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PETITIONER: DEPUTY COMMISSIONER OF SALES TAX (LAW),BOARD OF REVENUE (TAX

       Vs.

RESPONDENT: MOTOR INDUSTRIES CO., ERNAKULAM

DATE OF JUDGMENT18/02/1983

BENCH: VENKATARAMIAH, E.S. (J) BENCH: VENKATARAMIAH, E.S. (J) BHAGWATI, P.N.

CITATION:  1983 AIR  370            1983 SCR  (2) 384  1983 SCC  (2) 108        1983 SCALE  (1)145  CITATOR INFO :  F          1983 SC 369  (2)

ACT:      Kerala General  Sales  Tax  Rules,  1963-rs  .9(a)  and 9(b)(i)- When an additional discount allowed may be deducted from taxable turnover under r. 9(a)- Deduction in respect of returned goods  under r.  9(b)(i)  can  only  be  made  from turnover of  assessment year  in which  returned goods  were sold.

HEADNOTE:      The respondent was an assessee under the Kerala General Sales Tax Act, 1963. In determining the taxable turnover for the  assessment  year  1973-74,  it  claimed  exemptions  in respect of  a ’service discount’ under r. 9(a) and an amount of Rs. 982.83 in respect of ’sales returns’ under r. 9(b)(i) of the  Kerala General  Sales Tax Rules, 1963. The Assistant Commissioner disallowed the claim on both the counts stating that while  the ’service discount’ had not been allowed as a discount in  accordance with the terms of the sale but as an overriding commission  and incentive  to promote  trade, the ’sales returns’  related  to  the  sales  completed  in  the assessment year  1972-73. In appeal, the Deputy Commissioner allowed  the   assessee’s  claim   in  respect  of  ’service discount’ in  full and that in respect of ’sales returns’ to the extent of Rs. 552.70. The Department’s appeal before the Appellate Tribunal  and the  revision filed by it before the High Court were dismissed.      The appellant  contended that  the  ’service  discount’ could not  strictly be  termed as discount as it was in lieu of services  rendered by  the respondent’s main distributors by way of popularisation of the sales and consumption of the products sold  by the assessee and that it was either in the nature of  a set-off on account of reciprocal promises or it amounted  to   consideration  for  an  agreement  styled  as "trading in";  and That  the deduction claimed in respect of ’sales returns’  could  not  be  allowed  from  the  taxable turnover for  the year  1973-74 as  any deduction  under  r. 9(b)(i) could  only be  made from  the total turnover or the assessment year in which the goods were actually sold.      Dismissing the  appeal in  so far  as it  concerned the ’service discount’,  and allowing  the same  in  respect  of

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’sales returns’, ^      HELD: Rule  9 (a)  says that  all  amounts  allowed  as discount either  in accordance  with regular  practice or in accordance with agreement would be deductible from the total turnover provided  they are duly supported by the entries in the accounts  of the  assessee. Ordinarily,  any  concession shown in 385 the price  of goods  for any  commercial reason  would be  a trade discount  which  can  legitimately  be  claimed  as  a deduction under r.9(a). Such a concession is usually allowed with  the   object  of  improving  prospects  of  one’s  own business. It  is  common  experience  that  when  goods  are marketed through reputed concerns, the demand for such goods increases  and   correspondingly   the   business   of   the manufacturer or  the wholesale  dealer would become more and more prosperous. Hence any concession in price shown in such circumstances by  way of an additional incentive with a view to promote  one’s own  trade does qualify for deduction as a trade discount.  It cannot  be termed  as a  service charge. [389A-D]      In the  instant case, the ’service discount’ in respect of which  the deduction was claimed was the additional trade discount allowed  by the  assessee to  its main distributors over and above the normal trade discount in consideration of the extra  benefit derived  by the assessee by reason of the marketing of its goods through them. It is not disputed that there were  such agreements  between the  assessee  and  the purchasers and  the accounts of the assessee truly reflected the actual  discount allowed  to the  purchasers. Apart from buying the  products of  the assessee,  no other service was rendered by  the dealers  to the  assessee.  The  additional discount or ’service discount’ is no other than the discount referred to in r.9 (a). [388 E-H; 389 D-E]      (b)  ’Trade-in’ contracts  are those  where  goods  ale transferred by  the seller for consideration partly in money and partly in exchange of some other goods to be sold by the buyer to the seller. In such cases there may be one contract of  sale   only  of  the  principal  goods  coupled  with  a subsidiary agreement  that if  the  buyer  delivers  to  the seller the  other goods,  an agreed  allowance will be made. There may  also be cases where the buyer may become entitled to an  extra allowance for some service unconnected with the sale of  the goods in question being rendered to the seller. In such  cases the  allowance in the price of the goods sold given  by   the  seller  to  the  buyer  either  by  way  of consideration for  the goods  supplied by  the buyer  to the seller or  for services  rendered by the buyer to the seller would not be a trade discount as such which would qualify or deduction in the determination of the taxable turnover. [389 P-H; 390 A]      In the  instant case.  the service  said to  have  been rendered by  the buyers  for securing the ’service discount’ is an  integral part of the transaction of sale itself which incidentally  confers   on  the   assessee  the  benefit  of popularisation of  the assessee’s  goods in  the market. The discount so  allowed is  merely a percentage of the price of the Goods  sold which has nothing to do with any other goods supplied or  other service  rendered by  the buyers  to  the assessee. The  fact that  the discount is not allowed at the time of  sale but  on a  later date  at the end of the month would not  make it  any-the-less a  trade discount. The High Court rightly upheld the deduction of the ’service discount’ claimed in this case.[390A.C]

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    2.   The two  important conditions  which  have  to  be satisfied for  claiming the  deduction under  r. 9(b)(i) are that the  goods in  question must  have been returned within three months  from the  date of  delivery and that necessary entries are  made in  the accounts  of the assessee If these conditions  are   satisfied,  the   amount  allowed  to  the purchaser for  the returned  goods would  be deductible from the total turnover. Any deduction that can be made under 386 this rule  can only  be made  from the total turnover of the assessment year  in which the goods that are returned within three months  of the  date of  delivery were  actually sold. Such deduction  cannot be claimed from the total turnover of the succeeding  financial year.  If The  assessment for  the relevant year  is completed,  the department  has to  comply with the demand for adjustment or refund by making necessary rectification in the order of assessment.           [390 E-H. 391 F-G]      Jay Engineering  Works v.  State of  Kerala, 43  S.T.C. 492, overruled.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No. 210 of 1983.      Appeal by  Special leave  from the  Judgment and  order dated the 11th June, 1981 of the Kerala High Court in T.R.C. No. 117 of 1980.      P.A. Francis and V.J. Francis for the Appellant.      S. Balakrishnan for the Respondent.      The Judgment of the Court was delivered by      VENKATRAMIAH,  J.  In  this  appeal  by  special  leave arising under  the  Kerala  General  Sales  Tax,  Act,  1963 (hereinafter referred  to as  ’the Act’) two questions arise for consideration.  They are (i) whether on the facts and in the circumstances  of the  case the  Appellate Tribunal  was justified in  law in  holding that the assessee was entitled to, exemption  under Rule  9 (a) of the Kerala General Sales Tax Rules,  1963 (hereinafter  referred to  as ’the  Rules’) from payment  of sales  tax  on  the  turnover  relating  to ’service discount’  and (ii)  whether  the  value  of  goods returned by  the purchasers  could be- deducted under Rule 9 (b) (i)  of the Rules from the total turnover of the year of assessment in  which the  goods were  actually returned when they had been sold in the previous assessment year.      The assessee  M/s. Motor Industries Co., Ernakulam is a dealer  in   diesel,  fuel  injection  parts  etc.  For  the assessment year 1973-74 ending March 31, 1974 the assessment had been  completed under the Act on the best judgment basis determining the  taxable turnover  at  Rs.  47,42,687.71  by disallowing the  claim for  exemption of  an amount  of  Rs. 69,707.68  which   the  assessee  had  claimed  as  ’service discount’ under Rule 9 (a) of the Rules and a further amount of Rs.982.83 under Rule 9 (b) (i) of the Rules being the 387 value of goods returned. The Assistant Commissioner of Sales Tax (Assessment)  who was the assessing authority disallowed the claim  in respect  of ’service  discount’ on  the ground that the  amount in  respect of  which deduction was claimed had not  been allowed  as a  discount in accordance with the terms of  sale  but  had  been  allowed  as  an  over-riding commission and  ’incentive’ to  promote trade. He disallowed the claim  in respect  of the  value of goods which had been returned  OD  the  ground  that  it  related  to  the  sales

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completed in  the previous  assessment  year  i.e.  1972-73. Aggrieved by  the order  of assessment the assessee filed an appeal before  the Deputy Commissioner, Agricultural Income- Tax and  Sales Tax  (Appeal), Ernakulam. In that appeal, the exemption claimed  in  respect  of  ’service  discount’  was allowed But  the claim  in respect  of ’sales  returns’  was allowed to  the extent  of the  turnover of Rs. 552 70 being the turnover  of goods  returned within  a period  of  three months from  the date of sale. The appeal filed against that order by  Ã¸he Department  before the  Appellate Tribunal was dismissed. Against  the order of the Tribunal the Department filed a  revision petition  before the  High Court of Kerala which again  was dismissed  by its  judgment dated June l l, 1981. This  appeal is  preferred with  the special  leave of this Court against the aforesaid judgment of the High Court.      Under Chapter II of the Act which contains the charging pro- visions  the incidence  and  levy  of  tax  is  on  the turnover of  any dealer  during any assessment year computed in accordance  with the  Act. Explanation  (2) (ii) given in section 2(xxvii)  of the  Act which  defines the  expression ’turnover’  says   that  subject   to  such  conditions  and restrictions, if  any, as  may be  prescribed in that behalf any cash  or other  discount on the price allowed in respect of any  sale and  any amount refunded in respect of articles returned by customers shall not be included in the turnover.      Clause (a) and sub-clause (i) of clause (b) of - Rule 9 of the  Rules which  prescribes the method of computation of the taxable turnover of an assessee read thus:           "9. Determination of taxable turnover-In determin-      ing the  taxable turnover, the amounts specified in the      following clauses,  shall  subject  to  the  conditions      specified therein,  be deducted from the total turnover      of the dealer 388                (a) 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  a  contract  or           agreement entered  into in  a particular  case and           provided also  that the  accounts  show  that  the           purchaser has paid only the sum originally charged           less the discount:                (b) (i)  all amounts allowed to purchasers in           respect of  goods returned by them within a period           of 3 months from the date of delivery of the goods           to the  dealer when  the goods  are taxable on the           amount for  which they had been sold provided that           the accounts show the date on which the goods were           returned and  the date on which and the amount for           which refund was made or credit was allowed to the           purchaser .      We shall  first deal  with the claim made in respect of ’service discount’.  Under clause (a) of Rule 9 of the Rules all amounts  allowed as  discount  where  such  discount  is allowed in  accordance with  the  regular  practice  of  the dealer or  is in  accordance with  the terms  of contract or agreement entered  into in  a particular  case  have  to  be deducted from  the total turnover in determining the taxable turnover provided the accounts of the assessee show that the purchaser has  paid only the sum originally charged less the discount. In  the instant  case  the  ’service  discount  in respect of which - the deduction was claimed by the assessee was the  additional trade discount allowed by it to its main distributors  (purchasers)   namely  the   T.V.S.  group  of companies which constitute a prestigious group of commercial

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concerns  over  and  above  the  normal  trade  discount  in consideration of  the extra  benefit derived by the assessee by reason  of the  marketing of its goods through them. This additional trade  discount is allowed in accordance with the trade agreement  subject to  periodical variation  depending upon the cost structure and changes in market conditions. It is not  disputed that there were such agreements between the assessee and the purchasers and the accounts of the assessee truly  reflected   the  actual   discount  allowed   to  the purchasers. What  is however urged by the Department is that the said  additional discount  allowed by the assessee could not strictly  be termed  as discount  as it  was in  lieu of services  rendered  by  its  main  distributors  by  way  of popularisation of  the sales and consumption of the products sold by the assessee. We find it difficult 389 to accept  the submission  made on  behalf of the Department Rule A  9 (a)  says that  all amounts  allowed  as  discount either in  accordance with regular practice on in accordance with agreement  would be  deductible from the total turnover provided they  are duly  supported by  the  entries  in  the accounts of the assessee. Ordinarily any concession shown in the price  of goods  for any  commercial reason  would be  a trade discount  which  can  legitimately  be  claimed  as  a deduction under  clause (a)  of Rule  9 of the Rules. Such a concession  is  usually  allowed  by  a  manufacturer  or  a wholesale dealer in favour of another dealer with the object of improving  prospects of  his own  business. It  is common experience that  when goods  are  marketed  through  reputed companies, firms  or other individual dealers the demand for such goods increases and correspondingly the business of the manufacturer or  the wholesaler  would become  more and more prosperous and  its capacity  to withstand  competition from other manufacturers  or other  dealers  dealing  in  similar goods would  also improve.  Hence any  concession  in  price shown  in   such  circumstances  by  way  of  an  additional incentive with  a view  to  promote  one’s  own  trade  does qualify for  deduction as  a trade  discount. It  cannot  be termed as  a service  charge as is attempted to be termed in this case  In fact  in  this  case  apart  from  buying  the products of the assessee, no other service is being rendered by the  T V.S.  group of  companies to  the assessee. In the circumstances the  additional discount  or ’service discount as it  is called  in this case is no other than the discount referred to in Rule 9.(a) of the Rules.      We are  not inclined  to accept the submission that the ’service discount in question’ is in the nature of a set-off on  account   of   reciprocal   promises   or   amounts   to consideration  for  an  agreement  styled  as  ’trading-in’. ’Trade-in’ contracts are those where P goods are transferred by the  seller for  consideration partly in money and partly in exchange  of some  other goods to be sold by the buyer tn the seller.  In such cases there may be one contract of sale only of  the  principal  goods  coupled  with  a  subsidiary agreement that if the buyer delivers to the seller the other goods an  agreed allowance  will be  made. There may also be cases where  the buyer  may become  - entitled  to an  extra allowance for  some service unconnected with the sale of the goods in  question being  rendered to  the seller.  In  such cases the allowance in they price of the goods sold given by the seller  to the  buyer either by way of consideration for the goods  supplied by  the  buyer  to  the  seller  or  for services rendered  by the buyer lo the seller would not be a trade discount as such which would qualify for 390

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deduction in  the determination  of the taxable turnover. In the instant  case the  service said to have been rendered by the  buyers  for  securing  the  ’service  discount’  is  an integral part  of  the  transaction  of  sale  itself  which incidentally  confers   on  the   assessee  the  benefit  of popularisation of  the assessee’s  goods in  the market. The discount so  allowed is  merely a percentage of the price of the goods  sold which has nothing to do with any other goods supplied or  other service  rendered by  the buyers  to  the assessee. The  fact that  the discount is not allowed at the time of  sale but  on a  later date  at the end of the month would not make it any-the-less a trade discount.      We are,  therefore, of the view that The High Court has rightly upheld  the  deduction  of  the  ’service  discount’ claimed  in  this  case  by  the  assessee  from  the  total turnover. The  appeal should,  therefore, fail  in so far as this part of the case in concerned.      But on  the second point which arises for consideration in this  case, the case of the Department appears to be well founded. Rule  9 (b)  (i) of  the Rules  provides  that  all amounts allowed  to purchasers  in respect of goods returned by them  within a  period of  three months  from the date of delivery of  the goods  to the  dealer, when  the goods  are taxable on  the amount  for which  t hey  have been sold are deductible  from  the  total  turnover  in  determining  the taxable turnover  (provided the  accounts show  the relevant entries). The  two important  conditions which  have  to  be satisfied for  claiming the  deduction under  Rule 9 (b) (i) are that  the goods  in question  must  have  been  returned within three  months from  the date  of  delivery  and  that necessary entries  are made in the accounts of the assessee. If these conditions are satisfied, the amount allowed to the purchaser for  the returned  goods would  be deductible from the total  turnover. The  final assessment  under the Act is always made  in respect  of one  year i.e the financial year which commences  on April  I of every calendar year and ends with March 31 of-the succeeding calendar year. That is clear from the scheme of section 5 of the Act and Rules 11, 18, 20 and other  rules found  in the Rules. Any deduction that can be made  under Rule  9 (b) (i) of the Rules can only be made from the  total turnover of the assessment year in which the goods that  are returned  within three months of the date of delivery  were  actually  sold.  Such  deduction  cannot  be claimed from  the total turnover of the succeeding financial year.  The   reason  is   obvious  and   it  can  be  easily demonstrated by  taking the  illustration of  a  dealer  who ceases to  be a  dealer in the subsequent financial year. In his case unless deduction 391 is allowed in the financial year in which the goods that are subsequently returned  were actually  sold, he would have to pay tax  on the  amount for which the goods in question were sold in  the assessment  year in which they were sold and he would not  be able  to claim any deduction in the subsequent year as he has ceased to be a dealer in that year. There may also be  difference in the tax liability if the rates of tax are varied  in the  subsequent assessment  year. Further  by such deduction  the  turnover  relating  to  the  subsequent financial year  which is otherwise taxable under the statute would escape  taxation to the extent of the deduction Such a result cannot  be permitted to ensue. It is true that in the case of  many sales  which have taken place in the months of January, February  and March  in  any  financial  year,  the assessee would  become aware  of  his  right  to  claim  the deduction under  Rule 9  (b) (i) in his return pertaining to

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that assessment year during the subsequent financial year if such goods  are returned  within three months of the date of delivery. It  is quite  possible  that  in  such  cases  the assessee would have filed his annual return under Rule 18 of the Rules  without any  opportunity to  claim any  deduction where the goods are returned subsequent to the filing of the return but  before the  expiry of three months from the date of their  delivery This,  however,  need  not  present  much difficulty as an assessee in that position can always file a revised return and claim the deduction or even if assessment is completed,  demand adjustment or refund by preferring the claim in time. The learned counsel for the Department states that such  an adjustment  or refund  ’, can be claimed by an assessee.  The   above  statement  made  on  behalf  of  the Department is  in accordance  with the scheme of the any Act and the Rules. In order to make the position clear the State 1,  Government  may  take  steps  to  introduce  a  suitable amendment in  the Rules  or in  the Act. We are, however, of the view  that even  in p  the absence of such an amendment, the deduction  in respect  of ’sales  7 ,  return’ has to be allowed in  the assessment relating to the financial year in which the  sales of  the returned  goods had taken place and even where  assessment  for  that  year  is  completed,  the Department has  to comply  with the demand for adjustment or refund by  making necessary  rectification in  the order  of assessment, provided that other conditions are satisfied, as that is  the inevitable  consequence of Rule 9 (b) (i) which allows deduction  of the  value of the goods returned within three months  from the date of their delivery from the total turnover of  that assessment  year. But  in any  view of the matter it  is not  possible to  hold that  such deduction in respect of  returned goods  can be claimed in the assessment proceedings  for   the  financial  year  subsequent  to  the financial year in which the sales have taken 392 place. We  do not,  therefore, agree  with the contrary view expressed A by the High Court relying on its decision in The Jay Engineering Works Ltd. v. State of Kerala(l). The appeal of the Department has to be allowed to the above extent. .      In the  result the appeal is dismissed in so far as the first question is concerned. The appeal is allowed in so far the second  question is  concerned. The orders of assessment for  the   assessment  year   1973-74  shall   be   modified accordingly. As a consequence of this decision, the order of assessment for  the  year  1972-73  shall  be  rectified  in accordance with this judgment. No costs. H.L.C.                                  Appeal party allowed 393