Recent Judgment of Supreme Court on Trade discounts
(M/s. IFB Industries Ltd. Vs. State of Kerala (Supreme Court)
A Division bench of the Kerala High Court, in the case of M/s IFB industries Ltd 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.
Similarly in the case of India Cements also division bench of Kerala High court rejected the claim of the company for deduction of many kinds of trade discounts
Both M/s. IFB Industries Ltd and M/s India Cements Ltd have challenged the decision of division bench of the Kerala High Court in the Supreme court.
The Supreme court in the appeals filed by both the above parties observed that discount in order to qualify for exemption under Rule 9(a) two conditions must be satisfied. Firstly the discount given must be 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. There is nothing in Rule 9(a) which indicates that discount in order to qualify for exemption must be shown in the invoice itself.
An attempt has been made to examine the meaning of terms turnover, incentive, cash discount and trade discount in the article while analyzing the implication judgment of Supreme court.
What is a trade discount?
Trade discount is given by the wholesaler to retailer on printed price for encouraging bulk purchase of an item and to earn profit by selling the goods at printed price. Trade discount can be cash discount mentioned on the invoice or an in the form of an incentive passed after certain period of sale. The main advantage of trade discount is that a trader/manufacturer can always fix his printed price and charge different prices for different types of customers by allowing discount on the face of invoices. The other advantage is that taxing authorities will easily allow discount allowed to the customers as it is reflected in the invoice itself. This also obviates the passing of journal entry to record trade discount.
Distinction between cash discount and Trade discount:
Supreme court in the case of Deputy Commissioner of Sales Tax (Law) Board of Revenue(Taxes) v. M/s Advani Oerlikon (P) Ltd., (1980) 1 SCC 360 made a distinction between cash discount and trade discount. Cash discount is given when the purchaser makes payment promptly or within the period of credit allowed. A trade discount on the other hand is a deduction from the catalogue price of goods allowed by wholesalers to retailers engaged in the trade. This 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.
What is trade practice?
It is important to understand the meaning of trade practice. Normally cash discounts are mentioned on the face of the invoices and no tax is charged on the trade margin/discount allowed. In this case there is no problem as the taxing authority can not dispute this entry. Moreover the trader or manufacturer will have to claim the discounts allowed in the monthly returns as taxable turnover does not cover discounts or trade margins given to the customers. However the problem arises with respect to certain incentives given by manufacturers and wholesalers to dealers on reaching targets set by them. These incentives can be arrived at only after the sales take place. Here comes the problem as such incentives are given through credit notes. Trade practice is the practice generally followed by the traders who are in same business or industries which produce similar goods.
Analysis of Judgment of Supreme court
Now it would be easier to understand the judgment of Supreme court in the case of M/s IFB Industries Ltd. Vs State of Kerala. The main question that was examined by the Supreme court in IFB’s case is that whether incentives given through credit notes are outside the scope of Rule 9 (a) of the Kerala General Sales tax Rules.
Supreme court after examining definition of Turnover u/s 2(xxvii) of the Kerala General Sales Tax Act,1963 came to the conclusion that the definition of “turnover” recognizes discounts other than cash discount and it is abundantly clear from the explanation which provides that cash or other discounts and amount refunded in respect of articles returned by customers shall not be included in the turn over.
For better understanding of the readers, the relevant definition of “turnover” is quoted below:
Definition of Turnover u/s 2(xxvii) of the Kerala General Sales Tax Act, 1963.
“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.”
Explanation 2(ii) is as follows:-
“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 on bold words)
Supreme court set aside the orders of the Kerala High court and directed that the Assessing Authority shall not reject the claim for exemption of the amounts of trade discount solely on the ground that the discount amounts were not shown in the sale invoices.
Readers may note that Supreme court also referred to some its earlier decisions and set aside the judgment of Kerala High court. The following are the judgments that were referred.
1. Deputy Commissioner of Sales Tax (Law) Board of Revenue(Taxes) v. M/s Advani Oorlikon (P) Ltd., (1980) 1 SCC 360(In this case it is held that any trade discount must also be allowed as a deduction for determining the sale price although Central Sales tax mentioned only cash discount as allowable deduction from sale price)
2. Deputy Commissioner of Sales Tax(Law)Board of Revenue (Taxes), Ernakulam v. Motor Industries Co, Ernakulam,(1983) 2 SCC 108,( In this case it is held that as per Rule 9 (1) of KGSTR 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.
3. Kalpana Lamps and Components Ltd. v. State of Kerala, (2006) 143 STC 666, (in this case the Bench of Kerala High court held that if there has been a consistent practice of giving special discounts in the trade it has to be accepted by the assessing authorities.
Conclusion: This judgment certainly gives a scope to fight for trade discounts such as incentives, special discounts allowed but not shown on the face of the invoice. However the principles laid down by the Supreme court as to the consistent trade practice and terms of contract must be kept in mind to avail the benefit of this judgment.
G S Rao, Chief Manager (Legal),OCL India Ltd