COMMISSIONER GENERAL OF INLAND REVENUE

COMMISSIONER GENERAL OF INLAND REVENUE

Vs.

RHINO ROOFING PRODUCTS LTD

COURT OF APPEAL
DR. FERNANDO, J.
WIJERATNE, J.
CA/TAX/7/2019
TAC/VAT/002/2015
FEBRUARY 25, MAY 4, 2021

Tax Appeals Commission Act, No. 23 of 2011-Case stated-Value Added Tax Act, No. 14 of 2002, sections 5(1), 25, 83-Post-sale discounts-Principle of neutrality-Open market value-Adjustment procedure for VAT registered and non-VAT registered customers

The respondent was engaged in the business of manufacturing and supplying roofing sheets. The respondent issued invoices for the value of the supply at a discounted rate at the time of supplying roofing sheets to its dealers. At the end of each month, the dealers were given a further discount ranging from two to ten per cent as an incentive, based on the total value of their purchases during the month (quantity discount). The respondent's Value Added Tax (VAT) returns were not accepted by the assessor on the basis that quantity discounts to dealers were not allowable in determining VAT in terms of the Value Added Tax Act, No. 14 of 2002, as amended (VAT Act). The assessor proceeded to issue an assessment in terms of section 29 of the VAT Act. The respondent appealed against the assessment to the appellant, the Commissioner General of Inland Revenue, who confirmed the assessment. The respondent then appealed to the Tax Appeals Commission (TAC). The TAC reversed the appellant's determination and annulled the assessment. Aggrieved, the appellant appealed by way of a case stated to the Court of Appeal. The appellant argued that the respondent should not be allowed to adjust the value of the taxable supply for the purpose of calculating VAT owing to a quantity discount granted to its dealers subsequent to the time of supply.

Held:

1. Under the principle of neutrality, a trader should not be charged VAT on an amount greater than the true proceeds to him of the supply transaction, or an amount greater than the true cost of

the supply to the ultimate customer. If the terms of the supply provided for circumstances where the trader, having received the consideration for it in the first instance, was later obliged to part with an amount related in some way to the supply transaction, then the true proceeds of the supply must be determined after taking into account what the trader had to part with.

2. The value of a supply of goods as enacted through the various provisions of the VAT Act can accommodate post-sale quantity discounts such as those in issue in the instant appeal without being contrary to the meaning of 'time of supply' as specified in section 4 of the Act, so long as the terms of any such discount are known to any and all potential customers at the actual time of supply.

3. The definition of the open market value in section 83 would be met where the discount is available to all those who satisfy the terms of the discount without any discrimination. The crucial factor is that the availability of the discount, its terms and how the varying percentages are assigned must be known to all customers at the time of supply. It must also be the case that the discount is available on equal terms, regardless of the VAT registration status of the customer.

4. It is clear from the provisions of the Act that commercial invoices (invoices issued to non-VAT registered customers) are not meant to be adjusted using section 25, which is applicable only to tax invoices. No input tax can be deducted for commercial invoices. However, the principle of neutrality applies to both sets of customers and the process of post-sale adjustment for discounts must be allowed for both.

Cases referred to:

1. Godavari Fertilisers and Chemicals Ltd v. Commissioner of Commercial Taxes (2004) 138 STC 133 AP
2. Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes) v. M/s Advani Oorlikon (P) Ltd (1980) 1 sec 360
3

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