2022 (5) TMI 1300 - HC - VAT and Sales Tax

Court clarifies impact of credit notes on turnover under Kerala VAT Act.

The court held that the Fifth Proviso to Section 11(3) of the Kerala Value Added Tax Act, 2003 precludes the operation of the extended turnover definition ... Interpretation of statute - Levy of VAT - credit note received subsequent to the date of the invoice - Determination of Turnover - Input Tax Credit - Large Bench Decision - construction of Explanation VII to Section 2(lii) and the Fifth proviso to Section 11(3) of the Act - Whether the bar on assessment set out in the fifth proviso to Section 11(3) of KVAT Act 2003 would preclude operation of the extended definition of turnover provided under Explanation VII to Section 2(lii) of KVAT Act? HELD THAT:- On perusal of entire records, following summary is arrived at: (a) The definition of the word ‘turnover’ in Section 2(lii) is applicable unless the context otherwise demands. (b) The deemed turnover subject to satisfying a condition stipulated in Explanation VII could arise if the context in which the demand allows such definition to operate. (c) The Legislature incorporated the second limb to the Fifth proviso to Section 11(3) and by such amendment, the Legislature has taken out from the purview of assessment, credit notes received subsequent to invoice and payment of tax by the manufacturer/supplier and not claiming refund or adjustment of input tax. (d) In cases in which tax is paid at the time of invoice, and no adjustment of input tax is claimed by the manufacturer or the supplier, then, even if the dealer sells it at a lesser price and claims input credit proportionate to the sales price, and subsequently receives credit note from manufacturer/supplier, such credit notes, discount, loss on recoupment is not included for assessment, subject to manufacturer/supplier not claiming refund or adjustment of input tax already deposited. In other words, the credit notes not affecting input tax already deposited cannot be treated as taxable turnover by the extended meaning of Section 2 subsection (lii) Explanation VII of the Kerala Value Added Tax Act. (e) In the scheme of value addition and payment of tax on such value addition, the levy of tax is justified on value addition, but, without value addition, sale, or purchase, and for the amount retained by the dealer value-added tax is demanded contrary to Section 11(3) Fifth proviso of the Act. The matters are directed to be placed before the Single Bench. Issues Involved:1. Interpretation of the Fifth Proviso to Section 11(3) of the Kerala Value Added Tax Act, 2003.2. Applicability of Explanation VII to Section 2(lii) of the Kerala Value Added Tax Act, 2003.3. Validity of reassessment orders including discounts received by dealers in turnover.4. Interaction between input tax credit provisions and turnover definitions.Detailed Analysis:1. Interpretation of the Fifth Proviso to Section 11(3) of the Kerala Value Added Tax Act, 2003:The core issue was whether the Fifth Proviso to Section 11(3) of the Act precludes the operation of the extended definition of turnover under Explanation VII to Section 2(lii). The court noted that the Fifth Proviso, amended effective from 01.04.2005, has two parts: the first part denies input tax credit for discounts allowed after the sale, while the second part, introduced by Act 21 of 2008, excludes amounts covered by credit notes that do not affect input tax credit already availed or reimburse expenses incurred by the dealer from being reckoned for assessment. The court emphasized that the latter part of the proviso, starting with 'But,' serves as a conjunction to convey a different meaning from the first part, effectively excluding certain credit notes from assessment.2. Applicability of Explanation VII to Section 2(lii) of the Kerala Value Added Tax Act, 2003:Explanation VII, effective from 01.04.2005, deems any amount received by a dealer selling goods at a lower price than the purchase price as turnover. The court concluded that while this explanation extends the definition of turnover, it must be read in the context of the Act. The court held that the Fifth Proviso to Section 11(3) creates a specific context that excludes certain credit notes from being deemed turnover under Explanation VII.3. Validity of reassessment orders including discounts received by dealers in turnover:The reassessment orders challenged by the dealers included discounts received as part of the turnover, which the dealers argued had already suffered tax at the hands of the supplier. The court found that reassessment orders, which added discounts to the turnover, were contrary to the Fifth Proviso to Section 11(3). The court emphasized that if the supplier has paid tax on the invoice price and does not claim an adjustment of input tax, the discount should not be included in the dealer's turnover.4. Interaction between input tax credit provisions and turnover definitions:The court analyzed the interaction between input tax credit provisions under Section 11(3) and the turnover definition under Section 2(lii). It held that the Fifth Proviso to Section 11(3) should be interpreted to exclude certain credit notes from turnover, ensuring that the input tax credit already availed is not affected. The court concluded that the Revenue's interpretation, which included such credit notes in turnover, was incorrect as it ignored the specific context provided by the Fifth Proviso.Conclusion:The court answered the question by holding that the Fifth Proviso to Section 11(3) precludes the operation of the extended definition of turnover under Explanation VII to Section 2(lii) in cases where the credit notes do not affect the input tax credit already availed. The matters were directed to be placed before the Single Bench for further proceedings.