Trade Discount offered to Customers is Deductible from Turnover: Supreme Court [Read Judgment]

A three-Judge bench of the Supreme Court has categorically held that the trade discount given to customers do not form part of the taxable turnover under the Karnataka Value Added Tax Act even if the same was allowed without the support of an invoice.

 “Above all, it must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions,” a bench comprising Chief Justice Deepak Misra, Justice A M Khanwilkar, and Dr. D Y Chandrachud said.

Appellant allowed quantity discounts to its distributors as a regular trade practice and claimed the discount as a deduction from the total turnover while arriving at the taxable turnover under the Karnataka Value Added Tax Act 2003. However, the Deputy Commissioner of Commercial Taxes, Bengaluru disallowed the quantity discount 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 not be allowed under Rule 3(2)(c) of the Karnataka Value Added Tax Rules 2005.

However, the first appellate authority granted relief to the assessee by 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. Later, 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.

Though the appellant, challenged the order before the Appellate Tribunal and the High Court, the same was dismissed.

Before the Supreme Court, the appellant contended that 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. Further, sales tax is leviable on the sale consideration received/receivable.

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 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 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 contact 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.”