MAYA APPLIANCES (P) LTD NOW KNOWN AS PREETHI KITCHEN APPLIANCES PVT. LTD.versusADDL.COMMISSIONER OF COMMERCIAL TAXES & ORS

250                      [2018]REPORTS
               SUPREME COURT    2 S.C.R. 250                 [2018] 2 S.C.R.


A     M/S MAYA APPLIANCES (P) LTD NOW KNOWN AS PREETHI
                KITCHEN APPLIANCES PVT. LTD.
                                         v.
        ADDL.COMMISSIONER OF COMMERCIAL TAXES & ORS
B                      (Civil Appeal Nos. 357-367 of 2018)
                               FEBRUARY 06, 2018
             [DIPAK MISRA, CJI, A. M. KHANWILKAR AND
                        DR. D. Y. CHANDRACHUD, JJ.]
              Karnataka Value Added Tax Rules, 2005 – r.3(2)(c) – Claim
C     for deduction of trade discount from the total turnover – Appellant’s
      case that it offers a quantity discount to its distributors depending
      on their performance during the previous quarter – According to
      appellant, the discount is offered in the regular course of business
      and the amount which it receives towards sales consideration is
      only the net amount exclusive of discount, on which VAT is collected
D
      – Appellant claimed the discount as a deduction from the total
      turnover while arriving at the taxable turnover under the Act –
      High Court rejected the case of appellant on the ground that the
      discount is given in respect of the performance of the previous
      quarter and not in respect of the sales transaction for which invoice
E     is raised – On appeal, held: Having regard to the construction
      placed on r.3(2) of the Rules in the case of Southern Motors v. State
      of Karnataka, the judgment of the High Court is unsustainable –
      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” –
F
      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
G     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
H
                                         250
 MAYA APPLIANCES (P) LTD v. ADDL.COMMISSIONER OF                          251
              COMMERCIAL TAXES

first part of the proviso, r.3(2)(c) recognizes trade practice or, as     A
the case may be, the contract 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
                                                                          B
deductions – Accordingly, appellant entitled to deduction of a trade
discount – Karnataka Value Added Tax Act, 2003 – ss.2(35) and 3.
       The appellant manufactures home appliances. According
to the appellant, based on a regular trade practice, it allows
discounts to its distributors. These discounts may take the form
of a scheme discount or, as the case may be, a quantity discount.         C
The appellant claimed discount as a deduction from the total
turnover while arriving at the taxable turnover under the
Karnataka Value Added Tax Act, 2003. The assessing authority
held that the quantity discount offered by the appellant could not
be allowed under Rule 3(2)(c) of the Karnataka Value Added Tax            D
Rules, 2005. The first appellate authority set aside the order.
However, under s.64(1) of the Act, the Additional Commissioner
revised the order of the first appellate authority holding that the
quarterly discount given by the appellant was in respect of the
performance of the previous quarter and not in respect of the
sales offered under the same invoices. Appeals dismissed by the           E
High Court. Hence, the present appeals.
       Allowing the appeals, the Court
       HELD: 1. The definitions of ‘Turnover’ and ‘Taxable
turnover’ under s.2(36) and s.2(34) of the Karnataka Value Added
Tax Act 2003 respectively indicate that turnover is defined to            F
mean the aggregate amount for which goods are sold, distributed,
delivered or otherwise disposed of. The taxable turnover is
computed after making such deductions from the total turnover
and in such manner as may be prescribed (‘total turnover’ is
defined by Section 2(35) to mean the aggregate turnover in all
                                                                          G
goods of a dealer at all places of business in the States). In arriving
at the taxable turnover, the statute contemplates deductions, as
prescribed, are to be made from the total turnover. The liability
to pay tax is on the taxable turnover. Taxable turnover is the net
amount that remains upon making deductions as prescribed from
the turnover. [Para 8][257-B-D]                                           H
252            SUPREME COURT REPORTS                       [2018] 2 S.C.R.


A            2. Rule 3 of the Karnataka Value Added Tax Rules, 2005
      provide for the determination of turnover. Clause (1) of Rule 3
      provide for the determination of the total turnover of a dealer.
      Clause (2) provide for the determination of the taxable turnover.
      Taxable turnover is arrived at by making the deductions which
      are stipulated in clause (2) from the total turnover. [Para 9][257-
B
      D-E]
            3. In the case of Southern Motors v. State of Karnataka,
      provisions of r.3(2)(c) were considered. While relying on the
      earlier decisions of Supreme Court, it was held that a trade
      discount ought not to be disallowed merely on the ground that it
C     is not payable at the time of each invoice or deducted from the
      invoice price. Having regard to the construction placed on the
      provisions of Rule 3(2)(c) of the Rules in Southern Motors case,
      the judgment of the High Court in the present case is accordingly
      unsustainable. [Paras 10, 11][257-G-H; 258-A; 259-G-H]
D            4. 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
E     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
F     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 contract or
G     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. [Para
      12][260-A-D]
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 MAYA APPLIANCES (P) LTD v. ADDL.COMMISSIONER OF                              253
              COMMERCIAL TAXES

                                                                              A
      Union of India v. Bombay Tyre International Ltd (2005)
      3 SCC 787; Government of India v. Madras Rubber
      Factory Ltd (1995) 4 SCC 349 : [1995] 3 SCR 1143 –
      referred to.
      Southern Motors v. State of Karnataka (2017) 3 SCC                      B
      467 – relied on.
                          Case Law Reference
      (2005) 3 SCC 787            referred to               Para 6
      [1995] 3 SCR 1143           referred to               Para 6            C
      (2017) 3 SCC 467            relied on                 Para 11
      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 357-
367 of 2018.
      From the Judgment and Order dated 19.03.2014 of the High Court          D
of Karnataka at Bangalore in STA No. 120 of 2012 & STA Nos. 1-10 of
2013.
      K. K. Mani, Ms. T. Archana, Advs. for the Appellant.
     Devadatt Kamat, AAG, V. N. Raghupathy, Aditya Bhat, Rajesh
Inamdar, Parikshit P. Angadi, Advs. for the Respondents.                      E

      The Judgment of the Court was delivered by
      DR. D. Y. CHANDRACHUD, J. 1. The appellant manufactures
home appliances such as mixer grinders, wet grinders and gas stoves.
According to the appellant, based on a regular trade practice, it allows      F
discounts to its distributors. These discounts may take the form of a
scheme discount or, as the case may be, a quantity discount. The appellant
claims the discount as a deduction from the total turnover while arriving
at the taxable turnover under the Karnataka Value Added Tax Act
2003(‘the Act’).
                                                                              G
       2. On 29 May 2010, the Deputy Commissioner of Commercial
Taxes,Bengaluru disallowed the quantity discount accorded by the
appellant to its distributors on the ground that the discount was not
relatable to the sales effected by the relevant tax invoices. The assessing
authority held that the quantity discount offered by the appellant could
                                                                              H
254             SUPREME COURT REPORTS                            [2018] 2 S.C.R.


A     not be allowed under Rule 3(2)(c) of the Karnataka Value Added Tax
      Rules 2005 (‘the Rules’). The period in question was 1 April 2006 to 31
      March 2007, 1 April 2007 to 31 March 2008 and 1 April 2008 to 31
      March 2009.
             3. On appeal, the Joint Commissioner of Commercial Taxes
B     (Appeals – 1),Bengaluru set aside the order of the assessing authority,
      holding that the quarterly scheme discount given by the appellant was an
      allowable deduction since the appellant had realized the consideration
      from the purchaser towards the sale of goods after deducting the amount
      of discount and, VAT was charged only on the net amount shown in the
      tax invoice after allowing the benefit of discount.
C
             4. The order of the first appellate authority dated 12 October
      2010 was revised under Section 64 (1) of the Act by the Additional
      Commissioner on the ground that the quarterly discount given by the
      appellant was in respect of the performance of the previous quarter and
      not in respect of the sales offered under the same invoices.
D
            5. The appellant instituted Sales Tax Appeals before the High
      Court of Karnataka. By a judgment dated 19 March 2014, a Division
      Bench of the Karnataka High Court dismissed the appeals.
              6. The case of the appellant is that it offers a quantity discount to
E     its distributors depending on their performance during the previous quarter.
      This is part of a marketing/sales strategy under which the appellant allows
      a certain percentage as a quarterly discount to its dealers on the basis of
      the sales turnover generated by a dealer in every quarter of the financial
      year. The discount is given by the appellant to its dealers in the sales
      invoices raised in the subsequent quarter. The amount of the discount is
F     deducted from the gross sale price and VAT is collected and remitted on
      the net sale price. According to the appellant, the discount is offered in
      the regular course of business and the amount which it receives towards
      sales consideration is only the net amount exclusive of discount, on which
      VAT is collected. Sales tax is leviable on the sale consideration received/
G     receivable. Section 2 (36) defines the expression ‘turnover’ as the
      aggregate amount for which the goods are sold and the term ‘aggregate’
      means the net amount for which the goods are sold. The appellant claims
      that allowing a discount on the basis of the quarterly performance of its
      dealers is only a measure adopted by it for the computation of the
      discount. However, the discount is given in a sales bill and VAT is collected
H
    MAYA APPLIANCES (P) LTD v. ADDL.COMMISSIONER OF                              255
     COMMERCIAL TAXES [DR. D. Y. CHANDRACHUD, J.]

on the net sale consideration after the deduction of the discount. The           A
High Court, it has been submitted, erred in rejecting the case of the
appellant on the ground that the discount is given in respect of the
performance of the previous quarter and not in respect of the sales
transaction for which the invoice is raised. The High Court, it has been
submitted, has failed to notice that Section 2(36) mandates that turnover
                                                                                 B
be computed as the aggregate amount for which goods are sold. It has
been urged that deductions on account of trade discounts are given under
agreement; or under terms of sale or by established practice and should
not be disallowed only because they are not payable at the time of each
invoice or deducted, from the invoice price (Union of India v Bombay
Tyre International Ltd1). Moreover, periodical discounts such as half            C
yearly discounts cannot, by their very nature, be shown on the face of
each invoice as the discount is known only at the end of the relevant
period. Since the discount is known and understood at the time of the
removal of goods, though quantified later, it was held to be eligible for
deduction as held in Government of India v Madras Rubber Factory
                                                                                 D
Ltd2.In sum and substance, the case of the appellant is that the sale
price received by it is the net amount exclusive of discount. It is understood
at the time of the sale itself that the customer would be entitled to a
discount, the quantum being computed at the end of the quarter. Hence,
the real sale price charged by the appellant for parting with the goods is
the net amount exclusive of discount and hence the trade discount given          E
by the appellant cannot form a part of the sales turnover. Finally, it has
been urged that a literal construction of Rule 3 (2)(c) would render it
unworkable and practically impossible to implement.
       7. On the other hand, it has been urged on behalf of the respondents
that under Rule 3 (2)(c) an amount which has been allowed as discount            F
is permissible as a deduction in computing the taxable turnover only if
the tax invoice issued in respect of the sales relating to such discount
shows the amount allowed as discount. The taxable event is the sale and
the sale price has to be determined on the basis of the tax invoice or
sales bill issued at the time of sale from the seller to the purchaser. The
sale price cannot be altered or modified subsequent to the date of issuance      G
of the tax invoice or sales bill. According to the respondents, Rule 3
(2)(c) makes it mandatory that only a discount reflected in the sales
invoice is eligible for deduction. Admittedly, the discounts shown in the
1
    (2005) 3 SCC 787
2
    (1995) 4 SCC 349                                                             H
256            SUPREME COURT REPORTS                           [2018] 2 S.C.R.


A     invoices of the appellant were not for sale but for the performance of
      the previous period of three to six months before the date of the invoice.
      In the submission of the respondents, a harmonious reading of Section 3,
      the charging section, along with the definition of ‘taxable turnover’ in
      Section 2(34), ‘total turnover’ in Section 2(35) and ‘turnover’ in Section
      2 (36) read with Rule 3(2)(c) would show that a performance-based
B
      discount, issued at a much later date after assessing the performance of
      the dealer for a given period would not fall within the purview of eligible
      discount. In order to arrive at the taxable turnover under Rule 3(2)(c),
      the discount has to be shown in respect of the sales in the tax invoice or
      the bill of sale.
C            8. Section 3 of the Act provides for the levy of tax. It provides
      that the tax shall be levied on every sale of goods in the State by a
      registered dealer or a dealer liable to be registered in accordance with
      the provisions of the Act. Every such dealer is under Section 4 liable to
      pay tax on his taxable turnover. The expression ‘turnover’ is defined in
D     Section 2(36) thus:
            “2(36). ‘Turnover’ means the aggregate amount for which goods
            are sold or distributed or delivered or otherwise disposed of in any
            of the ways referred to in clause (29) by a dealer, either directly
            or through another, on his own account or on account of others,
E           whether for cash or for deferred payment or other valuable
            consideration, and includes the aggregate amount for which goods
            are purchased from a person not registered under the Act and the
            value of goods transferred or despatchedoutside the State
            otherwise than by way of sale, and subject to such conditions and
            restrictions as may be prescribed the amount for which goods are
F           sold shall include any sums charged for anything done by the dealer
            in respect of the goods sold at the time of or before the delivery
            thereof.
            Explanation: The value of the goods transferred or
            despatchedoutside the State otherwise than by way of sale, shall
G           be the amount for which the goods are ordinarily sold by the dealer
            or the prevailing market price of such goods where the dealer
            does not ordinarily sell the goods.”
            The expression ‘taxable turnover’ is defined in Section 2(34) as
      follows:
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    MAYA APPLIANCES (P) LTD v. ADDL.COMMISSIONER OF                              257
     COMMERCIAL TAXES [DR. D. Y. CHANDRACHUD, J.]

         “2(34) ‘Taxable turnover’ means the turnover on which a dealer          A
         shall be liable to pay tax as determined after making such deductions
         from his total turnover and in such manner as may be prescribed,
         but shall not include the turnover of purchase or sale in the course
         of interstate trade or commerce or in the course of export of the
         goods out of the territory of India or in the course of import of the
                                                                                 B
         goods into the territory of India and the value of goods transferred
         or despatched outside the State otherwise than by way of sale.”
        The above definitions indicate that turnover is defined to mean
the aggregate amount for which goods are sold, distributed, delivered or
otherwise disposed of. The taxable turnover is computed after making
such deductions from the total turnover and in such manner as may be             C
prescribed (‘total turnover’ is defined by Section 2(35) to mean the
aggregate turnover in all goods of a dealer at all places of business in the
States). In arriving at the taxable turnover, the statute contemplates
deductions, as prescribed, are to be made from the total turnover. The
liability to pay tax is on the taxable turnover. Taxable turnover is the net     D
amount that remains upon making deductions as prescribed from the
turnover.
       9. Rule 3 of the Rules provide for the determination of turnover.
Clause (1) of Rule 3 provide for the determination of the total turnover
of a dealer. Clause (2) provide for the determination of the taxable             E
turnover. Taxable turnover is arrived at by making the deductions which
are stipulated in clause (2) from the total turnover. Rule 3(2)(c) provides
as follows:
         “(2) The taxable turnover shall be determined by allowing the
         following deductions from the total turnover:-                          F
         (c) 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 any contract or agreement entered into in a particular
         case 3[and the tax invoice or bill of sale issued in respect of the     G
         sales relating to such discount shows the amount allowed as
         discount:.”
         10. In Southern Motors v State of Karnataka4, a Bench of
3
    Inserted vide Noti. No. FD 124 CSL 2006, dt. 27-5-2006, w.e.f. 1-4-2006.
4
    (2017) 3 SCC 467                                                             H
258            SUPREME COURT REPORTS                            [2018] 2 S.C.R.


A     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
      tothe customers granting them discounts.As a result, the appellant
      retained only the net amount of the invoice less the discount reflected in
B
      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
C           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
D           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
E           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
F           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
G     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 one’s 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
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 MAYA APPLIANCES (P) LTD v. ADDL.COMMISSIONER OF                              259
  COMMERCIAL TAXES [DR. D. Y. CHANDRACHUD, J.]

      but evidenced by contemporaneous documents and reflected in             A
      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     B
      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   C
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        D
      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            E
      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,    F
      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
                                                                              G
      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
                                                                              H
260                SUPREME COURT REPORTS                         [2018] 2 S.C.R.


A     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
B     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 assuch 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
C     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
D     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.
             13. We accordingly allow the appeals and set aside the judgment
E     of the High Court. We direct that in computing the taxable turnover for
      the relevant years, the appellant would be entitled to a deduction of the
      trade discount, following the parameters laid down in paragraph 40 of
      the judgment in Southern Motors (supra) and as explained above.
      There shall be no order as to costs.

F
      Ankit Gyan                                                    Appeals allowed.




G




H