Madras HC quashes demand of Tax from Motor Car Dealers on Trade Discount [Read Judgment]

The Madras High Court has quashed an order by the Income-tax department where it has demanded tax on trade discounts received by dealers in the sale of Motor Car.

The petitioner Kun Motor Company Pvt. Ltd. is a dealer in both new and used cars based in Chennai. In respect of Assessment Year 2009-10, the Petitioner received Trade discount amounting to Rs.9,13,35,246.00 which was treated as value addition and proposed to be assessed to tax at the rate of 12.5%. which effected a tax of Rs. 1,14,16,906/-

The Counsel for the petitioner submitted that the same is not part of the taxable turnover of the cars sold by the petitioner. It was an incentive given by the manufacturer to the petitioner based on the performance of the petitioner on the sale of a car manufactured by the said manufacturer. He further stated that the said amount cannot form part of the taxable turnover of the petitioner in terms of Section 2(28) of the Income Tax Act and the definition of taxable turnover under Section 2(40 & 2(41) of the Tamil Nadu Value Added Tax (TNVAT), 2006.

Justice C. Saravanan while partly allowing the petition held, “. . . There is no dispute that the Petitioner is a Motor Car Dealers tax and had received trade discounts from the manufacturer from whom it had purchased the cars for retail sales at its showrooms. The trade discount which has been offered by the dealer is an incentive given by the manufacturer based on the performance of the Petitioner in the retail market. The trade discount offered by the manufacturer to the Petitioner does not in any manner enhance the taxable value of the motor cars sold by the Petitioner to the retail buyer at its showrooms. . . . The two transactions are independent transactions. One transaction is between the manufacturer who is also a dealer who had passed on incentives to the Petitioner and the second transaction between the Petitioner and the buyers of its retail showroom to whom the Petitioner has sold the cars. As these two are independent transactions there is no basis on which the trade discount passed to it by the manufacturer(dealer) to the Petitioner can be added into the taxable turnover of the Petitioner for the purpose of assessment under the TNVAT Act, 2006.”.