1. Circular No. 105/24/2019-GST dt. 28th June, 2019 has been issued dealing with certain doubts related to the treatment of post-sale discounts under GST. In the present article we seek to examine the same in light of some settled principles.
True nature of post-sale discounts ??
2. The Circular provides for the examination of the true nature of the post-sale discounts given by the supplier to decide the tax treatment. In bifurcates the same into two types.
3. Circular provides that if the post-sale discount is given by the supplier of goods to the dealer without any further obligation or action required at the dealer’s end, then the post sales discount given by the said supplier will be related to the original supply of goods and it would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act. In other words, said discounts can be given by way of a tax credit note (subject to fulfillment of conditions) wherein a tax adjustment proportionate to the discount given is sought by way of lowering the liability or the same can even be given by way of an accounting/commercial credit note. Circular No. 92/11/2019-GST dated 7th March, 2019 had provided that such discounts can be given also by way of a commercial/accounting credit note wherein the tax is not sought to be adjusted. Present Circular further provides in this regard that the input tax credit claimed of the original tax amount charged will not require any reversal on issuance of the commercial/accounting credit note provided the reduced basic value along with the original tax amount is paid to the supplier.
4. Circular provides that if the additional discount given by the supplier of goods to the dealer is the post-sale incentive requiring the dealer to do some act like undertaking special sales drive, advertisement campaign, exhibition etc., then such transaction would be a separate transaction and the additional discount will be the consideration for undertaking such activity and therefore would be in relation to supply of service by dealer to the supplier of goods. The dealer, being supplier of services, would be required to charge applicable GST on the value of such additional discount and the supplier of goods, being recipient of services, will be eligible to claim input tax credit (hereinafter referred to as the “ITC”) of the GST so charged by the dealer. In other words such post-sales discounts will not be actually treated as discounts but as a separate consideration flowing to the dealer against some acts undertaken by him.
5. Let us understand the stand of the Circular by way of an example. Let us assume that a manufacturer (XYZ Ltd.) supplies certain goods to the dealer at Rs. 100. Under the said contract the dealer is required to undertake some special sales drive or an advertisement campaign. If the dealer undertakes the said activities, Circular provides that a post-sales discount of let us say Rs. 10 given by XYZ Ltd. to the dealer shall not be treated as a discount but as a consideration against the services supplied by the dealer by way of undertaking special sales drive or advertisement campaign. Hence the dealer is in fact required to raise an invoice for Rs. 10 in favor of XYZ Ltd. by charging applicable GST. XYZ Ltd. in turn can avail credit of the same.
6. One has to appreciate the difference between “consideration against a supply” and “condition of a contract”. An obligation emanating from a single contract of purchase and sale may entail some additional work on the part of buyer or the seller upon which some incentive may be linked. However such obligations cannot be seen in isolation as a separate supply by itself.
7. Leading case in the world on the above proposition is of New Zealand Court in the case of Chatham Islands Enterprise Trust v. Commissioner of Inland Revenue (1999) 19 NZTC 15. In the said case the facts were that the Chatham Islands Enterprise Trust came into existence after concern over a number of decades regarding the responsibility and financial liability for essential services required by Chatham Islands residents. At the heart of the plan was the injection of money which would ensure the infrastructure was retained and that the commercial operations could be developed from that point forward. The Government agreed to pay $8million in two instalments and the transfer the Crown assets.
8. Hence the issue was whether an amount settled on a trust by the New Zealand Government could be construed as consideration for a supply of services made by the trustee to either the settlor or the beneficiaries. Court held as under:
“‘I therefore have difficulty in seeing how it can be said that the payments made by the Crown were in respect of or for the inducement of any services. Clearly the payments were not in response to the supply of services.’”
“In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.”
9. Hence if the true character of the transaction is to sell the goods to the dealer with some additional obligation to push the sale or to carry out an exhibition, the same cannot be said to be an independent supply by itself warranting levy of tax. It would be part of many obligations enshrined in the contract of making a single economic supply (concept evolved under UK VAT Law) and hence the same should be brought to tax accordingly. Hence a discount granted against the earlier sale cannot be viewed separately as a consideration against a supply of some services by the dealer.
10. One may also refer to the ruling under UK VAT in the case of AP Group Ltd. vs. Commissioner of Taxation 2013 FCAFC 105 wherein the issue was whether an incentive granted by the manufacturer to the dealer can be considered as a consideration against the supply of any services by such dealer. Court held as under:
“On analysis, the so called supplies for consideration identified by the Commissioner are nothing more than the encouragement of an overall business relationship between the manufacturer and the dealer to the mutual benefit of both. The relationship involves a whole raft of obligations from one to the other all, presumably, with the ultimate objective of maximising their respective commercial positions
…….The fact that the dealer receives a payment as an incentive when certain thresholds associated with running the business in this way does not mean that the dealer is supplying a service to the manufacturer for consideration. If the incentive payment were not available there is no basis to infer that the dealer would not behave in the same way for free. For these reasons there cannot be said to be any supply for consideration in these arrangements.”
11. One may also refer to the ruling of Mumbai CESTAT in the case of Sharyu Motors v. Commissioner of Service Tax 2015-VIL-787-CESTAT-MUM-ST under the erstwhile regime wherein on a similar issue of whether incentives (given by way of discount) to the dealers against the earlier purchase can be considered as a consideration against a supply or not, it was held 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.”
12. We thus submit that divorcing such discounts from the original sale and giving it a new colour does not appear to be as per the settled principles worldwide (including India in the context of earlier regime) since the same emanates as part of multiple obligations under the same contract. The true character of the contract was not to avail the services by the manufacturer from the dealer but to carry out certain mutually beneficial activities in connection with the sale of goods upon which some incentive by way of post-sale discount is granted. Hence the position taken in the Circular needs to be relooked by the policymakers.
13. The Circular lastly clarifies that if the additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer. This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer, for the purpose of arriving value of supply, in the hands of the dealer, under section 15 of the CGST Act. The customer, if registered, would be eligible to claim ITC of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer in view of second proviso to sub-section (2) of section 16 of the CGST Act.
14. Hence essentially it clarifies that even though the dealer receiving the discount from the supplier of goods (e.g. manufacturer) sells the goods to the customers at the lower price than the purchase price and the same is mitigated by way of post-sale discount given by the manufacturer in our case, the said post-sale discount would be treated as a consideration against the supply made to the customer.
15. Let us consider an example to understand the said clarification. A manufacturer let us say sells the goods to the dealer for Rs. 100. The dealer in turn sells the same for Rs. 90 to the consumer. The dealer on achieving a certain sales target receives a post-sale discount of Rs. 15 from the manufacturer and hence makes a profit of Rs. 5 on the said activity. The Circular says that the consideration received by the dealer is not of only Rs. 90 (from the Customer) but will also include Rs. 15 received from the manufacturer. Hence GST needs to be paid by the dealer on Rs. 105. Purportedly the dealer shall be raising two invoices (one in favour of customer and another in favour of the manufacturer) for the single supply. Manufacturer will be able to avail the ITC in respect of the invoice raised.
16. Now to examine the correctness of the above clarification one needs to first consider Sec. 9(1) of the CGST Act, 2017 which imposes the tax on the supply on the value determined u/s 15. Sec. 15(1) provides as under:
“SECTION 15. Value of taxable supply. — (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.”
17. Bare reading of the above provision will suggest that the supply made by the dealer to the customer at the reduced price is clearly the price paid or payable for the said supply (which will result in the transfer of property in goods) and hence the same will only be the value of supply (i.e. the transaction value).
18. Said issue can also be looked at from yet another perspective. The word “consideration” has been defined u/s 2(31) of the CGST Act, 2017 as under:
“(31) “consideration” in relation to the supply of goods or services or both includes —
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;”
19. Above definition thus provides that the word “consideration” shall mean any payment made or to be made in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person. Even though the Circular does not expressly say that the post-sale discount given by the supplier to the dealer for the reduced price offered by the dealer to the customer is treated as consideration under the above referred definition, the intent seems to be to apply the said definition in reaching the conclusion.
20. Now Sec. 15(1) of the CGST Act, 2017 provides that the transaction value (price actually charged) can be ignored if price is not the sole consideration for the supply. Hence first it needs to be established that the dealer in question has received some consideration other than the price actually charged. Thus the question to ask is whether the discount given by the manufacturer to the dealer for the sale made by him to the customer can be considered as “any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply” ?
21. To interpret the phrase “any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply” we shall again refer to the New Zealand ruling discussed suprawherein it was held that the true character of the transaction shall determine the interpretation of the said phrase.
22. We may also refer to Goods and Service Tax Ruling 2001/6 issued by the Australian tax Office wherein the definition of “consideration” is akin to the one under the CGST Act, 2017. Key observations in the said ruling are as under:
“50. Section 9-15 further provides that a payment will be consideration for a supply if the payment is ‘in connection with’, ‘in response to’ or ‘for the inducement’ of a supply. Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.
51. It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply.”
23. Applying the same to the present clarification one needs to first appreciate the substance of the transaction. In our example the true character of the transaction is to purchase the said goods at the net price of Rs. 85 and sell the same at Rs. 90. Hence the actual price of the goods sold by the dealer is Rs. 90. Hence Rs. 15 of post-sale discount from the manufacturer cannot be construed as the price paid by him in relation to or in response to the supply made by the dealer to the consumer so as to consider the consideration as Rs. 115. The post-sale discount is in fact not the payment done by the manufacturer on behalf of the customer (having no nexus with the contract entered by the dealer with the customer) but actually is a reduction in the price of the goods sold by him to the dealer.
24. Said issue can also be looked at from yet another perspective. Even if we presume that the consideration is not the transaction value and hence the same cannot be accepted as the value of supply u/s 15(1), said provision entails that in such scenario reference must be made to the Rules. Now Rule 27 provides for determination of value where the consideration is not wholly in money. We thus submit that even if the said Rule is applied, the value of supply shall be Rs. 90 only (open market value) and not Rs. 115.
25. Before we end we may also refer to the decision of Supreme Court in the case of CCE vs. Ratan Melting & Wire Industries (2008) 231 ELT 22 wherein it has been held by the Constitution Bench that the circular which is contrary to the statutory provisions has really no existence in law.
26. We thus submit that the above referred contentions emanating from close reading of the given Circular deserves a re-think to avoid countless litigation on this front. At the end the scenario will be revenue neutral (whether treated as discounts or as a separate supply) and hence complicating it by issuance of such Circulars shall not benefit the trade and industry.