Investigations regarding levy of service tax on incentives/discounts received by the dealers of the vehicle manufacturers, FMCG companies

This is to update you regarding recent investigations being undertaken by Directorate General of Goods and Services Tax Intelligence (‘DGGSTI’) on the captioned subject. We have captured the background, legal viewpoint and our comments in this regard as under.

Background

The business entities devise unique marketing plans to increase their sales. One common practice adopted by entities is to offer various discounts, incentives, schemes etc. linked to targets or other commercial considerations to their dealers. The dealers also pass on some of these amounts to their respective customers.

The DGGSTI is conducting investigations at the end of dealers of various vehicle manufacturers, FMCG/Consumer durable companies on the pretext that such amounts are received by the dealers’ for rendering the service of tolerating the act of further selling the goods at discounted price for increasing sales of their suppliers and are subject to service tax. Accordingly, these amounts should be treated as ‘consideration’ for rendition of ‘declared service’ under Section 66E(e) of the Finance Act, 1994 (‘Finance Act’) i.e. ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’. In some cases, DGGSTI has even issued Show Cause Notice (SCN) to the dealers.

Legal viewpoint

The DGGSTI has adopted an interpretation that such amounts received by the dealers will be covered under the expression ‘tolerate an act’. In our view, such an interpretation is grossly mis-founded.

Service tax was a tax on ‘an activity carried out by a person for another’. In our view, the aforesaid amounts received by the dealers do not attract service tax for the following reasons:

• The aforesaid transaction is related to activity of purchase of goods made by the dealers and not towards provision of any service. This discounts etc. offered by suppliers effectively reduces the purchase price of goods at dealer’s end and is not towards rendition of any independent service; and
• The dealers undertake activities of sale of goods on their own account for their own benefit and not for another person (supplier). In the case of Philips India Limited v. CCE, 1997 (91) ELT 540 (SC), the Supreme Court held that advertisement undertaken by a dealer is to promote its own sales and not on behest of the supplier company.

Before the introduction of negative list service tax regime, the department proposed to tax such transactions under ‘business auxiliary service’. In several cases, the Tribunal held that such incentives allowed to dealers are in relation to sale of goods and in nature of trade discounts and not for any service. In our view, these decisions will hold valid even under the negative list regime.

NITYA Comments

The instant issue being raised by DGGSTI will have far reaching implications in automobile, FMCG as well as Consumer Durables sector wherein the Companies offer varied discounts and incentives to their dealers. The issue will be equally relevant under GST regime since ‘toleration of an act’ is specifically covered under the definition of ‘consideration’ and considered as service under Schedule II of the Central Goods and Services Tax Act, 2017.

The aforesaid investigations warrant a pro-active approach (both at dealers’ as well as Companies’ end) for handling such investigations and litigations. It must be an endeavour that the correct information and legal viewpoint is provided. The accounting & TDS treatment adopted by dealers as well as Companies for such amounts is equally important. The Companies can also issue an advisory to their dealers to ensure consistency and uniformity in handling these issues at their dealers’ end.