JULY 19, 2019

By R Sridhar, Consulting Editor, TIOL

THE GOI through its powers under section 168 issued a Circular (105/24/2019-GST) clarifying treatment of secondary or post sale discounts on 28 June 2019. The Trade and Industry opine that this recent clarification is bound to increase Litigation. This article for sake of simplicity in presentation, takes the two paras of the Circular, para 3 and para 4 and deals with some important dimensions.

Views on Para 3

The Circular clarifies PSD by creating two buckets of approaches - Approach A - PSD given where there is no further obligation at the Distributor /Trade intermediary level( referred to as Trade Intermediary) -Approach B - Where there is an activity required by the Trade Intermediary in form of Sales Drive, Campaign of Advertisement, Exhibition etc. Out of the above 3 situations, considering Sales Drive as an additional activity giving rise to a service is bound to be contentious.

It is pertinent to advert that Trade intermediaries are appointed across the spectrum of Industrial groups /sectors under a specific agreement. This invariably obligates the trade intermediary to redistribute the goods of the supplier/ manufacturer. In this background the redistribution of goods by the Trade Intermediary is itself arising out of a contractual obligation and this is considered as resale of goods. When volumes are augmented through sales drive also the character of re-distribution activity does not change. The trade intermediary is paid margins for redistribution and GST is applied on the same.

It is pertinent to explain by way of an example that if there is a sales drive in the month of September 2019 (in the trade intermediary area) and as against a standard margin of Rs. 1000 (10 per cent of normal turnover of Rs 10000) if there is an augmented turnover of Rs 20000 then on the incremental margins (Rs 1000) also, the GST is discharged as goods sold. This tax on margins is discharged by the Trade Intermediary after taking credit of ITC on the goods which he purchases from the supplier.

It is legally incorrect to contend that any additional discounts on sale drive would be service and hence taxed as a separate activity while the enhanced margin on sale of volumes arising out of sales drive is taxed as goods resold. It is relevant to emphasise that all discounts including post sale discounts are costed/accounted and included in the product price and GST is discharged on the same.

Looking at the fundamentals of seller and trade intermediary relationships in the Indian context, it is necessary to see whether the downstream activity (described in the Circular as a taxable activity arising out of an obligation) is independent or dependant. It is important to understand that the downstream reselling of goods is dependent on the upstream primary sale and hence this activity of reselling by the trade intermediary has an inextricable link with the upstream primary sale made by the supplier. The sale is made on Principal to Principal basis and there is a clear seller - buyer relationship and not any seller - service provider relationship. In this background, the reselling whether it is normal volumes or increased volumes does not provide any scope for relationship of provider - receiver of services at all.

Generally the Discounts which arise post sale can be reduced from value subject to the contours of Section 15 (3), but if the requirements cannot be fulfilled then financial credit notes are issued. In this context therefore there appears a possible argument of double taxation. Secondly, redistribution as an activity, is an obligation arising out of contract and hence this dichotomous treatment (normal and additional sale volumes) appears out of context. Thirdly in a sales enhancement scenario, enhanced discounts are issued to achieve higher sales turnover, which does not benefit only the trade intermediary and manufacturer but the one who achieves the target. One cannot be a service provider and also a beneficiary of service. Further, as the Circular talks about entitlement of ITC in the hands of the Supplier receiving the Invoice from the Trade Intermediary, the same is Revenue Neutral. Lastly the jurisprudence under the erstwhile law favours the treatment as secondary discount on goods sold as abatable from value subject to conditions.

Views on Para 4

Business Reality of Price Offs

In this para the Circular addresses that price support given to a Trade intermediary by a supplier, for them to support higher retail trade volumes would be taxed as additional consideration in the hands of the trade intermediary. Normally the retailers in General Trade considering the proximity to the ultimate consumer have to be motivated to sell more. The retailers buy from trade intermediaries and ask for price reduction or discounts. When the reaction of the retail trade is high (which Industries understand through market intervention studies/ continuous interaction) encourage the Trade intermediaries to offer extra discounts to the retailers. This discount (given by Trade Intermediaries to Retailers) cannot obviously be met by the Trade Intermediaries out of their margins. In order to complete the incentivisation cycle, the equivalent discounts are given to the Trade Intermediaries.

The definition of consideration as contained in Section 2(31) of the CGST Act gives an interpretation that when any other person makes any payment in relation to goods the same will be consideration. The phrase "any other person" in the definition connotes that he is not related to transaction (third person) but supporting the consideration paid/payable. In the clarification in para 4, if we analyse the trade context to the explanation, we will find there is no third person at all to the transaction and hence the entire approach in para 4 as regards price support is misplaced.

Price support is connotation given to incentivize the markets but stripped of its colour and presentation, this is nothing but lower purchase cost to Trade Intermediary for having motivated the market to sell more. Like in para 3, these costs are also costed /accounted in the price of the product under Selling Expenses and hence the duty has been fully discharged on the same. Considering that the same cannot be linked to actual sale invoice as per mandate of section 15, financial credit notes are issued. In summary the argument of consideration paid by any other person would only mean a third person not connected to flow of the trade of goods and not the supplier who is the first person in the chain of trade.

It is also necessary to look at the residual part of the definition in Section 2(31) which ensures that subsidy given by Central or State Government will not be taxed in the hands of the recipient as additional consideration. This residual part of the definition itself, conveys the intent of the legislature that subsidies other than what is given by the GOI/States will be taxed. In effect therefore, a subsidy is different from a discount and hence price off given to a trade intermediary to motivate retailer to sell more, is a discount and not subsidy as it reduces the prices of goods purchased. In summary discounts (price offs), cannot be construed as additional consideration paid by supplier to trade Intermediary and taxed in the hands of the Trade Intermediary. Lastly the Circular also does not address a situation when price -offs are given through GST credit notes. (Requirements of Section 15 getting complied).

Summary

Considering that various offices and field formations have already started raising queries on the basis of the Circular, it would be fitting if the Department of Revenue - GST Policy Wing, considers the above aspects in the Circular and adequate protection provided through a revised circular so as to contain unwanted litigation on Post Sale Discounts.