1.21     Query

Disclosure of certain discounts as per the requirements

of Schedule VI to the Companies Act, 1956

1.  A public sector undertaking incorporated under Companies Act, 1956, is involved in manufacturing organic and inorganic chemicals and selling the same in domestic and foreign markets.

2.The company has been advised that the value of discounts allowed by the company under its various discount schemes should be disclosed separately in the accounts as required under provisions of the Companies Act, 1956 since the same were not of the nature of “usual trade discounts”

3.The querist has drawn the attention of the Committee to Schedule VI part II of the Companies Act which provides that the following items should be exhibited in the profit and loss account.

            (i)            Turnover i.e. aggregate amount for which sales are effected by the company.

            (ii)            Commission paid to Sole Selling Agents.

            (iii)            Commission paid to other Selling Agents.

            (iv)            Brokerage and discounts on sale other than the usual trade discounts.

            4.            The discounts allowed by the company are as under:

(i)         Distance discounts: Distance discounts are allowed to attract the customers from long distances to buy company’s products by partly compensating for the extra transport charge that they have to incur.

(ii)        Quantity discounts: Quantity discounts are allowed for off-take in monthly/quarterly/half yearly/annual periods. The quantity slabs fixed for this purpose are different for different customers depending upon their capacity to use company’s products.

(iii)       Drum discounts: Drum discount is allowed for helping small customers to buy company’s products. Sometimes it is allowed to other customers also if the storage capacity of the company is not adequate to store production and hence the material is required to be sold in drums.

5.The querist is of the view that all the above discounts are usual trade discounts on the following grounds:

(i)         These discounts are allowed under prescribed schemes of the company which are made known to the concerned customers before hand.

(ii)        It is sometimes necessary to modify these schemes in order to respond to the market conditions, but these schemes are always offered to all the comparable customers without making any discrimination.

(iii)       The quantity slabs fixed for different customers are different but that is because products of the company are industrial products and the customers’ capacity to use the same depends upon his plant capacity and market.

(iv)       The schemes are finalised with the individual customers before hand and both seller and the buyer are fully aware of the discounts which will be allowed on fulfilment of the condition of the scheme.

(v)        The discounts are allowed at source, if fulfilment of the conditions can be checked at the time of preparing the invoice itself (for example, in case of drum discount where it can be known that the material is being taken in drums). In other cases the discounts are allowed by issuing the credit notes subsequently on fulfilment of the prescribed conditions by the customer. If a customer gives a bank guarantee for the amount of quantity discount to which he would be entitled at the end of prescribed period, discount is allowed at source on the strength of the bank guarantee.

6. The querist is further of the view that the fact whether the discount is allowed at the time of issuing an individual invoice or by way of credit note subsequently on fulfilment of the contract for a particular quantity off-take does not make any difference to the exhibition of the same in the accounts. The contrary view however is that if the discount is allowed in the invoice, it can be deducted from sale but if it is allowed by issuing credit notes subsequently, it should be exhibited separately.

7.The querist has sought the opinion of the Expert Advisory Committee whether in the above circumstances, the discounts mentioned in para 4 above should be deducted from sales or should be shown separately for the purpose of requirements of Part II of Schedule VI to the Companies Act, 1956.

                                                                          Opinion                                                   July 9,1986

 1. The Committee notes that the term ‘Trade Discount’ has been defined, in the Guidance Note on ‘Terms Used in Financial Statements’ issued by the Institute of Chartered Accountants of India, as “A reduction granted by a supplier from the list price of goods or services on business considerations other than for prompt payment.”

2.The Committee notes that none of the discounts mentioned by the querist in para 4 of the query are granted for prompt payment but are for other business considerations. The Committee is therefore of the view that the said discounts are ‘trade discounts.’

 3. The Committee is of the opinion that the discounts granted by the company should be considered as ‘usual trade discounts’ since they are available to any customer who wishes to purchase products of the company in accordance with the said discount schemes.

4. In view of the above, the Committee is of the opinion that the discounts mentioned by the querist in para 4 of the query should be deducted from sales for the purpose of requirements of Part II of Schedule VI to the Companies Act, 1956.

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