Discounts/Incentives-GST Implications

1. In many industries (e.g. automobiles, FMCG, etc.) various kinds of discounts/incentives are given to the distributors on achieving certain sales targets. Issue therefore for discussion and analysis is whether such discounts/incentives can be considered as a separate consideration against any services supplied by such distributors.

2. At the outset please note that the tax implications of any given transaction are closely dependent on the terms of the contract. For the sake of present analysis we shall presume that the contract (commonly referred as distributor agreement) in question provides for such discounts/incentives on achieving certain sales targets. With the said background we offer following reasons to canvass the view that such discounts/incentives accruing on achieving certain sales targets cannot be considered as a consideration against any separate supply of services by the distributors.

3. As per Sec. 9(1) of the CGST Act, 2017 the tax is levied on the supply of goods or services on the value determined u/s 15. The scope of supply as defined u/s 7(1)(a) of the CGST Act, 2017 includes supply of goods or services or both by way of sale made or agreed to be made for a consideration. Sec. 15(1) of the CGST Act, 2017 further provides that the value of supply shall be the transaction value, which is the price actually paid or payable for the supply in question.

4. With the above background it must be noted that the registered supplier (manufacturer) in question enters into a sale transaction of goods (e.g. automobiles) with various distributors (auto dealers) in accordance with the distributor agreement. It is in accordance with the said distribution agreement that various discounts/incentives are accrued to the distributor on achieving certain sales targets. Therefore we submit that as a condition of the contract the original price for sale of automobiles is varied subsequently to account/adjust for the discounts/incentives on achieving certain targets. Hence such discounts/incentives can be said to be reducing the original price payable by the distributor on account of fulfilling certain conditions of the contract and hence cannot partake the character of it being a consideration against any supply of services made by the distributor.

5. Reference here is invited to the decision of Hon’ble Supreme Court in the case of Southern Motors vs State of Karnataka 2017 (358) E.L.T. 3 (S.C.) in the context of Karnataka VAT Act, 2003. In the said case the issue was whether the discounts/incentives not reflected on the invoice would be allowed as a deduction for determining the sale price which will be exigible to tax. The Court observed as under:

“It is a matter of common experience that in the present contemporary competitive market, trade discounts not only are dependent on variable factors but also might be strategically not disclosable at the time of the original sale/purchase so as to be coevally reflected in the tax invoice or the bill of sale as the case may be. The actual quantification of the trade discount, depending on the nature of the trade and the related stipulations in any contract with regard thereto, may be deferred till the happening of a contemplated event, so much so that the benefit thereof is extended at a point of time subsequent to that of the original sale/purchase. That by itself, subject to proof of such regular trade practice and the contract/agreement entered into between the parties, would not render the trade discount otherwise legal and acceptable, either non est or fictitious for evading tax liability. In the above factual premise, the interpretation as sought to be provided by the Revenue would evidently reduce Section 3(2)(c) to a dead letter, ineffective and unworkable and would defeat the objective of permitting deductions from the total turnover on account of trade discount.

A trade discount conceptually is a pre sale concurrence, the quantification whereof depends on many many factors in commerce regulating the scale of sale/purchase depending, amongst others on goodwill, quality, marketable skills, discounts, etc. contributing to the ultimate performance to qualify for such discounts. Such trade discounts, to reiterate, have already been recognized by this Court with the emphatic rider that the same ought not to be disallowed only as they are not payable at the time of each invoice or deducted from the invoice price.

To insist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be ill-logical, irrational and absurd. To reiterate, trade discount though an admitted phenomenon in commerce, the computation thereof may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory.”

6. Reliance is also placed on the decision of Hon’ble Supreme Court in the case of Maya Appliances (Pvt.) Ltd. v. Additional Commissioner of Commercial Taxes 2018 (10) G.S.T.L. 6 (S.C.) wherein also the Apex Court relying on the above referred decision has held that the trade discounts even granted after the sale would be deducted from the invoice value to arrive at the sales turnover liable for tax.

7. Therefore we submit that the ambit of the term “trade discount” is very wide to cover all the price reductions pursuant to the fulfillment of the conditions of the contract, which is essentially in the given scenario for the sale of goods, and therefore once such discounts/incentives are considered as a reduction of the sale price, it cannot be considered as a separate consideration paid to the distributor for any supply of services.

8. We also rely on the decision of the Hon’ble Mumbai Tribunal in the case of Bharat Petroleum Corporation Ltd. v. Commissioner of Service Tax (2014 (36) S.T.R. 433 (Tri. – Mumbai). In the said case the facts were that the appellants viz. BPCL/HPCL were engaged in marketing of petroleum products. The appellants purchased Compressed Natural Gas (CNG) from Mahanagar Gas Limited (MGL) and, thereafter, sold the same to their dealers. As per the dealership agreement M/s. MGL was to be provided adequate space at the site by the appellant for installation of the equipment and construction of proper foundation, trenches, etc., at the site. The appellants were liable to make provisions for supply of water, electricity and other utilities, the cost of which are borne by MGL. The appellants were also obliged to take due care of the equipment and ensure that the same are properly handled and the required safety provisions are followed and all statutory approvals of the concerned authorities for opening and operating the retail outlets/installation of equipment, etc., were to be obtained by the appellants and the appellants were also required to pay all municipal taxes, property taxes, rents, etc., where the retail outlets operates. Department sought to recover service tax from the appellants on the ground that by undertaking the given activities they have provided services in the nature of marketing of the goods. It was held as under:

“11. As per the said provisions, the service provider provides service to his client for marketing or promotion of the goods to third party. In these cases, appellants themselves are buying goods from M/s. MGL. Therefore, the question of rendering the service to the client for marketing of the goods does not arise. We further find that MGL is discharging VAT/ST liability while selling the CNG to appellants. Although the RSP is fixed but it does not mean that the profit margin shall be constituted as commission for rendering the service. On examination, it is found that all the transactions shown by the appellants are done on principal to principal basis. Moreover, the appellants are selling these CNG on payment of VAT/ST to the buyers. There is no commission component that have been received by the appellants from M/s. MGL. FOR e.g., if the appellant is receiving goods from MGL at ` 100/- per kg. including VAT but these goods are sold by the appellant to customers on RSP fixed at ` 102/- per kg., that does not mean that the appellants are receiving commission of Rs. 2/- from MGL. In fact the appellants are also paying VAT on ` 2/- also. It is also a fact that the appellants are not receiving any commission from M/s. MGL. Therefore, it cannot be presumed that appellants are rendering any service to MGL.”

9. We thus submit that the ratio of the above ruling holding that there is no provision of services against the fulfilment of the conditions of dealership agreement would equally apply even under the GST regime and therefore discounts/incentives accruing on fulfilling the conditions of the contract of sale cannot be considered as a consideration for supply of any services.

10. We also rely on the decision of Hon’ble Mumbai Tribunal in the case of Sharyu Motors v. Commissioner of Service Tax 2016(43) S.T.R. 158 (Tri. – Mumbai). In the said case the issue was whether incentives received on achieving the sales target would be subjected to service tax or not as a business auxiliary service. The Tribunal observed as under:

“5.1 As regards the Service Tax liability under the category of Business Auxiliary Services for the amount received and for achieving the target under Target Incentive Scheme, we find that the appellant had been given targets for specific quantum of sale by the manufacturers of the cars. As per the agreement, on achievement of such target and in excess of it, appellant was to receive some amount as an incentive. It is the case of the Revenue that such amount is taxable under Business Auxiliary Services, we find no substance in the arguments raised by the learned AR as well as the reasoning given by the adjudicating authority. The said amounts are incentive received for achieving the target of sales cannot be treated as Business Auxiliary Services, as incentive are only as trade discount which are extended to the appellant for achieving the targets. We find that this view has been taken by the Tribunal in the case of Sai Service Station (supra). With respect, we reproduce the relevant paragraphs :-

14. In respect of the incentive on account of sales/target incentive, incentive on sale of vehicles and incentive on sale of spare parts for promoting and marketing the products of MUL, the contention is that these incentives are in the form of trade discount. The assessee respondent is the authorized dealer of car manufactured by MUL and are getting certain incentives in respect of sale target set out by the manufacturer. These targets are as per the circular issued by MUL. Hence these cannot be treated as business auxiliary service.

18. In respect of sales/target incentive, the Revenue wants to tax this activity under the category of business auxiliary service. We have gone through the circular issued by MUL which provides certain incentives in respect of cars sold by the assessee-respondent. These incentives are in the form of trade discount. In these circumstances, we find no infirmity in the adjudication order whereby the adjudicating authority dropped the demand. Hence, the appeal filed by the Revenue has no merit.”

11. It is thus submitted that even though the issue in the above decision was with respect to exigibility to tax under the business auxiliary services, the Tribunal went beyond the aspect of business auxiliary services and held that as the said incentives are a form of trade discount, it would not be liable to tax. Said ratio would therefore continue to hold good even under the GST regime. We hence submit that even under GST regime, the nature of such incentives would remain as “trade discount” and therefore it would not partake a character of a consideration against supply of any services.

12. Further Sec. 7(1)(a) of the CGST Act, 2017 defines the scope of supply to include sales or services made or to be made “for” a consideration. Distributor therefore by way of fulfilling various conditions of the contract (wherein some yields to discounts/incentives and some don’t (e.g. maintaining the dealer showroom tidy)) cannot be said to have made any supply “for” a consideration with respect to fulfilment of the conditions where he is granted discounts/incentives and not for fulfilment of the other conditions. Fulfilment of all the conditions of the contract (whether it leads to discounts/incentives or not) are part and parcel of the overriding sale contract and hence it has to be treated merely as a reduction in the price payable for the sale of goods and not as a separate supply of any services by the distributor.

13. That for the said reason Federal Court of Australia in the case of AP Group Limited v Commissioner of Taxation [2013] FCAFC 105 dismissed the appeal of the revenue against the decision of the Tribunal holding that incentives received by motor vehicle dealers cannot be considered as a consideration received against any supply made to vehicle manufacturers so as to be exigible to GST. It may be noted that even under the Australian GST law (A New Tax System (Goods and Services Tax) Act 1999) the levy of tax is on supply of services made “for” a consideration. Specifically the Tribunal held as under:

“one could just as readily conclude that a retailer makes a supply to its wholesaler by taking on an obligation to pay for the goods it purchases, or that the wholesaler makes a supply not only of its goods, but also of the promise to deliver those goods in a timely fashion.”

“In the context of the overall business relationships and contractual arrangements between the Applicant on the one hand, and the various manufacturers on the other, we do not think that the Applicant’s acceptance of the obligations or the making of the promises is properly viewed as the making of supplies to the manufacturers. Instead, they are part of the foundation underpinning the relationships, the background to the bargain the parties have made – in a sense, the rule book by which the game is to be played.”

“payments are not made “for”, or even “in connection with”, any such supplies. There is no nexus between the payment of the incentives and the making of the promises, the performance of the obligations, or the compliance with the manufacturers’ various rules and policies. The Commissioner’s submissions do not grapple with the indisputable truth that, on his argument, the [AP Group] always carries on its business in a particular way (as it has agreed with the manufacturers to do), but it only gets paid for doing so in circumstances which warrant the payment of an incentive; otherwise the supply is provided for free. We do not see how that can possibly be so.”

“the supply of a vehicle to the [AP Group’s] retail customer is at the same time the supply, by the [AP Group] to the manufacturer, of the service of supplying the vehicle to the customer. It is difficult, with respect, to imagine a more tortured analysis of what is a fundamentally simple transaction, a sale of goods.”

14. Therefore the acceptance of various obligations the fulfilment of which results in the reduction of the price payable cannot be considered as a separate supply.

15. Before we conclude we also submit that the fulfilment of various conditions of the contract cannot be considered as “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act” under paragraph no. 5(e) of Schedule II of the CGST Act, 2017 for the following reasons.

16. Schedule II is merely a classification schedule by virtue of Sec. 7(1A) of the CGST Act, 2017 and hence do not define the scope of supply. It merely classifies a supply identified u/s 7(1) into supply of goods or supply of services. Therefore for the foregoing reasons the grant of discounts/incentive does not partake the character of a consideration against a separate supply by the distributor and in absence of any supply, there is no scope of it being classified as a supply of services.

17. Without prejudice to above, paragraph 5(e) supra connotes a scenario wherein a person has assumed an obligation of refraining from an act or doing of an act against which a consideration is received. In the given issue the obligation stemming from the contract is for the manufacturer to sell the goods to the distributor under certain conditions of sale the fulfilment of which accrues price reduction by way of discounts/incentives. Therefore it cannot be said that the distributor has assumed any obligation of doing any act.

18. Further the discounts/incentives accrue on actually achieving the sales targets and not on merely assuming an obligation of achieving the sales target. Therefore even on this ground it cannot be said that the discounts/incentives are a consideration for supply of any services.

19. At last we submit that all the arguments canvassed above are fortified by the fact that the CBIC has withdrawn Circular no. 105/24/2019-GST dated 28.06.2019 ab initio, which sought to provide that the GST shall be payable on the post-supply discounts granted on achieving sales target, etc.

20. Hence the discounts/incentives on achieving the sale target shall be granted by way of issuance of credit notes. The supplier may issue a tax credit note u/s 34(1) of the CGST Act, 2017 and seek tax adjustment subject to fulfilment of prescribed conditions. Alternatively the supplier may issue a commercial credit note without seeking any tax adjustment and therefore not warranting consequent reversal of input tax credit.

(views are strictly personal)