Query
How does turnover discount (TOD) affect purchases for the purposes of audit? For example, sales Rs. 98,50,000/-, Purchases Rs. 1,01,10,000/-, TOD 2% Rs. 2,02,200/-. Net purchase as per profit and loss account is Rs. 99,07,800/-. As TOD is known at the year end, it is not deducted in regular return filed?
Reply
As per section 61 of MVAT Act, 2002, audit is applicable, if turnover, either sales or purchase exceeds Rs. 1 crore in the financial year.
The terms ‘turnover’ of sales or purchases are defined in sections 2(33) & 2(32) respectively. The said definitions are as under;
“2 (33) “Turnover of sales” means the aggregate of the amounts of sale price received and receivable by a dealer in respect of any sale of goods made during a given period after deducting the amount of —
(a) Sale price, if any, refunded by the seller, to a purchaser, in respect of any goods purchased and returned by the purchaser within the prescribed period; and
(b) Deposit, if any, refunded in the prescribed period, by the seller to a purchaser in respect of any goods sold by the dealer.
Explanation I. — In respect of goods delivered on hire purchase or any system of payment by installment or in respect of the transfer of the right to use any goods for any purpose (whether or not for a specified period) the amounts of sale price received or receivable during a given period shall mean the amounts received or as the case may be, due and payable during the said period;
Explanation II – …………..
Explanation III. —Where the registration certificate is cancelled, the amounts of sale price in respect of sales made before the date of the cancellation order, received or receivable after such date, shall be included in the turnover of sales during a given period;”
“2(32) “turnover of purchases” means the aggregate of the amounts of purchase price paid and payable by a dealer in respect of any purchase of goods made by him during a given period, after deducting the amount of, –
(a) Purchase price, if any, refunded to the dealer by the seller in respect of any goods purchased from the seller and returned to him within the prescribed period; and
(b) Deposit, if any, refunded in the prescribed period to the dealer by the seller, in respect of any goods purchased by the dealer.
Explanation I.— In respect of goods delivered on hire-purchase or any system of payment by installment or in respect of the transfer of the right to use any goods for any purpose (whether or not for a specified period) the amounts of purchase price paid or payable during a given period shall mean the amounts paid or, as the case may be, due and payable during the said period.”
The term ‘sale price’ is defined in section 2(25) as under;
“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.
Explanation I. —The amount of duties levied or leviable on goods under the Central Excise Act, 1944 or the Customs Act,1962 or the Bombay Prohibition Act, 1949, shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of the seller or the purchaser or any other person.
Explanation II. — Sale price shall not include tax paid or payable to a seller in respect of such sale.
Explanation III. — Sale price shall include the amount received by the seller by way of deposit, whether refundable or not, which has been received whether by way of a separate agreement or not, in connection with or incidental or ancillary to, the said sale of goods;”
It can be seen that sale price is amount of valuable consideration paid by the buyer.
Sale is a contract between the seller and the buyer. Therefore, the parties are entitled to decide their own consideration.
There can be fixed sale price. In such case, there is normally no variation allowable. For example, the goods are sold at a particular price. Thereafter seller offers discount in price. However, such discount was not pre-agreed and therefore it is not allowable discount.
However, there can be another mode of deciding the sale price. In such case, the parties may decide the tentative sale price. There may be terms like offering of discounts based on future events like turnover limits. In other words, TOD is normally linked with off take by the buyer. If the buyer purchases goods more than the prescribed turnover limit, the seller is bound by his commitment to offer it TOD. Such TOD is allowable from the price, as it is pre-agreed.
The above position is well-settled by number of judgments. For sake of reference following judgments can be referred.
Deputy Commissioner of Sales Tax v. Advani Oerlikon (P) Ltd. (45 STC 32)(SC).
In this case Supreme Court dealt with ‘sale price’ under CST Act, 1956 and observed that though only cash discount is mentioned in the definition of ‘sale price’ section 2(h) of CST Act, even trade discounts allowed are also to be reduced from sale price. It is observed that a trade discount is a deduction from the catalogue sale price of goods, allowed to customer. The net amount is the sale price, and it is that net amount which is finally realizable from the purchaser.
Orient Paper Mills Ltd. v. State of Orissa (35 STC 84)(Orissa)
Hon. Orissa High Court observed as under:
“Essentially, ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods. In this case the mill rate is mentioned in the catalogue. Under the agreement itself the mill rate is reduced by the discount. The consideration actually payable by the purchaser to the petitioner is the mill rate less the discount. Consideration is the amount which is actually paid or payable after the discount is deducted or deductible.
Century Enka Ltd. (S.A.163 of 99 dt.19-4-2003) (M.S.T.T.)
M.S.T. Tribunal has observed as under:
“11. The arguments of both the sides are required to be considered in the light of definition of sale price under the B.S.T. Act, the observations of the learned Assessing Officer and various decisions relied on by both the sides. As observed earlier, the learned assessing officer has disallowed the claim mainly on the ground that the quantity discount was not given in the sale invoices but it was allowed by issuing separate credit notes after fulfilling the requisite condition of lifting a particular quantity of materials in particular time limit. These facts are not in dispute. If the definition of ‘sale price’ under section 2(29) under Bombay Sales Tax Act and under section 2(h) of Central Sales Tax Act are read carefully, it is seen that under the Central Act in the definition of ‘sale price’ ‘cash discount’ according to practice normally prevailing in the trade is included. But under the Bombay Sales Tax Act, there is no such specific provisions of any type of discount included in the definition of sale price. Though it is so, it is well settled that the sale price is mutually agreed price of the goods sold by the seller and purchased by the purchaser. It appears that to meet competition in the market and to promote sales of their materials, the appellant has floated the scheme of granting quantity discount to purchaser from 1969-70. It appears, from the documents produced by the appellant that the appellant announces sales policy every month, announcing price of different kinds of yarn and it also announces quantity discount applicable upon lifting particular quantity within the particular period. Since the appellant issues sales policy, customers are aware that in view of announcing of quantity discounts by the appellant, the sale price agreed upon is going to be reduced in future depending upon the quantity lifted in a particular period. Therefore, the discount granted after the sales are effected would definitely reduce the sale price. It is seen from the sale policies and as pointed out by learned advocate that the appellant allows particular percentage of discount on the sales of particular quantity of materials sold to the purchaser in particular month and this discount is given by way of credit
notes some of which are produced on record……”
Further in para 15 it is observed as under:
“15. Thus the ratio of above quoted Supreme Court decisions as well as the decision of the Tribunal applies to the instant case. Even if the appellant had given the quantity discount by way of credit notes after some period and not shown in the sale invoice, the amount deducted from the sale price and the claim of the appellant will have to be allowed.”
The facts in the query are required to be seen in light of above legal position. The position is to be seen, whether the TOD is considered as pre-agreed and hence allowable deduction in hands of seller. Purchase price is nothing but sale price in the hands of buyer. Therefore, the crux of the matter is that the treatment given to TOD by the seller is required to be seen. If the seller has not considered TOD as deductible from sale price then the purchase price will also not get reduced. If the seller has considered the TOD as deductible then it will also reduce purchase price of the buyer. The purchase turnover limit will be required to be seen accordingly.
In above situation, it is advisable that a confirmation from the seller may be obtained to confirm whether TOD is claimed as deduction from sale price or not?
This will be useful to the buyer to have finality to the turnover.
Query
Whether pure art work or design charges as per the specification of the Customer without written agreement and passed on to the customer on CD media is liable to VAT or Not? What will be position if designs are being passed on by E-mail?
Reply
The facts are not very clear about ownership of the copyright in the art work or design. There are can be two situations.
The assessee may produce its own art work or design and may sell the same to the customer. This may be sale of own goods. The design or art work will fall in the category of intangible goods. Under MVAT Act, 2002, the notified intangible goods under Entry C-39 are liable to tax. The non-notified intangible goods are covered by Entry A-27, that is exempt. So far as notification under Entry C-39 is concerned ‘Designs registered under the Designs Act, 1911’ are covered.
Therefore, if the above conditions are fulfilled then it may be taxable commodity, whether sent by CD or by e-mail.
The other situation is that the customer may reserve right of copyright with it. In such situation, the assessee will be rendering services of art work and design. As the goods coming up, does not belong to assessee, there is no question of sale of the same. However, if the design or art work is passed CD then there will be issue of transfer of property in goods while executing contract and that may attract tax under works contract category. However, if the CD is received from the customer and art work or design is delivered on such CD then the issue will not arise.
The whole position of intangible goods is still not settled. There are also cases that the Service Tax Department is also claiming tax on such charges. Therefore, there may be cases where both taxes are being claimed.
So far as possible, the assessee should make the position clear by agreement in writing, so as to avoid future ambiguity.