JULY 22, 2019

By B Venkatramanan and Rohan Muralidharan

THE recent Circular Circular No. 105/24/2019-GST issued by CBIC with regard to post sale discounts has to an extent brought much needed clarity on how different types of post-sale discounts/incentives extended by manufacturers to their dealers will be treated under GST. However, as has been the recent trend, the circular also has its fair share of complications and confusions which may lead to opening up of a Pandora's box of litigation.

The circular broadly categorises the post-sale discounts/incentives into three types which are as under:

- Discounts/Incentives which are extended without any obligation or action required at the dealer's end; Type 1

- Incentives which are conditional upon dealers undertaking certain activities such as advertisement campaign and special sales drive etc.; Type 2

- Discounts/Incentives which are given subject to the condition that the dealer passes on the same to the end customer; Type 3

In respect of the Type 1 discounts, it has been clarified that these are relatable to the original supply of goods made by the manufacturers and thus the manufacturers will be eligible to claim reduction from their output tax liability provided that the discount scheme is pre-agreed, and the dealers reverse the input tax credit attributable to the said discounts.

However, when the circular categorically states that under this type only those discounts which are extended without any 'obligation' or 'action' required at the dealer's end are included, a question arises as to whether the said type will also include within its scope those discounts which are given subject to dealer fulfilling certain conditions say for e.g. achievement of the requisite purchase or sales target (volume discount) or payment of consideration before the agreed credit period (cash discount). Thus, a doubt arises as to whether the discount which is provided subject to fulfilment of certain conditions would be covered under Type 2 and not Type 1 as the discount is provided only when the dealer fulfils his obligation of achieving the targets or paying before the credit period.

In this regard, it may be viewed that the term 'obligation' has been used in the manner which would mean something which a dealer is bound to do for the manufacturer and not something which he is required to do for himself. For example: in the case of volume or cash discounts, even though the dealer has to fulfill certain obligations on his part to earn the discount, the said obligations are not something the dealer does for the manufacturer; rather he does it for himself. Hence, as stated above, the said discounts will be construed as one which is extended without any obligation or action required at the dealer's end.

On the other hand, if a dealer is agreeing to conduct an exhibition or fair on the insistence of the manufacturer subject to the condition that the manufacturer incentivises him for the same, then the discount will be treated as a consideration for the activity undertaken by the dealer and consequently will result in a separate supply Section 7(1)(a) of the CGST Act 2017 read with Schedule II Clause 5(e) of the CGST Act being subject to GST. In such circumstances, the manufacturer will not be eligible to claim reduction for the said discount from his output liability; rather the dealer will be liable to pay GST on the discount so received. This distinction can also be better appreciated when we deal with the post-sale incentives of nature referred to in Type 2.

Thus, in our view, the Type 1 post-sale discounts will include within its purview those discounts which are extended subject to fulfilment of certain conditions viz., volume or cash discounts.

The incentives of nature referred to in Type 2 are normally provided by way of reimbursement for the expenses incurred by the dealers for undertaking the activities such as advertisement campaign, special sales drive etc.

Accordingly, it has been clarified that the same will be treated as a consideration for the supply of service provided by the dealer to the manufacturer and accordingly, the dealer will be liable to remit GST on the same. This is because of the fact that the dealer is doing some activity for the manufacturer for which he is being compensated in return by the latter. Thus, it qualifies as a supply 2 under GST as stated above.

At this point, it is also relevant to take note of the decision of the Hon'ble Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd. - 2014-TIOL-2647-CESTAT-AHM wherein the Tribunal held that cost of sales promotion expenses incurred by the distributors which have been separately reimbursed by the manufacturer will qualify as a service in the hands of the distributor and accordingly will be exigible to service tax.

Moving further, in respect of Type 3 discounts, it has been clarified that it will be treated as a consideration flowing from the manufacturer to the dealer for the supply made by the dealer to the end customer and accordingly will be added to the transaction value for the said supply for the purpose of payment of GST.

Consequently, even in cases where the end customers are entitled for the input tax credit, they will not be eligible to claim the credit attributable to the GST paid on such addition to the transaction value solely for the reason that the end customer wouldn't have made any payment for such addition to the dealer. Therefore, it becomes all the more necessary for the dealers/manufacturers to have a relook of their transactions in such cases.

Since, these discounts are extended by the dealers to the end customers on the insistence of the manufacturers, there is a possibility to argue that the dealers have in essence agreed to do an act for the manufacturers for which they are being compensated by way of discount by the latter and hence, the said transaction should be viewed as a supply of service 2 rendered by the dealers to the manufacturers. If that is the case, then the entire transaction would be viewed as a separate supply and therefore, the dealers would not be required to include the said discount as a part of the transaction value for the supply made by them to the end customer. Also, the manufacturers would also be eligible to claim the credit of GST paid on such discounts by the dealers and thereby reducing the tax cost to the end customers.

In addition to the above, the circular has also clarified that in cases where post supply discounts are given by way of commercial credit notes, the dealers would be eligible to claim the entire input tax credit if they have paid to the manufacturer the value of supply along with tax after adjustment for the said commercial credit note.

This clarification has given a sigh of relief for the dealers especially in the wake of the unfavourable decision rendered by Hon'ble Authority for Advance Ruling in the case of MRF Limited. - 2019-TIOL-87-AAR-GST It was held therein that the assessee will not be eligible to claim the input tax credit to the extent it relates to the adjustment done for the said commercial credit notes in view of the second proviso to Section 16(2) of the CGST Act.

Thus, considering the fact that an Advance Ruling is binding only on the applicant who sought for the Ruling and the jurisdictional officer of the said applicant and that the circulars issued by CBIC are always binding on the Departmental Authorities, in our view, dealers can proceed to claim the entire input tax credit based upon the clarification issued by the circular.

On a concluding note, though the circular has put to rest a lot of burning issues, still the clarifications are susceptible to different interpretations considering the manner in which the same have been worded.

[B. Venkatramanan is Senior Associate and Rohan Muralidharan is Principal Associate, Lakshmikumaran & Sridharan, Chennai and the views expressed are strictly personal.]