IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR WEDNESDAY, THE 2ND APRIL 2008 / 13TH CHAITHRA 1930 WP(C).No. 33389 of 2007(Y) -------------------------- PETITIONER: ------------ M/S.VETTATHIL AGENCIES, PATTANAKAD P.O., ALAPPUZHA DISTRICT REPRESENTED BY ITS MANAGING PARTNER, K.SHAFI. BY ADV. SRI.V.P.SUKUMAR SRI.KURYAN THOMAS RESPONDENTS: ------------- 1. THE COMMERCIAL TAX OFFICER (AUDIT ASSESSMENT), DEPARTMENT OF COMMERCIAL TAXES, ALAPPUZHA. 2. THE DEPUTY COMMISSIONER (APPEALS), COMMERCIAL TAXES, KOLLAM. 3. THE DEPUTY TAHSILDAR (RR), TALUK OFFICE, CHERTHALA. 4. THE COMMISSIONER OF COMMERCIAL TAXES, THIRUVANANTHAPURAM. 5. THE STATE OF KERALA, REPRESENTED BY THE SECRETARY TO GOVERNMENT, TAXES (D) DEPARTMENT, SECRETARIAT, THIRUVANANTHAPURAM. BY SHRI.K.P.PRADEEP, GOVERNMENT PLEADER THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 02/04/2008, ALONG WITH W.P.(C) Nos. 34193 of 2007, 1010, 3026, 8626, 8742, 9707, 9777, 9806 of 2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C) No. 33389/2007 APPENDIX PETITIONER'S EXHIBITS P1 : COPY OF THE ASSESSMENT ORDER DATED 26/09/2006 PASSED BY 1ST RESPONDENT. P2 : COPY OF APPEAL DATED 01/02/2007 FILED BY PETITIONER BEFORE R2. P3 : COPY OF APPLICATION FOR STAY OF COLLECTION OF TAX DATED 01/02/2007. P4 : COPY OF CIRCULAR NO.41/2007 DATED 18/09/2007 ISSUED BY R4. P5 : COPY OF RR NOTICE DATED 01/06/2007 ISSUED TO PETITIONER BY R3 UNDER SECTION 7 OF THE RR ACT. P6 : COPY OF RR NOTICE DATED 01/06/2007 ISSUED TO PETITIONER BY R3 UNDER SECTION 34 OF THE RR ACT. // TRUE COPY // PA TO JUDGE. jg C.R. C.N.RAMACHANDRAN NAIR, J. ------------------------- W.P.(C) Nos. 33389, 34193 of 2007, 1010, 3026, 8626, 8742, 9707, 9777, 9806 of 2008, --------------------------------- Dated, this the 2nd day of April, 2008 J U D G M E N T The petitioners, in this batch of cases, are second dealers of cement, electrical goods etc. in the State. The goods sold by the petitioners are taxable under the KVAT Act. While paying tax on sales turnover, petitioners have taken input tax credit collected by the suppliers. The suppliers, periodically, give credit notes to the petitioners by way of incentives for sale of various goods under various schemes. The Assessing Officers, in all the cases, considered the amount covered by the credit notes as discount given by the suppliers and, consequently, while giving input tax credit, tax attributable to the credit note amount was reduced, thereby reducing the input tax credit claimed by the petitioners based on purchase bills. The input tax credits on credit note amounts were reduced because petitioners have not complied with circular No.41/07 dated 18/09/2007 issued by the Commissioner of Commercial Taxes, produced as Ext.P2 in WP(C) No.9806/2008. According to the petitioners, the requirement of circular among other things is that, the recepients of credit notes should produce WP(C) No. 33389/2007 & con.cases -2- certificate from the suppliers to the effect that the suppliers have not claimed any deduction of the credit note amount towards discount or otherwise in their turnover, or in otherwords, tax stands paid on full amount shown in bills issued and thereafter no deduction is claimed based on credit notes issued. This requirement introduced in the circular is under challenge by the petitioners. The assessment orders to the extent of reduction of input tax credit on the credit note amount is also under challenge for the reason that it is wrongly disallowed. Learned Government Pleader pointed out that reduction in input tax on credit note amounts is made only because of non-compliance of the circular by the petitioners. 2. I have heard various counsel appearing for the petitioners and learned Government Pleader appearing for the respondents. 3. In order to appreciate the contention, the relevant provision, which provide for deduction of discount in the determination of taxable turn over, has to be referred. Therefore, the said provision is extracted hereunder. “Section 2(lii) 'Turnover' means the aggregare 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 WP(C) No. 33389/2007 & con.cases -3- on account of others, whether for cash or for deferred payment or for other valuable consideration, provided that the proceeds of the sale by a person not being a Company or Firm registered under the Companies Act, 1956 (Central Act 1 of 1956) and Indian Partnership Act, 1932 (Central Act 9 of 1932) (or society including a co-operative society or association of individuals whether incorporated or not) of agricultural or horticultural produce grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover. Explanation I - ------------ Explanation II - ----------- Explanation III – Subject to such conditions and restrictions, if any, as may be prescribed in this behalf; (i) --------------- (ii) Any discount on the price allowed in respect of any sale where such discount is shown separately in the tax invoice and the buyer pays only the amount reduced by such discount, or any amount refunded in respect of goods returned by customers shall not be included in the turnover.” From the above, it is clear that discount to be allowed as deduction in the turn over is only trade discount, which is shown separately in the invoice, whereunder the purchaser pays for the goods, only the amount, reduced by discount, shown in the bill. In other words, under the above provision, discount given through credit notes, periodically, will not be entitled to any deduction from the turnover. WP(C) No. 33389/2007 & con.cases -4- Consequently, the suppliers from whom petitioners purchase the goods are not entitled to any deduction of credit note amount in the determination of their taxable turnover either as discount or otherwise and, so much so, the tax charged in the bills raised by them would have been or should have been paid by them entitling the petitioners for credit of full input tax in their assessment based on purchase bills. 4. The next question to be considered is the validity of the circular issued by the Commissioner in exercise of powers under Section 3(2) of the KVAT Act. Among other things, the Commissioner has under Section 3(2) power to issue such circulars or instructions or directions to such officers and persons, as he may deem fit for proper administration of this Act. This, obviously, means that the Commissioner enjoys the power to issue circulars giving guidelines to the Officers to make assessment in a fair and proper manner. The main objective is to ensure collection of tax in accordance with the Act. It is seen from circular No.41/07 that it is issued, specifically in the context of marketing of cement by cement companies through dealers. The conditions stated in the circular are as follows :- WP(C) No. 33389/2007 & con.cases -5- “(i) The cement companies should have remitted the entire tax collected as per sale bills without any deduction along with interest within 28/02/2007. (ii) The cement companies shall issue declarations to its distributors that they have paid the entire tax shown in their sale bills from 01/04/2005 without reducing it consequent on trade discount. (iii) The cement distributors shall submit such declarations to their assessing authorities and ensure that excess input tax is not claimed for 2005-06. On submission of the above declaration the assessing authorities will drop all further action under KVAT Act, 2003 on account of the credit notes issued by the companies up to 31/03/2006.” It is clear from clause (iii) above, that the circular is beneficial to the petitioners, in as much as, if the suppliers have not claimed deduction of credit note amount as discount and paid full tax shown in the sale bills, then petitioners are entitled to full input tax credit based on purchase bills, provided the cement supplying companies issue declarations to petitioners and their distributors to the effect that entire tax shown in their sale bills to the Buyers are paid and no deduction in the turn over is claimed by them towards trade discount based on credit notes. According to the petitioners, since the statute does not authorise deduction of the credit note amount as discount, the circular issued by the Commissioner providing for WP(C) No. 33389/2007 & con.cases -6- declaration to be obtained by the petitioners from the suppliers is unnecessary. I am unable to accept this contention for more than one reason. In the first place circular is consistant with the statutory provisions explained above. In the second place, the precautionary measure taken by the Commissioner is only to ensure that discount is not claimed by suppliers subsequent to sales based on credit notes issued by them. Further the Commissioner's apprehension is perfectly justified because discount understood in trade are in various forms, such as cash discount, trade discount, turnover discount etc., which were and still allowable to a large extent under several court decisions and under the prevailing sales tax laws, which are concurrently in force along with KVAT Act for some goods. The object of the circular is only to clarify that contrary to the common notion, discount given after sales throgh credit notes is not allowable under the KVAT Act. The circular cannot be challenged unless it is against the statute or the conditions provided in the circular are impossible or atleast difficult of performance. The requirement of a confirmation from the supplier who issues the credit note will ensure that he does not later claim refund of tax in respect of which input tax credit is claimed WP(C) No. 33389/2007 & con.cases -7- and allowed to the buyer. It is only to nutralise even a mistaken claim of deduction of credit note amount by the supplier, the declaration or certificate is prescribed to entitle purchaser for full input tax credit including credit note amount based on purchase bills. Moreover, petitioners have not shown any difficulty for them to get declaration from the suppliers with whom they have regular dealings in the form of purchases. However, I do not know why the circular is limited only to cement dealers. I feel the circular issued to cover cement dealers should be made applicable to every goods and to every dealer because the provisions on discount on sale under KVAT Act are same for all goods. However, I feel, petitioners should be given reasonable time to obtain declaration in terms of circular from suppliers, that the suppliers have not claimed deduction of the credit note amount and that full tax on the sale bills are fully paid. Petitioners are given six weeks time from today to produce declarations and if declarations are produced within six weeks from today, there will be direction to the Assessing Officer to verify the same and rectify assessments by giving full credit of input tax based on purchase bills. Revenue recovery proceedings and appeals should be kept in abeyance for two months from now. WP(C) No. 33389/2007 & con.cases -8- Thereafter, recovery will be based on rectified orders and once rectified orders are issued petitioners can withdraw the appeals on this issue and pursue appeal on other matters, if any. In view of the above exposition of the provisions on discount, there is no need to consider the validity of 5th proviso to Section 11(3) of the KVAT Act introduced with effect from 01/07/2006 challenged in some writ petitions. These writ petitions are disposed of as above. (C.N.RAMACHANDRAN NAIR, JUDGE) jg