8/23/2021

Discount as an additional consideration! Kerala AAAR re-ignites an age-old dispute

Rahul Jain Raghav Rajeev

Joint Partner, Lakshmikumaran & Associate. Lakshmikumaran &
Sridharan Sridharan

Introduction

The concept of discounts has always been associated with sales. The same has been used by businesses,
both large and small to increase the revenue. Such discounts on most occasions are given directly and at the
behest of the manufacturers. In supply structures involving a manufacturer, a distributor and a
dealer/customer, discounts are generally routed through the distributor and can partake two forms i.e.,
pre-supply and post supply discounts.

Pre-supply Discounts which are given prior to the supply of goods and generally mentioned in the
Discounts invoice.
Post-supply Discounts which are known at the time of supply but may not be quantified (or) discounts
Discounts not known at the time of supply and are issued/given subsequently.

The position on taxability of pre-supply discounts is largely clear. Such discounts are explicitly mentioned
in the invoice and are excludable from the value of supply in accordance with Section 15(3) of the Central
Goods and Services Tax Act, 2017 ("CGST Act"). However, disputes continue to exist on the treatment of
post-supply discounts, which have been a bone of contention in the erstwhile regime as well.

The current article proposes to examine an interesting proposition which has arising out of the decision of
the Kerala Appellate Authority of Advance Ruling ("AAAR") in Santhosh Distributors1 This case examined
the GST implications of post supply discounts routed through a supply chain involving a manufacturer, a
distributor, and a dealer.

Facts of the case

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The Assessee was an authorised distributor of the Manufacturer who supplied goods to its Dealers. As per
the contract entered between the Assessee and the Manufacturer, the Assessee had to purchase lubricants
from the Manufacturer and sell them to the Dealers based on the rates pre-fixed by the Manufacturer for
which the Assessee was entitled to a distributor's rebate.

In addition to the above, the Manufacturer offered post supply discounts to be passed to the Dealers
through the Assessee. Subsequently, such post supply discounts offered were reimbursed by the
Manufacturer to the Assessee via commercial credit notes.

In the background of these facts, the Assessee approached the Authority for Advance Rulings ("AAR") to
determine whether the post supply discounts provided by the Manufacturer to the Dealers through the
Assessee would attract any tax under GST along with other issues.

The AAR held that such discounts passed on by manufacturer to the distributor (assessee) will constitute
an additional consideration for the sale of goods by the distributor to the dealer. Aggrieved by the said
ruling, the Assessee sought an appeal to the AAAR.

AAAR's Ruling

The Assessee vehemently contended that since the post-supply discounts were routed through the supply
chain, they formed an intrinsic part of the transaction value of Castrol for which GST was discharged.
Furthermore, GST is levied on the actual consideration i.e. price actually paid or payable qua the supply
and does not extend to any notional consideration. Thus, the Assessee prayed to set aside the ruling.

The AAAR rejected the contentions of the Assessee. It was held that post supply discounts provided by the
Manufacturer to the Assessee were to augment sales and thus, the post supply discounts would represent
consideration flowing from the Manufacturer to the Assessee for supply of goods made to the dealers.
Hence, this amount would squarely fall under the definition of the term "consideration" as specified under
section 2(31) of the CGST Act.

Our Analysis:

In our humble opinion, we feel that the AAAR may not have laid out the proper interpretation of what
constitutes a consideration. Though a specific reference was not placed, the AAAR conveniently applied the
logic flowing from Circular No. 105/24/2019- GST dated 28-6-2019,2 which was withdrawn in light of
various representations submitted by members of the trade and industry. The said Circular verbatim stated
that additional discount given by a supplier of goods to dealer to offer a special reduced price to customer
to augment the sale volume would represent consideration flowing from supplier of goods to dealer.

In our view, GST is a contract-based levy and only such amount which is agreed as the price agreed
between the two parties i.e. supplier and recipient, will constitute consideration for such supply.
Consideration is a matter of inducement of something promised and requires a direct link or nexus with the
supply and in the present case, the Dealers are not privy to the contract entered between the Assessee and
the Manufacturer.

Thus, it follows that, the price at which goods are sold to the Dealers should have no role to play with
respect to increase in price of goods agreed between the Assessee and the Dealer. Such reasoning is based
on a Division Bench decision of the Madhya Pradesh High Court in Rita Sales Corporation.3

In Rita Sales Corporation, the manufacturer had introduced a gift scheme, according to which the
distributor, had to purchase the timepieces at their cost price and in turn sell the machines at 50% of cost
price to the retailers. The balance 50% was agreed to be paid by the manufacturer. The question before the
High Court was whether such amount received from the manufacturer would form part of sale price paid by
retailer to distributor and hence, liable to be included in turnover for purpose of taxation.

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The High Court answered the aforesaid issue in favour of the Assessee. It was held that vis-à-vis the
distributor and retailer, the sale was complete at the price to which they had agreed i.e. 50% of actual cost
price. Even though the manufacturer had promised to pay the balance 50 per cent price to the distributor,
it would not mean that the distributor has sold the timepieces to the retailer at this full price. Thus, the
Court rejected the argument that the dealer was liable for payment of sales tax on the full amount of
timepieces sold by him, even though he sold the same at 50 per cent of its cost price.

Applying the ratio enunciated in the aforesaid Court ruling, it can be said that post supply discount offered
by the Manufacturer in the case of Santhosh Distributors (supra) will not partake the character of
consideration flowing from dealers to distributors.

Going forward, considering the fact this issue will be contested in various forums, it will helpful if the Board
issues a Circular clarifying this issue pertaining to discount.

Views expressed are strictly personal.

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1.
Santosh Distributors, In re [Order No. AAR/10/2021, dated 1-3-2021].
2.
Circular No. 112, dated 3rd October, 2019.
3.
CST v. Rita Sales Corpn. [1986] 61 STC 240 (MP)

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