Tuesday, March 31, 2015

Discount allowed by ONGC to Oil Marketing Cos. for sale of petroleum products would not form part of sale price

Gujarat VAT - Where assessee for first quarter of April, 2014 to June, 2014 had given discount to Oil Marketing Companies on sale of its petroleum products by way of credit note, amount of discount would not form part of sale price as directed by Government of India.

a) The assessee was engaged in exploration, development and production of the petroleum products. It was obliged to act as an instrument to implement the policy of the Central Government subject to such directives as might have been issued by the President from time-to-time with a view to exercise control over strategic areas of economy and to serve public interest.

b) For the first quarter of April, 2004 to June, 2004, the assessee had given discount to the Oil Marketing Companies (OMCs) on the sale of its petroleum products as directed by the Government of India in its letter dated 27-8-2004 by way of a credit note dated 13-9-2004. It claimed that the amount of such discount would not form part of taxable turnover.

c) The assessing authority held that the discount given by the assessee to the OMCs on the sale of petroleum products was not an admissible deduction. The assessee was required to pay the tax inclusive of such discount.

d) Both, the First Appellate Authority and the Tribunal upheld the order of the Assessing Authority.

High Court held in favour of assessee as under: 1) The assessee could charge only such rate from the OMCs as Government of India directed.The broad formula adopted for such purpose was the crude price in international market minus the last discount which would prevail for a quarter. At the end of the quarter after, taking into consideration all the relevant factors, the Government of India would declare the final price.

2) Since for the petroleum products already supplied by the assessee to the OMCs during such quarter the invoices would have been raised on the basis of provisional discount, the adjustment would have to be done on the basis of final discount declared by the Government of India. Though in most of the cases, the final discount might have been higher than the provisional discount earlier declared, it was entirely possible that in some cases such final discount might have been lower than the provisional price. The assessee would eventually adjust its accounts with the OMCs by raising either the debit note or credit note, as might be required.

3) Perhaps it is a misnomer, though consistently so referred to by the Government of India as well as by the assessee, to term this component as discount. A discount is reduction in catalogue price for any reason recognised by the trade. In the instant case, there was no prefixed price which as per the trade practice was reduced by a discount given by the seller to the purchaser. It was a case where under a price control regime under the directives of Government of India, the assessee was obliged to sell its products at lesser than the market price. These terms were determined even before the sale. Initial invoices at the time of actual supply of petroleum products by the assessee were merely provisional. They were based on provisional price fixation by the Government. They were never meant to reflect final sale consideration for the goods sold. They were always subject to adjustment once the Government of India finally declared the reduced rate of specified petroleum products. Comparing the invoiced price with the finalised price after adjustment was a complete fallacy. Even invoiced price whenever based on provisional price fixed by the Government was always below the market price which the assessee could have fetched.

4) Therefore, the amount of discount given by the assessee to the OMCs on sale of its products would not form part of sale price. The assessee was not required to pay tax on such discount - ONGC Ltd. v. State of Gujarat - (2015) 55 taxmann.com 297 (Gujarat).