Holding

The "service discount" is a permissible trade discount deductible under Rule 9(a), while deductions for sales returns under Rule 9(b)(i) are allowable only in the assessment year in which the goods were originally sold.

Summary

The appellant, the Kerala Department of Sales Tax, challenged Motor Industries' claim of deductions under Rule 9(a) for a "service discount" and under Rule 9(b)(i) for sales returns in the assessment year 1973-74. The Deputy Commissioner had allowed the service discount deduction but limited the sales‑return deduction, a decision upheld by the Appellate Tribunal and the Kerala High Court. The Supreme Court examined whether the additional discount given to distributors was a genuine trade discount permissible under Rule 9(a) and whether the value of returned goods could be deducted from the turnover of the year in which the goods were originally sold. It held that the "service discount" was merely an additional trade discount and therefore deductible, but that deductions for sales returns must be made only in the assessment year of the original sale. Consequently, the Court dismissed the appeal on the first issue and allowed it on the second, directing modification of the assessment for 1973-74 and rectification of the prior year’s assessment.

Issues considered

Whether the "service discount" claimed by the assessee qualifies as a deductible trade discount under Rule 9(a) of the Kerala General Sales Tax Rules, 1963.
Whether the amount allowed for goods returned can be deducted under Rule 9(b)(i) from the taxable turnover of the assessment year in which the goods were sold, rather than the year of return.

Legislation cited

Kerala General Sales Tax Act, 1963s. 2(xxvii), s. 5
Kerala General Sales Tax Rules, 1963s. Rule 9(a), s. Rule 9(b)(i)

Subjects

sales taxtaxable turnovertrade discountservice discountsales returnsdeductionassessment yearKerala General Sales Tax ActRule 9Appellate TribunalHigh Court

Judgment

I

A 384
•
DEPUTY COMMISSIONER OF SALES TAX (LAW),
BOARD OF REVENUE (TAXES), ERNAKULAM

v,
B
MOTOR INDUSTRIES CO., ERNAKULAM

February 18, 1983

(P. N. BHAOWATI AND Ii. S. VENKATARAMIAH, JJ.J
c Kera/a G•neral Sales Tax Rule's, 1963-rs .9(a) and 9(b)(i)-Wh.nan
additional disco"u_nt 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.

The respondent was an assessee under the Kerala General Sales Tax
Act, 1963. In determining the taxable turnover for the assessment year 1973-74,
D it claimed exemptions in respect of a 'service discount' under r. 9(a) and an
amount of Rs. 982.83 in res Peet 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 tht 'service discount' had not been
allowed as a discount in accordance with the terms of the sale but as an over-
riding commission aod incentive to promote trade, the 'sales returns' related to
the sales completed in the assessment year 1972-73. Io appeal, the Deputy
E Commissioner allowed the a:ssessee's claim in respect of 'service discount' in
full and that in respect of 'sales returns' to the extent of Rs. SS2.10. 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 prorrlises or it amounted _to consideration for an
"agreement sly led 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 6S any deduction under r. 9(b)(i) couid only be made from the total
G turnover of the assessment year in which tbe· goods were actually sold.

H
Dismissing the appeal in so far as it concerned the 'service discount",
and allowing the same in respect of. 'sales returns',

HELD: Rule 9 (a) !lays 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
--
' -

~ntries in the accounts of tb~ ~s~es~ee. Ordin~rily~ any concession shown in

'
c.s.T. v. MOTOR INDUSTRIES 3ss
the price of goods for any commercial reason would be a trade discount which A
can 1cgitimately 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 8
ded_uction as a trade discount. It cannot be termed as a service charge. [389A-D]

In the instant case, the 'sefvice discount' in respect of which the deduc-'
"'f. . tion 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 C
the assessee and the purchasers 8nd 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 aSS01see. ·
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 at'e transferred by the D
seUer for consideration partly' in money and partly in exchange of some other
go_ods 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 seOer the other goods, an agreed allowance wi11
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 ques-
tion being rendered to the seller. In such cases the allowance in the price of the
E
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 selier would not be a trade discount as such which would qualify
for deduction in the determination of the taxable turnover. [389 F-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 assessec the benefit of popularisation of
the assessee's goods in the market. The discount so allowed is merely ~ percen-
tage 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 or
the month would not make it any-the-less a trade discount. The High Court G
rightly upheld the deduction of the 'service discount' claimed in this case. [390A-C)

2. The two important c<;>nditions 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 satis- ff
fled, tbe amount allowed to the purchaser for the returned goods would be
deductible from the total turnover. Any deduction that can be made u~der ·
386 SUPREME COURT REPORTS [1983] 2 S.C.R.

A this ri.ile 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 tbe order of assessment.
[390 E-H, 391 F-G]
B Jay Engineering Works v. State of Kera/a, 43 S.T.C. 492, overruled.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 210 of
1983.

C Appeal by Special leave from the Judgment and Order dated
the I Ith 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.

D S. Balakrishnan for the Respondent.

The Judgment of the Court was delivered by

VENKATARAMIAH, J. In this appeal bY, special leave ansing
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 ·Iaw 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'
F and (ii) whether the value of goods returned by the purchasers could
be deducted under Rule 9 (b) (il 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., Brnakulam is a
G
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 exemp-
H tion of an amount of Rs. 69,707.68 which the assessee bad claimed
as 'service discount' under Rule 9 (a) of the Rules and a further
ampunt of Rs. 982.83 under Rule 9 (b) (i) of the Rules being the
C.S.T. V. MOTOR INDUSTRIES (Venkataramiah, J.) 387

value of goods returned. The Assistant Commissioner of Sales Tax A
{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 iri respect of the value of goods which had
8
been returned on the ground that it related to the sales completed in
the previous assessment year i.e. I 972-73. Aggrieved by the order of
assessment the assessee filed an appeal before the Deputy Com-
missioner, Agricultural Income-tax arid Sales Tax (Appeal),
Ernakulam. In that appeal, the exemption claimed in respect of
'service discount' was allowed. But the claim in respect of 'sales
c
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 again~! that order
by the Departn;ient before the Appellate Tribunal was dismissed.
Against the order of the Tribunal the Department filed a revision D
petition before the High Court of Kerala which again was dismissed
by its judgment dated June! I, 1981. This appeal is preferred with
the special leave of this Court against the aforesaid judgment of tho
High Court.

Under Chapter II of the Act which contains the charging pro- E
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 F
amount refunded in respect of articles returned by customers shall
not be included in the turnover.

Clause (a) .and suh-clause (i) of clause (b) of Rule 9 of the
Rules which prescribes the method of computation of the taxable G
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 H
therein, be deducted from the total turnover of the
dealer-
388 SUPREME COURT REPORTS (1983) 2 s.c.R.

A (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
B 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
c 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 fo• which refund
was made or credit was allowed to the purchaser ....

D 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 qeducted from the total turnover in determining the
taxable turnover provided the accounts of the assessee show that
the purchser has paid only the sum originally charged less the dis-
count. 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
.J
the T.V.S. group of companies which constitute a prestigious group of
F commercial 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
G
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
H 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
C.S.T. v. MOTOR INDUSTRIES (Venkataramiah, J.) 389

to accept the submiSllion 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 con·
cession shown in the price of goods for any commercial reason
would be a trade discount which can legitimately be claimed as a B
deduction under clause (a) of Rule 9 of the Rules. Such a conces·
sion 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
c
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 D
promote one's own ·trade does qualify for deduction as a trade \!is·
count. It cannot be termed as a service charge as is attempted to be
termed in this case. Io fact in this case apart from buying the
products of the assessee, no other service is being rendered by the
T.V.S. group-0f companies to the assessee. In the circumstances the
additional discount or 'serv.ice discount' as it is called in this case is E
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
ac.count of reciprocal promises or amounts to consideration for an
agreement styled as 'trading-in'. 'Trade-in' contracts are those where F
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 to the seller. In such cases there may be one contract of sale
only of the principal goods coupled with a subsidiary ag1eement 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 G
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
~ellcr would not be a trade discount as sµch which would qualify for .
390 SUPREME COURT REPORTS [1983] 2 s.c.R.

A deduction in the determination of the taxable turnover. In the instant
ca11e the service said to have been rendered by thejbuyers for securing
the 'aervice 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
8 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 Uigh Court bas rightly
c upheld the deduction of the 'service disc011nt' 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
D 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 they have been sold are deducti-
ble from ithe total turnover in determining the taxable turnover
E (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 de livery 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
F 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 1 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
G 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 succeed-
B ing financial year. The reason is obvious and it can be easily
demonstrated by taking the illustration of a dealer wh<l ceases to be
a dealer in the subsequent financial year. In his case unless deduction
C.S.T. v. MOTOR INDUSTR!ES (Venkataramiah, J.) 391

is allowed in the. financial year in which the goods that are subse- A
quently 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 bas 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 B
such deduction the turnover relating t6 I.he 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 tbat in the case of many sales which have taken
place in the months of January, February and March in any finan9ial
year, the assessee would become aware of his right to claim the c
deduction under Rule 9 (b) (i) in his return pertaining to that
assessment yeat 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 cl.eduction where the goods are returned subsequent to the filing D
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 E
can be claimed by an assessee. The above statement made .
on behalf of the Department is in accordance with the scheme of the
• Act and the Rules. In order to make the position clear the State
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
the absence of such an amendment, the deduction in respect of 'sales
F
return' has to be allowed in ·!he assessment relating to the financial
r
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 rectifica\ion in the order of assessment, provided that other G
conditions are satisfied, as that is the inevitable consequence of Rule
9 (b) (i) which allows deduction of the value of the goods retuned
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 resp.eel of return-ed H
goods can be claimed in the assessment proceeding~ for the financial
year subsequent to the financi~l. ~ea~ in which the sales have taken
392 SUPllBMB COUILT RBPGRTS (1983) 2 s.c.a.

place. We do not, therefore, agree with the contrary view expressed
A by the High Court relying on it:; decision in The Jay Engineering
Works Ltd. v. State of Kera/a('). 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
B question is concerned. The appeal is allowed in so far the second •
question is concerned. The o~ders 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 1912-73 shall be
rectified in accordance with this judgment. No costs.

c
H.L.C. Appeal party allowed.

•

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(I) 43 S.T.C. 492,