvoice/bill of sale, would be to demand the impossible for allpractical purposes and thus would be illogical, irrational andabsurd.” (Id at page 492)

This Court accordingly read down the first proviso to Rule 3(2)(c)inthe following manner:

“40. On an overall review of the scheme of the Act and the Rulesand the underlying objectives, in particular of Sections 29 and 30of the Act and Rule 3 of the Rules, we are of the consideredopinion that the requirement of reference of the discount in thetax invoice or bill of sale to qualify it for deduction has to beconstrued in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the tradediscount. However, the transactions allowing discount have to beproved on the basis of contemporaneous records and the finalsale price after deducting the trade discount must mandatorily bereflected in the accounts as stipulated under Rule 3(2)(c) of theRules. The sale/purchase price has to be adjudged on a combinedconsideration of the tax invoice or bill of sale, as the case may be,along with the accounts reflecting the trade discount and the actualprice paid. The first proviso has thus to be so read down, as above,to be in consonance with the true intendment of the legislatureand to achieve as well the avowed objective of correctdetermination of the taxable turnover. The contrary interpretationaccorded by the High Court being in defiance of logic and theestablished axioms of interpretation of statutes is thus unacceptableand is negated.” (Id at page 493)

11. This view was rendered by a bench of two learned Judges,including one of us (the learned Chief Justice). Having regard to theconstruction which has been placed on the provisions of Rule 3(2)(c) ofthe Rules in Southern Motors (supra), the judgment of the High Court A

B

CDEF

G

H

Ain the present case is accordingly unsustainable.

12. The liability to pay tax is on the taxable turnover. Taxableturnover is arrived at after making permissible deductions from the totalturnover. Among them are “all amounts allowed as discounts.” Such adiscount must, however, be in accord with the regular trade practice ofBthe 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 thesales relating to such discount shows the amount allowed assuch discount”is not happily worded. The words “in respect of the sales relating tosuch discount” cannot be construed to mean that the discount would beinadmissible as a deduction unless the tax invoice pertaining to the goodsCoriginally issued shows the discount. This is a matter of ascertainment.The assessee must establish from its accounts that the discount relatesspecifically to the sales with reference to which it is allowed. In the firstpart of the proviso, Rule 3(2)(c) recognizes trade practice or, as thecase may be, the contact or agreement of the dealer. The latter partDwhich provides a methodology for ascertainment does not override theearlier part. Both must be construed together. Above all, it must beremembered that taxable turnover is turnover net of deductions. Alltradediscounts are allowable as permissible deductions.

13. We accordingly allow the appeals and set aside the judgmentEof the High Court. We direct that in computing the taxable turnover forthe relevant years, the appellant would be entitled to a deduction of thetrade discount, following the parameters laid down in paragraph 40 ofthe judgment in Southern Motors (supra) and as explained above.There shall be no order as to costs.

F

Ankit Gyan

Appeals allowed.

G

H