Case: M/s Maya Appliances (P) Ltd. now known as Preethi Kitchen Appliances Pvt. Ltd Vs. Addl. Commissioner of Commercial Taxes &amp; Others

Karnataka (2017) 3 SCC 467 ), a Bench of two learned judges of this Court considered the provisions of Rule 3(2)(c) of the Rules. In that case, the appellant who was a registered dealer with a business in motor vehicles issued tax invoices to its purchasers. After the sales were completed, credit notes were issued to the customers granting them discounts. As a result, the appellant retained only the net amount of the invoice less the discount reflected in the credit notes. During the course of the assessment, the appellant was subjected to orders of rectification, disallowing the deduction of post-sale discounts. This Court held thus:“28. It is a matter of common experience that in the present contemporary competitive market, trade discounts not only are dependent on variable factors but also might be strategically not disclosable at the time of the original sale/purchase so as to be coevally reflected in the tax invoice or the bill of sale, as the case may be. The actual quantification of the trade discount, depending on the nature of the trade and the related stipulations in any contract with regard thereto, may be deferred till the happening of a contemplated event, so much so that the benefit thereof is extended at a point of time subsequent to that of the original sale/purchase. That by itself, subject to proof of such regular trade practice and the contract/agreement entered into between the parties, would not render the trade discount otherwise legal and acceptable, either non est or fictitious for evading tax liability. In the above factual premise, the interpretation as sought to be provided by the Revenue would evidently reduce Section 3(2)(c) to a dead letter, ineffective and unworkable and would defeat the objective of permitting deductions from the total turnover on account of trade discount.” (Id at page 485)(emphasis supplied)Relying on the earlier decisions of this Court, it was held that a trade discount ought not to be disallowed merely on the ground that it is not payable at the time of each invoice or deducted from the invoice price. In the of view of this Court :“29…Perceptionally, if taxable turnover is to be comprised of sale/purchase price, it is beyond ones comprehension as to why the trade discount should be disallowed, subject to the proof thereof, only because it was effectuated subsequent to the original sale but evidenced by contemporaneous documents and reflected in the relevant accounts.” (Id at page 485)The Legislature, the Court held, would not be unaware of the prevalent practice of offering trade discounts in commercial dispensations. In the view of the Court:“38…To insist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be illogical, irrational and absurd.” (Id at page 492)This Court accordingly read down the first proviso to Rule 3(2)(c) in the following manner:“40. On an overall review of the scheme of the Act and the Rules and the underlying objectives, in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale, as the case may be, along with the accounts reflecting the trade discount and the actual price paid. The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated.” (Id at page 493)11. This view was rendered by a bench of two learned Judges, including one of us (the learned Chief Justice). Having regard to the construction which has been placed on the provisions of Rule 3(2)(c) of the Rules in Southern Motors (supra), the judgment of the High Court in the present case is accordingly unsustainable.12. The liability to pay tax is on the taxable turnover. Taxable turnover is arrived at after making permissible deductions from the total turnover. Among them are “all amounts allowed as discounts.” Such a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case. The expression “the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as such discount” is not happily worded. The words “in respect of the sales relating to such discount” cannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount. This is a matter of ascertainment. The assessee must establish from its accounts that the discount relates specifically to the sales with reference to which it is allowed. In the first part of the proviso, Rule 3(2)(c) recognizes trade practice or, as the case may be, the contact or agreement of the dealer. The latter part which provides a methodology for ascertainment does not override the earlier part. Both must be construed together. Above all, it must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]12. The liability to pay tax is on the taxable turnover. Taxable turnover is arrived at after making permissible deductions from the total turnover. Among them areamounts allowed asSuch a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case. The expressiontax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as suchis not happily worded. The wordsrespect of the sales relating to suchcannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount. This is a matter of ascertainment. The assessee must establish from its accounts that the discount relates specifically to the sales with reference to which it is allowed. In the first part of the proviso, Rule 3(2)(c) recognizes trade practice or, as the case may be, the contact or agreement of the dealer. The latter part which provides a methodology for ascertainment does not override the earlier part. Both must be construed together. Above all, it must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions.In Southern Motors v State of Karnataka (2017) 3 SCC 467  ), a Bench of two learned judges of this Court considered the provisions of Rule 3(2)(c) of the Rules. In that case, the appellant who was a registered dealer with a business in motor vehicles issued tax invoices to its purchasers. After the sales were completed, credit notes were issued to the customers granting them discounts. As a result, the appellant retained only the net amount of the invoice less the discount reflected in the credit notes. During the course of the assessment, the appellant was subjected to orders of rectification, disallowing the deduction ofdiscounts. This Court heldIt is a matter of common experience that in the present contemporary competitive market, trade discounts not only are dependent on variable factors but also might be strategically not disclosable at the time of the original sale/purchase so as to be coevally reflected in the tax invoice or the bill of sale, as the case may be. The actual quantification of the trade discount, depending on the nature of the trade and the related stipulations in any contract with regard thereto, may be deferred till the happening of a contemplated event, so much so that the benefit thereof is extended at a point of time subsequent to that of the original sale/purchase. That by itself, subject to proof of such regular trade practice and the contract/agreement entered into between the parties, would not render the trade discount otherwise legal and acceptable, either non est or fictitious for evading tax liability. In the above factual premise, the interpretation as sought to be provided by the Revenue would evidently reduce Section 3(2)(c) to a dead letter, ineffective and unworkable and would defeat the objective of permitting deductions from the total turnover on account of trade(Id at pagesupplied)Relying on the earlier decisions of this Court, it was held that a trade discount ought not to be disallowed merely on the ground that it is not payable at the time of each invoice or deducted from the invoice price. In the of view of this Courtif taxable turnover is to be comprised of sale/purchase price, it is beyond ones comprehension as to why the trade discount should be disallowed, subject to the proof thereof, only because it was effectuated subsequent to the original sale but evidenced by contemporaneous documents and reflected in the relevantd at pageLegislature, the Court held, would not be unaware of the prevalent practice of offering trade discounts in commercial dispensations. In the view of theinsist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be illogical, irrational andd at pageCourt accordingly read down the first proviso to Rule 3(2)(c) in the followingOn an overall review of the scheme of the Act and the Rules and the underlying objectives, in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale, as the case may be, along with the accounts reflecting the trade discount and the actual price paid. The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and isd at pageThis view was rendered by a bench of two learned Judges, including one of us (the learned Chief Justice). Having regard to the construction which has been placed on the provisions of Rule 3(2)(c) of the Rules in Southern Motors (supra), the judgment of the High Court in the present case is accordingly unsustainable.