By TIOL News Service

AHMEDABAD, JAN 24, 2015: THE issue before the Bench is - Whether the discount given by the assessee to the oil marketing companies on sale of its products as per the direction of the Government would not form part of "sales price" as defined in section 2(29) of the Gujarat Sales Tax Act and consequently would not form part of "turnover of sales" as defined in section 2(36) of the Act. And the verdict goes in favour of the assessee.

Facts of the case

The assessee, ONGC is engaged in exploration, development and production of the petroleum products. The Memorandum of Association of ONGC outlines the main object to be pursued by the Corporation. For the first quarter of April to June 2004, ONGC had given credit to Indian Oil Corporation ("IOC"), the oil company, on the sale price discount as directed by the Government of India in its letter dated 27.8.2004 by way of a credit note dated 13.9.2004. The credit of tax relating to such discount was claimed by ONGC. Such tax credit on discount came to Rs.11,07,06,024/-. The ONGC claimed that discount would not form part of taxable turnover. The AO however, objected to the stand of the ONGC. The Deputy Commissioner of Commercial Tax sought explanation from ONGC on this issue. ONGC submitted a detailed reply stating that such discount was given as per the directives of the Government of India. The same cannot be considered as a part of the turnover. It was clarified that such discount was not taken into account for the purpose of computing royalty payable to the State Government. The AO passed the order of assessment on 30.3.2009 holding that the discount given by the ONGC to IOC on the sale of petroleum products was not an admissible deduction and that ONGC was required to pay the tax inclusive of such discount with interest and penalty.

The Tribunal by the impugned judgement upheld the stand of the Revenue. It was observed that the decision to discount the price was not that of ONGC taken on its free volition but such decision was imposed on it by the Central Government. The instance therefore, would not fall in any of the well recognised concepts of discount. The Tribunal was of the opinion that the sale price initially fixed between the buyer and the seller was not received by the buyer but was certainly receivable, but for the waiver of profit by subsequently granting artificial discount from the sale price. It was observed that in case of nonrealisation of sale price, the sale price of the goods remained the same but the portion of non-realised sale price is borne by the seller. In fact, the Tribunal went on to observe that "such a practice adopted by the appellant under the mandate of the Central Government is virtually amounting to restrictive trade practice and an artificial determination of sale price which is prohibited under the Competitions Act." On such basis, the Tribunal confirmed the levy of duty, but deleted the penalty and thus allowed the appeal in part.

On further appeal, the High Court held that,

++ the entire focus of the controversy revolves around the expression "the amount of sale price received or receivable by a dealer in respect of any sale of goods". In facts of the case, what would be the amount of sale price received or receivable by ONGC from OMC is the fundamental question. According to ONGC, it is the finally computed sale price which alone would qualify as one being received or receivable. The State however, contends that it is the originally invoiced price and not the discounted price which would be receivable, whether received or not;

++ it is the final price which the ONGC received from the OMCs which alone can form part of the taxable turnover. Under the price control mechanism, ONGC was under an obligation to sale its specified petroleum products at the rate fixed by the Government of India. To ensure that such petroleum products are available to the consumer at affordable price, the Government of India devised a mechanism where such products would be sold by ONGC and other oil companies to the OMCs at a price less than the market price or may even be less than its procurement price. Such component the ONGC and other oil companies had to bear from their other profit making products by cross subsidizing the sale of specified petroleum products. This was in substitution of earlier price control mechanism where Government of India would bear the burden by subsidizing such products. In essence, ONGC could charge only such rate from OMCs as Government of India directed. The precise computation of the rate required complex considerations of economic and other aspects. Various factors such as cost of production for procurement of all products, the international price of the product, the local demand and of course, the other economic considerations such as the ability of the various stake holders to absorb the loss, would enter into consideration. Since all these parameters would not be known before hand, the Government of India would announce provisional prices for such products. We are informed that 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, Government of India would declare the final price. Since for the petroleum products already supplied by ONGC to 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 cases, the final discount may be higher than the provisional discount earlier declared, it is entirely possible that in some cases, such final discount may be lower than the provisional price. ONGC would eventually therefore, adjust its accounts with OMCs by raising either the debit note or credit note as may be required;

++ under no consideration any price other than the final price so arrived at, can be stated to be the price of goods sold either realised or realisable. From the outset the terms between ONGC and OMCs were clear. ONGC would supply the petroleum products to the OMCs at a price that may be fixed by the Government of India. Initially though such products were invoiced at the provisional price, the final bills would be raised by adjusting such provisional price with the finally fixed price by Government of India. Thus only this final price which would be received or receivable by ONGC and no more. In essence, therefore, additional component other than the final price never entered the turnover. Merely because its precise computation was differed at a later point of time, would not change the situation;

++ perhaps it is a misnomer though consistently so referred to as Government of India as well as by ONGC, to term this component as discount. A discount is reduction in catalogue price for any reason recognised by the trade. In the present case, there is no prefixed price which as per the trade practice is reduced by a discount given by the seller to the purchaser. It is a case where under a price control regime under the directives of Government of India, ONGC is obliged to sell its products at lesser than the market price. These terms are determined even before the sale. Initial invoices at the time of actual supply of petroleum products by ONGC 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 ONGC could have fetched;

++ merely because such adjustments were made post sale, would not change the situation. Firstly, because even before the sale it was always clear that ONGC would charge and OMCs would be obliged to pay only such price as Government of India may finally fix. Merely because its precise computation was deferred, since it required taking into consideration complex economic and other factors, would not mean that this was a case of waiver of the sale price by ONGC. We therefore, would have to clearly distinguish this case from a case where a seller for whatsoever reason forgoes a part of the sale consideration receivable from the purchaser after the sale is completed. In such a case, the State's contention of underrealisation of the sale price or waiver by way of bad debt would be well received. In the present case, event of charging reduced price from OMCs was predecided. Be it in the form of discount or in form of reduced sale price, ONGC would receive only such sale price as Government of India would fix for a quarter. All along the invoices were raised on provisional basis. Term 'provisional' is described in Advanced Law Lexicon by P Ramanatha Aiyar (3rd edition Reprint 2009) as "temporary, preliminary; tentative; taken or done by way of precaution or ad interim. Not final, temporary in nature." Thus when ONGC raised invoices at the time of actual supply of petroleum products to OMCs, price indicated there was merely provisional, temporary, and ad-hoc and always subject to finalisation once the Government of India issued final directives of the rate of petroleum products. Nothing prevented the seller from selling products below the cost price unless prohibited by some law either voluntarily or under compulsion. It is this price realised which would be the sale price and not its cost price. Merely because it is determined later does not change this because each invoice was provisional and was thus subject to positive or negative adjustment;

++ merely because for computation of royalty payable to the State, it is the full and not discounted price which is taken into account would not alter the situation. As is well known the royalty is paid to a State for exploitation of the natural resources located in the State. The Government of India had specifically provided that for the purpose of computing the royalty, it would be the full and not the discounted rate which would be taken into consideration. The appellate authority and the Tribunal were unduly influenced by this factor. This dichotomy therefore, would not in any manner throw any light on the nature of transaction between the ONGC and OMCs;

++ the observations of the Tribunal that "The OMCs are liable to pay the sale price to the appellant as per the invoices raised against them. They might have paid less sale price only because of the fact that they were given compensation for their agreeing not to increase the price of crude oil, PDS kerosene and domestic LPG to the consumers with the increase of international oil prices", are based on no materials and only on conjectures and in any case, not in any manner relevant to the controversy on hand. Further the observation that "Such a practice adopted by the appellant under the mandate of the Central Government is virtually amounting to restrictive trade practice and an artificial determination of sale price which is prohibited under the Competitions Act", with respect, was not borne out from any material on record. We wonder whether the Tribunal accused the Central Government of restrictive trade practice by providing for an artificial determination of the sale price of the PDS kerosene and LPG for domestic use. In what manner the same was prohibited under any law is not demonstrated. In any case, such price fixation was never under challenge before the Tribunal;

++ in the result, question was answered in favour of assessee and against the Revenue.

(See 2015-TIOL-197-HC-AHM-VAT)