NOVEMBER 05, 2019

By R Sridhar, Consulting Editor, TIOL

THE Hon Authority for Advance Ruling in Trivandrum Kerala recently, in the case of Santosh Distributors (Applicant) - 2019-TIOL-433-AAR-GST, an Authorized Distributor of Castrol India Limited held that when an Applicant is reimbursed Discounts passed on by him to Retailer/Customers, the reimbursement would amount to additional consideration in the their hands and hence eligible to GST. The findings articulated by the Hon AAR is as follows

A) The Discounts reimbursed is given to Retailers/Customers as directed by Castrol Limited and is directed to augment sales volume of a category of customers as identified by Castrol Limited

B) The Applicant had no control over quantum of Discounts offered or on the Retailers /Customers to whom the scheme of Discounts were offered.

C) The reimbursement of Discounts by Castrol to applicant would represent additional consideration in their hands and eligible to GST as per Section 15.

D) The reimbursed amount would liable to be taxed as consideration payable to the Customer /Retailer by the applicant.

Crucial Issues

It is pertinent that before reaching the sanctum sanctorum of Section 15, a reader has to take into account Section 7 of the CGST Act (Act) read with Section 2(31) to understand what is the consideration for the supply of goods. While it is true that section 15, taxes the supply at Transaction value, it is obvious that a supply cannot be taxed without consideration barring situations detailed under Schedule I read with Section 7(1) (c).

Consideration as defined in Section 2(31) includes

Section 2(31):  "consideration"  in relation to the supply of goods or services or both includes-

"(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply."

It will be worthwhile to peruse the language of the Act as plain interpretation cannot be substituted except under exceptional circumstances. The definition of consideration as given in the Act permits inclusion as consideration only when the same is footed by any other person to the transaction. It is important to advert that the phrase "any other person" occurs in the 2 legs of the definition repeatedly and hence the legislative intent is expressed. With this in the background it is important to understand the flow analysis of the transaction from GST Chain perspective.

Transaction Flow analysis Argument

A (Principal Manufacturer) supplies goods to B who is the Wholesale Distributor of geographical area. B in turn resupplies the goods to a geographical sub area Retailer C who in turn supplies / sells to ultimate customer. From Transaction flow perspective and the GST Chain A, B, C are all persons in the GST Chain and none of them can be construed as any other person as per Act.

We can illustrate the applicability of the definition again by taking up an example.

A is a GST registered person who runs an online Electronic portal in e-commerce business. There are various suppliers who come on the platform to sell goods to consumers who through I-net access the platform. In case A incentivizes the Suppliers who sells goods to the Consumers by giving an incentive for participating in the on line portal, then A could be considered as "any other person" as per mandate of Section 2(31) of the Act and the incentive could be taxed in the hands of the supplier who uses the platform.

Reasoning in the order

The order referred in the case, does not give reasons as to why the reimbursement could be treated as a consideration and how the reimbursement is covered within the clear sweep of Section 2(31) read with section 7 and section 15 of the Act.

In light of the above and also due to the clear language used in Section 2(31) which has not been tested by the Hon Authority for Advance Rulings, it is with utmost humility, we can say that the decision appears to be non- speaking order.

Concept of Subsidy versus Discount

It is crystal clear from the definition in Section 2(31) that subsidies given by any person other than government would be taxable as consideration. Subsidy as defined in the Oxford Dictionary "1 Money granted especially by the State to keep down the price of commodities etc. 2 any monetary grant".

However Discount means amounts deducted from full or normal price.

It is amply evident that a reimbursement of a Discount cannot result in consideration as what is reimbursed is equal to amount parted as a Discount. It will be a fair construction if consideration given by third parties to a transaction that is in the nature of a subsidy, is taxed as additional consideration.

Comparative Jurisdiction analysis

The Australian GST vide code reference 9 -15   needs to be mentioned particularly as the decisions of the Australian regime are being used persuasively in many GST jurisdictions. Section 9-15 of the Code defines Consideration

Consideration

(1)   Consideration  includes:

(a)  any payment, or any act or forbearance, in connection with a supply of anything; and

(b)  any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2)  It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

It will be important to see item 2 of the definition as above and note that the expression used is entirely different as compared to the Indian regime. It is also true that the Australian code has a list of items that does not tantamount to consideration but these have not been taken up as they are not relevant for pointing the difference in laws of India and Australia as regards the phrase "any other person". It is also important to understand that cases like the AP Distributors case [2013] FCAFC 105- Full Federal Court, Sydney Australia  which have considered certain payments as additional consideration have to be seen and understood in the light of the law as prevalent in that jurisdiction.

Trade conditions argument - Commercial perspective

It is relevant to note that in any sector where multiple suppliers compete for share of volumes, the discounts schemes implemented have various connotations and methodologies. In all the sectors, it is important note that there are two types of Discounts that are generally given and they are a) Intermediary Trade Discounts b) Consumer Promotion Discounts.

Reimbursements of discounts given to Customer will have to be reimbursed by taking resort to trade chain similar to the manner in which the goods were first sold. In these transactions, there is nothing additional that is left behind in a Trader hands as the Principal Supplier (first in the chain) will lose value if the same is retained and not passed on.

Transaction Value on which taxes have been paid

It will be pertinent to understand that invariably Discounts that are passed on post Sale (as in the applicant case) are passed on through financial credit notes. The values on which the transaction was originally taxed would be inclusive of the Discount passed on and the special discounts are generally costed for, by the manufacturer supplier as selling expenses and included in the value.

Considering that the Discounts reimbursed for Consumer promotion schemes are already included in the value on which GST has been paid and that the financial credit notes do not have any GST reversal impact, the entire concept of additional consideration needs to be reviewed by the GOI and the Council as the taxing of these could have huge detriment on trade and volumes consequently affecting GST collections.

Summary

While GST is truly an evolving law, it is in the interest of the GOI, States and all stakeholders, that incrementally taxing a transaction on account of pseudo additional consideration (like in the case of the applicant in the referred ruling) will only enhance litigation and may not yield revenue. It is also important to evaluate the relevance of commercial context, maturity of markets and overall consumer strength etc. when decision to tax such reimbursements are made in the GST environment.