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No requirement to reverse of ITC in case of a Financial Credit Note and no GST liability on recipient in such cases

Before devolving into the detailed discussed, it can be noted that:

1. Issuance of credit note in terms of GST law is the responsibility of the supplier. The burden of charging, collecting and discharging GST liability is on the supplier of goods or services.

2. Recipient is eligible to claim input tax credit of the GST ‘charged’ by the supplier.

In this regard, attention is invited to Section 2(62) which deals with input tax credit uses the words ‘tax charged’ whereas Section 2(82) which deals with output tax liability uses the words ‘tax chargeable’. This itself reflects the fact that the recipient of the goods or services is only concerned with tax charged by the supplier for the claim of input tax credit and need not to go on the compliances/chargeability issues of the supplier.

3. Further, in case of incentive related benefits such as cash discount which are extended by supplier to recipient of the supply, there cannot be any service by the recipient to the supplier. There is no service which is rendered by the recipient in this case. There is no quid pro quo or agreement or intention for the rendering of any services by recipient to the supplier.

 Illustrative facts: We are registered in Delhi as trader of Paint and Furniture Fittings. We are authorised channel partners/distributors of various brand of paints and furniture fittings such as Jubilant, etc. Various scheme from time to time are floated by these brands. These schemes have various incentives linked to them. Illustratively: Incentives are in form of gifts, cash discount, etc.


Target discount scheme is being floated for a specified period by the supplier states that on achieving sale quantity of 100 units having sale price of Rs.200 during the month of February, 2022, cash discount of Rs. 2000 would be granted.

Here if we achieve this target we are being provided with a financial credit note of value Rs.2000/- by the supplier. While issuing this financial credit note, no GST liability is being reduced by the supplier i.e. GST at the notified rate on sale value of Rs.20000/- stands as it is (i.e. value of supply as determined under Section 15 remains as it is). We have availed input tax credit of such GST amount.

Also, the onus is on supplier and not on us to issue credit note as per sub-section (1) of section 34 of CGST Act, 2017. If the supplier had issued credit note with GST amount to us and reduced his GST liability, then only we can be held accountable for reversal of the Input Tax Credit of GST amount, if any. In our case there was no loss of revenue to government as tax revenue for which input tax credit has been claimed by us has already been received by the government.

Also, we would like to throw the light on clause (aa) sub-section (2) of section 16 of CGST Act, 2017 and sub-rule (4) of rule 36 of CGST Rules, 2017, wherein it is mentioned that registered person can avail ITC only if the invoice/debit note reflects in GSTR-2B/GSTR-2A. Since, in our case the supplier has issued financial credit note and accordingly the same is not reflected in GSTR-2B/GSTR-2A. As such there is no liability on us to reverse the Input Tax Credit.

 At the outset, we would like to draw your kind attention towards the circular no. 92/11/2019-GST issued by CBIC in which Para D gives clarity regarding secondary discounts. The same is reproduced here for your ready reference: –

“D. Secondary Discounts

i. These are the discounts which are not known at the time of supply or are offered after the supply is already over. For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet.

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 supplier in this case.

The circular categorically states that there is no requirement to reverse input tax credit on account of the issuance of financial/commercial credit notes by the supplier.

It is further relevant to note that Section 34(1) of the CGST Act, 2017 allows the issuance of the GST credit note only for the reduction of the taxable value or tax charged which is not the present case. Even if it does qualify the requirements of Section 34(1), issuance of the such credit note is discretionary on the part of the supplier. It is relevant to note that Section 34(1) states that ‘…………… may issue to the recipient…………..’ unlike Section 34(3) which deals with the issuance of debit notes and states that ‘……….. shall issue to the recipient…………..’

Nonetheless, in the present facts of the case, no credit note reducing GST liability has been issued to us and accordingly there is no requirement on us to reduce the corresponding input tax credit which is availed by us in due compliance with Section 16. This aspect is unequivocally clarified by circular no. 92/11/2019-GST as reproduced above which is issued by CBIC in the exercise of the powers conferred by Section 168. Circulars issued by CBIC are binding on all the proper officers employed in the implementation of the CGST Act.

It is needless to mention that we have already paid the GST amount on the original value of supply as charged by the supplier.

Further, we are also not liable to issue an invoice to the supplier as there was no supply of goods or services from our side. The definition of supply as per sub-section (1) of section 7 is reproduced here for your ready reference:-

“(1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation-For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

(b) import of services for a consideration whether or not in the course or furtherance of business and

(c) the activities specified in Schedule I, made or agreed to be made without a consideration.”

In the present facts of our case, no supply of any services or goods is undertaken by us in relation to incentives. There is quid pro quo or agreement or intention for the rendering of any services by us to the supplier. All the incentives are in the form of trade discount, etc. which does not partake in the form of any services. It is further submitted that it is trite principle of law that conditions to contract cannot be considered as consideration to contract. Under GST law only consideration is taxable.

It is relevant at this juncture to refer to Circular no. 105/24/2019-GST dated 28.06.2019 (even though the same has already been withdrawn ab initio vide Circular no. 112/31/2019-GST dated 03.10.2019) which states that:

There may be cases where post-sales discount granted by the supplier of goods is not permitted to be excluded from the value of supply in the hands of the said supplier not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act. It has already been clarified vide circular no. 92/11/2019-GST that the supplier of goods can issue financial / commercial credit notes in such cases but he will not be eligible to reduce his original tax liability. Doubts have been raised as to whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial / commercial credit notes have been received by him. It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance  of  financial  /  commercial  credit  notes  by  the  supplier  of  goods  in  view  of  the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.”

In support of our above submissions, we place reliance on the following judicial precedents and advance rulings:

In M/s Rajesh Kumar Gupta of M/S. Mahveer Prasad Mohanlal AAR Madhya Pradesh (case no. 07/2021) dated 06.01.2022 (see para 9) it was ruled that:

the applicant can avail input tax credit (ITC) of the full Goods and Services Tax (GST) charged on invoice of the supply and no reversal of ITC is required in respect of commercial credit issued by supplier on cash discount and incentive/schemes provided without adjustment of GST…”

It was further ruled by the authority “since the amount in the form of a credit note is actually a discount and not a supply by the applicant, no GST is leviable on the receiver on cash discount/incentives/schemes offered by the supplier to applicant through credit note against supply without adjustment of GST”.

 In MRF Ltd. AAAR Tamil Nadu (TN/AAAR/04/2019(AR) dated 24.06.2019) dated 24.06.2019 (see para 12), it was ruled that that:

“appellant (recipient) can avail the Input Tax Credit of the full GST charged on the undiscounted supply invoice of goods/ services by their suppliers. A proportionate reversal of the credit is not required to be done by them in case of a post purchase discount given by the supplier to them through the C2FO platform (commercial credit note)”.

In the case of Challenger Computers Ltd. v. Commissioner of Trade & Taxes, Delhi High Court 2015-TIOL-1956-HC-DEL-VAT dated 21.08.2015, it was held that:

Where selling dealer provided post sell discount and deposited entire VAT collected from purchasing dealer to department, Tribunal was not right in holding that appellant was required to reverse input tax credits claimed on purchases made by them.

In the case of Sharyu Motors v. Commissioner of Service Tax 2016 (43) S.T.R. 158 (Tri. – Mumbai), it was held that:

“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- 2013 (10) TMI 1155 – CESTAT MUMBAI). 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.”


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July 2024