Showing trade discounts in tax Invoice not compulsory. Credit notes eligible under Rule 3(2)(c) of the Karnataka Value Added Tax Rules 2005-Supreme Court
ABCAUS Case Law Citation:
ABCAUS 1105 (2017) (01) SC
Important Case Laws Cited:
State of Karnataka vs. M/s Kitchen Appliances India Ltd.
M/s Southern Motors vs. State of Karnataka and Ors.
Brief Facts of the Case:
The present two appeal were intended to spell out the statutory intendment lodged in Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005 ( “the Rules”) so as to facilitate the determination of taxable turnover as defined in Section 2(34) of the Karnataka Value Added Tax Act, 2003 ( “the Act”) in interface with Section 30 and Rule 31.
The appellant(s) were registered dealers and had raised tax invoices without mentioning any discounts. However, credit notes were issued to the customers granting discounts after the sales were completed.
However, following the decision of the High Court in which discounts mentioned only in the tax invoices were recognizing as eligible for deduction from the total turnover in terms of Rule 3(2)(c) of the Rules, the Commercial Taxes Assessing Authority passed the rectification orders under Section 41(1) of the Act, disallowing the deduction of post sale discounts earlier awarded by the corresponding credit notes.
Not successful in the High Court the appellants had moved the Hon’ble Supreme Court’s jurisdiction under Article 136 of the Constitution of India for redress.
Contentions of the Assessee:
It was contended that as per the combined reading of Section 30 and Rule 31 demonstrates in clear terms that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover.
It was submitted that Rule 3(2)(c) could not be conceded a primacy to curtail or abrogate Section 30 or Rule 31 of the Rules, lest the latter provisions are rendered otiose. Such an explication would also be extinctive of the concept of the well ingrained concept of turnover/trade discount which is indefensible.
It was pleaded that a post sale discount through credit notes is revenue neutral in terms of Section 30(3) of the Act, as a consequence whereof the selling and the purchasing dealers accordingly remodel their returns and pay tax as due.
Observations made by the Apex Court:
The Supreme Court observed that though words in a statute must, to start with, be extended their ordinary meanings, but if the literal construction thereof results in anomaly or absurdity, the courts must seek to find out the underlying intention of the legislature and in the said pursuit, can within permissible limits strain the language so as to avoid such unintended mischief.
Recognising the prevalent trade discounts practices, the Hon’ble Court observed that it would, in any case be incomprehensible that the legislature, while occasioning the amendment to the first proviso to Rule 3(2)(c) of the Rules, was either ignorant or unaware of the prevalent practice of offering trade discount in the contemporary commercial dispensations. And the intention of the legislature could not have been to deny the benefit of deduction of trade discount by insisting on the reflection of such trade discount in the text invoice or the bill of sale at the point of the sale as the only device to guard against possible avoidance of tax under the cloak thereof. To insist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be ill-logical, irrational and absurd.
The Apex Court stated that the computation of that trade discount may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory. This may herald as well the possible unauthorised taxation even in the face of cotaneous accounts kept in ordinary course of business, attesting the grant of such trade discount and adjustment thereof against the price.
The Hon’ble Court observed that while, devious manipulations in trade discount to avoid tax in a given fact situation is not an impossibility, such avoidance can be effectively prevented by insisting on the proof of such discount, if granted. The interpretation to the contrary, as sought to be assigned by the Revenue to the first proviso to Rule 3 (2)(c) of the Rules, when tested on the measure of the judicial postulations adumbrated hereinabove, thus does not commend for acceptance.
Thus the Apex Court opined that on an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount.
The Hon’ble Court clarified that however, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid. The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover.
The interpretation accorded by the High Court was considered as being in defiance of logic and the established axioms of interpretation of statutes being unacceptable. Consequently, the appeals were allowed.