TMI Blog2014 (12) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... from the OMCs which alone can form part of the taxable turnover - under the price control mechanism, ONGC was under an obligation to sale its specified petroleum products at the rate fixed by the Government of India - To ensure that such petroleum products are available to the consumer at affordable price, the Government of India devised a mechanism where such products would be sold by ONGC and other oil companies to the OMCs at a price less than the market price or may even be less than its procurement price. Such mechanism operates even today and operated during the entire period under consideration - to ensure that the prescribed petroleum products reach the end consumers at affordable cost, the same had to be sold at lower than the market price or at times even lower than the production or procurement cost - Instead of subsidizing this component of loss by the Government, under the said circular dated 30.10.2003, it was envisaged that the 1/3rd of the under recoveries would be borne by the OMCs by cross subsidization through other retail products - The balance of 2/3rd under recoveries would be equally shared amongst OMCs and the upstream sector i.e ONGC and GAIL - It was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ONGC would eventually therefore, adjust its accounts with OMCs by raising either the debit note or credit note as may be required. Merely because for computation of royalty payable to the State, it is the full and not discounted price which is taken into account would not alter the situation - the royalty is paid to a State for exploitation of the natural resources located in the State - The Government of India had specifically provided that for the purpose of computing the royalty, it would be the full and not the discounted rate which would be taken into consideration - The appellate authority and the Tribunal were unduly influenced by this factor. The observations of the Tribunal that “The OMCs are liable to pay the sale price to the appellant as per the invoices raised against them - They might have paid less sale price only because of the fact that they were given compensation for their agreeing not to increase the price of crude oil, PDS kerosene and domestic LPG to the consumers with the increase of international oil prices”, are based on no materials and only on conjectures and in any case, not in any manner relevant - the observation that “Such a practice adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of taxable turnover. The Assessing Officer however, objected to the stand of the ONGC. The Deputy Commissioner of Commercial Tax sought explanation from ONGC on this issue. ONGC submitted a detailed reply stating that such discount was given as per the directives of the Government of India. The same cannot be considered as a part of the turnover. It was clarified that such discount was not taken into account for the purpose of computing royalty payable to the State Government. The Assessing Officer passed the order of assessment on 30.3.2009 holding that the discount given by the ONGC to IOC on the sale of petroleum products was not an admissible deduction and that ONGC was required to pay the tax inclusive of such discount with interest and penalty. 2.2. ONGC carried such issue in appeal. The appellate authority noted that the ONGC had not claimed any deduction of discount for computing the royalty, but claimed deduction for computation of turnover. He was of the opinion that since the sales tax is payable on the turnover of sales which is valuable consideration received or receivable by the seller, once the sales bill was issued, such consideration becomes receivable. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as imposed on it by the Central Government. The instance therefore, would not fall in any of the well recognised concepts of discount. The Tribunal was of the opinion that the sale price initially fixed between the buyer and the seller was not received by the buyer but was certainly receivable, but for the waiver of profit by subsequently granting artificial discount from the sale price. It was observed that in case of nonrealisation of sale price, the sale price of the goods remained the same but the portion of nonrealised sale price is borne by the seller. In fact, the Tribunal went on to observe that such a practice adopted by the appellant under the mandate of the Central Government is virtually amounting to restrictive trade practice and an artificial determination of sale price which is prohibited under the Competitions Act. On such basis, the Tribunal confirmed the levy of duty, but deleted the penalty and thus allowed the appeal in part. Against such decision of the Tribunal to the extent it is adverse to ONGC, present appeal has been filed. 3. Issue in all the appeals is identical. The appeals were admitted for consideration of the following substantial question of law : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether due to the offer of a discount or for any other reason, the dealer is authorised under subsection (2) of section 8 to make adjustment accordingly. 3) Counsel drew our attention to Articles 39(b) and 297 of the Constitution of India and contended that as held by the Supreme Court in case of Reliance Natural Resources Limited v. Reliance Industries Limited reported in (2010) 7 Supreme Court Cases 1, the Government of India is the custodian of all natural resources and is a trustee holding such properties for the common good of people of the country. If such natural resources are exploited for the common good and price of such essential commodities is controlled by the Government of India, it is only in the nature of discharging of its obligation under Article 39(b) of the Constitution. 4) Counsel also relied on the decision of the Supreme Court in case of IFB Industries Limited v. State of Kerala reported in (2012) 4 Supreme Court Cases 618 in which it was observed that in terms of Kerala General Sales Tax Act and Rules made thereunder, exemption is liable subject to two conditions. Firstly, that the discount is given in accordance with the regular practice in the trade a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment but had to absorb the losses of the reduced price on its own. So also was the view of the learned Single Judge of Gauhati High Court in case of Bongaigaon Refinery Petrochemcials Limited v. Commissioner of Taxes, Assam and others reported in (1996) 103 STC 132. 5. On the other hand, learned Advocate General opposed the appeals raising the following contentions : 1) This is not a case of discount from the sale price. Term sale price is defined in section 2(29) of the Gujarat Sales Tax Act and section 2(24) of the VAT Act. 2) In the present case, the sale price remained unchanged. The discounted portion of the sale price would represent the unrealised sale consideration. It did not emanate from any trade practice and, therefore, cannot be categorised as a trade discount. 4) In case of a trade discount, the rate of discount must be known before or atleast at the time of sale. Discount cannot be left uncertain to be decided at a later stage long after the sale is completed as in the present case. 5) The public trust doctrine does not apply. It is purely a commercial transaction between a seller and a buyer. In any case, the State Government cannot be prevented f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over defined under section 2(30) of the VAT Act means the turnover of all sales or purchases of a dealer during the prescribed period in any year, which remains after deductions provided in the said provision. The term turnover of sales is defined in section 2(33) of the VAT Act as under : (33) turnover of sales means the aggregate of the amount of sale price received or receivable by a dealer in respect of any sale of goods made during a given period after deducting the amount of sale price, if any refunded by the dealer to a purchaser, in respect of any goods purchased and returned by the purchaser within the prescribed period 7. The term sale price is defined under section 2(24) of the VAT Act as under : (24) sale price means the amount of valuable consideration paid or payable to a dealer or received or receivable by a dealer for any sale of goods made including the amount of duties levied or leviable under the Central Excise Tariff Act, 1985 or the Customs Act, 1962 and any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof and includes.( a) In relation to ( i) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment would authorise the ONGC to collect from the OMCs that the ONGC could charge. It was also not in dispute that it is only such price which the ONGC actually collected from OMCs during the period under consideration. From the documents on record we notice that till March 2002, the prices of specified petroleum products such as PDS kerosene, LPG for domestic cooking etc. were regulated through Administrated Price Mechanism ( APM for short). The Ministry of Petroleum and Natural Gas passed a resolution dated 28.3.2002 and decided to dismantle the APM with effect from 1.4.2002. Relevant portion of such resolution reads as under : 2. Pursuant to the decisions contained in the aforesaid resolution of November 1997, the Government have now decided to dismantle the APM in the hydrocarbon section with effect from 1st April 2002. The details of the decisions are given below.... xxx (iv) The price of indigenous crude oil of Oil and Natural Gas Corporation Ltd and Oil India Ltd will be market determined with effect from 1st April 2002. xxx (vii) A Cell, by the name Petroleum Planning and Analysis Cell will be created under the Ministry of Petroleum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive to make up for about 1/3rd of the projected under recoveries by cross subsidization through other retail products. (ii) the balance under recoveries of OMCs, after accounting for over recoveries from other retail products, would be equally shared amongst the OMCs and upstream section (ONGC and GAIL). Considering that OIL is a relatively smaller company with its operations concentrated in the Northeast region, it would be exempted from sharing the under recoveries. (iii) The amount of under recovery of each OMC to be made good by the upstream sector would be equal to half of the balance under recoveries after taking into account the over recoveries from other retail products with these over recoveries adjusted amongst the OMCs in the same ratio as the ratio of total under recoveries from PDS kerosene and Domestic LPG. (iv) The contribution from ONGC and GAIL would come in terms of appropriate discounts on the prices of crude oil, LPG and Kerosene supplied by them to OMCs. (v) Within the allocated sharing burden of upstream sector companies the contribution of ONGC and GAIL would be broadly in the ratio of each company s PAT (profit after tax) during 200203. (vi) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isputed that such mechanism operates even today and operated during the entire period under consideration. It can be seen that to ensure that the prescribed petroleum products reach the end consumers at affordable cost, the same had to be sold at lower than the market price or at times even lower than the production or procurement cost. Instead of subsidizing this component of loss by the Government, under the said circular dated 30.10.2003, it was envisaged that the 1/3rd of the under recoveries would be borne by the OMCs by cross subsidization through other retail products. The balance of 2/3rd under recoveries would be equally shared amongst OMCs and the upstream sector i.e ONGC and GAIL. It was provided that the contribution from ONGC and GAIL would come in terms of appropriate discounts on the price of crude oil, LPG and kerosene supplied by them to OMCs. 14. This price fixing mechanism also required complex economic considerations. The precise rate at which therefore, even under this regime the oil companies would sell their petroleum products to the OMCs had to be decided by the Government of India based on range of factors. Such factors would include the international oi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d charge only such rate from OMCs as Government of India directed. The precise computation of the rate required complex considerations of economic and other aspects. Various factors such as cost of production for procurement of all products, the international price of the product, the local demand and ofcourse, the other economic considerations such as the ability of the various stake holders to absorb the loss, would enter into consideration. Since all these parameters would not be known before hand, the Government of India would announce provisional prices for such products. We are informed that the broad formula adopted for such purpose was the crude price in international market minus the last discount which would prevail for a quarter. At the end of the quarter after taking into consideration all the relevant factors, Government of India would declare the final price. Since for the petroleum products already supplied by ONGC to OMCs during such quarter, the invoices would have been raised on the basis of provisional discount, the adjustment would have to be done on the basis of final discount declared by the Government of India. Though in most cases, the final discount may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Firstly, because even before the sale it was always clear that ONGC would charge and OMCs would be obliged to pay only such price as Government of India may finally fix. Merely because its precise computation was deferred, since it required taking into consideration complex economic and other factors, would not mean that this was a case of waiver of the sale price by ONGC. We therefore, would have to clearly distinguish this case from a case where a seller for whatsoever reason forgoes a part of the sale consideration receivable from the purchaser after the sale is completed. In such a case, the State s contention of underrealisation of the sale price or waiver by way of bad debt would be well received. In the present case, event of charging reduced price from OMCs was predecided. Be it in the form of discount or in form of reduced sale price, ONGC would receive only such sale price as Government of India would fix for a quarter. All along the invoices were raised on provisional basis. Term provisional is described in Advanced Law Lexicon by P Ramanatha Aiyar (3rd edition Reprint 2009) as temporary, preliminary; tentative; taken or done by way of precaution or ad interi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltd.(supra), the Supreme Court in context of trade discount held and observed that though section 2(h) of the Central Sales Tax Act permits deduction of sums in the nature of cash discount and makes no reference to sums allowed by way of trade discount, the trade discount would not form part of the turnover since it does not enter into the composition of sale price. It was observed as under: 6. Under the Central Sales Tax Act, the sale price which enters into the computation of the turnover is the consideration for which the goods are sold by the assessee. In a case where trade discount is allowed on the catalogue price, the sale price is the amount determined after deducting the trade discount. The trade discount does not enter into the composition of the sale price, but exists apart from and outside it and prior to it. It is immaterial that the definition of sale price in section 2(h) of the Act does not expressly provide for the deduction of trade discount from the sale price. Indeed, having regard to the circumstance that the sale price is arrived at after deducting the trade discount, no question arises of deducting from the sale price any sum by way of trade discount. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct price remained. It was further held that remissions were not by reducing the rates agreed to in the contract but through credit notes and that too in lumpsum. It was therefore, held that this was not a case of novatio or recession of the contract. It was on such basis that the claim for deduction from the turnover of the component of price forgone by seller was rejected. 27. The observations of the Tribunal that The OMCs are liable to pay the sale price to the appellant as per the invoices raised against them. They might have paid less sale price only because of the fact that they were given compensation for their agreeing not to increase the price of crude oil, PDS kerosene and domestic LPG to the consumers with the increase of international oil prices , are based on no materials and only on conjectures and in any case, not in any manner relevant to the controversy on hand. Further the observation that Such a practice adopted by the appellant under the mandate of the Central Government is virtually amounting to restrictive trade practice and an artificial determination of sale price which is prohibited under the Competitions Act , with respect, was not borne out from any m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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