Full Judgment Text
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PETITIONER:
DEPUTY COMMISSIONER OF SALES TAX (LAW),BOARD OF REVENUE (TAX
Vs.
RESPONDENT:
MOTOR INDUSTRIES CO., ERNAKULAM
DATE OF JUDGMENT18/02/1983
BENCH:
VENKATARAMIAH, E.S. (J)
BENCH:
VENKATARAMIAH, E.S. (J)
BHAGWATI, P.N.
CITATION:
1983 AIR 370 1983 SCR (2) 384
1983 SCC (2) 108 1983 SCALE (1)145
CITATOR INFO :
F 1983 SC 369 (2)
ACT:
Kerala General Sales Tax Rules, 1963-rs .9(a) and
9(b)(i)- When an additional discount allowed may be deducted
from taxable turnover under r. 9(a)- Deduction in respect of
returned goods under r. 9(b)(i) can only be made from
turnover of assessment year in which returned goods were
sold.
HEADNOTE:
The respondent was an assessee under the Kerala General
Sales Tax Act, 1963. In determining the taxable turnover for
the assessment year 1973-74, it claimed exemptions in
respect of a ’service discount’ under r. 9(a) and an amount
of Rs. 982.83 in respect of ’sales returns’ under r. 9(b)(i)
of the Kerala General Sales Tax Rules, 1963. The Assistant
Commissioner disallowed the claim on both the counts stating
that while the ’service discount’ had not been allowed as a
discount in accordance with the terms of the sale but as an
overriding commission and incentive to promote trade, the
’sales returns’ related to the sales completed in the
assessment year 1972-73. In appeal, the Deputy Commissioner
allowed the assessee’s claim in respect of ’service
discount’ in full and that in respect of ’sales returns’ to
the extent of Rs. 552.70. The Department’s appeal before the
Appellate Tribunal and the revision filed by it before the
High Court were dismissed.
The appellant contended that the ’service discount’
could not strictly be termed as discount as it was in lieu
of services rendered by the respondent’s main distributors
by way of popularisation of the sales and consumption of the
products sold by the assessee and that it was either in the
nature of a set-off on account of reciprocal promises or it
amounted to consideration for an agreement styled as
"trading in"; and That the deduction claimed in respect of
’sales returns’ could not be allowed from the taxable
turnover for the year 1973-74 as any deduction under r.
9(b)(i) could only be made from the total turnover or the
assessment year in which the goods were actually sold.
Dismissing the appeal in so far as it concerned the
’service discount’, and allowing the same in respect of
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’sales returns’,
^
HELD: 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
385
the price of goods for any commercial reason would be a
trade discount which can legitimately be claimed as a
deduction under r.9(a). Such a concession is usually allowed
with the object of improving prospects of one’s own
business. It is common experience that when goods are
marketed through reputed concerns, the demand for such goods
increases and correspondingly the business of the
manufacturer or the wholesale dealer would become more and
more prosperous. Hence any concession in 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.
[389A-D]
In the instant case, the ’service discount’ in respect
of which the deduction was claimed was the additional trade
discount allowed by the assessee to its main distributors
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. 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. Apart from
buying the products of the assessee, no other service was
rendered by the dealers to the assessee. The additional
discount or ’service discount’ is no other than the discount
referred to in r.9 (a). [388 E-H; 389 D-E]
(b) ’Trade-in’ contracts are those where goods ale
transferred by the seller for consideration partly in money
and partly in exchange of some other goods to be sold by the
buyer to the seller. In such cases there may be one contract
of sale only of the principal goods coupled with a
subsidiary agreement that if the buyer delivers to the
seller the other goods, an agreed allowance will be made.
There may also be cases where the buyer may become entitled
to an extra allowance for some service unconnected with the
sale of the goods in question being rendered to the seller.
In such cases the allowance in the price of the goods sold
given by the seller to the buyer either by way of
consideration for the goods supplied by the buyer to the
seller or for services rendered by the buyer to the seller
would not be a trade discount as such which would qualify or
deduction in the determination of the taxable turnover. [389
P-H; 390 A]
In the instant case. the service said to have been
rendered by the buyers for securing the ’service discount’
is an integral part of the transaction of sale itself which
incidentally confers on the assessee the benefit of
popularisation of the assessee’s goods in the market. The
discount so allowed is merely a percentage of the price of
the Goods sold which has nothing to do with any other goods
supplied or other service rendered by the buyers to the
assessee. The fact that the discount is not allowed at the
time of sale but on a later date at the end of the month
would not make it any-the-less a trade discount. The High
Court rightly upheld the deduction of the ’service discount’
claimed in this case.[390A.C]
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2. The two important conditions which have to be
satisfied for claiming the deduction under r. 9(b)(i) are
that the goods in question must have been returned within
three months from the date of delivery and that necessary
entries are made in the accounts of the assessee If these
conditions are satisfied, the amount allowed to the
purchaser for the returned goods would be deductible from
the total turnover. Any deduction that can be made under
386
this rule can only be made from the total turnover of the
assessment year in which the goods that are returned within
three months of the date of delivery were actually sold.
Such deduction cannot be claimed from the total turnover of
the succeeding financial year. If The assessment for the
relevant year is completed, the department has to comply
with the demand for adjustment or refund by making necessary
rectification in the order of assessment.
[390 E-H. 391 F-G]
Jay Engineering Works v. State of Kerala, 43 S.T.C.
492, overruled.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 210 of
1983.
Appeal by Special leave from the Judgment and order
dated the 11th June, 1981 of the Kerala High Court in T.R.C.
No. 117 of 1980.
P.A. Francis and V.J. Francis for the Appellant.
S. Balakrishnan for the Respondent.
The Judgment of the Court was delivered by
VENKATRAMIAH, J. In this appeal by special leave
arising under the Kerala General Sales Tax, Act, 1963
(hereinafter referred to as ’the Act’) two questions arise
for consideration. They are (i) whether on the facts and in
the circumstances of the case the Appellate Tribunal was
justified in law in holding that the assessee was entitled
to, exemption under Rule 9 (a) of the Kerala General Sales
Tax Rules, 1963 (hereinafter referred to as ’the Rules’)
from payment of sales tax on the turnover relating to
’service discount’ and (ii) whether the value of goods
returned by the purchasers could be- deducted under Rule 9
(b) (i) of the Rules from the total turnover of the year of
assessment in which the goods were actually returned when
they had been sold in the previous assessment year.
The assessee M/s. Motor Industries Co., Ernakulam is a
dealer in diesel, fuel injection parts etc. For the
assessment year 1973-74 ending March 31, 1974 the assessment
had been completed under the Act on the best judgment basis
determining the taxable turnover at Rs. 47,42,687.71 by
disallowing the claim for exemption of an amount of Rs.
69,707.68 which the assessee had claimed as ’service
discount’ under Rule 9 (a) of the Rules and a further amount
of Rs.982.83 under Rule 9 (b) (i) of the Rules being the
387
value of goods returned. The Assistant Commissioner of Sales
Tax (Assessment) who was the assessing authority disallowed
the claim in respect of ’service discount’ on the ground
that the amount in respect of which deduction was claimed
had not been allowed as a discount in accordance with the
terms of sale but had been allowed as an over-riding
commission and ’incentive’ to promote trade. He disallowed
the claim in respect of the value of goods which had been
returned OD the ground that it related to the sales
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completed in the previous assessment year i.e. 1972-73.
Aggrieved by the order of assessment the assessee filed an
appeal before the Deputy Commissioner, Agricultural Income-
Tax and Sales Tax (Appeal), Ernakulam. In that appeal, the
exemption claimed in respect of ’service discount’ was
allowed But the claim in respect of ’sales returns’ was
allowed to the extent of the turnover of Rs. 552 70 being
the turnover of goods returned within a period of three
months from the date of sale. The appeal filed against that
order by øhe Department before the Appellate Tribunal was
dismissed. Against the order of the Tribunal the Department
filed a revision petition before the High Court of Kerala
which again was dismissed by its judgment dated June l l,
1981. This appeal is preferred with the special leave of
this Court against the aforesaid judgment of the High Court.
Under Chapter II of the Act which contains the charging
pro- visions the incidence and levy of tax is on the
turnover of any dealer during any assessment year computed
in accordance with the Act. Explanation (2) (ii) given in
section 2(xxvii) of the Act which defines the expression
’turnover’ says that subject to such conditions and
restrictions, if any, as may be prescribed in that behalf
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.
Clause (a) and sub-clause (i) of clause (b) of - Rule 9
of the Rules which prescribes the method of computation of
the taxable turnover of an assessee read thus:
"9. Determination of taxable turnover-In determin-
ing 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
388
(a) all amounts allowed as discount, provided
that such discount is allowed in accordance with
the regular practice of the dealer or is in
accordance with the terms of a contract or
agreement entered into in a particular case and
provided also that the accounts show that the
purchaser has paid only the sum originally charged
less the discount:
(b) (i) all amounts allowed to purchasers in
respect of goods returned by them within a period
of 3 months from the date of delivery of the goods
to the dealer when the goods are taxable on the
amount for which they had been sold provided that
the accounts show the date on which the goods were
returned and the date on which and the amount for
which refund was made or credit was allowed to the
purchaser .
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 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
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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
389
to accept the submission made on behalf of the Department
Rule A 9 (a) says that all amounts allowed as discount
either in accordance with regular practice on 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 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.
We are not inclined to accept the submission that the
’service discount in question’ is in the nature of a set-off
on account of reciprocal promises or amounts to
consideration for an agreement styled as ’trading-in’.
’Trade-in’ contracts are those where P goods are transferred
by the seller for consideration partly in money and partly
in exchange of some other goods to be sold by the buyer tn
the seller. In such cases there may be one contract of sale
only of the principal goods coupled with a subsidiary
agreement that if the buyer delivers to the seller the other
goods an agreed allowance will be made. There may also be
cases where the buyer may become - entitled to an extra
allowance for some service unconnected with the sale of the
goods in question being rendered to the seller. In such
cases the allowance in they price of the goods sold given by
the seller to the buyer either by way of consideration for
the goods supplied by the buyer to the seller or for
services rendered by the buyer lo the seller would not be a
trade discount as such which would qualify for
390
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deduction in the determination of the taxable turnover. In
the instant case the service said to have been rendered by
the buyers for securing the ’service discount’ is an
integral part of the transaction of sale itself which
incidentally confers on the assessee the benefit of
popularisation of the assessee’s goods in the market. The
discount so allowed is merely a percentage of the price of
the goods sold which has nothing to do with any other goods
supplied or other service rendered by the buyers to the
assessee. The fact that the discount is not allowed at the
time of sale but on a later date at the end of the month
would not make it any-the-less a trade discount.
We are, therefore, of the view that The High Court has
rightly upheld the deduction of the ’service discount’
claimed in this case by the assessee from the total
turnover. The appeal should, therefore, fail in so far as
this part of the case in concerned.
But on the second point which arises for consideration
in this case, the case of the Department appears to be well
founded. Rule 9 (b) (i) of the Rules provides that all
amounts allowed to purchasers in respect of goods returned
by them within a period of three months from the date of
delivery of the goods to the dealer, when the goods are
taxable on the amount for which t hey have been sold are
deductible from the total turnover in determining the
taxable turnover (provided the accounts show the relevant
entries). The two important conditions which have to be
satisfied for claiming the deduction under Rule 9 (b) (i)
are that the goods in question must have been returned
within three months from the date of delivery and that
necessary entries are made in the accounts of the assessee.
If these conditions are satisfied, the amount allowed to the
purchaser for the returned goods would be deductible from
the total turnover. The final assessment under the Act is
always made in respect of one year i.e the financial year
which commences on April I of every calendar year and ends
with March 31 of-the succeeding calendar year. That is clear
from the scheme of section 5 of the Act and Rules 11, 18, 20
and other rules found in the Rules. Any deduction that can
be made under Rule 9 (b) (i) of the Rules can only be made
from the total turnover of the assessment year in which the
goods that are returned within three months of the date of
delivery were actually sold. Such deduction cannot be
claimed from the total turnover of the succeeding financial
year. The reason is obvious and it can be easily
demonstrated by taking the illustration of a dealer who
ceases to be a dealer in the subsequent financial year. In
his case unless deduction
391
is allowed in the financial year in which the goods that are
subsequently returned were actually sold, he would have to
pay tax on the amount for which the goods in question were
sold in the assessment year in which they were sold and he
would not be able to claim any deduction in the subsequent
year as he has ceased to be a dealer in that year. There may
also be difference in the tax liability if the rates of tax
are varied in the subsequent assessment year. Further by
such deduction the turnover relating to the subsequent
financial year which is otherwise taxable under the statute
would escape taxation to the extent of the deduction Such a
result cannot be permitted to ensue. It is true that in the
case of many sales which have taken place in the months of
January, February and March in any financial year, the
assessee would become aware of his right to claim the
deduction under Rule 9 (b) (i) in his return pertaining to
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that assessment year during the subsequent financial year if
such goods are returned within three months of the date of
delivery. It is quite possible that in such cases the
assessee would have filed his annual return under Rule 18 of
the Rules without any opportunity to claim any deduction
where the goods are returned subsequent to the filing of the
return but before the expiry of three months from the date
of their delivery This, however, need not present much
difficulty as an assessee in that position can always file a
revised return and claim the deduction or even if assessment
is completed, demand adjustment or refund by preferring the
claim in time. The learned counsel for the Department states
that such an adjustment or refund ’, can be claimed by an
assessee. The above statement made on behalf of the
Department is in accordance with the scheme of the any Act
and the Rules. In order to make the position clear the State
1, Government may take steps to introduce a suitable
amendment in the Rules or in the Act. We are, however, of
the view that even in p the absence of such an amendment,
the deduction in respect of ’sales 7 , return’ has to be
allowed in the assessment relating to the financial year in
which the sales of the returned goods had taken place and
even where assessment for that year is completed, the
Department has to comply with the demand for adjustment or
refund by making necessary rectification in the order of
assessment, provided that other conditions are satisfied, as
that is the inevitable consequence of Rule 9 (b) (i) which
allows deduction of the value of the goods returned within
three months from the date of their delivery from the total
turnover of that assessment year. But in any view of the
matter it is not possible to hold that such deduction in
respect of returned goods can be claimed in the assessment
proceedings for the financial year subsequent to the
financial year in which the sales have taken
392
place. We do not, therefore, agree with the contrary view
expressed A by the High Court relying on its decision in The
Jay Engineering Works Ltd. v. State of Kerala(l). The appeal
of the Department has to be allowed to the above extent. .
In the result the appeal is dismissed in so far as the
first question is concerned. The appeal is allowed in so far
the second question is concerned. The orders of assessment
for the assessment year 1973-74 shall be modified
accordingly. As a consequence of this decision, the order of
assessment for the year 1972-73 shall be rectified in
accordance with this judgment. No costs.
H.L.C. Appeal party allowed
393