Deduction of discount only if shown in tax Invoice

By | August 3, 2015

Question: Dealer has given discount and wants to claim deduction from total turnover to arrive at taxable turnover How can he do that ?

or

 Question : A Dealer did not show the discount given to the customers in the tax invoice, but issued credit notes towards the same separately. can he claim  deduction of discount given by issuing credit notes ?

Deduction of discount is allowed from turnover only when it is shown in tax invoice.

A dealer may have the particular practice or he may enter into a contract or agreement with the purchaser providing for such discount. But such practice or contract or agreement should be in existence before issuing of tax invoice. If, in any of modes, the dealer is giving discount to the purchaser, the said discount should be reflected in the invoice under which the sale is effected. Only if the discount is reflected in the sale invoice or bill of sale, the said amount is allowed as discount and would be reduced from total turnover to determine or to arrive at the taxable turnover.

The discount is given before sale to attract the customers and it acts as an incentive.

Once the sale invoice is issued and the sale price is collected along with tax, the aggregate of such sale constitutes the total turnover and the tax is payable on taxable turnover. To arrive at the taxable turnover what are the deductions that are legitimately be made are provided under rule 3(2). One such permissible deduction is that the amount paid by way of discount provided that the discount is reflected in the sale invoice. Accordingly by issuing a credit note after receiving the amount, of course, before filing the returns, it cannot be said that the amount of discount goes outside the purview of the turnover

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HIGH COURT OF KARNATAKA

Southern Motors

v.

State of Karnataka

N. KUMAR AND B. MANOHAR, JJ.

WA NOS. 5769-5785 OF 2012 (T-RES)

APRIL  3, 2013

Case Law on : proviso to Rule 3(2)(c) of the Karnataka Value Added Tax Rules

FACTS

■           The assessee, a dealer in motor vehicles, did not show the discount given to the customers in the tax invoice, but issued credit notes towards the same separately. He claimed deduction of discount given by issuing credit notes.

■           The Assessing Authority following the decision of the Karnataka High Court rendered in the case of State of Karnatakav. Reliance Industries Ltd. [2012] 51 VST 274 allowed the claim of the assessee for the tax periods 2007-08 and 2008-09.

■           Subsequently the Assistant Commissioner vide order dated 21-5-2012 passed under section 41(1) rectified the above assessment orders and disallowed the discount given by way of credit notes by relying on the later decision rendered by another division bench of the Karnataka High Court in the case of State of Karnataka v. Kitchen Appliances India Ltd.2011 (71) Kar. LJ 234.

■           The Single Judge of the High Court upheld the rectification order.

■           On writ appeal:

HELD

■           Section 30 deals with a case where a tax invoice has been issued for any sale of goods and within six months of the date of such sale the amount shown as tax charged in that tax invoice is found to exceed the tax payable in respect of the sale effected, the registered dealer effecting the sale shall issue forthwith to the purchaser a credit note containing the particulars as prescribed. After issuance of such credit note, he shall declare it in his return to be furnished for the tax period in which the credit note is received and then claim for reduction in tax. Therefore, there is no reference to the value of the goods in section 30 and there is no reference to any discount being given by the registered dealer to the purchaser. Section 30 exclusively deals with the payment of excess tax and issue of a credit note refunding the excess tax collected and then declaring the same in the returns to be filed by the dealer and then claiming reduction in tax which is to be refunded. [Para 9]

■           How the credit note and debit note is to be issued is provided under rule 31. Again the particulars which are to be set out in such a credit note is provided in clause (7). All that is mentioned is the value of the goods and the amount of tax credited or debited to the buyer is to be set out in the invoice. If rule 31 is read with section 30 in the case of charging of excess tax, in the credit note what is to be mentioned is the value of goods and the excess tax credited and if credit note is given reducing the tax amount, declare it in the returns to be furnished claiming reduction in tax on such total turnover. Hence, there is no conflict between section 30 and rule 31. [Para 10]

■           Section 3 is the charging section which provides that the tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. Section 4 provides that every dealer who is or is required to be registered shall be liable to pay tax, on his taxable turnover. Taxable turnover is defined under section 2(34) to mean 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. The total turnover is defined under section 2(35) to mean the aggregate turnover in all goods of a dealer at all places of business in the State. The word turnover is also defined under section 2(36) to mean the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer.

■           Rule 3 deals with the determination of turnover. The total turnover of a dealer, for the purposes of the Act, shall be aggregate of what is mentioned in the said rule. Sub-rule (2) of rule 3 deals with the determination of taxable turnover. The taxable turnover shall be determined by allowing the deductions mentioned in sub-rule (2). Once such deduction permissible is, all amounts are allowed as discounts.

■           The proviso to clause (c) of sub-rule (2) makes it clear that such discount is allowed in accordance with the regular practice of the dealer or is in accordance with the terms of any contract or agreement entered into in a particular case and the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as discount. It is clear from the said proviso that a dealer may have the particular practice or he may enter into a contract or agreement with the purchaser providing for such discount. But such practice or contract or agreement should be in existence before issuing of tax invoice. If, in any of modes, the dealer is giving discount to the purchaser, the said discount should be reflected in the invoice under which the sale is effected. Only if the discount is reflected in the sale invoice or bill of sale, the said amount is allowed as discount and would be reduced from total turnover to determine or to arrive at the taxable turnover.

■           Clause (d) of sub-rule (2) deals with the all amounts allowed to purchasers in respect of goods returned by them to the dealer. The purchaser is eligible for the said benefit, only when the goods are to be returned within six months from the date of purchase and a credit note is issued to him. It is understandable, the condition precedent for return of goods is, there should be valid sale and the purchaser has to pay the value of goods + tax and within six months, if he finds that the goods are defective and if there is an agreement for return of the said goods, he has to return the goods and then the dealer can raise a credit note returning the money which he had received at the time of sale.

■           Therefore, the Legislature consciously has not insisted the amount which represents the value of the returned goods to be mentioned in the sale invoice. It looks absurd. But when it came to the question of discount, expressly they have provided for its legal requirement. Reason is obvious. The discount is given before sale to attract the customers and it acts as an incentive. It may also enter into a contract if it is a case of bulk sale.

■           Therefore, if the dealer wants to have the benefit of reduction of the value representing discount from the total turnover in the sale invoice, he can mention the gross value of the property sold + tax and discount given and then declare the same in the returns to be filed by him on that basis, to arrive at the taxable turnover. If the said discount is not reflected in the sale invoice, the same cannot be deducted from the total turnover in arriving at the taxable turnover. The language employed in sub-rule (2) is emphatic, namely, the taxable turnover shall be determined by allowing the deductions and the proviso to clause (c) of sub-rule (2) of rule 3 makes it mandatory that the said discount should be reflected in the sale invoice otherwise the dealer is not entitled to deduct the amount of discount from the total turnover. [Para 11]

■           A harmonious reading of section 30, rule 31 and rule 3(2)(c) make it clear that if a dealer/assessee has claimed the tax in excess of what is payable under the VAT Act, he can issue a credit note for the excess amount claimed from the purchaser within six months from the date of sale invoice. After issuance of such credit note, he should promptly declare it in his returns to be furnished for the tax period in which the credit note is received and claim reduction in tax. How the said credit note should be issued and what are the details which the credit note should contain is what is stipulated in rule 31. However, rule 3 deals with the determination of the turnover. Sub-rule (2) deals with the deductions from the total turnover to arrive at the taxable turnover.

■           If a dealer has given discount and wants to claim deduction from the total turnover to arrive at the taxable turnover, the condition precedent is the amount allowed as discount should be shown in the tax invoice or bill of sale and then only the said amount could be deducted from the taxable turnover. However, if the discount given is not shown in the tax invoice or bill of sale, then the dealer is not entitled to deduction of the said amount from the total turnover. The language employed in the three provisions is clear, unambiguous and there is no scope for any interpretation. There is no conflict and there is no ambiguity.

■           Therefore, by misconstruing the judgment in Reliance Industries Ltd.’s case (supra), the Assessing Authority had granted the benefit of reduction in tax. When the legal position was made clear by the Karnataka High Court in Kitchen Appliances India Ltd.’s case (supra), the Assistant Commissioner promptly initiated proceedings for rectification of the order and had rightly rectified the said order. The said rectification order is in conformity with the statutory provisions and in accordance with law. [Para 14]

■           It was contended by the assessee that once the credit note is issued, the said discount falls outside the turnover and, therefore, no question of applying rule 3(2)(c) would arise. Once the sale invoice is issued and the sale price is collected along with tax, the aggregate of such sale constitutes the total turnover and the tax is payable on taxable turnover. To arrive at the taxable turnover what are the deductions that are legitimately be made are provided under rule 3(2). One such permissible deduction is that the amount paid by way of discount provided that the discount is reflected in the sale invoice. Accordingly by issuing a credit note after receiving the amount, of course, before filing the returns, it cannot be said that the amount of discount goes outside the purview of the turnover. [Para 15]

■           In view of the aforesaid, the writ appeal was liable to be dismissed. [Para 16]

 

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