AAAR holds that Reimbursement of additional discount offered by authorized dealers is taxable

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.

AAR Ruling

In view of the above, the Applicant had filed an application before the Kerala AAR to ascertain:

• The tax liability on the above-mentioned transaction;
• Whether the discount provided by Castrol to their dealers through the Applicant attracts any tax under the GST laws;
• Whether the amount shown In the Commercial Credit note issued to the Applicant attracts proportionate reversal of ITC;
• Any tax liability under GST laws on the Applicant for the amount received as reimbursement of discount or rebate provided by Castrol as per the agreement between Castrol and their dealers and also an agreement between Castrol and distributors.

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.

AAAR Observations

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:

• Any discount which is given before or at the time of supply if such discount has been duly recorded in the Invoice Issued in respect of such supply.
• After the supply has been affected if:
  • 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
  • ITC as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

In view of the above, it was observed that in the instant case, two types of discounts are being offered by Castrol:

• First scheme of the discount is the one that is known at or prior the point of time of supply, where the quantum of discount is indicated in the Invoices and the GST is paid and the discounted amount of transaction value; and
• Another scheme of discount offered is on post sale basis, wherein the amount of discount may be known at the point of supply but may not be quantified or some discounts may not even be known at the time of supply of goods. In both these cases, discounts are extended through credit notes. Accordingly, it had been held that such post sale discounts are subjected to GST at the time of supply.

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’.

AAAR Ruling

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]

Disclaimer:

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.