Saji Thomas Vs Assistant Commissioner (Kerala High Court)
Facts- The writ petitioner is a registered dealer under the Kerala Value Added Tax Act 2003. The petitioner is a trader in cement. As per the trade practice, the suppliers extend discounts to buyers based on the purchases made by the dealers from the suppliers in an accounting year.
The deductions, namely, turnover discount, target discount, additional discount, special discount etc., are allowable deductions from the sales price or the purchase price, as the case may be, subject to the value of goods paid by buyers is the amount less such discount. W.P.(C) No.5467/2017 is filed challenging reassessment order dated 24.01.2017 for return period 2013-14. During the return period, the dealer received cash discount from the suppliers based on the purchases the petitioner made from respective suppliers. The returns filed by the dealer, in regular course, are accepted. Subsequently, the 1st respondent issued a notice under Section 25 of the Act proposing to revise the returns and complete the assessment on best judgment for the year 2013-14. The reason for reassessment is that a part of the sales turnover of the dealer has not undergone self–assessment and did not suffer value-added tax. The reply of the dealer is that the cash credit or discount now proposed to be included in the turnover was on the purchases made by the dealer/petitioner. The respective suppliers/manufacturers paid tax on the gross amount shown in the tax invoice. The discount received on purchases by the dealer from the supplier, firstly, suffered tax at the hands of the supplier, and secondly, there is no concealment of turnover. The dealer’s reply was rejected, confirming the proposal to add the amount received by way of discount to total turnover and tax was demanded.
Conclusion- In cases in which tax is paid at the time of invoice, and no adjustment of input tax is claimed by the manufacturer or the supplier, then, even if the dealer sells it at a lesser price and claims input credit proportionate to the sales price, and subsequently receives credit note from manufacturer/supplier, such credit notes, discount, loss on recoupment is not included for assessment, subject to manufacturer/supplier not claiming refund or adjustment of input tax already deposited. In other words, the credit notes not affecting input tax already deposited cannot be treated as taxable turnover by the extended meaning of Section 2 sub-section (lii) Explanation VII of the Kerala Value Added Tax Act.
In the scheme of value addition and payment of tax on such value addition, the levy of tax is justified on value addition, but, without value addition, sale, or purchase, and for the amount retained by the dealer value-added tax is demanded contrary to Section 11(3) Fifth proviso of the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
We have heard the learned Senior Advocate Mr K Srikumar, the learned Advocates Mr Tomson T Emmanuel, Mr K M Firoz, Mr V P Narayan, Mr Premjith Nagendran, Mr Anil D Nair, and Smt S.K. Devi for petitioners and Mr Mohammed Rafiq, the learned Special Government Pleader (Taxes) for respondent.
2. On 27.02.2018, learned Single Judge, Mr Justice P B Suresh Kumar, noticing that the fifth proviso to Section 11 was not considered in Cement House v. State of Kerala1; State of Kerala v. Syed Muhammed2 and Tenny Devassy v. State of Kerala3, referred W.P.(C) No.5467/2017 and two other petitions to Division Bench for examination of the issues noted therein. On 24.07.2020, a Division Bench of Mr Justice K Vinod Chandran and Mr Justice T R Ravi referred the matters to a Full Bench, particularly because the views taken by the learned Judges in the Reference Order are inconsistent with the view taken in the three Division Bench judgments (a) Cement House v. State of Kerala; (b) State of Kerala v. Syed Muhammed and (c) Tenny Devassy v. State of Kerala. Hence, the matters are posted before the Full Bench.
2.1 W.P.(C) No.5467/2017 is treated as the representative case to appreciate the circumstances raising the question of law by us. The counsel appearing for the parties stated that the reference to circumstances in all the cases is unnecessary. Even if a slight variation in circumstances in other matters is present, still the question of law raised for consideration would be common in all the cases.
W.P.(C) No.5467/2017
3. The writ petitioner is a registered dealer under the Kerala Value Added Tax Act 2003 (for short, ‘the Act’). The petitioner is a trader in cement. As per the trade practice, the suppliers extend discounts to buyers based on the purchases made by the dealers from the suppliers in an accounting year.
The deductions, namely, turnover discount, target discount, additional discount, special discount etc., are allowable deductions from the sales price or the purchase price, as the case may be, subject to the value of goods paid by buyers is the amount less such discount. W.P.(C) No.5467/2017 is filed challenging reassessment order dated 24.01.2017 for return period 2013-14. During the return period, the dealer received cash discount from the suppliers based on the purchases the petitioner made from respective suppliers. The returns filed by the dealer, in regular course, are accepted. Subsequently, the 1st respondent issued a notice under Section 25 of the Act proposing to revise the returns and complete the assessment on best judgment for the year 2013-14. The reason for reassessment is that a part of the sales turnover of the dealer has not undergone self–assessment and did not suffer value-added tax. The reply of the dealer is that the cash credit or discount now proposed to be included in the turnover was on the purchases made by the dealer/petitioner. The respective suppliers/manufacturers paid tax on the gross amount shown in the tax invoice. The discount received on purchases by the dealer from the supplier, firstly, suffered tax at the hands of the supplier, and secondly, there is no concealment of turnover. The dealer’s reply was rejected, confirming the proposal to add the amount received by way of discount to total turnover and tax was demanded.
3.1 As part of the narrative, it is helpful to take note of the judgment dated 02.12.2015 of a learned Single Judge in W.P.(C) No.5077/2009 and batch who considered a few nuances of Value Added Tax and the obligation of the Revenue to test the cases on those principles. The portion relied on by the dealers are paragraphs 8 to 11, which read thus:
8. In my view, three factual situations can arise, and in the said situations, the course of action to be adopted by the assessing authority would vary based on the provisions of the KVAT Act.
9. Firstly, there cannot be an insistence on an automatic reversal of input tax credit availed by the petitioners, proportionate to the discount subsequently received by them from their suppliers. The assessing authority would have to first ascertain the sale price of the product in the hands of the petitioners and determine the output tax paid by the petitioners. If thereafter, it is found that the output tax paid by the petitioner is less than the input tax that he has taken credit of, then the appropriate course of action would be to direct the petitioners to restrict the input tax credit to the extent provided in the second proviso to Section 11 (3) of the KVAT Act.
10. Secondly, if the discount amounts received by the petitioners from their suppliers, can be demonstrated to be amounts received by them towards balance of the sale price of the goods, then the sales turnover of the petitioners can be enhanced to that extent alone and the output tax payable by the petitioner computed accordingly. Against this output tax found to be payable by the petitioners, the input tax availed by them would have to be set off to the extent possible. In this event, the assessing authorities would be acting in accordance with Explanation VII to Section 2 (ii) to determine the output tax payable by the petitioner on the enhanced sales turn over.
11. Thirdly, if it is found that the petitioners’ sale price in respect of the product, is less than his purchase price, but it cannot be demonstrated that the discount subsequently received by the petitioners is an amount received towards the balance of the sale price, then, so long as the supplier of goods to the petitioners has paid his output tax, on the price inclusive of the discount that was subsequently offered to the petitioners, the input tax credit availed by the petitioners cannot be varied, taking note of the provisions of the 5th proviso to Section 11(3) of the KVAT Act.
The assessment order was challenged as contrary to the tests laid down by the learned Single Judge in W.P.(C) No.5077/2009 and batch. We hasten to add that the challenge of assessment orders as contrary to the Single Judge’s judgment is not examined by us.
3.2 The common case of dealers is that credit note received subsequent to the date of the invoice is covered by the Fifth proviso to Section 11(3) of the Act, but the Revenue, by applying Explanation VII to Section 2(lii) of the Act, contends that where a dealer sells any goods purchased by the dealer at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, such amount shall be deemed to be turnover of goods and added to the turnover.
Learned counsel appearing for the parties, by taking note of the absence of a question for decision, in the Reference Order, by the Full Bench and also that there is consensus among them on the question of law arising for consideration, suggested the draft question of law from their respective views, and after taking note of all aspects present in the batch of cases the following question is framed:
“Whether the bar on assessment set out in the fifth proviso to Section 11(3) of KVAT Act 2003 would preclude operation of the extended definition of turnover provided under Explanation VII to Section 2(lii) of KVAT Act.”
4. The learned counsel appearing for the dealers argue that, at the first instance, the manufacturer/supplier while selling to dealers remitted tax on invoice price. The dealers, after achieving targets set by the manufacturers, receive credit notes from the manufacturers. The manufacturer is not claiming a refund or adjustment of input tax already paid by it on or from the input tax deposited. The manufacturer/supplier is filing a declaration or affidavit stating that it is not claiming refund or adjustment of input tax deposited on invoice value. Therefore, the inclusion of credit notes in turnover would amount to levy of tax on the component which has already suffered tax and contrary to the scheme of value-added taxation implemented under the Act. Section 2(lii) deals with ‘turnover’, and Explanation VII deals with cases where the dealer sells goods purchased by him at a price lower than at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price. Such difference received is deemed to be turnover in respect of such goods. Firstly, the Revenue is not appreciating the distinction between purchase cost and purchase value. The Legislature, appreciating the working of the scheme insofar as a few cases were concerned, where the discount is given for a variety of reasons, introduced the Fifth proviso to Section 11(3) of the Act. The decisions rendered by this Court did not consider the Fifth proviso to Section 11(3) of the Act while deciding what constitutes turnover. Therefore, the correctness of the ratio laid down in the decisions (a) Cement House v. State of Kerala; (b) State of Kerala v. Syed Muhammed and (c) Tenny Devassy v. State of Kerala was, for valid reasons, was doubted by the Division Bench in the Reference Order dated 24.07.2020.
4.1 It is further contended that Explanation VII to Section 2(lii) would result in taxing the discount offered as credit notes by the supplier, which does not form part of the sale price. Section 6, the charging section, stipulates the charge on the sales turnover, at any rate, does not include the discount offered as recoupment of loss, reimbursement of price, etc. The supplier has paid tax on the invoice price, affirming not to claim adjustment from input tax. The dealers can claim credit of input tax proportionate to the price at which the dealer sells to a third party. There is no escapement of tax.
4.2 The interpretation canvassed by Revenue on Explanation VII to Section 2(lii) for arriving at the purchase price and sale price results in the erroneous and illegal application of Explanation VII to Section 2(lii) of the Act. Explanation VII to Section 2(lii) is part of the definition clause and cannot regulate either the charging section under Section 6 or the section dealing with credit of input tax under Section 11. The credit note given to the dealer by the supplier, subsequent to sales, is an incentive for targeted performance by the dealer. At the cost of repetition, it is emphasised, that the manufacturer/suppliers remitted tax on such credit note (i.e., while raising the invoice in favour of the dealer). The dealer, therefore, is not required to include the discount or credit note or incentive in the turnover or assessment. In all the cases, the manufacturer/suppliers filed a declaration not to claim refund of tax already paid on sales in favour of the dealers. The inclusion of discounts in dealers’ turnover is against the prohibition contained in the Fifth proviso to Section 11(3) of the Act. The Budget Speech of the Hon’ble Finance Minister, though is not conclusive, spells out the reasons for introducing the Fifth proviso to Section 11(3) of the Act. The inclusion of discount/credit notes as part of turnover is contrary to the scheme of Value Added Tax under the Act. The counsel appearing for the dealers rely on the following judgments:
“Vettathil Agencies (M/s.) v. Commercial Tax Officer, Cherthala4; J K Cotton Spinning and Weaving Mills Co. Ltd v. State of U P5; M/s. Mahim Patram Private Ltd. V. Union of India6; Ashok Leyland Ltd. V. State of Tamil Nadu7; Andhra Agencies v. State of Andhra Pradesh8; Commissioner of Sales Tax, U P v. Hind Lamps Limited9; and Union of India v. Bombay Tyres International (P) Ltd10.
5. Mr Mohammed Rafiq argues that under Section 6 of the Act, the dealer is liable to pay tax on sales or purchases and the liability is determined by the taxable turnover. Section 2(lii) deals with turnover, and the Explanation deals with deemed turnover as well. In the case on hand, the dealers are 4 2017 (1) KHC 141 selling at a price lower than at which the dealer purchased and, subsequently, received amount, whatever name, from the manufacturer/supplier as reimbursement of the balance of the price, so Explanation VII to Section 2(lii) is attracted.
Therefore, receipt of such difference amount is deemed turnover under the Act. According to him, Section 6 and Explanation VII to Section 2(lii) read together, there is no escape from the conclusion that credit notes, discounts, received at a subsequent point of time, are received on account of the sale of goods by dealer at a price lower than the purchase cost. The inclusion of such an amount in turnover is legal and justifiable.
5.1 Replying to the argument of dealers on Section 11(3), it is contended that the dealer’s interpretation of proviso to Section 11(3) is unavailable. He argues that Section 11(3) deals with, subject to provisions of sub-sections (4) to (13), the input tax credit shall be allowed to a registered dealer in respect of the return period against the output tax payable by him for such period. The dealer shall pay to Government the balance of the output tax in excess of the input tax, credited in the manner prescribed. Being Value Added Tax, by giving credit to the tax already paid, tax is collected on the value added to the goods at the hands of the latest dealer. A proviso is understood and appreciated as an exception.
5.2 The first part of the Fifth proviso denied credit of input tax, where the tax paid on the turnover is subsequently allowed as a discount and disallowed where it is found that the dealers claim input tax credit under Section 11(3) on such goods sent outside or on such goods used in the manufacture of goods sent outside. The latter portion of the Fifth proviso deals with the amount covered under credit notes issued by a supplier that does not affect the input tax credit already availed of will not be reckoned for assessment under the Act.
5.3 According to him, the amendment introduced with effect from 01.04.2005 to the Fifth proviso erases the effect of the first portion of the proviso. The words ‘for the purpose of assessment under this Act’ are appreciated in the context of a Section. Therefore, the credit note received as a discount, for whatever reason, is reimbursement and is treated as deemed turnover. The latter portion of the Fifth proviso erases the outcome of the first limb of the proviso. Thus, the Fifth proviso cannot be of any assistance to dealers. In effect, the Fifth proviso, as interpreted by the Revenue, would not preclude the application of the extended meaning of ‘turnover’ in terms of Explanation VII to Section 2(lii) of the Act. He places reliance on the following judgments which deal with the concept of discount and consideration of such discount either for assessment or turnover: Priya Agencies v. Commercial Tax Officer (A.A.)11; Madras Cements v. Assistant Commissioner12; Cement House; Tenny Devassy; Syed Muhammed (supra); Southern Motors v. State of Karnataka13; C Mohanan v. State of Kerala14; and Ali M K v. State of Kerala15.
6. We have gone through the case law relied on by both sides. The three decisions: Cement House, Tenny Devassy, Syed Muhammed (supra), admittedly did not notice the Fifth proviso to Section 11(3) of the Act. The counsel appearing for the parties admit that the other judgments are not directly on the point or deal with the scope and object of Explanation VII to Section 2(lii) on the one hand and, on the other hand, the ambit of operation of the Fifth proviso to Section 11(3) of the Act.
6.1 Therefore, what falls for the consideration of the Full bench is the construction of Explanation VII to Section 2(lii) and the Fifth proviso to Section 11(3) of the Act.
6.2 Section 2(lii) was amended, and Explanation VII was incorporated by Kerala Value Added Tax (Amendment) Act 2005 (for short ‘Amendment Act’) with effect from 01.04.2005. The amended provision, i.e., Explanation VII, reads as under:
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Explanation VII:- Where a dealer sells any goods purchased by him at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, the amount so received shall be deemed to be turnover in respect of such goods.
The Fifth proviso to Section 11(3) was amended with effect from 01.04.2005 by the Kerala Finance Act 2008, and the latter portion was added to the existing proviso. The Budget Speech dealing with the amendment to the Fifth proviso to Section 11(3) of the Act is excerpted hereunder:
“There is some disquiet among trade regarding the treatment of credit notes. It is proposed to amend the KVAT Act to make it clear that credit notes that do not affect input tax credit will be permitted. It will be further clarified that reimbursement of expenses in the trade through credit note will not affect the tax liability of the dealer.”
Circular No.41/2007, issued by the Commissioner for ready reference, is excerpted hereunder:
