Summary: The Kerala AAR in the case of M/s. P Achuthan Nair & Company (Advance Ruling No. KER/01/2024) ruled that the differential dealer margin provided by HPCL to its retail dealer is taxable under GST at 18%. The applicant, a petroleum dealer, received the margin as a consideration for continuing operations despite low sales volumes. This amount was deemed a supply of service under clause (e) of Serial No. 5 of Schedule II of the CGST Act, which pertains to agreeing to refrain from an act. The ruling clarified that this margin is not a discount or incentive related to petroleum sales, which are outside GST’s purview, but a taxable supply of service classified under SAC 999793, heading 9997. The AAR observed that the payment has a direct nexus with the dealer’s agreement to sustain operations despite low volumes, distinguishing it from discounts under Section 15(3) of the CGST Act. Circular No. 178/10/2022-GST also supports the taxable nature of such considerations linked to agreements. The AAR dismissed the applicant’s reliance on Circular 29/2019, affirming that the margin is not exempt from GST. As per Notification No. 11/2017-Central Tax (Rate), the service is taxable at 18%, aligning with SI No. 35, Chapter 99. This ruling underscores that differential dealer margins tied to agreements with petroleum companies are treated as taxable supplies under GST laws.
Introduction: The AAR, Kerala in the case of M/s. P Achuthan Nair & Company [Advance Ruling No. KER/01/2024 dated January 10, 2024] where amount paid as differential dealer margin is in nature of a consideration received for agreeing an obligation to refrain from an act. Therefore, it squarely falls under clause (e) of SI No. 5 of Schedule and hence taxable to GST. Further, differential dealer margin is taxable under Heading No. 9997 at 18%.
Facts:
M/s. P Achuthan Nair & Company (“the Applicant”) was a retail dealer of petroleum products in the State of Kerala. The Applicant was an authorized retail dealer of HPCL. Petroleum is outside the purview of GST. The Applicant was engaged in providing other services also like washing, cleaning and dyeing services, beauty and physical well- being services and other miscellaneous services including services nowhere else classified under heading 9997.
The levy of GST on Differential Dealer Margin, provided by HPCL to the Applicant. The Differential Dealer Margin is actually not a discount or incentive taxable under the purview of GST. The quantum of this margin is directly related to the volume of sale of petroleum products effected by the Applicant. The Differential Dealer Margin given by HPCL is inversely proportional to the volume of sales effected by each dealer. Further, it is not in the nature of any consideration for ‘agreeing to the obligation to do an Act’ as per Serial No. 5(e) of Schedule II in terms of Sub-Section.
The Applicant filed an advance ruling application on the differential dealer margin provider by the petroleum companies to its retail dealers are taxed under GST as supply of service.
Issue:
Whether differential dealer margin provider by the petroleum companies to its retail dealers are taxable under GST as a supply of service?
Held:
The AAR, Kerala in Advance Ruling No. KER/01/2024 held as under:
- Noted that, S. No. 5(e) of Schedule II of the CGST Act which state activities or transactions to be treated as supply of goods or supply of services which further provide that agreeing to the obligation to refrain from an act, or to tolerate an act or situation or to do an act is supply of service. In the current case, the differential dealer margin is provided by the HPCL to the Applicant when the volume decreases below a mutually agreed level so that the Applicant does not close down his petrol pump due to such loss. Thus, the amount paid as differential dealer margin is in the nature of a consideration in return of the Applicant agreeing to run the dealership despite low sales volume. This amount is therefore in the nature of a consideration received for agreeing to the obligation to refrain from an act, and squarely falls under clause (e) of SI. No. 5 of Schedule II of the CGST Act and hence taxable to GST. Hence, Circular 29/2019 (F 17(134) AACT/GST/2017/4596 dated June 28, 2019 cannot be cited as a reason for non-payment of tax by the Applicant.
- Opined that, CBIC vide Para No. 6 of its Circular No. 178/10/2022-GST dated August 03, 2022 clarified that there must be a necessary and sufficient nexus between the supply i.e. agreement to do or to abstain from doing something and the consideration. In the instant case, HPCL provides the differential margin based on the agreement and the consideration is related to the decrease in sale volume. The Differential dealer margin is given only to a dealer and not the general public. The amount will not be paid if the Applicant’s sales volume touches the agreed limit or if the Applicant winds up his business.
- Observed that, Section 15 of the CGST deals with calculation of the value of taxable supply and sub-section 3 deals with taxability of discount given on that value of taxable supply under Section 15(3) of the CGST Act as interpreted by the Applicant. The taxable supply is agreeing to the obligation to refrain from an act for which a differential dealer margin is given by HPCL to the Applicant. Though the consideration for this supply is linked to the sales volume of petrol, it is not a discount given on the supply of petrol. Hence, Section 15(3) of the CGST Act is not applicable in the present case. Further, in view of the above, GST Circular 29/2019 (F 17(134) AACT/GST/2017/4596 dated June 28, 2019 cannot be cited as a reason for non-payment of tax by the Applicant.
- Opined that, there is no dispute the Applicant’s supply of petrol/diesel to end customer is not taxable to GST. However, as already discussed above, the supply in the present case is that of the service of agreeing to refrain from doing an act is classified under heading 9997, SAC 999793. A per SI. No. 35 of the aforementioned notification, the same is taxable @18%.
- Held that, the differential dealer margin provided by HPCL to the Applicant is taxable under GST as a supply of service and the applicant was held liable to pay GST @18% as per SI No. 35, Chapter 35, Chapter 99, Section 9, Heading 9997 of the Notification No. 11/2017-Central Tax (Rate) dated June 28, 2017.
*****
(Author can be reached at [email protected])
Author Bio
