The issue before the Appellate Authority for Advance Ruling, Kerala (‘AAAR’) was the taxability of discounts reimbursed by Castrol India Limited to its authorized dealer (i.e. ‘the Appellant’), against supplies made by the Appellant at a discounted price to its customers.
Facts of the case:
- M/s Santhosh Distributors (‘Appellant’) an authorized dealer of Castrol India Limited (‘Principal’), is engaged in the supply of Castrol- brand industrial and automotive lubricants.
- To augment sales volume, the Appellant supplied goods to its customers, at reduced prices (‘SKU discounts’), in accordance with the scheme approved by the Principal. The Principal reimbursed the Appellant for such SKU discounts, through the issuance of commercial credit notes.
- The Appellant filed an application with the Kerala Authority for Advance Ruling (‘AAR’) on the following questions:
a. Whether the SKU discounts offered by the Principal to the customers (via the Appellant) were taxable under GST;
b. Whether the Appellant was liable to reverse Input Tax Credit (‘ITC’) against the commercial credit notes issued by the Principal.
- Observing that SKU discounts offered by the Principal through the Appellant were intended to augment the sales volumes, the AAR held that these discounts were to be treated as an additional consideration flowing from the Principal. Hence, these amounts were liable to be added to the taxable value of supplies made by the Appellant to its customers. It was also observed that the Appellant was eligible to avail full ITC without undertaking any reversals.
- Aggrieved by the advance ruling, the Appellant filed an appeal before the AAAR.
Judgment of the AAAR:
Upholding the decision of the AAR, the AAAR held that in the present case, the additional discount (SKU discounts) given by the Principal to the customers through the Appellant attracted GST. The AAAR addressed the following questions (as part of the appeal):
a. Whether the discount provided by the Principal to the customers through the Appellant attracted GST;
b. Whether the amount shown in the commercial credit notes issued to the Appellant attracted proportionate ITC reversals;
c. Whether there was any GST liability on the Appellant for the reimbursements of SKU discounts provided by the Principal to the Appellant.
The appellate ruling was made on the following basis:
- The AAAR noted that the dispute in the instant case was regarding the taxability of post-sale SKU discounts, wherein the amount of discount was not agreed between the parties at the time of supply of goods.
- Referring to Section 15(3) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), the AAAR observed that reduction in the ‘taxable value’ was allowed only on satisfaction of the following conditions:
a. The discount was established under an agreement entered before the time of supply and linked to relevant invoices; and
b. ITC attributable to the discount was reversed by the recipient.
- Further, it was elucidated that the quantum of ‘post-sale discounts offered by the supplier had to be pre-determined according to the agreement terms. In other words, the same could not be open-ended or based on any criteria at the supplier’s discretion. The AAAR observed that the SKU discounts being reimbursed by the Principal, after the supply of goods, did not fulfill the twin requirements of Section 15(3) of the CGST Act. Hence, such reimbursements could not be considered as discounts for the purposes of arriving at ‘transaction value’ under Section 15 of the CGST Act.
- It was held that commercial credit notes issued by the Principal would not be relevant for reducing the tax liability of the Principal. At the same time, the Appellant was not required to undertake ITC reversals in such a case.
- Importantly, the AAAR observed that additional discounts given by the Appellant and then reimbursed by the Principal, are to be treated as a ‘consideration’ in terms of Section 2(31) of the CGST Act, since it is paid to offer the reduced price and augment the sales.
- The Appellant in this case had no discretion to decide the discount being offered to the customer and was offering the discount as specified by the Principal. Since the Principal decided upon such SKU discounts and then reimbursed the amount to the Appellant, the AAAR held that that it is an (additional) consideration paid by the Principal to the Appellants for making such supply and is liable to be taxed. Consequently, such discounts were liable to be added to the consideration for arriving at the taxable value of goods supplied to customers.
- It emerges that the customer would not be eligible to claim ITC of differential GST payable on such SKU discounts, since the appellate order states that ITC is available only to the extent of tax paid by the customer.
Our Comments: Such reimbursement offered by the principal to distributor against SKU discount are in the nature of discount only and accordingly receipt from the principal by way of credit note shall not be treated as additional consideration. The AAAR should have appreciated that such discounts are effectively a reduction in consideration for the supply made by the principal.
Favorable jurisprudence under the erstwhile indirect taxes regime is available, wherein the Courts, relying on common trade practice and the accounting policies adopted by assessee-companies, have held that such post-sale discounts are merely price adjustments and the same cannot be treated as an ‘additional consideration’ against the original supply of goods.
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