1. MRF Limited, the respondent herein is a well-known manufacturer of different types of tyres and tubes, and is a registered dealer under the West Bengal Sales Tax Act, 1994 (in short, "the 1994 Act"). In course of its business the respondent imports tyre, tube, flap retreading materials, tyre bands, etc., from its factory or branch office located outside West Bengal into West Bengal.
2. During assessment of the respondent's tax liability for the year from October 1, 1996 to September 30, 1997 under the provisions of the 1994 Act, the respondent-dealer claimed, among others, deduction of certain discounts allowed by the company to different purchasers of its goods, viz., cash discount, additional trade discount, turnover discount, prompt-payment discount, etc. The assessing officer did not allow those deductions excepting cash discount. The respondent preferred an appeal before the Deputy Commissioner, Commercial Taxes, Corporate Division.
3. By order dated July 27, 2001 the Deputy Commissioner modified the assessment order by allowing deduction of prompt-payment discount in addition to cash discount. He did not allow any other deduction.
4. The respondent moved the West Bengal Commercial Taxes Appellate and Revisional Board (in short, "the Board") in revision. The Board allowed both "the disputed additional trade discount" and "turnover discount" in addition to the cash discount and prompt-payment discount allowed by the Deputy Commissioner.
5. Being aggrieved by the aforesaid decision of the Board the Deputy Commissioner of Commercial Taxes, Corporate Division, has filed this application under Section 8 of the West Bengal Taxation Tribunal Act, 1987.
6. Mr. S. Bhattacharyya, learned State Representative appearing for the petitioner has not disputed that a dealer is entitled to get deduction of "trade discount" but he has contended that the discount which the dealer claimed as "trade discount" was not at all trade discount. He has referred to the essential features of "trade discount" as mentioned in books on accountancy to show that some vital and decisive features were absent in the said disputed discount. Mr. Bhattacharyya has further submitted that the dealer was not entitled to get any benefit of deduction for "turnover discount" in view of the definition of "sale price" in Section 2(31) of the Act of 1994.
7. Mrs. Bhattacharyya, learned Advocate appearing for the respondent-dealer has opposed the contention raised on behalf of the Revenue and asserted that the disputed discount was a "trade discount" and that the dealer was/is entitled to deduction of both "additional trade discount" and "turnover discount".
8. Section 2(31) and Section 2(40) of the 1994 Act have defined "sale price" and "turnover of sales" respectively.
Section 2(31).-'Sale price' means the amount payable to a dealer as valuable consideration for the sale, other than that referred to in Section 15, of any goods, less any sum allowed as cash discount according to ordinary trade practice-or any sum charged as cess leviable under the West Bengal Transport Infrastructure Development Fund Act, 2002 (W. B. Act XXI of 2002), but including any sum charged for anything done by the dealer in respect of the goods at the time of, or before, delivery thereof, other than the cost of freight or delivery or the cost of installation or interest when such cost or interest is separately charged.
Section 2(40).-'turnover of sales', in relation to any period, means the aggregate of the sale prices or parts of sale prices receivable by a dealer, or if a dealer so elects, actually received by the dealer, during such period after deducting therefrom: (a) the sale prices or the parts of sale prices, if any, in respect of sale during such period, of goods specified in Schedule IV, other than rice, wheat and foreign liquor as specified in that Schedule, which are shown to the satisfaction of the Commissioner to have been purchased by the dealer in West Bengal, but excluding such sales as the State Government may, by notification, specify ; (b) the amounts, if any, refunded by the dealer in respect of any goods returned by the purchaser within such period ; and (c) the amounts charged as surcharge payable under Section 16 and the amounts charged as additional surcharge payable under Section 16A and the amounts charged as turnover tax payable under Section 16B during such period: Provided that an election as aforesaid once made shall not be altered except with the permission of the Commissioner and on such terms and conditions as he may think fit to impose.
9. According to the definition of "sale price" only "cash discount according to ordinary trade practice" is permitted to be deducted from sale price. The Supreme Court, however, in Deputy Commissioner of Sales Tax v. Advani Oerlikon (P.) Ltd. [1980] 45 STC 32, dealing with a similar provision in the Central Sales Tax Act, 1956 has laid down (at page 34): 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.
10. In usual commercial/trade transactions sale price is arrived at after deducting the trade discount. Concept of sale price does not permit inclusion of trade discount in sale price. According to the Supreme Court definition or no definition sale price cannot include a real trade discount.
11. Admittedly the respondent-dealer did not show any additional trade discount in the sale invoices, charged entire invoice amount as sale price from the purchasers and realised sales tax and surcharges thereon. Subsequently in the next month credit notes allowing discount on the previous purchase or purchases during previous month were being issued and adjusted against future purchases. Issue of credit notes also confirmed that the dealer was first charging entire invoice-amount and thereafter adjusting the said additional discount against price of subsequent purchases in the next month and the discount was not being actually refunded to the purchasers with liberty or option to utilise the amount according to their option.
12. Mr. S. Bhattacharyya, learned State Representative has drawn our attention to several text books on accountancy to point out the essential features and purpose of allowing trade discount. According to those books traders allow deduction of a certain amount normally fixed on percentage basis from the catalogue or listed price to enable the buyer trader to make profit by selling the goods at the catalogue or listed price. The price after deduction of "trade discount" is shown to be the sale price of the goods at the time of sale. In "Advance Accounts" by M. C. Shukla and T. S. Grewal "trade discount" has been described: The treatment of trade discount is that at the time of preparation of the invoice and therefore entry in original books, the amount is deducted. If goods have been purchased and trade discount received, the purchase will be recorded in the Purchase Daybook at the net figure, i.e., gross purchase minus the trade discount. Similarly, if trade discount has been allowed to a customer, the entry in the sales book should be at the net figure.
13. Concept and basic features of "trade discount" have been discussed in several judicial decisions also. In a judgment of the Orissa High Court in Orient Paper Mills Ltd. v. State of Orissa reported in [1975] 35 STC 84 concept of trade discount was discussed. In the said judgment following excerpt from "Advanced Accounting" by J. R. Batliboi was approvingly quoted: The same concept also is to be found from the book 'Advanced Accounting' by J. R. Batliboi (25th Edition) at page 14. The entire passage may be extracted: Distinction between trade discount and cash discount.-Trade discount is an allowance made by wholesale dealers to retailers off the catalogue or invoice price. This allowance is made between buyers and sellers engaged in the same class of trade. The object of the trade discount being allowed by the wholesale dealer to the retailer is to enable the latter to sell the goods at the price mentioned in the catalogue or price list issued by the wholesale trader. The trade discount is to enable the dealer to meet all the necessary business expenses and yet leave him a margin of profit on his selling the goods at the catalogue price. The amount of trade discount allowed varies considerably according to different trades and even on different articles in the same trade.
In the books of the wholesale dealer, trade discount is deducted from the outward invoice sent to the retailer and the entry in the sales book is made of the net amount, because the actual amount realisable by him is the catalogue price less the trade discount.
Similarly, in the books of the retailer, the entry in the purchase book is made of the net amount, i.e., the amount for which he is liable. Thus, trade discount as a rule does not appear in the books either of the seller or of the purchaser.
14. After discussing the features of trade discount, the Orissa High Court held therein (at page 93 of 35 STC): 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.
15. Aforesaid decision of the Orissa High Court in Orient Paper Mills [1975] 35 STC 84 was approved by the Supreme Court in Deputy Commissioner of Sales Tax (Law) v. Advani Oerlikon (P.) Ltd. [1980] 45 STC 32. In Advani Oerlikon , it has been pointed out (at page 35): 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.
16. The system followed by the respondent-dealer does not appear to be normal or usual in the trade circle. 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.
17. 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.
18. Trade discounts are to be deducted from the sale amount as "trade discount" does not form part of the sale price. What does not form part of the sale price in usual course of business and trade practice cannot be charged and realised as "sale price".
19. From the judicial decisions placed before us certain features of trade discount have emerged.
(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.
20. The practice or the system followed by the respondent-dealer for allowing the disputed discount was not a usual method for allowing a pure trade discount. No reason or explanation has been given why such unusual circuitous process was being followed if the disputed discount was simple unconditional discount on sale price.
21. In its affidavit-in-opposition the respondent-dealer has only referred to the observations of the Supreme Court in Motor Industries [1983] 53 STC 48 that discount allowed "on a later date at the end of the month would not make it any-the-less a trade discount".
22. It is well-known and settled that the amount of trade discount cannot be included as a component of the sale price particularly when it was payable and deductible at the time of sale. Primary and basic feature of normal trade discount is that the discount component cannot be realised from the purchaser as "sale price" and it is to be separately shown and deducted from the sale price unless it was not possible to compute or deduct at the time of invoice.
23. 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.
24. In the present case not only full price was realised but also sales tax and surcharge were charged on the full price without any discount.
25. Respondent-dealer has relied upon observations of the Supreme Court in Motor Industries Co. [1983] 53 STC 48, Advani Oerlikon [1980] 45 STC 32 and Government of India v. Madras Rubber Factory Ltd. .
26. In Motor Industries Co. [1983] 53 STC 48 (SC) the dealer was claiming deduction of "service discount" under the provisions of rule 9(a) of the Kerala General Sales Tax Rules, 1963 (in short, "the Kerala Rules") on the plea that the said discount was really an additional "trade discount". Rule 9(a) of the Kerala Rules permitted deduction of all kinds of "discount allowed in accordance with the regular practice of the dealer or in accordance with the terms of a contract or agreement provided that the accounts show that the purchaser has paid only the sum charged less the discount". (emphasis supplied). In the context of the aforementioned definition the Supreme Court was considering whether the "service discount" was an additional trade discount allowed to the company's main distributors in consideration of the extra benefit earned by the assessee-company because of marketing its goods through such distributors. It appears to us that the expression "trade discount" was being used in the aforesaid judgment not in the particular sense commonly understood but in the sense of the definition in the Kerala Rules. Under the Kerala Rules any kind of concession in price which satisfied rule 9(a) thereof was to be treated as a trade discount.
27. Judgment of the Supreme Court in Motor Industries Co. [1983] 53 STC 48 and observations contained therein are to be understood in the context of the Kerala Rules. Those observations cannot be taken out of the said context and applied to override commonly known and academically recognised concept of "trade discount". All text books indicate that trade discount is allowed to allow margin to the distributors and is to be deducted from the listed or catalogue price at the time of sale. Once the listed price without any deduction is realised in full, subsequent return of the discount would not qualify as "trade discount" as it is known and understood in accountancy.
Observations of the Supreme Court if taken literally in general sense, it will militate against the basic concept of "trade discount".
28. The Supreme Court has explained the meaning and purpose of trade discount in Advani Oerlikon (P.) Ltd. [1980] 45 STC 32 (at page 34).
...A trade discount is a deduction from the catalogue price of goods allowed by wholesalers to retailers engaged in the trade. The allowance enables the retailer to sell the goods at the catalogue price and yet make a reasonable margin of profit after taking into account his business expense. The outward invoice sent by a wholesale dealer to a retailer shows the catalogue price and against that a deduction of the trade discount is shown. The net amount is the sale price, and it is that net amount which is entered in the books of the respective parties as the amount realisable : Orient Paper Mills Ltd. v. State of Orissa 29. The judgment of the Supreme Court in Advani Oerlikon [1980] 45 STC 32 was not placed and considered in Motor Industries Co. [1983] 53 STC 48 (SC).
30. An analysis of the system followed by the respondent-dealer clearly shows there was not only no deduction of the disputed discount at the time of sale but not even any indication that the purchaser would get such deduction at any future point of time. Moreover, the object of such additional discount was to promote its sale. The discount was being given by issuing credit notes which could not be used for any purpose other than adjustment against the price of any future purchase.
Whole purpose was to ensure continuous purchase by the purchasers if they wanted to avail of the discount. This disputed discount was really in the nature of a concession contingent upon the purchasers' future purchase from the respondent-dealer. In the present case the dealer deducted promotion-discount, indicated entitlement to turnover discount in the invoice itself but did not mention anything about the so-called additional trade discount. Even sales tax and surcharges were realised on the total sale price minus the promotion discount. There was no difficulty in indicating the amount of discount in the invoice inasmuch as rate of discount was fixed, sale price was known and computation was possible. The observations of the Supreme Court in Union of India v.Bombay Tyre International Ltd. [1984] 2 ECC 102 (at page 136) as quoted in the judgment of the Supreme Court in Government of India v. Madras Rubber Factory Ltd. [1995] 77 ELT 433 (para 52) is not applicable inasmuch as this discount, according to the dealer itself, was payable, quantifiable and easily deductible at the time of making each invoice.
31. In such circumstances, Board fell into error in not appreciating the essential features of a trade discount and in not applying its mind to the undisputed facts of the case. The disputed additional trade discount did not qualify as a trade discount and respondent-dealer is not entitled to get any deduction of the said discount in view of the definition of "sale price" in the Act of 1994.
32. Definition of "sale price" in the Act of 1994 does not exclude discounts other than cash discount. Trade discount is also to be excluded from the sale price and the total turnover on the basis of the judgment of the Supreme Court in Advani Oerlikon [1980] 45 STC 32. In several statutes all kinds of discounts, if really a discount, are excluded.
33. In the present case the respondent-dealer allowed a discount termed as "turnover discount" at the rate of one per cent on the total price of purchase made during a quarter to the customers who purchased goods on credit. The said discount was expressly mentioned in the invoice though not quantified and deducted at the time of sale.
Respondent-dealer had claimed that this discount was really a cash discount.
34. Aforesaid discount was allowed to purchasers who purchased on credit. According to Batliboi's book on accountancy cash discount is an allowance in addition to the trade discount made by the seller to purchaser upon consideration of prompt payment within or before the stipulated date during the period of credit. Admittedly this "turnover discount" was not allowed for prompt payment. This discount was related to achievement of targeted volume of purchases by a dealer within a specified period. Both the assessing authority and the appellate authority disallowed the claim for deduction of the said "turnover discount" on the ground that the said discount could not be cash discount. Board allowed the claim on the ground that it was "very close to the concept of bonus discount", treated it as additional incentive and relied on the observations of the Supreme Court in Motor Industries Co. [1983] 53 STC 48. We have already explained the observations of the Supreme Court in Motor Industries Co. [1983] 53 STC 48, made in the context of the provisions of the Kerala General Sales Tax Rules, 1963 which permitted deduction of all kinds of discounts allowed for commercial reason.
35. A bonus-discount is not trade discount in the strict sense of the term. To qualify for deduction under the West Bengal Act the discount was/is to be either cash discount or trade discount. Turnover discount was not and could not be cash discount. None of the authorities below has considered whether the said discount could be said to be a "trade discount". In fact, the respondent-dealer also did not advance any claim that the "turnover discount" was a trade discount (vide grounds of revision) although features of disputed turnover discount were placed before the Board.
36. Same question on the deductability of same "turnover discount" of the respondent-dealer under the Central Excise Act came up for consideration before the Supreme Court in Government of India v. Madras Rubber Factory Ltd. 37. Under the provisions of the Central Excise Act at the relevant point of time "value" of excisable goods did not include, among others, "the trade discount (such discount not being refundable on any account whatsoever) allowed in accordance with the normal practice of the wholesale trade at the time of removal, in respect of such goods sold or contracted for sale." (emphasis supplied). Thus only "trade discount" qualified for exclusion in determining the value of the excisable goods. In the said context the Supreme Court in the said case held: 55. The assessee's case in this behalf is this : this is a discount granted to all dealers operating under Recurring Credit Scheme (RCS) with effect from April 1, 1980. The discount is being given on a half-yearly basis depending upon the volume of purchases made by each such dealer. Out of the total Madras Rubber Factory dealers, about eighty per cent are said to be RCS dealers and out of the total sales effected by the Madras Rubber Factory, over sixty per cent sales are made by these RCS dealers (as per the figures relating to the year 1981-82). The discount is being granted by issuing credit notes to dealers and though the said discount is not shown on the face of each invoice, it is known to all the Madras Rubber Factory dealers. The discount cannot indeed be shown in the invoice for the simple reason that the discount is known only at the end of the half year.
56. The Assistant Collector allowed the said claim on the finding that this discount is given with a view to encourage the turnover of the sales and that having regard to the objects underlying the Recurring Credit Scheme, this deduction is liable to be allowed. He found that in the ultimate analysis the dealer pays one per cent less than the catalogue price and that the said claim is also consistent with the clarificatory order of this Court in Bombay Tyre International [1984] 2 ECC 102 (SC).
57. The learned Additional Solicitor General, however, contended that this discount, not being known or paid at the time of removal/ sale, cannot be allowed.
58. In the light of the findings recorded by the Assistant Collector, it must be held that this is a discount which is known and understood at the time of removal of the goods though it is quantified later. The Assistant Collector has also recorded a finding, 'I also find that such system of grant of discounts is not uncommon in the trade'. Keeping in view the clarificatory order of this Court in Bombay Tyre International [1984] 2 ECC 102, this claim must be held to have been rightly allowed by the Assistant Collector.
38. In the present case invoices clearly mentioned that the customer was entitled to one per cent discount. Obviously it was known and understood at the time of removal of the purchased goods. The discount amount was quantified at the end of quarter and credit notes for the discount amount were being issued quarterly. As the amount of deduction depended on achievement of target, it was not possible to quantify and to deduct the said discount at the time of sale. Three-judge Bench of the Supreme Court in the aforementioned case considered the nature of the same discount of the respondent-dealer under the Central Excise Act and treated it as a "trade discount". According to us the Supreme Court had already settled the issue and it is no longer res integra.
39. For the reasons stated hereinbefore we allow this application in part. We set aside the decision and order of the Board in respect of the "disputed additional discount" claimed to be "trade discount" and hold that the said discount was not a "trade discount" and could not be deducted from the "sale price" or "turnover" under the West Bengal Sales Tax Act, 1994. On the basis of the judgment of the Supreme Court in Government of India v. Madras Rubber Factory Ltd. , we hold that the turnover discount was a "trade discount" and qualified for exclusion from "sale price" or "turnover" under the aforesaid Act of 1994 and do not accept the petitioner's contention to the contrary with regard to the said "turnover discount". The judgment and order of the Board is set aside in part to the extent indicated above.
Application is disposed of. No order as to costs.