M/S Ifb Industries Ltd vs State Of Kerala

(Arising out of S.L.P. (Civil) Nos. 26102-26103 of 2010)

M/s IFB Industries Ltd. .....Appellant

Versus

State of Kerala .....Respondent

AND

CIVIL APPEAL NOS. 2521-2522 OF 2012

(Arising out of S.L.P. (Civil) Nos. 6861-6862 of 2011)

The India Cements Ltd. ...Appellant

Versus

The Assistant Commissioner & Ors. ...Respondents

JUDGMENT

Aftab Alam,J.

1. Leave granted in both the Special Leave Petitions.

2 2. How far deductions are allowable under rule 9(a) of the Kerala

General Sales Tax Rules, 1963 ("the Rules" hereinafter) for trade discounts?

3. A division bench of the Kerala High Court has held that unless the

discount was shown in the invoice itself, it would not qualify for deduction

and further that any discount that was given by means of credit note issued

subsequent to the sale of the article was in reality an incentive and not trade

discount eligible for exemption under rule 9(a) of the Rules. The decision

was rendered somewhat gratuitously in the case of M/s IFB Industries Ltd.,

(the appellant in the appeals arising from SLP (Civil) Nos. 26102-03 of

2010) but it is the India Cements Ltd., the appellant in the other set of

appeals (arising from SLP (Civil) Nos. 6861-62 of 2011), that got badly hit

by the decision and its claim for deduction of many kinds of trade discounts

was rejected summarily and even without an opportunity of any effective

hearing to it right from the stage of assessment up to the High Court. But to

put the matter in order, we must see how the issue developed before

reaching this Court and for that we need to first advert to the case of M/s

IFB Industries Ltd.

4. M/s IFB Industries Ltd. is a manufacturer of home appliances. It has a

scheme of trade discount for its dealers under which the dealer, on achieving

a pre-set sale target gets certain discount on the price for which it purchased

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the articles from the manufacturer, the appellant. As the discount is subject

to achieving the sale target the dealer would naturally qualify for it in the

later part of the financial year/assessment period, that is to say, long after the

sales took place between the appellant and its dealer. For the sales taking

place between the appellant and its dealer after the sale target is achieved,

the dealer would of course get the articles on the discounted price but for the

sales that took place before the sale target was achieved, the appellant would

issue credit notes in favour of the dealer. The Assessing Authority, in

principle, accepted the appellant's claim for deduction of the amount of

discount given by it to its dealers through credit notes under rule 9(a) of the

Rules and it was only a dispute over computation that took the matter to the

High Court and the High Court held that the discount in question was not

trade discount at all and it was not eligible for deduction in terms of rule

9(a).

5. The case of the appellant (M/s IFB Industries Ltd.) relates to

assessment periods 2001-02 and 2002-03. Dealing with the assessment

periods 2001-02, the Assistant Commissioner (Assessment), Commercial

Taxes, (the Assessing Authority) in its order dated January 27, 2006

observed that the dealer had given discount to the tune of Rs.58,15,485/- and

4

as the discount was allowable in ordinary course of business, that turnover

was allowed as exempted.

6. In making the computation, however, the Assessing Authority started

with the figure of `Taxable turnover as per account (Home appliances) Vth

Schedule Items' that was Rs.11,62,36,424.23. He then added to it the

amounts of (i) Turnover under AMC, (ii) Sales return, (iii) Stock transfer,

(iv) Second sale, (v) Tax collected and (vi) Scheme Discount amounting to

Rs.58,15,485/- and arrived at the figure of `total turnover proposed' that

came to Rs.14,27,69,607/-. From the total turnover, he then deducted the

amounts of (i) AMC, (ii) Sales return, (iii) Second sales, (iv) Tax Collected

and (v) Scheme Discount being the sum of Rs.58,15,485/- and, thus, finally

arrived at the figure of Rs.11,95,56,460/- as the `taxable turnover proposed'.

7. The Assessing Authority passed a similar order for the assessment

period 2002-03 as well.

8. The appellant had objection to the computation made by the Assessing

Authority. It contended that though in principle allowing deduction for the

trade discount the Assessing Authority actually denied any deduction by

subtracting the amount of trade discount only after first adding it to the

turnover. In the computation made by the Assessing Authority the amount of

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trade discount, thus, got neutralized and the appellant did not actually get

any deduction of the trade discount from its turnover.

9. Before proceeding further, it needs to be understood that the

appellant's objection would have any basis only in case it is shown that the

original figure of Rs.11,62,36,424.23 taken by the Assessing Authority as

`Taxable turnover' was inclusive of the amount of the scheme discount

being the sum of Rs.58,15,485/-. For, unless the amount of scheme discount

was a factor of `Taxable turnover' there would be no question of deducting

it from taxable turnover. Only in case the appellant could show that the

figure of Rs.11,62,36,424.23 also included the amount of Rs.58,15,485/- as

the trade discount, there would be any question of deducting it from the

larger figure.

10. Be that as it may, the appellant preferred appeals against the

Assessment Order (Sales Tax Appeal Nos. 219 & 220 of 2006) in which it

also took the objection that the computation made by the Assessing

Authority by first adding up the amount of trade discount and only then

deducting it from the turnover denied it the exemption of trade discount

which the Assessing Authority had himself allowed in the earlier part of his

order. It is significant to note, however, that in the appeal also it was never

6

stated that the figure of Rs.14,27,69,607/- forming the basis of the

computation included the amount of trade discount of Rs.58,15,485/-.

11. The Deputy Commissioner (Appeals) III Ernakulam, (the Appellate

Authority) seems to have accepted the case of the appellant and while

disposing of its appeals by order dated April 28, 2006 observed that in effect

the appellant's claim was disallowed even though it was allowed in the order

of the Assessing Authority. He, accordingly, directed the Assessing

Authority to verify whether it was a computation mistake and to modify the

order accordingly.

12. Against the order passed by the Appellate Authority, the Revenue

preferred appeals (T.A. Nos. 429 & 430 of 2006/C.O. 67 & 68 of 2006)

before the Kerala Sales Tax Appellate Tribunal and the Tribunal by its order

dated February 28, 2007 allowed the Revenue's appeals holding that since

there was no assessment on trade discount, the direction of the Assessing

Authority to verify whether there was a mistake in this computation was

without any basis.

13. The appellant made a Rectification application but it was rejected by

the Tribunal by order dated August 29, 2008.

7 14. Against the order passed by the Sales Tax Appellate Tribunal, the

appellant went to the High Court in ST Revision Nos. 396 & 397/2008. The

appellant, safe in the belief that the Assessing Authority had in principle

accepted its claim for deduction of the trade discount from the taxable

turnover, confined its revision to the computation made by the Assessing

Authority. The High Court, nevertheless, went into the basic question

whether the discount under the scheme of the appellant at all qualified for

deduction under rule 9(a) of the Rules. In a brief order dated June 26, 2009

that does not refer to any earlier precedents of this Court or even of the

Kerala High Court, the High Court observed that from a plain reading of rule

9(a) it appeared that what is allowable as discount in the computation of

taxable turnover is the trade discount given in the bills. According to the

High Court, what is insisted in the rule is that the purchaser should have paid

the price charged, less the discount. And this certainly meant that the

discount should be shown in the original invoice and tax should be charged

only on the net amount exclusive of discount so that the buyer gets the

deduction towards discount.

15. On the appellant's claim of deduction of their trade discount from the

taxable turnover, the High Court made the following observation: -

8 "Petitioner is a manufacturer engaged in supply of goods in

wholesale to distributors and dealers. Sales are therefore first

sales and discount if any given can only be trade margin to

dealers. If tax is not to be charged on the dealer margin, then

discount should be given in the invoice itself. If the petitioner

has made sales in this way, then necessarily deduction should

have been claimed in the monthly return itself as the taxable

turnover does not cover discount/trade margin given in the

invoice. On the other hand, in the Tribunals order, what is

referred to as scheme discount which is nothing but incentives

given by manufacturers, and wholesalers to dealers, may be for

seasonal sales or may be for annual sales. Such incentives are

normally given by the credit note at the end of the season or at

the end of the year. These incentives given through credit notes

are outside the scope of discount covered by Rule 9(a) of the

KGST Rules."

16. Observing thus, the High Court found and held that the assessment in

the case of the appellant had not been properly made. It, accordingly, set

aside the orders passed by the Revenue authorities and remitted the case to

the Assessing Authority for passing fresh assessment orders in light of its

order and after examining the quarterly returns and the annual returns

submitted by the appellant.

17. The appellant has brought the matter to this Court making the

grievance that though the order of the High Court is an order of remand, for

all intent and purposes it puts an end to its claim of deduction of trade

discount from its taxable turnover.

9 18. Shortly after the case of M/s IFB Industries Ltd., came the case of

Godrej and Boyce Mfg. Co. Ltd. and in an equally brief order dated

November 4, 2009 a bench of the Kerala High Court took the same view on

the question of deductibility of trade discounts as in the case of M/s IFB

Industries Ltd. The High Court observed that in order to be eligible for

deduction in terms of rule 9(a) of the Rules the discount must be granted in

the invoices itself. According to the High Court, the rule stipulates that in

order to qualify for deduction it should be proved that the purchaser had paid

the sale price less amount of discount allowed. This presupposed that the

deduction available is only trade discount allowed in invoices and not on

credit notes given later.

19. By the time the case of the India Cement Ltd. (appellant in the appeals

arising from SLP(C) Nos. 6861-6862 of 2011) came up for assessment for

the assessment periods 2003-04 and 2004-05 the decision of the High Court

in M/s IFB Industries Ltd. was firmly before the Revenue authorities. The

Assessing Authority, therefore, turned down the claim of the appellant, the

India Cement Ltd., for exemption of different kinds of discount, namely,

special discount, annual discount, turnover discount, target discount etc.

given by means of credit notes and aggregating to the large sum of

Rs.25,55,83,751.82. The Assessing Authority referred to the High Court

10

decision in M/s IFB Industries Ltd. and rejected the appellant's claim for

deduction of the aforesaid amount from their taxable turnover holding that,

discounts given through credit notes were nothing but incentives and did not

come under rule 9(a) of the Rules.

20. The appellant challenged the assessment orders before the High Court

in Writ Petitions (WP(C) Nos. 34989 & 38517 of 2010). A single judge of

the High Court declined to entertain the writ petitions filed directly against

the assessment orders and by order dated January 18, 2011 dismissed the

writ petitions leaving it open to the appellant to seek their remedies before

the statutory authorities.

21. Against the order of the single judge the appellant filed intra-court

appeals (W.A. Nos. 173 & 177 of 2011). The division bench agreed that

since the appellant was confronted with an order of the division bench of the

High Court, it would be pointless to relegate it to the statutory authorities. It

referred to its orders passed in the cases of M/s IFB Industries Ltd. and

Godrej and Boyce Mfg. Co. It also noted that against its decision in M/s IFB

Industries Ltd. a SLP was filed which was admitted by this Court. It also

referred to the decisions of this Court and of the Kerala High Court relied

upon by the appellant in support of the contentions that a discount in order to

11

qualify for deduction under rule 9(a) need not necessarily be shown in the

invoice itself and may also be given by means of credit notes. It, however,

declined to reconsider its order in M/s IFB Industries Ltd. and by order dated

February 8, 2011 dismissed the appeals observing as follows: -

"We feel that appellant's remedy is to challenge the decision of

this Court relied on by the Assessing Officer in disallowing

claim of deduction of discount before the Supreme Court.

Consequently, following our above two decision, we uphold the

assessment disallowing discount on credit notes. These Writ

Appeals are, accordingly, dismissed on merit leaving it open to

the appellant to approach the Supreme Court, if they have any

grievance against this judgment."

22. In the aforesaid circumstances, the appellant is before this Court

making the grievance that its claim stands rejected practically unheard and

without any considerations of the earlier precedents on the point relied upon

by it in support of its claim.

23. In order to clearly understand the kinds of discount that are exempted

in terms of rule 9(a) we may usefully refer to the definition of `turnover'

under Section 2(xxvii) of the Kerala General Sales Tax Act, 1963. The main

body of the definition is as follows: -

"(xxvii) "turnover" means the aggregate 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

on account of others, whether for cash or for deferred payment

or other valuable consideration."

It is followed by several explanations. Explanation 2(ii) is as follows: -

12 "Explanation 2 - Subject to such conditions and restrictions, if

any, as may be prescribed in this behalf,-

(i) xxx

(ii) any cash or other discount on the price allowed in

respect of any sale and any amount refunded in respect of

articles returned by customers shall not be included in

the turnover."

(emphasis added)

24. It is, thus, to be seen that the very definition of "turnover" recognises

discounts other than cash discount and provides that those other discounts

too like the cash discount shall not be included in the turn over.

25. Rule 9(a) provides as follows -

"9. Determination of taxable turnover - In determining the

taxable turnover, the amounts specified in the following clauses

shall subject to the conditions specified therein, be deducted

from the total turnover of the dealer: -

(a) All amounts allowed as discount, provided that such

discount is allowed in accordance with the regular practice

in the trade and provided also that the accounts show that

the purchaser has paid only the sum originally charged less

the discount."

(emphasis added)

26. It is significant to note that the rule does not speak of invoices but

stipulates that the discount must be shown in the accounts. On a plain

reading of the provision it is clear that the exemption is allowable subject to

13

two conditions; first, the discount is given in accordance with the regular

practice in the trade and secondly, the accounts should show that the

purchaser had paid only the sum originally charged less the discount. We

find nothing in rule 9(a) to read it in the restrictive manner to mean that a

discount in order to qualify for exemption under its provision must be shown

in the invoice itself.

27. We, therefore, find it difficult to sustain the view taken by the Kerala

High Court in the orders impugned before us.

28. We are fortified in our view on the basis of some earlier decisions of

this Court and some High Courts, including the Kerala High Court.

29. In Deputy Commissioner of Sales Tax (Law) Board of Revenue

(Taxes) v. M/s Advani Oorlikon (P) Ltd., (1980) 1 SCC 360, this Court

pointed out that cash discounts and trade discounts are wholly distinct and

separate concepts and are not to be confused with one another. Advani

Oorlikon was a case under the Central Sales Tax Act and section 2(h) of the

Act defined the expression `sale price' to mean `the amount payable to a

dealer as consideration for the sale of any goods, less any sum allowed as

cash discount...'. It is to be noted that though the Central Sales Tax Act

mentioned only cash discount as being deductible from sale price, this Court

14

nevertheless held that any trade discount must also be similarly deducted for

determining sale price of goods. In paragraphs 5 and 6 of the judgment the

Court observed and held as follows: -

"5. At the outset, it is appropriate that we set forth the two

relevant definitions contained in the Central Sales Tax Act.

Section 2(j) defines "turnover" to mean "the aggregate of the

sale prices received and receivable by him (the dealer) in

respect of sales of any goods in the course of inter-State trade

or commerce...". And Section 2(h) of the Act defines the

expression "sale price" to mean "the amount payable to a dealer

as consideration for the sale of any goods, less any sum allowed

as cash discount according to the practice normally prevailing

in the trade...". It is true that a deduction on account of cash

discount is alone specifically contemplated from the sale

consideration in the definition of "sale price" by Section 2(h),

and there is no doubt that cash discount cannot be confused

with trade discount. The two concepts are wholly distinct and

separate. Cash discount is allowed when the purchaser makes

payment promptly or within the period of credit allowed. It is a

discount granted in consideration of expeditious payment. A

trade discount is a deduction from the catalogue price of goods

allowed by wholesalers to retailers engaged in the trade. The

allowance enables the retailer to sell the goods at the catalogue

price and yet make a reasonable margin of profit after taking

into account his business expense. The outward invoice sent by

a wholesale dealer to a retailer shows the catalogue price and

against that a deduction of the trade discount is shown. The net

amount is the sale price, and it is that net amount which is

entered in the books of the respective parties as the amount

reliable. Orient paper Mills Ltd. v. State of Orissa, (1975) 35

STC 84: 1974 Tax LR 2224 (Ori. HC)

6. Under the Central Sales Tax Act, the sale price which enters

into the computation of the turnover is the consideration for

which the goods are sold by the assessee. In a case where trade

discount is allowed on the catalogue price, the sale price is the

amount determined after deducting the trade discount. The trade

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discount does not enter into the composition of the sale price,

but exists apart from and outside it and prior to it. It is

immaterial that the definition of "sale price" in Section 2(h) of

the Act does not expressly provide for the deduction of trade

discount from the sale price. Indeed, having regard to the

circumstance that the sale price is arrived at after deducting the

trade discount, no question arises of deducting from the sale

price any sum by way of trade discount."

30. The decision of this Court in Deputy Commissioner of Sales Tax(Law)

Board of Revenue (Taxes), Ernakulam v. Motor Industries Co, Ernakulam,

(1983) 2 SCC 108, is on rule 9(a) of the Kerala General Sales Tax Rules and

the discount admissible to exemption under that provision. It may, however,

be clarified that in terms of the rule, as it stood at that time, exemption was

allowable on trade discount given not only in accordance with the regular

practice in the trade but also in accordance with the terms of the contract or

agreement entered into a particular case. In Motor Industries Co. the claim

for exemption was on the basis of the agreement entered into between the

dealer and its purchaser, the retailer. But that is of no significance as the

issue in the case was in regard to the nature of discount admissible to

exemption under rule 9(a). This Court, upholding the decision of the Kerala

High Court allowing exemption to the dealer, held and observed as follows:-

"We shall first deal with the claim made in respect of "service

discount". Under clause (a) of Rule 9 of the Rules all amounts

allowed as discount where such discount is allowed in

accordance with the regular practice of the dealer or is in

accordance with the terms of contract or agreement entered into

16

in a particular case have to be deducted from the total turnover

in determining the taxable turnover provided the accounts of

the assessee show that the purchaser has paid only the sum

originally charged less the discount. In the instant case the

"service discount" in respect of which the deduction was

claimed by the assessee was the additional trade discount

allowed by it to its main distributors (purchasers) namely the

T.V.S. group of companies which constitute a prestigious group

of commercial concerns over and above the normal trade

discount in consideration of the extra benefit derived by the

assessee by reason of the marketing of its goods through them.

This additional trade discount is allowed in accordance with the

trade agreement subject to periodical variation depending upon

the cost structure and changes in market conditions. It is not

disputed that there were such agreements between the assessee

and the purchasers and the accounts of the assessee truly

reflected the actual discount allowed to the purchasers. What is

however urged by the department is that the said additional

discount allowed by the assessee could not strictly be termed as

discount as it was in lieu of services rendered by its main

distributors by way of popularisation of the sales and

consumption of the products sold by the assessee. We find it

difficult to accept the submission made on behalf of the

department. Rule 9(a) says that all amounts allowed as discount

either in accordance with regular practice or in accordance with

agreement would be deductible from the total turnover provided

they are duly supported by the entries in the accounts of the

assessee. Ordinarily any concession shown in the price of goods

for any commercial reason would be a trade discount which can

legitimately be claimed as a deduction under clause (a) of Rule

9 of the Rules. Such a concession is usually allowed by a

manufacturer or a wholesale dealer in favour of another dealer

with the object of improving prospects of his own business. It is

common experience that when goods are marketed through

reputed companies, firms or other individual dealers the

demand for such goods increases and correspondingly the

business of the manufacturer or the wholesaler would become

more and more prosperous and its capacity to withstand

competition from other manufacturers or other dealers dealing

in similar goods would also improve. Hence any concession in

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price shown in such circumstances by way of an additional

incentive with a view to promote one's own trade does qualify

for deduction as a trade discount. It cannot be termed as a

service charge as is attempted to be termed in this case. In fact

in this case apart from buying the products of the assessee, no

other service is being rendered by the T.V.S. group of

companies to the assessee. In the circumstances the additional

discount or "service discount" as it is called in this case is no

other than the discount referred to in Rule 9(a) of the Rules."

31. In Union of India and Others v. Bombay Tyres International (P) Ltd.,

(2005) 3 SCC 787, in a very brief order this Court very succinctly described

`trade discount' and held it to be deductible from the sale price:

"(1) Trade discounts - Discounts allowed in the trade (by

whatever name such discount is described) should be allowed to

be deducted from the sale price having regard to the nature of

the goods, if established under agreements or under terms of

sale or by established practice, the allowance and the nature

of the discount being known at or prior to the removal of

the goods. Such trade discounts shall not be disallowed only

because they are not payable at the time of each invoice or

deducted from the invoice price."

(emphasis added)

32. A bench of the Andhra Pradesh High Court in Godavari Fertilizers

and Chemicals Ltd. v. Commissioner of Commercial Taxes, (2004) 138 STC

133, examined a number of earlier decisions on this point and came to the

conclusion that a discount given by means of credit notes issued subsequent

to the sale is as much a trade discount admissible to deduction in

determining the turnover of a dealer.

18 33. A bench of the Kerala High Court in Kalpana Lamps and

Components Ltd. v. State of Kerala, (2006) 143 STC 666, in paragraphs 4

and 5 of the judgment observed and held as follows: -

"4. According to us, in the present case, the Appellate Tribunal

dismissed the appeal merely on the ground that the

circumstances under which the special discount has been

granted to the customer (sic). Learned counsel for the petitioner

submits that the petitioner was not able to convince the

Tribunal because no opportunity was given by both the

authorities, viz., the assessing authority and the appellate

authority. They rejected the case of the petitioner merely on the

ground that the books of accounts were not produced. Hence,

the petitioner prayed for an opportunity to explain the

circumstances under which the special discount was granted.

5. Before parting with the case, we may state that so far as the

special discount is concerned, all that the authorities have to

look into whether as a matter of fact, the petitioner received

only the sum originally charged less the discount. It is the look

out of the traders to see that the trade increase and it is for that

purpose the trade discount is given. Hence, a person may not be

able to clearly prove as to why the special discount was given.

But if there has been a consistent practice of giving special

discount, that has to be accepted by the assessing authority."

34. On the basis of the discussions made above and in light of the earlier

decisions of the Court, we are unable to sustain the orders of the Kerala High

Court coming under appeal. The impugned orders in both the appeals are set

aside. The cases of the appellants for the respective assessment periods are

19

remitted to the Assessing Authority with a direction to make assessments

and pass fresh orders in accordance with law and in light of this judgment.

The Assessing Authority shall not reject the appellants' claim for exemption

of the amounts of trade discount solely on the ground that the discount

amounts were not shown in the sale invoices.

35. In the result the appeals are allowed but with no orders as to cost.

.................................J.

(Aftab Alam)

.................................J.

(Anil R. Dave)

New Delhi;

February 27, 2012.