AAR Update | Inclusion of purchase discount in value of supply to customers

by | Nov 6, 2019

This is to apprise you about the recent Advance Ruling in the case of Santhosh Distributors, 2019-VIL-416-AAR issued by the Kerala Authority for Advance Ruling (‘AAR’). The AAR ruled that GST is payable on reimbursement of discounts received by the distributor from the manufacturer by including it in the taxable value of supply between distributor and its customers.

 

Facts

 

The Applicant was an authorized distributor of industrial and automotive lubricants (‘goods’) manufactured by Castrol India Limited (‘Principal Supplier’). The distributors could supply goods to dealers at reduced rates pre-fixed by the Principal Supplier through the latter’s billing software. In case of sale of goods at reduced rates, the Principal Supplier was reimbursing the differential amount to the distributors through commercial Credit Notes.

 

The question before the AAR was whether reimbursement of discounts provided by the Principal Supplier to Applicant attracts levy of GST. Secondly, whether the Applicant was required to reverse Input Tax Credit (‘ITC’) to the extent attributable to the commercial Credit Notes.

 

Ruling

 

The AAR held that the Applicant gives discount to the dealers on the directions of the Principal Supplier and discount is intended to augment the sales volume. Accordingly, the reimbursement amount forms consideration flowing from Principal Supplier for the supply made by the Applicant to its dealers. Hence, the same is liable to be added to the taxable value of supply between the Applicant and its dealers.

 

For supply between the Principal Supplier and the Applicant, the AAR held that the deduction of discounts from value of taxable supply is subject to the conditions prescribed in Section 15(3) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). Since the instant discount do not satisfy the conditions prescribed in Section 15(3), the same is not deductible from taxable value of supply of the Principal Supplier. Consequently, the Applicant is eligible to avail full ITC of tax paid by the Principal Supplier without making any ITC reversals.

 

NITYA’s Comments:

 

The Applicant was merely selling goods to dealers at prices fixed by the Principal Supplier. In respect of supplies of the Applicant to dealers, price was the sole consideration for the supply. The amount received from the Principal Supplier cannot be said to be an additional consideration since the same does not flow from the buyer (or on his directions) to the seller. While the AAR did not refer to Circular No. 105/24/2019-GST dated June 28, 2019 (‘Circular No. 105’), it implemented the clarifications provided therein. The ruling summarily holds that reimbursement of discounts forms consideration for the goods supplied by the Applicant to its dealers without providing any concrete reasons.

 

It is important to note that Circular No. 105 has been withdrawn vide Circular No. 112/31/2019-GST dated October 3, 2019 (Refer Update NITYA’s Insight | Issue 50 | Recent Notifications and Circulars in Indirect Taxes (including Notifications issued post 37th GST Council meeting) dated October 7, 2019. Hence, the above interpretation has been renounced by the department itself.

 

Since the ruling was pronounced before the date of withdrawal of the Circular, the applicant is likely to file an appeal against the same before Appellate AAR.

 

The dealer discounts and incentives are a highly contentious subject matter and will witness substantial litigation under the GST regime.

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