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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: A.Kumar, Advocate.
  • For the Respondent: Government Pleader.
Judges
  • C.N Ramachandran Nair
  • V.K Mohanan, JJ.
Acts
  • provisions of the Sales Tax Act and Rules, Form 8
  • Act 39 of 2005 to Explanation III to S. 2(1)
  • Sales Tax Act.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: A.Kumar, Advocate.
  • For the Respondent: Government Pleader.
Judges
  • C.N Ramachandran Nair
  • V.K Mohanan, JJ.
Acts
  • provisions of the Sales Tax Act and Rules, Form 8
  • Act 39 of 2005 to Explanation III to S. 2(1)
  • Sales Tax Act.
See more information ...
Smart Summary

Structured Summary of the Opinion — Judgment by C.N. Ramachandran Nair, J.

Factual and Procedural Background

The connected writ petitions and writ appeals arise from claims by various assessees (mostly manufacturers or wholesalers of cement, and a few dealers in automobiles and spares) that they were entitled to deduction from taxable turnover for discounts subsequently allowed to purchasers by issuing credit notes after sales. The assessees had made sales, collected tax under the Value Added Tax Act, 2003 (the "Act"), and remitted tax with monthly returns. After meeting certain targets and receiving prompt payments, the assessees issued credit notes to dealers representing discounts which they claimed should reduce taxable turnover and entitle them to refunds of tax paid on the discount amounts.

The learned single Judge rejected the assessees' claim, concluding that the Act, Rules and Form 8 (the prescribed tax invoice format) do not permit deduction of discount except where a cash discount is separately shown in the tax invoice. The assessees appealed the single Judge's decision by filing writ appeals; the court heard senior counsel for the assessees and the Special Government Pleader for the respondents before delivering the present judgment.

Legal Issues Presented

  1. Whether discounts allowed by sellers after sales by issuing credit notes to purchasers are deductible from taxable turnover under the Value Added Tax Act, 2003 (i.e., whether such discounts entitle the assessees to exemption or refund of tax paid on the discounted amount).
  2. Whether the amendment made by Act 39 of 2005 (substituting clause (ii) of Explanation III to S. 2(1) to require that discounts be "shown separately in the tax invoice" and the buyer pay the reduced amount) — which was notified with retrospective effect from 1.4.2005 — changed the substance of the original provision such that it affected assessees' rights, and whether that retrospective amendment is constitutionally objectionable (as contended under Articles 14, 19(1)(g) and 301 of the Constitution by the assessees).

Arguments of the Parties

Appellants' (Assessees') Arguments

  • Tax could be levied only on the sale price; a cash discount granted should not constitute part of the price and therefore should not be treated as part of turnover irrespective of when or how the discount is granted.
  • Discounts allowed later via credit notes to dealers are deductible in computing taxable turnover and the tax paid on such discount amounts should be refunded.
  • Alternatively, the retrospective amendment made by Act 39 of 2005 deprived assessees of deductions previously available and is arbitrary and unconstitutional, violating Articles 14, 19(1)(g) and 301 of the Constitution.
  • Reliance was placed on several Supreme Court and High Court decisions concerning discount, particularly D.C. Law v. Advani Oerlikon (P) Ltd. (45 STC 32 (SC)).

Respondents' Arguments

The opinion does not contain a detailed account of the respondents' or State's separate legal arguments in adversarial form; however, the single Judge's and this Court's analysis emphasize statutory provisions (including Form 8 and the amended Explanation III to S.2(1)) to deny the assessees' claims.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
D.C. Law v. Advani Oerlikon (P) Ltd., 45 STC 32 (SC) One of the decisions relied upon by assessees concerning treatment of discount for tax purposes. The Court observed that decisions relied upon (including this one) concerned discount principles under pre-VAT regimes and held that they are not relevant to the VAT regime's distinct scheme; accordingly, these precedents were not applied to allow the assessees' claims in the present context.

Court's Reasoning and Analysis

The Court engaged in a step-by-step statutory and contextual analysis focused on the nature of the VAT regime, the statutory definitions, the prescribed invoice format (Form 8), and the amendment brought by Act 39 of 2005:

  1. Nature of the tax regime: The Court contrasted the former Sales Tax Act scheme (where tax was largely levied at the first sale) with the VAT regime under the Act, where tax paid by earlier sellers is carried forward as input tax credit and the net tax burden rests on the ultimate consumer. Given S.11(1) provides for input tax credit, accurate invoicing is critical to the functioning of the VAT system.
  2. Role of Form 8 and Rules: Rule 58(10) prescribes the form of the tax invoice (Form 8) and makes issuance of invoices in the prescribed format mandatory; Form 8 specifically includes a column for discount and for free gifts. The Court treated this mandatory invoicing requirement and the presence of a discount column as integral to the statutory scheme.
  3. Statutory language — original and amended Explanation III: The original Explanation III(ii) excluded "any cash discount on the price allowed in respect of any sale where such cash discount is shown separately" from turnover. Act 39 of 2005 substituted that clause to read: "Any discount on the price allowed in respect of any sale where such discount is shown separately in the tax invoice and the buyer pays only the amount reduced by such discount..." The amendment was notified retrospectively from 1.4.2005.
  4. Interpretation of "shown separately": The Court concluded that the requirement, even under the original wording, for a discount to be "shown separately" must be understood in the context of the mandatory tax invoice (Form 8). Thus "shown separately" effectively meant "shown separately in the tax invoice." The Court reasoned that this was consistent with the statutory scheme which taxes the actual sale price after permitted deductions.
  5. Effect of the amendment: The Court examined whether Act 39 of 2005 introduced a new condition or merely clarified the pre-existing requirement. It concluded that the amendment was a clarification (meticulous clarification) rather than a substantive change. The added wording — specifying the tax invoice and that the buyer pays the reduced amount — did not alter the substance of the original provision but clarified the form and manner in which discount must be evidenced for deduction.
  6. Relevance of pre-VAT decisions: The Court found that authorities relied upon by assessees concerning discounts (including D.C. Law v. Advani Oerlikon) were decided under pre-VAT regimes and did not have relevance to the VAT scheme's distinct features, particularly the invoicing and input tax credit mechanics.
  7. Constitutional challenge and Entry 54 argument: The Court rejected the contention that Entry 54 of List II (tax on sale of goods) prevents the Legislature from prescribing conditions for deduction. It held the Legislature may prescribe terms and conditions for granting deduction from sale price; thus the constitutional challenge to the retrospective clarification did not arise once the Court found the amendment to be clarificatory rather than substantive.
  8. Application to facts: Because the Act and Rules require that discount be shown separately in the tax invoice and tax collected on the net value (price reduced by discount), discounts allowed later by issuing credit notes — i.e., not shown separately in the tax invoice at the time of sale and tax collection — do not qualify for deduction from taxable turnover under the Act. Hence the assessees' attempt to obtain refund for tax paid on discounts granted by credit notes was held not permissible under the statutory scheme.
  9. Disposition on penal consequences: Although the Court upheld the disallowance, it exercised remedial discretion and directed that penal provisions should not be invoked against assessees who accept the disallowance and remit the balance tax, if any, along with applicable interest. The Court directed respondents to recall orders in cases where appellants/petitioners concede liability and pay within a specified time frame.

Holding and Implications

Holding: The Court confirmed the judgment of the learned single Judge upholding the disallowance and demand of tax on discounts given after sales through credit notes; discounts not shown separately in the tax invoice such that the buyer paid the reduced amount do not qualify for deduction from taxable turnover under the VAT Act.

Implications:

  • Direct effect on the parties: The assessees' claims for refund of tax paid on discounts granted later by credit notes were rejected; the single Judge's decision was affirmed.
  • Remedial direction: The Court directed that penal provisions should not be invoked against assessees who accept the disallowance and remit outstanding tax (if any) with applicable interest. The respondents were directed to recall orders in respect of appellants/petitioners who concede liability and make the required remittance within three weeks of receiving the judgment.
  • Precedential effect: The Court treated the amendment by Act 39 of 2005 as clarificatory of existing statutory requirements (that discounts be shown separately in the tax invoice and the sale price be net of discount) and therefore refused to give effect to the assessees' broader contention that discounts could be excluded irrespective of manner and timing. The Court did not accept reliance on authorities decided under pre-VAT regimes for the distinct VAT context. The opinion does not purport to create a novel principle beyond applying and clarifying how the statutory provisions and mandatory invoice form operate under the VAT regime.

Note: This summary is limited strictly to the information and reasoning contained in the provided judgment text and does not add facts or inferences beyond that text.

Show full summary ...

    Ultra Tech Cement Ltd. v. State Of Kerala

    JUDGMENT

    The Judgment of the Court was delivered by

    C.N Ramachandran Nair, J.:— The question raised in the connected Writ Petitions and Writ Appeals is whether the appellants/petitioners are entitled to exemption from tax payable under the Value Added Tax Act, 2003, hereinafter called the “Act”, on the discount allowed by them after sales through credit notes issued to purchasers. Excepting one or two assessee-dealers who are engaged in sale of automobiles and spares, all other assessees are either manufacturers or wholesalers of cement. Admittedly assessees made sales, collected tax under the Act, and remitted the same along with monthly returns. However, according to them, depending upon the target achieved, and the prompt payments, assessees have later issued credit notes to dealers representing discount which appellants/petitioners are entitled to deduction in the determination of taxable turnover and therefore the tax paid on the discount given should be refunded to them. The learned single Judge considered all the contentions in a detailed judgment but rejected the claim stating that the provisions of the Act and Rules and Form 8, which is the format of tax invoice prescribed under the Act and Rules do not provide for deduction of discount except cash discount separately shown in the tax invoice. It is against this judgment of the learned single Judge that Writ Appeals are filed by some of the assessees. However, when Writ Appeals are posted for hearing, pending Writ Petitions are also posted and we have heard senior counsel Sri. K.P Kumar and other counsel appearing for the appellants/petitioners and Special Government Pleader appearing for the respondents.

    2. Sales tax under the VAT regime came into force in the State with effect from 1.4.2005 The charging Section, namely, S. 6(1) of the Act provides for levy of tax on the taxable turnover. ‘Taxable turnover” under S. 2(1) means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed. ‘Turnover” as defined under S. 2(iii) and clause (ii) of Explanation III to S. 2(iii) provides for exclusion of discount in the computation of turnover.

    3. The said clause of Explanation III providing for deduction of discount as originally contained in the statute is as follows:

    (ii) Any cash discount on the price allowed in respect of any sale where such cash discount is shown separately or any amount refunded in respect of articles returned by customers shall not be included in the turnover.

    4. The above provision was substituted by the following clause by Act 39 of 2005 notified on 28.8.2005 with retrospective effect from 1.4.2005:

    (ii) Any discount on the price allowed in respect of any sale where such discount is shown separately in the tax invoice and the buyer pays only the amount reduced by such discount; or any amount refunded in respect of goods returned by customers shall not be included in the turnover.

    5. The question raised in all these cases pertains to interpretation of the above provision. In the first place, senior counsel Sri. K.P Kumar and other counsel appearing for the assessees contended that tax could be levied only on the sale price, and cash discount granted should not constitute price at all and so much so it cannot be treated as forming part of turnover much less taxable turnover, irrespective of how and when such discount is granted. Alternatively they contended that discount allowed to their dealers through credit notes issued later was allowable under the original provision prior to it's amendment and disallowance is only on account of retrospective amendment made by Act 39 of 2005 which according to them is arbitrary and liable to be declared unconstitutional by this Court as violative of Arts. 14,19 (1)(g) and 301 of the Constitution of India. We therefore proceed to consider one after another of the contentions raised on behalf of the assessees.

    6. Before proceeding to consider the case on merits, we have to consider the distinction between the scheme of tax on sale of goods both under the VAT regime and under the Sales Tax Act existing prior to that. Under the Sales Tax Act except few items, all other goods were taxable at the point of first sale in the State. Therefore tax was levied and collected only from the first seller. Contrary to this, the scheme under the VAT regime is that tax collected by the first seller is given as input tax credit to the second seller, and the tax paid by the second seller is given as input tax credit to the third seller and ultimately the entire tax is borne by the ultimate consumer. In other words, tax paid on the value addition by series of dealers is ultimately passed on to the ultimate customer and dealers get reimbursement of the tax paid by them. Since S. 11 (1) of the Act provides for input tax credit, the Government decided to prescribe procedure for grant of input tax credit. For this purpose, form of Tax Invoice itself is prescribed under R. 58(10) of the V.A.T Rules, which makes it mandatory that every dealer shall compulsorily issue bill in the prescribed format. Form 8 prescribed under the said rule specifically requires the seller to show all the details including the value or price on which tax is collected, and the amount of tax collected with specific column for discount and free gift allowed. In other words, unlike under the provisions of the Sales Tax Act and Rules, Form 8 prescribed under the V.A.T Rules provides for specific deduction of discount and charge of tax is on the net value which is the taxable turnover. Even though counsel appearing for the assessees relied on several decisions of the Supreme Court and that of the High Courts on discount, paiticularly the decision in D.C Law v. Advani Oerlikon (P) Ltd. (45 STC 32 (SC)) we do not think these decisions have any relevance for the purpose of deciding the assessees’ claim for deduction under the VAT regime the features of which we have already found are different from the scheme available under the Sales Tax Act. We therefore proceed to consider the case with reference to the statutory provisions. The contention of the assessees that discount is allowable irrespective of time and manner in which the seller gives it to the purchaser does not find a place in the statute. On the other hand, provision of deduction of eligible discount is specifically covered by cl. (4) of Explanation III to defintion of “turnover”. Going by the main clause in the definition, namely, turnover, it is clear that tax is on the actual sale price. Explanation specifically clarifies that any discount on the price allowed in respect of any sale if shown separately has to be excluded. Admittedly under the original provision and in the amended provision, eligibility for deduction of discount is only when it is allowed on the price and only if it is separately shown. The amendment made by Act 39 of 2005 to Explanation III to S. 2(1) was for inclusion of “tax invoice” and the requirement of purchaser paying only the sale price reduced by discount amount. The question to be considered is whether original provision which did not contain these words conveys a different meaning or whether the amendment made is only clarification of the original provision. There is no dispute that Form 8 which is the tax invoice prescribed under R. 58(10) provides for separate column for discount and the rule makes it mandatory for a selling dealer to compulsorily raise invoice in the prescribed form. So much so, in our view discount if separately shown as stated in the original Explanation means only discount shown separately in the tax invoice. Therefore even prior to clarification made by Act 39 of 2005, the requirement of showing discount separately in the original provision can only mean showing discount separately in the tax invoice. Another addition made in the amended provision for allowing discount is that sale price should be the mount reduced by discount amount granted. In our view, when discount is given from the sale price by the seller and tax is charged on the net price after excluding the discount, seller's claim is only sale price reduced by discount and no buyer can be called upon to pay discount amount after seller grants it as reduction in the tax invoice itself. Original provision did not contemplate buyer paying discount amount along with price or in other words, payment is always net of the discount. Therefore in our view the additions made to Explanation III (ii) to S. 2(1) through amendment with retrospective effect do not convey any new meaning and content to the original provision to which only further clarification is made to avoid unnecessary controversy and litigation. Since we have already found that amendment has not brought out any new provision or condition for allowing discount and is only a meticulous clarification of the original provision, there is no need for going into constitutional validity of the amendment with retrospective effect which does not arise for consideration because, in our view, the provision which originally stood also did not entitle the assessees for claiming deduction of discount granted other than in the tax invoice. In other words the meaning and scope of provisions before and after amendment are that no dealer is entitled to deduction of discount unless it is separately shown in the tax invoice and the price collected is net of the discount.

    7. Senior counsel appearing for the assessees relying on Entry 54 of List II of 7th Schedule to the Constitution contended that discount which does not form part of price cannot be brought to tax as the constitutional entry authorises only tax on sale of commodity which means that tax should be on actual sale price. We do not think the contention is tenable because it is within the powers of the Legislature to prescribe terms and conditions for grant of deduction from sale price. In fact dealers are entitled to give discount at any time that is after raising tax invoice and after making sales through credit notes after the end of the month, quarterly, periodically or even after the end of the year. However, question to be considered is what discount qualifies for deduction from payment of tax. It is obvious from the statutory provisions discussed above that in order to qualify any discount for deduction whether it be trade discount, or cash discount, or any other form of discount, such discount should be shown in the tax invoice separately and the sale price along with tax thereon should be collected from the buyer without including the discount granted. Since conditions for deduction of discount from taxable turnover is mandatory, appellants/petitioners have no escape from liability to pay tax on the original sale price on which they have in fact collected sales tax and remitted the same. The present attempt to get refund of tax paid based on the discount allowed through credit notes in our view is not tenable and is not permissible under the Act.

    8. For the forgoing reasons, we confirm the judgment of the learned single Judge upholding disallowance and demand of tax on discount given after sales through credit notes. However, since the Legislature itself has felt that discount provision calls for clarification, we feel penal provision should not be invoked against the appellants/petitioners, provided they accept disallowance, clear the arrears if any, with interest due thereon. We therefore direct the respondents to recall the orders in the case of such of the appellants/petitioners who concede liability in terms of the judgment and who remit balance tax if any along with applicable rate of interest within three weeks from the date of receipt of a copy of this judgment.

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    Comments

    Ultra Tech Cement Ltd. v. State Of Kerala
    (Nov 30, 2009)