Karnataka Value Added Tax Rules, 2005 – r.3(2)(c) – Claim for deduction of trade discount from the total turnover – Appellant’s case that it offers a quantity discount to its distributors depending on their performance during the previous quarter – According to appellant, the discount is offered in the regular course of business and the amount which it receives towards sales consideration is only the net amount exclusive of discount, on which VAT is collected – Appellant claimed the discount as a deduction from the total turnover while arriving at the taxable turnover under the Act – High Court rejected the case of appellant on the ground that the discount is given in respect of the performance of the previous quarter and not in respect of the sales transaction for which invoice is raised – On appeal, held: Having regard to the construction placed on r.3(2) of the Rules in the case of Southern Motors v. State of Karnataka, the judgment of the High Court is unsustainable – The liability to pay tax is on the taxable turnover – Taxable turnover is arrived at after making permissible deductions from the total turnover – Among them are “all amounts allowed as discounts” – Such a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case – The expression “the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as such discount” is not happily worded – The words “in respect of the sales relating to such discount” cannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount – This is a matter of ascertainment – The assessee must establish from its accounts that the discount relates specifically to the sales with reference to which it is allowed – In the first part of the proviso, r.3(2)(c) recognizes trade practice or, as the case may be, the contract or agreement of the dealer – The latter part which provides a methodology for ascertainment does not override the earlier part – Both must be construed together – Above all, it must be remembered that taxable turnover is turnover net of deductions – All trade discounts are allowable as permissible deductions – Accordingly, appellant entitled to deduction of a trade discount – Karnataka Value Added Tax Act, 2003 – ss.2(35) and 3. The appellant manufactures home appliances. According to the appellant, based on a regular trade practice, it allows discounts to its distributors. These discounts may take the form of a scheme discount or, as the case may be, a quantity discount. The appellant claimed discount as a deduction from the total turnover while arriving at the taxable turnover under the Karnataka Value Added Tax Act, 2003. The assessing authority held that the quantity discount offered by the appellant could not be allowed under Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005. The first appellate authority set aside the order. However, under s.64(1) of the Act, the Additional Commissioner revised the order of the first appellate authority holding that the quarterly discount given by the appellant was in respect of the performance of the previous quarter and not in respect of the sales offered under the same invoices. Appeals dismissed by the High Court. Hence, the present appeals.
Allowing the appeals, the Court
HELD: 1. The definitions of ‘Turnover’ and ‘Taxable turnover’ under s.2(36) and s.2(34) of the Karnataka Value Added Tax Act 2003 respectively indicate that turnover is defined to mean the aggregate amount for which goods are sold, distributed, delivered or otherwise disposed of. The taxable turnover is computed after making such deductions from the total turnover and in such manner as may be prescribed (‘total turnover’ is defined by Section 2(35) to mean the aggregate turnover in all goods of a dealer at all places of business in the States). In arriving at the taxable turnover, the statute contemplates deductions, as prescribed, are to be made from the total turnover. The liability to pay tax is on the taxable turnover. Taxable turnover is the net amount that remains upon making deductions as prescribed from the turnover. [Para 8][257-B-D]
2. Rule 3 of the Karnataka Value Added Tax Rules, 2005 provide for the determination of turnover. Clause (1) of Rule 3 provide 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 which are stipulated in clause (2) from the total turnover. [Para 9][257D-E]
3. In the case of Southern Motors v. State of Karnataka, provisions of r.3(2)(c) were considered. While relying on the earlier decisions of Supreme Court, it was held that a trade discount ought not to be disallowed merely on the ground that it is not payable at the time of each invoice or deducted from the invoice price. Having regard to the construction placed on the provisions of Rule 3(2)(c) of the Rules in Southern Motors case, the judgment of the High Court in the present case is accordingly unsustainable. [Paras 10, 11][257-G-H; 258-A; 259-G-H]
4. The liability to pay tax is on the taxable turnover. Taxable turnover is arrived at after making permissible deductions from the total turnover. Among them are “all amounts allowed as discounts.” Such a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case. The expression “the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as such discount” is not happily worded. The words “in respect of the sales relating to such discount” cannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount. This is a matter of ascertainment. The assessee must establish from its accounts that the discount relates specifically to the sales with reference to which it is allowed. In the first part of the proviso, Rule 3(2)(c) recognizes trade practice or, as the case may be, the contract or agreement of the dealer. The latter part which provides a methodology for ascertainment does not override the earlier part. Both must be construed together. Above all, it must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions. [Para 12][260-A-D]
Union of India v. Bombay Tyre International Ltd (2005)
3 SCC 787; Government of India v. Madras Rubber Factory Ltd (1995) 4 SCC 349 : [1995] 3 SCR 1143 – referred to.
Southern Motors v. State of Karnataka (2017) 3 SCC
467 – relied on.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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