|By CA Ankit Gulgulia (Jain). He can be reached at firstname.lastname@example.org.|
Trade Discount after Issue of Invoice – Is it a Sales Tax ‘Mirage’?
The intent behind this write-up is to discuss the intricacies of several seemingly inconsistent judgements which have made the matter of availing trade discount a discounting issue in itself.
Though the VAT provisions are similar at large across the states, there are variances observed with respect to the deductions allowed against sales price or gross turnover under different state vat laws. For example:-
- DVAT – Allows any discount as per practice.
- Haryana VAT – Allows cash discount or trade discount at the time of sales.
- Karnataka VAT – Allows only if explicitly effectuated through invoice.
- Kerala VAT – Allows any discount if books speak so and passed as per trade practice (as per KGST Rules).
It has been generally understood and widely held practice that the discount to be eligible for deduction from sales price of selling price shall be as disclosed / effectuated on the invoice and only the net amount shall be effectively collected. In such cases where it is claimed on the invoice it shall be a straight forward deduction if broadly applicable compliance is made.
The concern is where the discount is passed on to the purchasing dealer after the sales are affected via the credit note, whether such credit note adjustment shall qualify for deduction from sales price remains a question that seeks our discussion.
In case of M/s Monga Trading Co. vs. State of Haryana (2009) 33 PHT 651 (HTT) it was held that credit notes issued as business promotion incentive for achieving sales targets are not recognised by Haryana VAT Act or rules thereunder.
In case of Priya Agencies vs CTO (2008) 14 VST 293 (Ker) it was held that
“From the above, it is clear 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. In other words, under the above provision, discount given through credit notes, periodically, will not be entitled to any deduction from the turnover.”
In case of DCCT vs M.R.F. Ltd. (2008) 14 VST 124 (WBTT), it has been held that
“If the listed price is realised from the purchaser and shown in the invoice or seller's account as sale price without any indication about such discount, subsequent adjustment of an amount against price of subsequent purchases cannot ordinarily qualify as trade discount.”
“(6) Discount allowed long after the invoice is raised and/or removal of goods which is in the nature of bonus or incentive is not a trade discount.”
“Object of allowing trade discount is to enable the purchasers to earn profit by selling at the listed price. The system of allowing discount by issuing credit notes and adjustment thereof at the time of subsequent purchase indicates that the real purpose behind such discount was to compel the purchasers to continue to purchase goods from the respondent-dealer if they wanted to avail of the discount facility. If a purchaser did not purchase any goods from the dealer after a particular purchase, he might not get the discount at all.”
In many sense MRF’s judgement has enlightened the concept of trade discount and also provided the broad features to identify the trade discount, some of them are :-
(1) The discount is to be an integral part of transaction of sale itself.
(2) The discount should be related to the price of the goods sold and it cannot have any relation to any other goods supplied or service rendered.
(3) The invoice should at least reflect that the discount is allowed or will be allowed.
(4) A discount which is in the nature of compensation for any loss suffered by the purchaser in the previous purchase is not a trade discount.
(5) Trade discount should be known and understood at or before the time of removal of the goods.
(6) Discount allowed long after the invoice is raised and/or removal of goods which is in the nature of bonus or incentive is not a trade discount.
(7) The outward invoice sent by a wholesale dealer to a retailer should show the catalogue price and the deduction of the trade discount.
(8) The object of allowing trade discount is to enable the retailers to earn profit by selling the goods at the catalogue price.
(9) Sale price payable by the retailer will be the difference between the catalogue price and trade discount.
(10) There will be only one agreement between the parties to the effect that the goods will be sold by the dealer to the retailer at the net sale price calculated after allowing the discount.
(11) Trade discount is to be deducted from the catalogue price in accordance with the terms of the agreement.
(12) Net amount of sale price after deduction of the discount will be entered in the sale book of the dealer.
(13) Net amount of price payable by the retailer after deduction of the discount will be entered in the purchase book of the purchaser (retailer).
(14) Trade discount as a rule does not appear in the books of the seller or the purchaser.
(15) Trade discount need not be always allowed at the time of sale and may be allowed on a later date at the end of the month or quarter if computation of discount was not possible at the time of making the invoice.
Note: - Point no. 15 above might not be applicable in various VAT’s like Haryana where specifically it is provided that allowability of ‘cash or trade discount at the time of sales’.
In a judgment of the Orissa High Court in Orient Paper Mills Ltd. v. State of Orissa reported in  35 STC 84 concept of trade discount was discussed
"Para 8. The resultant position, therefore, is that trade discount is to be deducted from the catalogue price in accordance with the terms of the agreement and it is only thereafter that the consideration is to be fixed which is the sale price within the meaning of section 2(h). Such a concept has nothing to do with the deduction of cash discount as referred to in the definition."
In case of Deputy Commissioner of Sales Tax (Law) v. Advani Oerlikon (P.) Ltd.  45 STC 32 wherein which it has been pointed out (at page 35) :
“Trade discount is usually and almost invariably reflected in the invoice as a discount and ultimate sale price payable by the buyer is mentioned in the invoice after deducting the discount. Allowing discount by issuing credit notes in favour of the purchaser after realisation of the price mentioned in the invoice is not a usual accountancy practice in the trade circle.”
"Nor is there any question here of two successive agreements between the parties, one providing for sale of the goods at the catalogue price and the other providing for an allowance by way of trade discount. Having regard to the nature of a trade discount, there is only one sale price between the dealer and the retailer, and that is the price payable by the retailer calculated as the difference between the catalogue price and the trade discount. There is only one contract between the parties, the contract being that the goods will be sold by the dealer to the retailer at the aforesaid sale price."
Now by reading above, one would clearly assume that any discount of perhaps any nature shall fail to qualify as trade discount unless it is effectuated through the invoice but it is not the case unanimously. Silver-lining on the issue was provided by recent Hon’ble Supreme Court’s judgement in case of IFB Industries (Ker) & India Cement’s* case.
In Union of India and Others v. Bombay Tyres International (P) Ltd., (2005) 3 SCC 787 it was held that trade discounts are discounts allowed in the trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such trade discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price."
In IFB Industries Ltd. vs State of Kerala 2012 (3) TMI 666 (SC) read with Andhra Pradesh High Court’s ruling in Godavari Fertilizers and Chemicals Ltd. v. Commissioner of Commercial Taxes, (2004) 138 STC 133 it has been held that that a discount given by means of credit notes issued subsequent to the sale is as much a trade discount admissible to deduction in determining the turnover of a dealer. Further it was held that unless the requirement of deduction of trade discount is explicitly on the account of invoice it cannot be understood as mandatory requirement to claim the benefit of trade discount passed at later stage in form of credit note.
Note: - This ruling clearly won’t apply in state laws where there is mandatory requirement of discount being allowed only on the strength of invoice say as in Karnataka VAT provisions, further deepening the cob-web’s jargon.
Considering the growing complicacies in the retail market and companies looking for most innovative ways to provide the customer with discount benefits, it is high time that the room for such deductions shall be made the part of law as clear eligible deductions.
Avoiding a legal perspective’s implementation just because of difficulty in execution of assessment of dealers might become hindrance in several industries including Indian Retail Industry. India Inc. would relish a non discriminatory discount deduction mechanism for sales tax purpose.
Also, conditional discounts as discussed in MRF’s case by Hon’ble West Bengal Tax Tribunal shall be considered for deduction by law makers as this may happen to boost the retail sector which in large tends to offer such discounts.
About the Author:
CA Ankit Gulgulia (Jain)
Author is Practicing Chartered Accountant in New Delhi/NCR and specialising in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at email@example.com or firstname.lastname@example.org
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