Discounts Received through Credit Notes are Part of Sales Turnover: Kerala HC [Read Judgment]

Kerala High Court-Tax Exemption-taxscan

In M/s Vettathil Agencies v. CTO and Ors, the single bench of the Kerala High Court reiterated that discounts received through credit notes subsequent to sale would form part of the turnover under the relevant provisions of the Kerala Value Added Tax Act, 2003.

While doing so, Justice A.M Shaffique clarified that the amendment to s. 11(3) in 2008, which do not disentitle the dealer the input credit already availed on the amount covered under credit notes issued by a supplier, does not in any way, affect this position.

The petitioners, through the writ petition, sought for a declaration from the Court that the discount received by them from its suppliers through credit notes will not form part of the taxable turnover especially when the turnover of discount suffered tax in the hands of the seller and the action to levy tax on discount received through credit notes is without legal sanction. The petitioners claimed that the inclusion of discount received in credit notes in petitioner’s taxable turnover and estimation of gross profit deviating from the gross profit without any basis and thereafter to levy tax on such amount is illegal. According to them, the discount allowed on sale price is a normal rate practice which is an item specially excluded from sale price and purchase price by definition given in the statute. They further claimed that the levy of tax on discount received in credit note is prohibited under s. 11(3) subject to certain conditions. Based on these arguments, they urged that the discount received in credit note falls outside the scope of levy contemplated under the KVAT Act.

The petitioners further relied upon the decision in WP(C) No. 27088/14 and connected cases wherein a single bench of the similar Court held that

Earlier, in Cement House v. State of Kerala it was held that the discount received subsequent to sale will form part of the turnover. The Court, in this case, took a view that in so far as the assessee sold the goods at a lower price than the purchase price, Explanation VII to Section 2(lii) of the KVAT Act is applicable in the case.

Further, in State of Kerala v. Syed Muhammed and Tenny Devassy v. State of Kerala, it has been held that any reimbursement of price received by a dealer is liable to be included in his turnover whereas the discount allowed to the customer and shown separately is liable to be excluded. It was held that the amount received by the assessee towards reimbursement of the balance price, though called reimbursement of discount, is a payment in reimbursement of balance of the price attracting Explanation VII to section 2(lii).

The petitioners vehemently contended that in all these cases the scope and effect of s. 11(5) was not considered by the division bench and therefore, the matter requires a fresh consideration.

Analyzing the provisions of s. 11(5) Justice shaffique said that the provision relates to the manner and procedure in which the eligibility of input tax credit is allowed. As per the said section, the input tax credit shall be allowed to a registered dealer in respect of a return period against the output tax payable by him for such period and the dealer shall pay to the Government the balance of the output tax in excess of the input tax credited in the manner prescribed.After the amendment in 2008, the provision indicates that 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 the Act.

Answering the question,“whether the amendment brought to s. 11(3)has the effect of not including the credit notes issued by a supplier to the total turnover, the bench clarified that the provision cannot be made applicable to assessment.

“Prior to amendment, there was no ambiguity to the above provision in so far as it was made clear that input tax credit shall not be available in respect of tax paid on the turnover subsequently allowed as discount. But it is relevant to note that though the statute had incorporated an amendment to proviso to Section 11(3) as per Finance Act, 2008, it has not touched on the issue regarding the turnover to be considered as far as the liability to pay tax is concerned. The amendment by the Finance Act, 2008 only clarifies the fact that the amount covered under credit notes issued by a supplier that do not affect the input tax credit already availed shall not be reckoned for the purpose of assessment under the Act. This provision according to me cannot be extended to the assessment of turnover for the purpose of payment of tax. Of course, it could be said that there is some ambiguity to the provision. But in so far as the liability to pay tax is on the turnover and discount given is part of the turnover, which is clearly indicated in Cement House (supra) and Syed Muhammed(supra), I do not think that a different view is possible to be taken in the matter.” The bench added.

Read the full text of the Judgment below.

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