1. Query and understanding:
What would be the ground of defence in case of post-sale incentives given by manufacturer to distributor by way of commercial credit note and these incentives were not identifiable as the time of supply?
2. Our Views
2.1 Before discussing to the legal provision related credit note under GST Act, we would like to define the commercial credit note:
A commercial credit note is a credit note other than that specified in CGST Act, i.e., without any GST implication. This type of credit note is issued for reasons other than those specified under Section 34(1) of the GST Act. Tax amounts are not shown on commercial credit notes. The issuance of a commercial credit note does not have any impact on the supplier’s output tax liability.
2.2 As the outset, attention is invited to Section 34(1) and Section 15(3) of the CGST Act 2017 which states as follows:
Section 34. Credit and debit notes.-
(1) Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.
Section 15. Value of Taxable Supply.-
(3) The value of the supply shall not include any discount which is given-
a) ……………………………………………………………………….; 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.
2.3 Per the above provision, it’s important to note that Section 34 of the CGST Act permits the issuance of a credit note only in the following three scenarios:
- When the Taxable Value and Tax charged exceeds the amount payable, or
- When there is a deficiency in the Goods or Services or both, or
- In the case of Sales Return.
2.4 Further, Additionally, the issuance of GST Credit Notes, as per clause (b) of Section 15 (3), is permitted for Post Sale Discounts only if the following three conditions are met concurrently:
- Existence of a pre-sale agreement.
- The Credit Note can be associated with the original invoice.
- The recipient has reversed the Input Tax Credit (ITC).
2.5 If the transaction does not meet the Triple Tests as stated above, a GST Credit Note cannot be issued, and consequently, the supplier cannot reduce its GST Liability. In such scenarios, the supplier can issue a commercial credit note. In these instances, no GST has been charged by the manufacturers on the said Commercial debit note, and no reversal of Input Tax Credit (ITC) is required by the distributor.
2.6 This can further be substantiated by a perusal of the Circular No. 92/11/2019-GST dated 07.03.2019: Clarification of various doubts related to treatment of sales promotion schemes under GST. The relevant extract of above circular i.e. “Secondary Discount” is reproduced as under:
i. These are the discounts which are not known at the time of supply or are offered after the supply is already over.
ii. The provisions of sub-section (1) of section 34 of the said Act provides as under: “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.
iii. Representations have been received from the trade and industry that whether credit notes(s) under sub-section (1) of section 34 of the said Act can be issued in such cases even if the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.
iv. It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.
v. In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.
vi. There is no impact on availability or otherwise of ITC in the hands of recipient in this case.
2.7 Further, it is worthwhile to note that the ruling pronounced by the AAR Andhra Pradesh in the case of Vedmutha Electricals India Pvt. Ltd. Has clarified that:
“The eligibility of businesses to retain Input Tax Credit (ITC) even when a financial credit note is issued for a post sale discount. AAR ruled that assessee is eligible to take full credit of GST charged in invoice issued by the supplier even though later commercial/financial credit note has been issued.”
2.8 It is also submitted that The Hon’ble AAR, Karnataka in the case of M/s Kwality Mobikes (P) Ltd. in Advance Ruling No. KAR ADRG 76/2019 decided on September 24, 2019 has held that:
“Volume discount received on purchases and sales through credit note without any adjustment of GST is not liable for GST. Further, since amount received in the form of credit note is actually a discount and not a supply by Applicant to Authorized supplier, the Applicant need not issue tax invoice for this transaction.”
2.9 Further, it is also submitted that Authority for Advance Ruling, Madhya Pradesh on the application filed by Rajesh Kumar Gupta proprietor of M/s Mahaveer Prasad Mohanlal, Gandhi Ganj, Jabalpur (M.P.) [Case No. 07/2021 order dated 06.01.2022] has held that:
“The applicant can avail the Input Tax Credit of the full GST charged on the invoice of the supply and no proportionate reversal of ITC is required in respect of commercial credit note issued by the supplier for cash discount for early payment of supply invoice (bills) and Incentive/scheme provided without adjustment of GST, if the said discount is not covered under Section 15(3)(b) of CGST Act, 2017 and the said discount is not in terms of prior agreement. This is subject to the conditions that the GST paid for the said goods/service is not reversed or reimbursed / re-credited by the supplier to the applicant in any manner. Since the amount received in the form of credit note is actually a discount and not a supply by the applicant to the supplier, no GST is leviable on receiver on cash discount/incentive/scheme offered by the supplier to applicant through credit note against supply without adjustment of GST. “
2.10 Further, it is to be noted that the said ruling shall be binding on the applicant only in terms of the provisions contained under Section 103(2) of the CGST Act until and unless declared void under section 104(1) of the GST Act.
3. Conclusion/ view:
3.1 Considering the aforementioned facts, provisions under the GST law, circulars, and judicial pronouncements, it can be inferred that commercial credit note can be issued by the manufacturer to distributor for the post-sale incentives. In such instances, there is no obligation to levy GST on the commercial debit note issued by the manufacturer to distributor pertaining to the incentive as the said incentives is not covered under Section 15(3)(b) of CGST Act, 2017 and the said incentives is not in terms of prior agreement.
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