Post Supply Discount- A Dilemma for Corporates

[CA.Chitresh Gupta]

Post Supply Discounts, generally refers to discounts which are allowed subsequent to the supply of goods/services. Post Supply discounts are invariably offered to incentivize/boost sales and are commonly quantified based on quantity or turnover achieved for prescribed period. Such discounts are a part and parcel of any distribution business.

Concept of Discount in Erstwhile Indirect Tax Regime

As per CBEC's excise manual of supplementary instruction, 2005 in Chapter 3, Part - III of Para 2.5(iv) has clarified as follows with regard to deduction of discount.

(iv) discount of any type or description given on any normal price payable for any transaction will not form part of the transaction value for the goods, e.g. quantity discount for goods purchased or cash discount for the prompt payment etc. will therefore not form part of the transaction value. However, it is important to establish that the discount has actually been passed on the buyer of the goods. The differential discount extended as per commercial consideration on different transactions to unrelated buyers is also permissible and different actual prices paid or payable for various transactions are lo be accepted. Where the assessee claims that the discount of any description for a transactions is not readily known but would be known only subsequently as for example year end discount the assessment for such transactions may be made on a provisional basis. However, the assessee has to disclose the intention of allowing such discount to the department and make a request for provisional assessment.

Legal Premise of Post Supply Discount under GST

Sec 15(3) of CGST Act states that the value of the supply shall not include any discount which is given;

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; 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.

Thus, the Post supply Discounts can be reduced from transaction value if both the conditions are satisfied;

1. Discount is provided as per the agreement entered into before or at the time of supply and should be specifically linked to invoices and
2. The recipient shall reduce corresponding ITC claimed on such invoices.

Further , Section 34 of CGST Act states that 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 a credit note containing such particulars as may be prescribed.

Thus, supply discounts have to be effected through Credit notes which should be specifically linked to the invoices. With the recent change, a single credit note may be linked to multiple invoices.

The glaring issue faced by the Industry is on the treatment of different types of Post supply discounts offered by the manufacturers or wholesalers (May be called supplier hereafter) to drive the sales of their product or services.

Advance Ruling on Post Supply Discount

In the case of M/S. ULTRATECH CEMENT LIMITED  2018 (7) TMI 1761 - AUTHORITY FOR ADVANCE RULINGS MAHARASHTRA the applicant company enters into an agreement with the authorised dealers/stockists for supply of goods on a principal-to-principal basis. The agreement entered with the authorised dealers/stockists provides that the goods shall be supplied to the letter at the prices fixed by the applicant. The applicant clears the goods to the authorised dealers/stockists under the cover of tax invoice after discharging applicable rate of GST on the said goods. The authorised dealers/stockists further supply the goods manufactured by the applicant in the regional markets to the ultimate customers or retailers. In certain cases, due to the highly competitive and dynamic market conditions, the authorised dealers/stockists of the applicants have to sell the goods purchased from the applicant, at a price lower than their purchase price.  In order to provide relief to the authorised dealers/stockists in such scenario, the applicant pays a certain amount to the authorised dealers/stockists as 'rate difference' (Commonly known as 'Trade Discount' also). The aforesaid payment of rate difference by the applicant to the authorised dealers/stockists is made by way of issuance of a credit note, which is linked to the sales/supplies made to the authorised dealers/stockists in a particular month.

The question on which Advance Ruling is sought by the Applicant is as under:-

• Whether the amount paid to authorized dealers towards “rate difference” after effecting the supply of goods by the applicant to aforesaid dealers can be considered for the purpose of arriving at the 'transaction value' in terms of Section 15 of the CGST Act.
• Whether the amount paid to authorized dealers towards “rate difference” after effecting the supply of goods would be allowed under Section 15(1) read with Section 34(1) of the CGST Act or under Section 15(3) read with Section 34(1).

It was observed by the AAR Authority that “the discount that is given after the goods have been sold has to be established in terms of the agreement entered into at or before such supply i.e. the discount that is to be given afterwards has to be mentioned in the terms of the agreement or the criteria for arriving at the quantum or percentage of discount has to be given in the terms of the agreement which is entered into at or before such supply.

The wordings of Section 15 (3) (b) (i) very clearly states that quantum of discount is given after the supply of goods has taken place has to be there in the terms of such agreement i.e. it cannot be open ended not based on any criteria. Thus, this discount quantum cannot be arrived at without any basis only at the discretion of the supplier. The supplier has to clearly 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 the bare word '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 at arm's length business transactions and no taxation statute can be construed to be having open ended discount with legislative intent”

Thus, it was held that the amount paid to the Dealer towards “rate difference” and “special discount” as mentioned above, post supply are not complying with the requirements of section 15(3)(b)(i) of the CGST Act and therefore cannot be considered and allowed as discount for the purpose of arriving at the 'transaction value' in terms of Section 15 of the CGST Act.

Departmental Clarifications

CBIC has issued two circulars on the Post supply discounts. In Circular no  92/11/2019-GST issued on 7th March, 2019 , it has termed Secondary discounts which are the discounts which are not known at the time of supply or are offered after the supply is already over. It was 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.

In the recent clarification in Circular No. 105/24/2019-GST issued on 28th June, 2019, CBIC has further clarified on the treatment of various types of Post supply or Secondary discounts offered by the suppliers to the dealers. The same has been tabulated in the following table;

Scenario	Type of Secondary Discount Offered	Treatment in GST
I	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	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.
II	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	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. GST will be charged on such transaction.
III	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,	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.
IV	In other cases where conditions of Sec 15(3)(b) are not satisfied	The supplier can issue Accounting Credit notes to the dealer for discount.

Author’s Comments

The Departmental Clarification read with AAR Ruling pose a very difficult situation for corporates. It also conflicts with the basic structure of discount as laid down by the Hon’ble Supreme court in the case of GOVERNMENT OF INDIA Vs MADRAS RUBBER FACTORY LTD [1995 (5) TMI 28 - SUPREME COURT] whereby it was observed and held by Hon’ble Supreme court

“Trade Discounts.- Discounts allowed in the Trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such Trade Discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price.”

There are various discounts/ incentives given by the principal manufacturers which are as per the established business practice, however by virtue of the above clarifications issued by the department, they may come under the purview of GST. Certain instances are given below;

1. Manufacturing companies usually provide additional discount to dealers to sale the old models at the lower price in order to clear the stock. This happens when a new variant of the car is being launched in the market. As per the above clarification, the discounts provided will be added in the consideration and GST will be applicable on them. It will result in higher cost being incurred by principal manufacturers.
2. Additionally, as per the Circular, the customer, if registered would be eligible to claim ITC to the extent of  actual tax paid by the customer. This clarification may be contended in the court of law basis the premise that in the above case consideration is paid party by the recipient and partly by any other person i.e principal manufacturer in this case and by virtue of Sec 16(2), all the conditions of availment of full ITC is satisfied.
3. In certain industries where the product, example cement, tyre etc. are being sold which are subject to daily price fluctuations, the differential price is being reimbursed by the principal manufacturer, such discounts/ price adjustments are part of normal business trade practice but may again come within the purview of post supply discount.
4. There are various sales promotion schemes which are organised by companies on periodic basis. The dealers are being incentivised by them based on their performance on various schemes. These incentives may be in form of organizing Travel trips to different parts of the World. Such schemes may also be contended by the department as consideration against the services of dealers on various sales promotion schemes.

Way Forward for Corporates

All the above discussion lead us to a primary conclusion that Companies who majorly work through dealer network may focus their attention on following:

1. Impact on the corporates in case of Retrospective Application of the aforementioned clarification issued by the Department.
2. Complete documentation of their Discount Policies including the various schemes which are floated from time to time.
3. Analysis of the Tax implications of such schemes both on them and on their dealers
4. The companies may also have to increase the quantum of the marketing budgets on account of tax implications of various discount schemes.