AAR Update – Availability of Input Tax Credit attributable to post-sales discount

by | Mar 27, 2019

This is to apprise you regarding the recent Tamil Nadu Advance Ruling in the case of MRF Limited, 2019-VIL-71-AAR. The Ruling relates to availability of Input Tax Credit (‘ITC’) at the recipient’s end to the extent of tax attributable to post-sales discount given by the supplier to the recipient.

In the instant case, MRF Limited (‘Applicant’) will enter into an agreement with a software company for exchange of data between the Applicant and its suppliers. The software will allow suppliers to offer discount to the recipient (Applicant).

The Applicant accepted that the suppliers cannot claim deduction of discount under Section 15(3)(b) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) being post-sales discount whose factum / quantum of discount will not be known at time of supply. The moot question was whether the Applicant will be eligible to claim full ITC in this case or not, where the suppliers will pay full tax in the Government account. 

The Authority for Advance Ruling (‘Authority’) placing reliance on second proviso to Section 16(2)(d) of the CGST Act, considered that non-payment of the differential amount (equivalent to amount of post-sales discount) constituted to be ‘failure to pay the amount towards the value of supply’. The Authority observed that since deduction of discount was not permissible, value of supply remained pre-discounted value. Thus, non-payment of value to the extent of post-sales discount is covered by the said proviso triggering reversal of ITC at the Applicant’s end.

The above conclusion of the Authority, can be summarized with the following example:



Transaction Value

Applicable GST@18 percent

Post-sales discount offered by supplier

Actual amount paid by Applicant

Value of supply

ITC admissible

(credit pro-rata to ` 20 reduced)




₹80 + ₹18




NITYA Comments: The aforesaid ruling on inadmissibility of ITC attributable to discount amount, is grossly incorrect.

The Authority did not appreciate that the expression ‘failure to pay’ employed in Section 16(2)(d) of the CGST Act, encompasses an act of non-fulfilment of commitment at end of buyer. In the instant case, there will be no ‘failure to pay’ at the end of the Applicant. The Applicant will not be required to pay discount amount (₹20) since the parties have commercially agreed for payment of reduced amount (₹98 in the above example).

It is also pertinent to refer to Circular No. 122/03/2010-ST dated April 30, 2010 issued in respect of an identically worded provision viz. Rule 4(7) of the Cenvat Credit Rules, 2004. In this Circular, CBIC clarified that full credit will be available even if the service receiver pays discounted amount to the supplier of services.

Accordingly, as full tax will be paid and deposited by the supplier in the Government account, full ITC will be available to the Applicant.