Trade discounts/credit notes post-sale by suppliers, on which tax remitted, not includible in dealer's taxable turnover under KVAT Act.

JUDGMENT

Dated this the 31^st day of March, 2026 This writ petition is preferred seeking to quash Ext.P4 assessment order of the 4^th respondent dated 29.06.2019, bearing No.32151083714/2012-13 as well as the consequent demand notice dated 29.06.2019, issued as per Ext.P5.

2. The petitioner is a dealer in cement and other construction materials, registered under the Kerala Value Added Tax Act, 2003 (hereinafter referred to as ‘the KVAT Act). The petitioner submitted the returns for the financial year 2012-13 and paid the tax as well. However, the 4^th respondent issued Ext.P1 notice to the petitioner on 06.03.2019, invoking the provisions under Section 25(1) of the KVAT Act, contending that, the trade discounts given by the companies to the petitioner, form part of the taxable turnover and therefor is liable to be taxed. The petitioner submitted his reply to Ext.P1 as per Ext.P2, and even a personal hearing was granted. However, without considering the contentions, Ext.P4 assessment order was issued and a consequential demand notice was also issued as per Ext.P5.

3. It is submitted by the petitioner that the issue is covered by the reported decision in Saji Thomas v. Assistant Commissioner, Department of Commercial Taxes Special Circle and Others [2022 (3) KHC 515]. Paragraph No.4.2 of the said decision is extracted hereunder;

“The interpretation canvassed by Revenue on Explanation VII to Section 2(iii) for arriving at the purchase price and sale prices results in the erroneous and illegal applications of Explanation VII to (iii) of the Act. Explanation VII to (iii) is part of the definition clause and cannot regulate either the charging section under Section 6 or the section dealing with credit of input tax under Section 11. The credit note given to the dealer by the supplier, subsequent to sales, is an incentive for targeted performance by the dealer. At the cost of repetition, it is emphasised, that the manufacturer/suppliers remitted tax on such credit note (i.e., while raising the invoice in favour of the dealer). The dealer, therefore, is not required to include the discount or credit note or incentive in the turnover or assessment. In all the cases, the manufacturer/suppliers filed a declaration not to claim refund of tax already paid on sales in favour of the dealers. The inclusion of discounts in dealers' turnover is against the prohibition contained in the Fifth proviso to (3) of the Act. The Budget Speech of the Hon'ble Finance Minister, though is not conclusive, spells out the reasons for introducing the Fifth proviso to (3) of the Act. The inclusion of discount/credit notes as part of turnover is contrary to the scheme of Value Added Tax under the Act. The counsel appearing for the dealers rely on the following judgments:

"Vettathil Agencies (M/s.) v. Commercial Tax Officer, Cherthala, 2017 (1) khc 141; JK Cotton Spinning and Weaving Mills Co. Ltd v. State of U P , 1961 khc 653: M/s. Mahim Patram Private Ltd. v. Union of India , 2007 khc 3135: Ashok Leyland Ltd. v. State of Tamil Nadu , 2004 khc 463, Andhra Agencies v. State of Andhra Pradesh (2009) 17 KTR 476 (SC), Commissioner of Sales Tax, U P v. Hind Lamps Limited , (2009) 17 KTR 480 (SC), and Union of India v. Bombay Tyres International (P) Ltd, 2005 khc

519”

In such circumstances, the demand raised under Ext.P4 proceedings, by invoking Section 25(1) of the KVAT Act as well as the consequential demand as per Ext.P5, are set aside.