2008 (4) TMI 688 - HC - VAT and Sales Tax

Deduction of discount in the determination of taxable turnover - Held that - Discount to be allowed as deduction in the turnover 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. As under the above provision discount given through credit notes periodically will not be entitled to any deduction from the turnover. 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. The 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 is fully paid. The 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. Thereafter recovery will be based on rectified orders and once rectified orders are issued the 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 the fifth proviso to section 11(3) of the KVAT Act introduced with effect from July 1 2006 challenged in some writ petitions.

Summary

Issues:
Interpretation of circular requiring certificate for credit notes, reduction of input tax credit based on circular compliance, validity of circular under KVAT Act, applicability of circular to all goods and dealers, time given for compliance with circular, recovery proceedings and appeals.

Interpretation of Circular Requirement:
The petitioners, as second dealers of taxable goods, claimed input tax credit based on credit notes from suppliers. The assessing officers reduced the credit based on circular No. 41/07, requiring a certificate from suppliers confirming no deduction claimed on credit note amounts. The petitioners challenged this requirement, arguing it was unnecessary as the statute did not authorize such deductions. However, the court upheld the circular, stating it aligns with the statutory provisions and aims to prevent suppliers from later claiming discounts based on credit notes.

Reduction of Input Tax Credit:
The reduction in input tax credit was due to non-compliance with the circular by the petitioners. The court clarified that under the Kerala Value Added Tax Act, only trade discounts shown separately in invoices are allowed as deductions from turnover. Discounts given through credit notes periodically do not qualify for deduction. The circular was deemed necessary to ensure proper tax collection and prevent mistaken claims of deductions by suppliers.

Validity of Circular under KVAT Act:
The circular issued by the Commissioner under section 3(2) of the KVAT Act was found to be valid. The Commissioner has the power to issue guidelines for fair assessment and tax collection. The circular, specifically related to cement marketing, aimed to ensure full tax payment by suppliers without subsequent deductions for discounts. The court upheld the circular's validity, stating it was consistent with statutory provisions and necessary to prevent misuse of discounts.

Applicability of Circular to All Goods and Dealers:
While the circular was limited to cement dealers, the court suggested its application to all goods and dealers under the KVAT Act. The provisions on discounts in sales are the same for all goods, warranting a broader application of the circular. The petitioners were given six weeks to obtain declarations from suppliers, with recovery proceedings and appeals put on hold for two months.

Time Given for Compliance and Recovery Proceedings:
The petitioners were granted six weeks to produce declarations from suppliers as per the circular. If compliance was met within the specified timeframe, the assessing officer would rectify assessments to provide full input tax credit based on purchase bills. Recovery proceedings and appeals were stayed for two months, with recovery to proceed based on rectified orders thereafter.

Conclusion:
The court upheld the circular's requirement for certificates on credit notes, clarified the deduction rules under the KVAT Act, validated the circular's issuance, suggested broader application, and provided a timeline for compliance and recovery proceedings. The writ petitions were disposed of accordingly.