IN THE HIGH COURT OF KERALA AT ERNAKULAM
WP(C).No. 33389 of 2007(Y)
1. M/S.VETTATHIL AGENCIES,
... Petitioner
Vs
1. THE COMMERCIAL TAX OFFICER
... Respondent
2. THE DEPUTY COMMISSIONER (APPEALS),
3. THE DEPUTY TAHSILDAR (RR),
4. THE COMMISSIONER OF COMMERCIAL TAXES,
5. THE STATE OF KERALA, REPRESENTED BY THE
For Petitioner :SRI.V.P.SUKUMAR
For Respondent : No Appearance
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
Dated :02/04/2008
O R D E R
C.R.
C.N.RAMACHANDRAN NAIR, J.
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W.P.(C) Nos. 33389, 34193 of 2007,
1010, 3026, 8626, 8742, 9707, 9777, 9806 of 2008,
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Dated, this the 2nd day of April, 2008
J U D G M E N T
The petitioners, in this batch of cases, are second dealers of
cement, electrical goods etc. in the State. The goods sold by the
petitioners are taxable under the KVAT Act. While paying tax on
sales turnover, petitioners have taken input tax credit collected by
the suppliers. The suppliers, periodically, give credit notes to the
petitioners by way of incentives for sale of various goods under
various schemes. The Assessing Officers, in all the cases,
considered the amount covered by the credit notes as discount
given by the suppliers and, consequently, while giving input tax
credit, tax attributable to the credit note amount was reduced,
thereby reducing the input tax credit claimed by the petitioners
based on purchase bills. The input tax credits on credit note
amounts were reduced because petitioners have not complied with
circular No.41/07 dated 18/09/2007 issued by the Commissioner of
Commercial Taxes, produced as Ext.P2 in WP(C) No.9806/2008.
According to the petitioners, the requirement of circular among
other things is that, the recepients of credit notes should produce
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certificate from the suppliers to the effect that the suppliers have
not claimed any deduction of the credit note amount towards
discount or otherwise in their turnover, or in otherwords, tax stands
paid on full amount shown in bills issued and thereafter no
deduction is claimed based on credit notes issued. This requirement
introduced in the circular is under challenge by the petitioners. The
assessment orders to the extent of reduction of input tax credit on
the credit note amount is also under challenge for the reason that it
is wrongly disallowed. Learned Government Pleader pointed out
that reduction in input tax on credit note amounts is made only
because of non-compliance of the circular by the petitioners.
2. I have heard various counsel appearing for the
petitioners and learned Government Pleader appearing for the
respondents.
3. In order to appreciate the contention, the relevant
provision, which provide for deduction of discount in the
determination of taxable turn over, has to be referred. Therefore,
the said provision is extracted hereunder.
“Section 2(lii) ‘Turnover’ means the aggregare 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
WP(C) No. 33389/2007 & con.cases
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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) (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 I – ————
Explanation II – ———–
Explanation III – Subject to such conditions and restrictions, if
any, as may be prescribed in this behalf;
(i) —————
(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.”
From the above, it is clear that discount to be allowed as deduction
in the turn over is only trade discount, which is shown separately in
the invoice, whereunder the purchaser pays for the goods, only the
amount, reduced by discount, shown in the bill. In other words,
under the above provision, discount given through credit notes,
periodically, will not be entitled to any deduction from the turnover.
WP(C) No. 33389/2007 & con.cases
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Consequently, the suppliers from whom petitioners purchase the
goods are not entitled to any deduction of credit note amount in the
determination of their taxable turnover either as discount or
otherwise and, so much so, the tax charged in the bills raised by
them would have been or should have been paid by them entitling
the petitioners for credit of full input tax in their assessment based
on purchase bills.
4. The next question to be considered is the validity of the
circular issued by the Commissioner in exercise of powers under
Section 3(2) of the KVAT Act. Among other things, the
Commissioner has under Section 3(2) power to issue such circulars
or instructions or directions to such officers and persons, as he may
deem fit for proper administration of this Act. This, obviously,
means that the Commissioner enjoys the power to issue circulars
giving guidelines to the Officers to make assessment in a fair and
proper manner. The main objective is to ensure collection of tax in
accordance with the Act. It is seen from circular No.41/07 that it is
issued, specifically in the context of marketing of cement by cement
companies through dealers. The conditions stated in the circular
are as follows :-
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“(i) The cement companies should have remitted the entire tax
collected as per sale bills without any deduction along with
interest within 28/02/2007.
(ii) The cement companies shall issue declarations to its
distributors that they have paid the entire tax shown in their sale
bills from 01/04/2005 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 31/03/2006.”
It is clear from clause (iii) above, that the circular is beneficial to
the petitioners, in as much as, if the suppliers have not claimed
deduction of credit note amount as discount and paid full tax shown
in the sale bills, then petitioners are entitled to full input tax credit
based on purchase bills, provided the cement supplying companies
issue declarations to petitioners and their distributors to the effect
that entire tax shown in their sale bills to the Buyers are paid and
no deduction in the turn over is claimed by them towards trade
discount based on credit notes. According to the petitioners, since
the statute does not authorise deduction of the credit note amount
as discount, the circular issued by the Commissioner providing for
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declaration to be obtained by the petitioners from the suppliers is
unnecessary. I am unable to accept this contention for more than
one reason. In the first place circular is consistant with the
statutory provisions explained above. In the second place, the
precautionary measure taken by the Commissioner is only to ensure
that discount is not claimed by suppliers subsequent to sales based
on credit notes issued by them. Further the Commissioner’s
apprehension is perfectly justified because discount understood in
trade are in various forms, such as cash discount, trade discount,
turnover discount etc., which were and still allowable to a large
extent under several court decisions and under the prevailing sales
tax laws, which are concurrently in force along with KVAT Act for
some goods. The object of the circular is only to clarify that
contrary to the common notion, discount given after sales throgh
credit notes is not allowable under the KVAT Act. The circular
cannot be challenged unless it is against the statute or the
conditions provided in the circular are impossible or atleast difficult
of performance. The requirement of a confirmation from the
supplier who issues the credit note will ensure that he does not later
claim refund of tax in respect of which input tax credit is claimed
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and allowed to the buyer. It is only to nutralise even a mistaken
claim of deduction of credit note amount by the supplier, the
declaration or certificate is prescribed to entitle purchaser for full
input tax credit including credit note amount based on purchase
bills. Moreover, petitioners have not shown any difficulty for them
to get declaration from the suppliers with whom they have regular
dealings in the form of purchases. However, I do not know why the
circular is limited only to cement dealers. I feel the circular issued
to cover cement dealers should be made applicable to every goods
and to every dealer because the provisions on discount on sale
under KVAT Act are same for all goods. However, I feel, petitioners
should be given reasonable time to obtain declaration in terms of
circular from suppliers, that the suppliers have not claimed
deduction of the credit note amount and that full tax on the sale
bills are fully paid. Petitioners are given six weeks time from today
to produce declarations and if declarations are produced within six
weeks from today, there will be direction to the Assessing Officer to
verify the same and rectify assessments by giving full credit of input
tax based on purchase bills. Revenue recovery proceedings and
appeals should be kept in abeyance for two months from now.
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Thereafter, recovery will be based on rectified orders and once
rectified orders are issued petitioners can withdraw the appeals on
this issue and pursue appeal on other matters, if any. In view of
the above exposition of the provisions on discount, there is no need
to consider the validity of 5th proviso to Section 11(3) of the KVAT
Act introduced with effect from 01/07/2006 challenged in some writ
petitions.
These writ petitions are disposed of as above.
(C.N.RAMACHANDRAN NAIR, JUDGE)
jg