Credit notes not affecting input tax already deposited not to be treated as taxable turnover

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:

CIRCULAR NO 41/2007

Sub:- Taxes Department- Problems faced by the dealers in cement

sector – instructions – issued

Ref: Govt letter No 14357/B1/2007/TD dated 11-9-2007

Based on the announcement made in Para 149 of the Budget Speech and the decisions taken after elaborate discussion in the meeting taken by the Minister (Finance) with cement dealers and senior officials of the Commercial Taxes Department the following instructions are issued to tackle the problems faced by the dealers in cement sector as decided by Government as per the letter read above.

(i) The cement companies should have remitted the entire tax collected as per sale bills without any deduction along with interest within 28.2.2007.

(ii) The cement companies shall issue declarations to its distributors that they have paid the entire tax shown in their sale bills from 1-4-2005 without reducing it consequent on trade discount.

(iii) The cement distributors shall submit such declarations to their assessing authorities and ensure that excess input tax is not claimed for 2005-06. On submission of the above declaration the assessing authorities will drop all further action under KVAT Act, 2003 on account of the credit notes issued by the companies up to 31-3-2006.

(iv) Only those companies/dealers who withdraw unconditionally all writ petitions/appeals filed by them on account of amendment made in this context will get the benefit.

All assessing authorities shall see that the above instructions are complied with.

Commissioner

To

All Concerned.”

6.3 Now, let us look at the amended Fifth proviso to Section 11(3), which reads as follows:

Provided also that input tax credit shall not be available in respect of the tax paid on the turnover subsequently allowed as discount, and shall be disallowed where it is found that the dealer has claimed input tax credit under this section on such turnover or of such goods used in the manufacture of goods sent outside. But the amount covered under credit notes issued by a supplier that do not affect the input tax credit already availed of or on account of reimbursement of any expenses incurred by the dealer shall not be reckoned for the purpose of assessment under this Act.”

(emphasis supplied)

It is fairly well established that in a taxing Act one must merely look at what is clearly stated in the Section or the Act. There is no room for intendment. There is no equity about tax. There is no presumption to tax, and nothing is read into a Section. Likewise, nothing is implied. One looks at the language used by the Legislature for deciding the incidence, person, or rate of tax. In the instant circumstance, the State Legislature has jurisdiction to define and decide the taxable events, turnover, taxable turnover, total turnover, taxable persons, the measure of tax, and the rate of tax under the Act. As part of its policy of imposing compensatory tax from the above-stated situations, the Legislature, in its wisdom and experience, defines what constitutes sale price, purchase price, turnover etc. The liability to pay or exemption from payment arises depending upon the expression employed by the Legislature.

6.4 At this juncture, we keep in perspective the basic concepts of ‘Value added’ and ‘Value added tax’.

Value added. The increase in value of a product or service resulting from an alteration in the form, location or availability excluding the cost of bought-out materials or services. This is also referred to as added value.

The value of output minus the value of all inputs used in production. Equals, by definition, the contribution of, and payments to, primary factors of production (labour, capital, and land).

Value added tax (VAT). A tax which is assessed at each stage of production and distribution on the amount of value contributed at each stage to the final product.

An indirect tax levied at each discrete production and distribution from the stage of raw materials to final consumption stage.

Form of indirect taxation in which the producer, seller and consumer pay a percentage of the value added to the product or service. For example, if a manufacturer buys raw materials at Rs.10 per unit and sells each unit of product for Rs.20/-, the value added is Rs.10/-. The manufacturer is required to pay a percentage of the Rs.20/- in VAT, and can claim back the VAT paid on the Rs.10/- worth of materials.

(source Ramanatha Aiyar’s Law Lexicon).”

In the case on hand, the dealers on the value addition are liable to pay the difference of tax between the output tax and the input tax credit to the exchequer by the manufacturer/supplier.

7. In the case on hand, the first portion of the legislative declaration on what constitutes turnover is covered by Section 2(lii), read with Explanation VII. The definition and extended meaning of ‘turnover’ are part of Section 2 of the Act, which reads, “In this Act, unless the context otherwise requires”. Section 11 deals with the input tax credit.

7.1 A definition is appreciated in different backdrops, settings, and for our purpose, the following principles are helpful and excerpted:

[Dr. Vepa P Sarathi – Interpretation of Statutes Edition 2010 Page Nos.267 and 268]

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(b) The definition must ordinarily determine the application of the word or phrase defined; but the definition must itself be interpreted first before it is applied.

(c) When the definition of a word gives it an extended meaning, the word is not to be interpreted by its extended meaning every time it is used, for the meaning ultimately depends on the context; and a definition clause does not, ordinarily enlarge the scope of an Act.

(emphasis supplied)

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“***                  ***                  ***

(f) Definitions in an Act are to be applied only when there is nothing repugnant in the subject or context, and this is so even if such a qualifying provision is not expressly stated by the legislature.”

7.2 An explanation, at times, is appended to a section to explain the meaning of words contained in the section. It becomes part and parcel of the enactment. The meaning to be given to an explanation must depend upon its terms, and no theory of its purpose can be entertained unless it is to be inferred from the language used. Purposive construction is permissible if any other construction which does not fit in with the description or the avowed purpose. We may sum up the objects of an explanation by quoting from to Sundaram Pillai v. Pattabiraman16:

“(a) to explain the meaning and intendment of the Act itself,

(b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve.

(c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful,

(d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and

(e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same.”

7.3 Properly speaking, a proviso is a clause that introduces a condition by the word ‘provided’. A proviso is introduced to indicate the effect of certain things which are within the statute but accompanied by the peculiar conditions embraced within the proviso. It modifies the immediately preceding language. [James DeWitt Andrews – statutory construction]

7.4 In Union of India v. VKC Footsteps (India) (P) Ltd17, the role of a proviso in different backdrops is set out by the Supreme Court as follows:

“Construing the proviso.

91. Provisos in a statute have multi-faceted personalities. As interpretational principles governing statutes have evolved, certain basic ideas have been recognised, while heeding to the text and context. Justice G.P. Singh, in his seminal text, Principles of Statutory Interpretation formulates the governing principles of interpretation which have been adopted by courts while construing a statutory proviso. The first rule of interpretation is that:

“The normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. As stated by Lush, J.; (QBD p. 173). ‘…. When one finds a proviso to the section, the natural presumption is that but for the proviso the enacting part of the section would have included the subject-matter of the proviso. In the words of Lord Macmillan (SCC Online PC) ‘… The proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. The proviso may, as Lord Macnaghten laid down, be a qualification of the preceding enactment which is expressed in terms too general to be quite accurate (AC p. 62). The general rule has been stated by Hidayatullah, 1.2, in the following words: (AIR p. 1600, para 9) 9. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general rule. And in the words of Kapur. J.2 (AIR p. 717, para 9) *9. …The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment….”(emphasis supplied)

92. But then these principles are subject to other principles of statutory interpretation which may supplement or even substitute the above formula. These other rules which have been categorised by Justice G.P. Singh are summarised as follows:

92.1. A proviso is not construed as excluding or adding something by implication:

“Except as to cases dealt with by it. a proviso has no repercussion on the interpretation of the enacting portion of the section so as to exclude something by implication which is embraced by clear words in the enactment.”

92.2. A proviso is construed in relation to the subject-matter of the statutory provision to which it is appended:

“The language of a proviso even if general is normally to be construed in relation to the subject-matter covered by the section to which the proviso is appended. In other words, normally a proviso does not travel beyond the provision to which it is a proviso. It is a cardinal rule of interpretation”, observed Bhagwati, J., “that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other. “

92.3. Where the substantive provision of a statute lacks clarity, a proviso may shed light on its true meaning:

“If the enacting portion of a section is not clear, a proviso appended to it may give an indication as its true meaning. As stated by Lord Herschell27: (AC p. 655) “Of course a proviso may be used to guide you in the selection of one or other of two possible constructions of the words to be found in the enactment, and shew when there is doubt about its scope, when it may reasonably admit of doubt as to its having this scope or that, which is the proper view to take of it:”

92.4. An effort should be made while construing a statute to give meaning both to the main enactment and its proviso bearing in mind that sometimes a proviso is inserted as a matter of abundant caution:

“The general rule in construing an enactment containing a proviso is to construe them together without making either of them redundant or otiose. Even if the enacting part is clear effort is to be made to give some meaning to the proviso and to justify its necessity. But a clause or a section worded as a proviso, may not be a true proviso and may have been placed by way of abundant caution.”

92.5. While ordinarily, it would be unusual to interpret the proviso as an independent enacting clause, as distinct from its main enactment, this is true only of a real proviso and the draftsperson of the statute may have intended for the proviso to be, in substance, a fresh enactment:

“… To read a proviso as providing something by way of an addendum or as dealing with a subject not covered by the main enactment or as stating a general rule as distinguished from an exception or qualification is ordinarily foreign to the proper function of a proviso. However, this is only true of a real proviso. The insertion of a proviso by the draftsman has not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before.”

93. Perhaps the most comprehensive and oft-cited precedent governing the interpretation of a proviso is the decision of this Court in S. Sundaram Pillai v. V.R. Pattabiraman, S. Murtaza Fazal Ali, J. speaking for a three-Judge Bench of this Court held: (SCC p. 610, para 43)

‘43. ………… To sum up, a proviso may serve four different purposes:

(1) qualifying or excepting certain provisions from the main enactment:

(2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable:

(3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and

(4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.”

94. While enunciating the above principles, S. Sundaram Pillai” took note of the decision in Hiralal Rattanlal v. State of U.P. where K.S. Hegde, J… speaking for a four-Judge Bench of this Court observed that while ordinarily, a proviso is in the nature of an exception, the precedents indicate that sometimes a proviso is in the nature of a separate provision, with a life of its own. The Court held: (Hiralal Rattanlal case, SCC p. 224, para 22)

“22. … Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called a proviso, it is really at separate provision and the so-called proviso has substantially altered the main section. In CIT v. Bipinchandra Maganlal & Co. Ltd this Court held that by the fiction in Section 10(2)(vii) second proviso read with. Section 2(6-C) of the Indian Income Tax Act. 1922 what is really not income is, for the purpose of computation of assessable income, made taxable income.”

Besides the decision in CIT v. Bipinchandra Maganlal & Co. Ltd. the Court in Hiralal Rattantal adverted to the earlier decisions in State of Rajasthan v. Leela Jain and Bihta Coop. Development Cane Mktg. Union Ltd. v. Bank of Bihar.”

8. Let us turn to the Fifth proviso to Section 11(3) of the Act. With effect from 01.04.2005, the Fifth proviso was introduced by Act 21 of 2008. Explanation VII to Section 2(lii) was made effective from 01.04.2005.

8.1 The Fifth proviso of Section 11(3) has two limbs. Section 11(3) provides for input tax credit, subject to sub-sections (4) to (13) and facilitates payment of difference of tax between output tax and input tax payable to the Government by the dealer. Unamended Fifth proviso deals with a situation where a dealer allows discount subsequent to the sale, the input tax in relation to the discount so allowed will be disallowed to the buyer. The unamended Fifth proviso denies credit of input tax on subsequent discount to the buyer. The proviso as amended by Act 21 of 2008 begins with the word ‘But’ the amount covered under credit notes issued by a supplier that do not affect the input tax credit already availed of, or amounts covered by credit notes received by the dealer on account of reimbursement of any expenses incurred by the dealer are not reckoned for the purpose of assessment under this Act. In other words, the word ‘but’ whether is used in the Fifth proviso as a conjunction, a preposition or an adverb is appreciated. The word ‘but’ is used as a conjunction for joining two ideas or statements when the second one is different from the first one. The first limb of the Fifth proviso reads thus:

“Provided also that input tax credit shall not be available in respect of the tax paid on the turnover subsequently allowed as discount, and shall be disallowed where it is found that the dealer has claimed input tax credit under this section on such turnover or of such goods used in the manufacture of goods sent outside.”

The first limb deals with where a dealer allows discount subsequent to sale; the input tax in relation to the discount so allowed will be denied to the buyer. The amended proviso does not deny such claim if, firstly, the amount covered by credit notes that do not affect the input tax credit already availed of; secondly, the amount covered by credit notes received by the dealer towards reimbursement of expenses incurred by the dealer. In the computation of input credit, the proviso envisages exclusion from the assessment these two eventualities. In M/s. Mahim Patram Private Ltd. (supra), the Supreme Court has considered and held what ‘assessment’ means:

“26. The expression ‘assessment’, therefore, comprehends the power to even compute the amount chargeable to tax in terms of the procedure prescribed under the State Act.

(emphasis supplied)

9. Now, we will examine Section 2 of the Act, which begins with the words “In this Act, unless the context otherwise requires”, which means that the words covered by Section 2 are treated as defined words, and the defined meaning is to be applied unless the context otherwise requires. There is no quarrel on the above proposition. The definition reads:

“2. Definitions.- In this Act, unless the context otherwise requires,-

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(lii) “turnover” means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or for other valuable consideration, provided that the proceeds of the sale by a person not being a Company or Firm registered under the Companies Act, 1956 (Central Act 1 of 1956) and Indian Partnership Act, 1932 (Central Act 9 of 1932) 18[or society including a co-operative society or association of individuals whether incorporated or not] of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover.

***                          ***                      ***

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 extended meaning of the word is not applied every time it is used, but the meaning ultimately depends on the context.

The definition clause does not extend the scope of the Act or shadow the second limb of the Fifth proviso to Section 11(3) of the Act in its application. Section 2(lii) Explanation VII must be read and interpreted as defined in the Act unless the context otherwise requires. The Fifth proviso is a context otherwise spelt out by Kerala Finance Act 2008, effective from 01.04.2005. The Legislature, in its competence, wisdom and policy of providing measures to a few individuals in the trade, added a second limb to the Fifth proviso to Section 11(3) of the Act. The amended portion of proviso does not deny such claim if, firstly, the amount covered by credit notes that do not affect the input tax credit already availed of; secondly, amount covered by credit notes received by the dealer towards reimbursement of expenses incurred by the dealer.

9.1 The argument of Revenue to include such cash credits as turnover under Section 2(lii) Explanation VII does not fit into the context in which the Fifth proviso is incorporated. We have construed the text of relevant provisions and apply natural and literal meaning to the expressions both in Section 2 and 2(lii) read with Explanation VII and Fifth proviso to Section 11(3) of the Act. The Revenue applies the extended meaning of Explanation VII to Section 2(lii) of the Act for bringing within the scope of turnover. This argument ignores the operative portion of Section 2 of the Act.

This Court, for answering the question framed, takes the path of, firstly, interpreting the words viz. In this Act, unless the context otherwise requires. The meaning of the expression is that the defined words are applied as per the definition unless the context otherwise requires.

Explanation VII to Section 2(lii) deals with the extended meaning of what ‘turnover’ constitutes. It is a straight application of the meaning of defined words if the context permits. If the context does not permit, then applying the definition read with Explanation to a substantive provision is impermissible. Though a very serious attempt was made by both sides to interpret the subject provisions of law with their convenient figures and examples, we refrain from understanding the provisions of law by these external details.

9.2 The syntax of the latter portion of the proviso is definitely used as conjunction only to convey meaning at variance with the first limb of the proviso. The second proviso is once attracted, the consequence of such position is that the  effect of two situations is not reckoned for assessment under the Act. That being so, the interpretation of the Revenue not only brings the credit notes within the scope of assessment but tax also is levied. The language of Section 11(3) read with the Fifth proviso does not permit such levy. We have construed and interpreted whether the proviso as it stands from 01.04.2005 warrants a different view because of contextual change. The context in the second limb of the Fifth proviso to Section 11(3) warrants a different understanding, and through a restricted interpretation, we ought not to deny what is expressed by the State Legislature to a few of the credit notes, subject to complying with the condition set out in the Fifth proviso to Section 11(3) of the Act.

10. To sum up:

(a) The definition of the word ‘turnover’ in Section 2(lii) is applicable unless the context otherwise demands.

(b) The deemed turnover subject to satisfying a condition stipulated in Explanation VII could arise if the context in which the demand allows such definition to operate.

(c) The Legislature incorporated the second limb to the Fifth proviso to Section 11(3) and by such amendment, the Legislature has taken out from the purview of assessment, credit notes received subsequent to invoice and payment of tax by the manufacturer/supplier and not claiming refund or adjustment of input tax.

(d) 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

(e) 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.

The question is answered as indicated above. The matters are directed to be placed before the Single Bench.

Notes:-

1 (2011) 38 VST 74 (Ker)

2 2016 (4) KLT 462

3 O.T. Rev. No.98/2012

4 2017 (1) KHC 141

5 1961 KHC 653

6 2007 KHC 3135

7 2004 KHC 463

8 (2009) 17 KTR 476 (SC)

9 (2009) 17 KTR 480 (SC)

10 2005 KHC 519

11 (2008) 14 VST 293

12 2010 (2) KHC 847

13 (2017) 3 SCC 467

14 2017 SCC OnLine Ker 15549

15 (2003) 11 SCC 632

16 (1985) 1 SCC 591

17 (2022) 2 SCC 603