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The Applicant is an authorized distributor of M/s. Castrol India Limited (‘Castrol’) for the supply of Industrial and automotive lubricants. The Applicant had been paying tax dues as per the value of the invoices issued and availed ITC of GST shown in the inward invoice received by them from Castrol or their stockiest.
In view of the above, the Applicant had filed an application before the Kerala AAR to ascertain:
The Kerala AAR ruled that the Applicant is eligible to avail ITC shown in the inward invoice received from the supplier of goods. As for the GST liability on the discounts provided by Castrol, the AAR had observed that the additional discount given by Castrol through the Applicant which is reimbursed to the Applicant, is to offer a special reduced price by the Applicant to the customers. Accordingly, it was observed that the amount represent consideration paid by Castrol to the distributors Applicant for supply of goods by the distributor / Applicant to the customer.
Accordingly, it had been ruled that the such additional discount reimbursed by Castrol to the Applicant is liable to be added to the consideration payable by the customer to the Applicant arrive at the value of supply at the hands of the Applicant. The AAR had further ruled that the Applicant is liable to pay GST on the amount received as reimbursement of discount from Castrol. Aggrieved, the Applicant had preferred an Appeal before the Kerala AAAR.
The AAAR observed that Section 15 of the CGST Act inter alia states that the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or payable. The said provision further states that the value of supply shall not include any discount which is giver in ways as under:
In view of the above, it was observed that in the instant case, two types of discounts are being offered by Castrol:
The AAAR further observed that Section 15 (3)(b) very clearly states that if the quantum of discount is given after the supply of goods has taken place, it has to be given as per the terms of such agreement i.e., it cannot be open ended. Thus, this quantum of discount cannot be arrived at without any basis, only at the discretion of the supplier. The supplier has to dearly mention the quantum of discount or percentage of discount which is to be worked out on the basis of certain parameters or certain criteria which may be agreed to between the supplier and the recipient and which are predetermined and mentioned in agreement in respect of supply of the goods.
Thus, it had been observed that the discount mentioned In such an agreement without there being any parameters or criteria mentioned with it would not fulfill the requirement of Section 15(3)(b)(i) of the CGST Act, as the word ‘discount’ if left open ended or without any qualifications or criteria attached can mean there can be any percentage of discount ranging from bare minimum to even 100% as per discretion of the supplier and certainly such abnormal discounts without any criteria or basis can In no way be considered as fair and no taxation statute can be construed to be having open ended discount.
It had been further observed by the AAAR that the additional discount given by Castrol to the Appellant is a consideration to offer the reduced price in order to augment the sales. This additional discount squarely falls under the definition of ‘consideration’.
In light of the above observations, the AAAR ruled that the additional discount reimbursed by Castrol is liable to be added to the consideration payable by the customers or dealers to the Applicant. Accordingly, the Applicant is liable to pay GST. Therefore, the AAR order has been affirmed by the AAAR.
Santosh Distributors [Order No. AAR/10/20 dated 01 March 2021]
The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned hereinrra quis.
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