pri Authority for Adverse Rulings: Dis-counting discounts Authority for Adverse Rulings: Dis-counting discounts

Chapter XVII of the Central Goods & Services Tax Act, 2017 lays down the provisions of Advance Ruling as may be sought by a taxpayer for obtaining clarification regarding the classification of goods or services, determination of time and value of supply, admissibility of input tax credit etc. The power to constitute the Authority for Advance Ruling (“AAR”) under this Chapter has been vested with the State Government. Section 96 of the CGST Act / SGST Act provides for the constitution of the AAR. There has been widespread criticism amongst the indirect tax practitioners and litigators regarding the constitution of this Authority by the various State Governments, as most of these Authorities consist of Central and State Tax Revenue Officers. It has been noted that most of these Authorities approach the Advance Ruling applications with a pro-revenue mindset, which also reflects in their final Rulings.

One would assume that the taxpayer would have a remedy in case the Ruling is found to be deficient or unsatisfactory. There does exist, in fact, a remedy in the form of Appellate Authority for Advance Ruling (“AAAR”). The irony is, even the Appellate Authority consists of the Commissioner of Central & State Tax, both of whom are Revenue Officers, in all the States! Rarely has there been a case so far where the AAR has given a Ruling which has been overturned by the AAAR. To make matters worse, there is currently no option available to taxpayers to appeal against the Ruling by the Appellate Authority.

I would like to discuss a recent advance ruling given by the Tamil Nadu AAR in the case of M/s. MRF Limited (“the applicant”). The brief facts of the case are given below –

– The Applicant intends to enter into an agreement with a payment platform C2F0 to streamline the invoicing and payments operations

– This platform works by automatically offering discounts to the customers on early payment to the suppliers, which may be at a fixed percentage or determined on case to case basis

– Since the discount is given post-sale, the applicant submitted that this cash discount cannot be excluded from the value of supply as per the provisions of Section 15 of the CGST Act, 2017

– By virtue of the above, the applicant is required to pay GST on the total undiscounted net invoice value. Thus, the gross payment by the applicant to its vendors would be the discounted net amount plus the GST on the undiscounted net amount.

– The applicant wished to obtain a Ruling on the eligibility of input tax credit (“ITC”) of the entire GST amount paid to the vendor even if the payment was made net of discount but with full GST on undiscounted value.

It is common practice in the industry to offer cash discounts to customers on account of early payments. It helps the entities meet their working capital requirements and save the cost of borrowing thereof, which is passed on to the customers as discount. By forgoing the amount of discount, the entities are in fact taking a hit to their profit margin. It is an age-old tradition, so to speak, and is being followed religiously all over the world. It is an accepted thumb rule that when an amount is paid net of cash discount, it has been paid towards the entire invoice value and the transaction is complete.

The crux of the GST law lies on the definition of “supply” contained in Section 7. For the sake of brevity, I will restrict to the basic definition of supply which is supply of goods or services or both by way of sale, transfer, barter, etc. for a consideration and in the course or furtherance of business. Also, the charging Section for GST is Section 9 of the CGST Act, which says that GST shall be levied “…on the value determined under Section 15…”. Hence, once a transaction is classified to be a “supply of goods or services or both”, one would turn to Section 15 of the CGST Act for determining the value of such supply. Let us analyse the relevant provisions of Section 15 for our discussion. The same are reproduced below –

“(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.


(3) The value of the supply shall not include any discount which is given––

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.”

Sub-section (1) above lays down the basic value of supply to be considered for determining the taxable value of supply for the purpose of Section 9. It mentions that the transaction value shall be the value of supply, which is the price paid or payable for the supply of goods or services or both. Further, sub-section (2) and (3) go on to illustrate which amounts shall be included and excluded from the transaction value to determine the final value of supply. For our discussion, we shall focus on sub-section (3) of Section 15.

Sub-section (3) starts with the words “the value of supply shall not include any discount……”. This means that the value of discount shall be reduced from the value of supply to determine the final taxable value, if the conditions provided in clauses (a) and (b) are fulfilled. Clause (a) allows for reduction of discount amount from value of supply if this discount is duly recorded on the invoice to arrive at the net value. This is also commonly known as on-invoice discount. Sub-clause (i) of Clause (b) allows for reduction of discount amount from the value of supply if such discount is pre-agreed between the parties or forms part of the agreement between the parties before the time of supply and it should be linked to specific invoices. In addition to sub-clause (i), the input tax credit availed by the recipient of supply should be reduced to the extent of discount offered by the supplier to be eligible for reduction of discount from value of supply under clause (b). Only under the above 2 scenarios, the supplier shall be eligible to reduce the discount amount from the value of supply.

In the case of M/s. MRF Limited, the applicant shall receive the proposed discount if the payment is made before the amount is due, as agreed between the supplier and recipient. It is at the option of the recipient to accept the discount or go ahead with the original credit period. Therefore, this discount can not form part of the invoice, as the invoice shall be raised as per the terms of the contract much before it is uploaded on to the C2F0 platform. This excludes our case from clause (a) of Section 15(3) and the discount can not be reduced from the invoice value under this clause. Since the discount received by the applicant is not pre-agreed, the cash discount offered can not be excluded from the value of supply under Clause (b) either. Hence, the applicant has correctly submitted that they are not covered under Section 15(3) and the discount received by them can not be excluded from the value of supply. The suppliers shall, thus, also charge GST on the entire contract value without considering the cash discount offered to the recipient. In consequence, the recipient shall pay the discounted contract value along with the GST on the entire non-discounted contract value to the supplier.

Now, the question that was raised before the Authority was whether the entire amount of GST, which was paid to the supplier and subsequently to the Government, on the entire contract value, would be eligible as ITC to the recipient of goods or services. The Authority relied on Section 16 of the CGST Act to provide the Ruling. To avoid unnecessary lengthening, let us analyse only the relevant provisions of Section 16 of the CGST Act, reproduced below –

“16. (1) ……

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––


(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and


Provided that …………….

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.”

Sub-section (2) of Section 16 lays down the eligibility criteria for claim of ITC under the GST Act. It is assumed that Clause (a), (b) & (d) of Section 16(2) and other sub-sections are met by the applicant as the tax invoices have been received, goods or services have also been received and returns have been filed. Clause (c) of this Section 16(2) states that the tax charged in respect of the supplies should be actually paid to the Government, either by cash or by ITC. The applicant has submitted that the suppliers shall charge tax on the entire undiscounted contract value. It is presumed that the amount shall also be paid to the Government by the supplier in the ordinary course. Therefore, the entire amount of tax charged and paid to the supplier shall qualify as ITC under Section 16(2)(c). Since the conditions under all the Clauses of Section 16(2) and other sub-sections are met, the GST amount paid by the applicant qualifies as ITC under Section 16. The Authority, in the case under discussion, seems to have conveniently ignored deliberation on the conditions of Section 16(2) altogether.

In the text of the Advance Ruling released in the public domain, the Authority has solely relied on the second proviso to Section 16(2) while Ruling against the applicant. The second proviso to this Section states that if the recipient fails to make the payment towards the value of supply within 180 days from the date of invoice, the ITC availed by the recipient shall be added to his output tax liability. The Authority has ruled that since the amount of discount shall not be paid by the applicant within 180 days or at all, they shall not be entitled to ITC of the GST amount proportionate to the value of discount under this proviso. In my view, the Authority has also failed to deliberate on and appreciate the meaning of the words used in the statute. I believe there is a specific reason that the statute mentions the phrase “payment towards” instead of “payment of” the value of supply. “Towards” is a preposition which is generally used in the language to portray a relation. The Merriam-Webster Dictionary gives one of the definitions of “towards” as “for the partial payment of”. Even generally, “payment towards” would be understood by a layman as a direction where the funds shall be utilised. It is used to denote a contribution, which may or may not be the full and total amount. If the words used in the statute were “payment of value of supply”, it would be interpreted as the ITC being limited to the exact amount of value of supply to be paid, which could also be controversial but in a different light.

Also, Section 15 artificially excludes the post-sale discount for the purpose of calculation of taxable value. It can be said that the value of supply derived under Section 15 is only relevant for the calculation of tax liability under the GST law. In the present case, the liability is being discharged as per the value determined under Section 15. Post meeting this criterion, any payment made against the invoice, even if partial or in full and final settlement, should be counted as a payment towards the value of supply only. It would be absurd to assume that despite being offered a cash discount, the recipient would opt to pay the entire contract value and increase his cost. It is an agreement between the supplier and the recipient as to how much consideration shall be paid for full and final settlement of the contract.

Before the introduction of the GST law, the Excise, VAT and Service Tax laws were in force in our country. All of these laws were introduced with a view to avoid double taxation and allow the taxpayers to avail credit of the tax already paid and the concept of input tax credit was, therefore, introduced. This effectively resulted in taxing only the value addition done at every stage of the supply chain. GST law was introduced to further streamline the cascading effect of taxes and bring the indirect taxation across the country at par. In the case under discussion, the Government is receiving the tax from the supplier on the undiscounted contract value. Hence, the ITC of this tax should be fully available to the recipient making further taxable supplies, in keeping up with the spirit of GST. If any part of this ITC is denied to him, it would unnecessarily increase the cost for the recipient, which shall be passed on in the supply chain and in turn, shall artificially increase the cost to the ultimate consumer. This would be against the very spirit of introduction of GST and would also result in unjust enrichment to the Government.

In view of the above arguments, I firmly believe that the Authority should have deliberated the issue presented by the applicant in depth and given a Ruling keeping in view the most basic aspects of GST. If a taxpayer is approaching the Authority with an issue which requires clarity, it is the duty of the Authority to examine the issue in the light of all the relevant provisions of the law and not only the ones which it deems beneficial to the Government Revenue. This farce, however, is a product of the law itself, which vests the power of constitution of these Authorities with the Revenue itself. I am sure the applicant has mulled over an appeal to the Appellate Authority with little hope. After all, the AAAR is also the Revenue in disguise, who shall approach the Revenue-favourable Ruling by the lower Authority with the same mindset and narrow view.

This article is the first in a new series, “Authority for Adverse Rulings”, written by Mr. Tanmay Mody, GST Practitioner.

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July 2021