DISCOUNTS/INCENTIVES

– GST IMPLICATIONS
1. In many industries (e.g. automobiles, FMCG, etc.) various kinds
of discounts/incentives are given to the distributors on achieving
certain sales targets. Issue therefore for discussion and analysis is
whether such discounts/incentives can be considered as a separate
consideration against any services supplied by such distributors.

2. At the outset please note that the tax implications of any given
transaction are closely dependent on the terms of the contract. For
the sake of present analysis we shall presume that the contract
(commonly referred as distributor agreement) in question provides
for such discounts/incentives on achieving certain sales targets. With
the said background we offer following reasons to canvass the view
that such discounts/incentives accruing on achieving certain sales
targets cannot be considered as a consideration against any separate
supply of services by the distributors.

3. As per Sec. 9(1) of the CGST Act, 2017 the tax is levied on the
supply of goods or services on the value determined u/s 15. The
scope of supply as defined u/s 7(1)(a) of the CGST Act, 2017 includes
supply of goods or services or both by way of sale made or agreed to
be made for a consideration. Sec. 15(1) of the CGST Act, 2017 further
provides that the value of supply shall be the transaction value, which
is the price actually paid or payable for the supply in question.

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4. With the above background it must be noted that the registered
supplier (manufacturer) in question enters into a sale transaction of
goods (e.g. automobiles) with various distributors (auto dealers) in
accordance with the distributor agreement. It is in accordance with
the said distribution agreement that various discounts/incentives are
accrued to the distributor on achieving certain sales targets.
Therefore we submit that as a condition of the contract the original
price for sale of automobiles is varied subsequently to account/adjust
for the discounts/incentives on achieving certain targets. Hence such
discounts/incentives can be said to be reducing the original price
payable by the distributor on account of fulfilling certain conditions of
the contract and hence cannot partake the character of it being a
consideration against any supply of services made by the distributor.

5. Reference here is invited to the decision of Hon’ble Supreme

Court in the case of Southern Motors vs State of Karnataka 2017
(358) E.L.T. 3 (S.C.) in the context of Karnataka VAT Act, 2003. In
the said case the issue was whether the discounts/incentives not
reflected on the invoice would be allowed as a deduction for
determining the sale price which will be exigible to tax. The Court
observed as under:

“It is a matter of common experience that in the present

contemporary competitive market, trade discounts not only are
dependent on variable factors but also might be strategically not
disclosable at the time of the original sale/purchase so as to be
coevally reflected in the tax invoice or the bill of sale as the case may
be. The actual quantification of the trade discount, depending on the

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nature of the trade and the related stipulations in any contract with
regard thereto, may be deferred till the happening of a contemplated
event, so much so that the benefit thereof is extended at a point of
time subsequent to that of the original sale/purchase. That by itself,
subject to proof of such regular trade practice and the
contract/agreement entered into between the parties, would not
render the trade discount otherwise legal and acceptable, either non
est or fictitious for evading tax liability. In the above factual premise,
the interpretation as sought to be provided by the Revenue would
evidently reduce Section 3(2)(c) to a dead letter, ineffective and
unworkable and would defeat the objective of permitting deductions
from the total turnover on account of trade discount.

A trade discount conceptually is a pre sale concurrence, the

quantification whereof depends on many many factors in commerce
regulating the scale of sale/purchase depending, amongst others on
goodwill, quality, marketable skills, discounts, etc. contributing to the
ultimate performance to qualify for such discounts. Such trade
discounts, to reiterate, have already been recognized by this Court
with the emphatic rider that the same ought not to be disallowed only
as they are not payable at the time of each invoice or deducted from
the invoice price.

To insist on the quantification of trade discount for deduction at the

time of sale itself, by incorporating the same in the tax invoice/bill of
sale, would be to demand the impossible for all practical purposes
and thus would be ill-logical, irrational and absurd. To reiterate, trade
discount though an admitted phenomenon in commerce, the

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computation thereof may depend on various factors singular to the
parties as well as by way of uniform norms in business not necessarily
enforceable or implementable at the time of the original sale. To deny
the benefit of deduction only on the ground of omission to reflect the
trade discount though actually granted in future, in the tax invoice/bill
of sale at the time of the original transaction would be to ignore the
contemporaneous actuality and be unrealistic, unfair, unjust and
deprivatory.”

6. Reliance is also placed on the decision of Hon’ble Supreme Court

in the case of Maya Appliances (Pvt.) Ltd. v. Additional Commissioner
of Commercial Taxes 2018 (10) G.S.T.L. 6 (S.C.) wherein also the
Apex Court relying on the above referred decision has held that the
trade discounts even granted after the sale would be deducted from
the invoice value to arrive at the sales turnover liable for tax.

7. Therefore we submit that the ambit of the term “trade discount”

is very wide to cover all the price reductions pursuant to the
fulfillment of the conditions of the contract, which is essentially in the
given scenario for the sale of goods, and therefore once such
discounts/incentives are considered as a reduction of the sale price,
it cannot be considered as a separate consideration paid to the
distributor for any supply of services.

8. We also rely on the decision of the Hon’ble Mumbai Tribunal in

the case of Bharat Petroleum Corporation Ltd. v. Commissioner of
Service Tax (2014 (36) S.T.R. 433 (Tri. - Mumbai). In the said case
the facts were that the appellants viz. BPCL/HPCL were engaged in

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marketing of petroleum products. The appellants purchased
Compressed Natural Gas (CNG) from Mahanagar Gas Limited (MGL)
and, thereafter, sold the same to their dealers. As per the dealership
agreement M/s. MGL was to be provided adequate space at the site
by the appellant for installation of the equipment and construction of
proper foundation, trenches, etc., at the site. The appellants were
liable to make provisions for supply of water, electricity and other
utilities, the cost of which are borne by MGL. The appellants were also
obliged to take due care of the equipment and ensure that the same
are properly handled and the required safety provisions are followed
and all statutory approvals of the concerned authorities for opening
and operating the retail outlets/installation of equipment, etc., were
to be obtained by the appellants and the appellants were also
required to pay all municipal taxes, property taxes, rents, etc., where
the retail outlets operates. Department sought to recover service tax
from the appellants on the ground that by undertaking the given
activities they have provided services in the nature of marketing of
the goods. It was held as under:

“11. As per the said provisions, the service provider provides service
to his client for marketing or promotion of the goods to third party.
In these cases, appellants themselves are buying goods from M/s.
MGL. Therefore, the question of rendering the service to the client for
marketing of the goods does not arise. We further find that MGL is
discharging VAT/ST liability while selling the CNG to appellants.
Although the RSP is fixed but it does not mean that the profit margin
shall be constituted as commission for rendering the service. On
examination, it is found that all the transactions shown by the

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appellants are done on principal to principal basis. Moreover, the
appellants are selling these CNG on payment of VAT/ST to the buyers.
There is no commission component that have been received by the
appellants from M/s. MGL. FOR e.g., if the appellant is receiving goods
from MGL at ` 100/- per kg. including VAT but these goods are sold
by the appellant to customers on RSP fixed at ` 102/- per kg., that
does not mean that the appellants are receiving commission of ` 2/-
from MGL. In fact the appellants are also paying VAT on ` 2/- also. It
is also a fact that the appellants are not receiving any commission
from M/s. MGL. Therefore, it cannot be presumed that appellants are
rendering any service to MGL.”

9. We thus submit that the ratio of the above ruling holding that
there is no provision of services against the fulfilment of the
conditions of dealership agreement would equally apply even under
the GST regime and therefore discounts/incentives accruing on
fulfilling the conditions of the contract of sale cannot be considered
as a consideration for supply of any services.

10. We also rely on the decision of Hon’ble Mumbai Tribunal in the

case of Sharyu Motors v. Commissioner of Service Tax 2016 (43)
S.T.R. 158 (Tri. - Mumbai). In the said case the issue was whether
incentives received on achieving the sales target would be subjected
to service tax or not as a business auxiliary service. The Tribunal
observed as under:

“5.1 As regards the Service Tax liability under the category of

Business Auxiliary Services for the amount received and for achieving

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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). 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

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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.”

11. It is thus submitted that even though the issue in the above
decision was with respect to exigibility to tax under the business
auxiliary services, the Tribunal went beyond the aspect of business
auxiliary services and held that as the said incentives are a form of
trade discount, it would not be liable to tax. Said ratio would therefore
continue to hold good even under the GST regime. We hence submit
that even under GST regime, the nature of such incentives would
remain as “trade discount” and therefore it would not partake a
character of a consideration against supply of any services.

12. Further Sec. 7(1)(a) of the CGST Act, 2017 defines the scope of
supply to include sales or services made or to be made “for” a
consideration. Distributor therefore by way of fulfilling various
conditions of the contract (wherein some yields to
discounts/incentives and some don’t (e.g. maintaining the dealer
showroom tidy)) cannot be said to have made any supply “for” a
consideration with respect to fulfilment of the conditions where he is
granted discounts/incentives and not for fulfilment of the other
conditions. Fulfilment of all the conditions of the contract (whether it
leads to discounts/incentives or not) are part and parcel of the
overriding sale contract and hence it has to be treated merely as a
reduction in the price payable for the sale of goods and not as a
separate supply of any services by the distributor.

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13. That for the said reason Federal Court of Australia in the case
of AP Group Limited v Commissioner of Taxation [2013] FCAFC 105
dismissed the appeal of the revenue against the decision of the
Tribunal holding that incentives received by motor vehicle dealers
cannot be considered as a consideration received against any supply
made to vehicle manufacturers so as to be exigible to GST. It may be
noted that even under the Australian GST law (A New Tax System
(Goods and Services Tax) Act 1999) the levy of tax is on supply of
services made “for” a consideration. Specifically the Tribunal held as
under:

“[o]ne could just as readily conclude that a retailer makes a supply

to its wholesaler by taking on an obligation to pay for the goods it
purchases, or that the wholesaler makes a supply not only of its
goods, but also of the promise to deliver those goods in a timely
fashion.”

“In the context of the overall business relationships and contractual

arrangements between the Applicant on the one hand, and the
various manufacturers on the other, we do not think that the
Applicant’s acceptance of the obligations or the making of the
promises is properly viewed as the making of supplies to the
manufacturers. Instead, they are part of the foundation underpinning
the relationships, the background to the bargain the parties have
made – in a sense, the rulebook by which the game is to be played.”

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“payments are not made “for”, or even “in connection with”, any such
supplies. There is no nexus between the payment of the incentives
and the making of the promises, the performance of the obligations,
or the compliance with the manufacturers’ various rules and policies.
The Commissioner’s submissions do not grapple with the indisputable
truth that, on his argument, the [AP Group] always carries on its
business in a particular way (as it has agreed with the manufacturers
to do), but it only gets paid for doing so in circumstances which
warrant the payment of an incentive; otherwise the supply is provided
for free. We do not see how that can possibly be so.”

“the supply of a vehicle to the [AP Group’s] retail customer is at the

same time the supply, by the [AP Group] to the manufacturer, of the
service of supplying the vehicle to the customer. It is difficult, with
respect, to imagine a more tortured analysis of what is a
fundamentally simple transaction, a sale of goods.”

14. Therefore the acceptance of various obligations the fulfilment of

which results in the reduction of the price payable cannot be
considered as a separate supply.

15. Before we conclude we also submit that the fulfilment of various

conditions of the contract cannot be considered as “agreeing to the
obligation to refrain from an act, or to tolerate an act or a situation
or to do an act” under paragraph no. 5(e) of Schedule II of the CGST
Act, 2017 for the following reasons.

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16. Schedule II is merely a classification schedule by virtue of Sec.
7(1A) of the CGST Act, 2017 and hence do not define the scope of
supply. It merely classifies a supply identified u/s 7(1) into supply of
goods or supply of services. Therefore for the foregoing reasons the
grant of discounts/incentive does not partake the character of a
consideration against a separate supply by the distributor and in
absence of any supply, there is no scope of it being classified as a
supply of services.

17. Without prejudice to above, paragraph 5(e) supra connotes a

scenario wherein a person has assumed an obligation of refraining
from an act or doing of an act against which a consideration is
received. In the given issue the obligation stemming from the
contract is for the manufacturer to sell the goods to the distributor
under certain conditions of sale the fulfilment of which accrues price
reduction by way of discounts/incentives. Therefore it cannot be said
that the distributor has assumed any obligation of doing any act.

18. Further the discounts/incentives accrue on actually achieving

the sales targets and not on merely assuming an obligation of
achieving the sales target. Therefore even on this ground it cannot
be said that the discounts/incentives are a consideration for supply of
any services.

19. At last we submit that all the arguments canvassed above are
fortified by the fact that the CBIC has withdrawn Circular no.
105/24/2019-GST dated 28.06.2019 ab initio, which sought to

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provide that the GST shall be payable on the post-supply discounts
granted on achieving sales target, etc.

20. Hence the discounts/incentives on achieving the sale target

shall be granted by way of issuance of credit notes. The supplier may
issue a tax credit note u/s 34(1) of the CGST Act, 2017 and seek tax
adjustment subject to fulfilment of prescribed conditions.
Alternatively the supplier may issue a commercial credit note without
seeking any tax adjustment and therefore not warranting consequent
reversal of input tax credit.

(views are strictly personal)

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