7/26/2019 Incentives as Discounts

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Incentives as Discounts
Direct Tax Rules, Regulations N: Companies (App
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By: CA Akash Phophalia
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December 14, 2017
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Central GST / CGST
Contents H: Exemption from G
Integrated GST / IGST services for the man
Section 15 states about the valuation principles under GST. Section 15(3) reads as under – Non-Network Tanke
Compensation Cess GST

H: Compensation an
Union Territory GST / UTGST
“Section 15(3) The value of the supply shall not include any discount which is given––

towards the substan
GST Case Laws / AAR
making paym...
(a) before or at the time of the supply if such discount has been duly recorded in the invoice
GST Rates + FAQs + More
issued in respect of such supply; and H: Levy of GST - tax
GST - States subscription/contrib
(b) after the supply has been effected, if- National Inst...

Customs (i) such discount is established in terms of an agreement entered into at or before the time of H: Classification of s
Foreign Trade Policy such supply and specifically linked to relevant invoices; and delivery of goods (M
Products) to th...
Special Economic Zone
(ii) input tax credit as is attributable to the discount on the basis of document issued by the
H: TP Adjustment -
supplier has been reversed by the recipient of the supply.”
comparables - subm
Foreign Exchange Management
an identica...
The simple understanding form the above provision is that the discount is admissible as deduction from

Company Laws
the sale value only when the conditions mentioned in the said section is fulfilled. To put it differently, H: Disallowance of b
discount is admissible as deduction only when it is recorded in the invoices or linked with the invoices loss and unabsorbe
Securities and Exchange Board depreciation of ama
coupled with the fact that the input credit is duly reversed.
Insolvency & Bankruptcy Code
H: Assessment u/s
Now let us understand the implication of GST on different kinds of prevailing discounts in the industry
LLP/ Trusts/ Societies incriminating materi
in the following paragraphs. Here we need to look the transaction from two perspective. Firstly, whether
against the ...
the GST is reversible on the discounts or incentives received. Secondly, whether the incentive or
Indian Laws H: Admission of add
discount in itself is an independent consideration for and independent supply.
Budget 2019-2020
evidence - Deductio
Trade discount is a discount that is deduction from the catalogue price of goods and is generally the evidences f...
allowed to wholesalers and retailers engaged in the trade. Thus it is the net reduction in the sale price.
Wealth Tax H: Gain from sale of
Now under GST law whether such trade discount is allowable as deduction from sale price for payment STCG or business i
of GST on the reduced sale price. CBDT Circular No..
Service Tax
As the nature of trade discount is such that it is the reduction from the catalogue price and is generally H: Addition on a/c o
Central Excise
given upfront as reduction from the sale price in the invoice itself. Therefore, the said trade discount is valuation of closing
invoices of raw ...
admissible as deduction from the sale price and no GST is required to be paid on such trade discount.
Delhi VAT
In the case of Orient General Industries Ltd v/s Collector of Central Excise, New Delhi 1984 (12) H: Capital gain com
Central Sales Tax TMI 303 - CEGAT NEW DELHI, it was held in para 13 that the Lordships of Supreme Court have FMV for determinati
permitted the deduction of discount allowed in the trade by whatever name such discount is described acquisitio...
having regard to the nature of goods provided the same is established either under an agreement or in
H: Penalty u/s 271-C
terms of sale of by established practice. The said decision will hold true in GST regime also, however, exemption for TDS
with an additional condition that the said trade discount is either in the invoice itself or is specifically salary - High Cou...
linked to the invoice.
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7/26/2019 Incentives as Discounts
Another kind of practice prevailing in the industry is to provide discounts in the form of incentives by H: Condonation of d
way of reduction in the price of the product. Such discounts are generally given post procurement of days - Penalty u/s 2
goods or even after sale of goods. As the terms of such discounts itself says that these are directly assessee ha...

linked to the invoices therefore such discounts are eligible for deduction from sale price and GST can H: Validity of order i
be reversed on the value of such discounts provided that the input tax credit claimed is also reversed. by the officer who h
personal h...
Turnover discounts are generally given by various names. It can be turnover discount, special
incentive, bonus incentive, performance discount etc. It is given on attainment of the target by the H: Penalty u/s 117 o
Broker and initiation
retailer or the wholesaler. This type of benefit is given on the value of turnover achieved. It is clear on
under Cust...
one part that since these kinds of discounts are not linked with the invoices and therefore it will not
result in reversal of GST. However, the other side of the transaction calls for review whether such H: Maintainability of
discounts are taxable in the hands of the receives as the supply of service. under I&B Code - pr
dispute o...
In order to understand the taxability the author gives reference of the various judicial decisions cited in
H: Classification of s
the judiciary.
supply of manpowe
not - an a...
In Grey Worldwide (1) Pvt . Ltd v/s Commissioner of Service Tax, Mumbai 2014 (9) TMI 180 -
CESTAT MUMBAI it was held that - H: Penalty - reversa
CENVAT credit whe
“It is seen and as correctly pointed out by the learned counsel that the coordinate bench of the manufactured good
Tribunal in the three cases as cited herein above, have held that the discounts/incentives ...
received by the assesses from the print media will not be liable for service tax under the
H: Parity of remune
category of advertising agency services. If that be so, the said discount/incentive itself cannot be
other members Mem
considered for the purpose of taxability under the head business auxiliary service as the Tax Tribunal (U...
amounts which are received are received are in respect of the services provide under the head
category of advertising agency services and the amount are discounts and incentives and H: Principal of natur
Petition filed for arb
not as charges for service.
well ...

Again in the case of tradex polymers Pvt.Ltd. these views were reiterated. Therefore, it can be A: Proposed deduct
seen that the tribunal has been consistently taking the stand that incentives received by an interest on loans for
advertising agencyfrom the media without any contractual obligation to render any service housing - - Lo...
cannot be levied to service tax under the category of BAS..........................…. Therefore, the
C: Exim Banks Gov
confirmation of service tax demand on these amounts, i.e. volume discounts, rate different and India supported Line
amounts written back cannot be sustained in law and accordingly, we set aside the same.” USD 10 mill...

In Tradex Polymers Pvt. Ltd. Commissioner of S.T., Ahmedabad 2011 (12) TMI 398 - CESTAT, The Fifteenth Finan
AHMEDABAD it was held as - Commission holds m
the Government of
Stay/Dispensation of pre- deposit – business Auxiliary service- ‘Early payment incentive’
received by the distribution of goods of the principal and retained by them – HELD : No service
is involved as such retention of incentive is nothing but a discount received by the assessee –
section 35F of central excise act, 1944 as applicable to service tax vide section 83 of finance
act, 1994. [2011(24)S.T.R. 447(Tribunal) relied on]. [Paras 3, 4]

In Satnam Auto v/s CCE, Meerut I, 2017 (3) TMI 117 - CESTAT NEW DELHI -

Business Auxiliary services – Target incentive – “Depot Expenses” paid by manufacture in

pursuance of declared policy for achieving target in sales to authorised dealer – cannot be
subjected to service tax under category of business auxiliary services or business
promotion services provided to manufacturer – sections 65, 66 and 73 of finance act, 1994.
[2016 (43) S.T.R. 158 (Tribunal) relied on]. [para - 6]

In Toyota Lakozy Auto Pvt Ltd v/s CST Ex Mumbai I-II &V 2016 (12) TMI 541 - CESTAT MUMBAI -

Business Auxiliary service – commission / incentive received under dealership agreement –

agreement with manufacture for supply of vehicles on principal – to- principal basis on which
title and risk, passed on to assessee when vehicles are excise cleared and placed on common
carrier – assessee when vehicles are excise quantity invoices raise by manufacture after
according discounts designated as commission / incentive merely as management terminology
–Held : in view of settled position in tribunal’s decisions, discounts received on procurement of
vehicles from manufacture not liable to tax as business auxiliary services – demand set
aside – section 73 of finance act, 1994. [paras 3, 4]

In the following cases the discounts are not allowed as deduction from the assessable value for paying
excise duty, meaning thereby the discounts will form part of the assessable value as cost and is liable

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7/26/2019 Incentives as Discounts
to tax in the hands of the person giving the discount and will not again be liable to tax in the hands of
the person receiving the discount.

(a) In Orient General Industries Ltd v/s Collector of Central Excise, New Delhi 1984 (12)
TMI 303 - CEGAT NEW DELHI -

We further observe that as per the clarification of the supreme court reported in 1983 (11) TMI
70 - SUPREME COURT OF INDIA (Union of India and others v. Bombay Tyres International
Ltd.) The nature of the discount should be know at or prior to the removal of the goods. In the
case it is not possible to determine the quantum discount because it is based on a target figure
to be found by the appellants at a future date. We are therefore of the firm view that the
appellants are not entilled to any deduction on the ground of incentive bonus discount, which
was contigent is nature.

(b) In S.S. Miranda Ltd v/s Union of India 1985 (4) TMI 78 - BOMBAY HIGH COURT -

Valuation – Trade discount – ‘Surprise Incentives’ not known at or prior to the time of removal of
goods but contingent upon customer’s purchasing a particular quota and during a particular
period . not deductible as trade discounts from sale price – section 4 (4) (d) (2) of central
excises and salt Act, 1994.

The trade discounts if they are to be allowed as deductions from the sale price must be known at or
prior to the removal of the goods. Judged on this criterion the discounts claimed for none the periods
are permissible as deduction. As regards the period upto 31st May, 1983, admittedly the petitioner’s
customers were not even aware that there was going to be any such incentive scheme since it was
announced for the first time only by a circular dated 23rd May, 1983. Similar is the situation with regard
to the period from July to October, 1983, for the incentive was announced for the said period only by
the circular dated 1st November, 1983. The customer are, therefore, obviously unaware of any such
incentive at the time they cleared their individual consignments during the said three months. The only
period for which it can be said that, the customers were made known of the said incentive scheme was
the period of three months viz. June, November and December, 1983. All that however can be said
with regard to the said three moths is that the petitioner’s customers were aware that there was some
such incentive scheme operative during the period. But even with regard to those three months it can
hardly be said that they knew at the time they cleared the individual consignments during the said three
months, the quantum of discount that they would be entitled to. In fact at the time they cleared the
specific consignments during the said three months they would not even be sure that they would get
any discount at all. In other words the incentive was not as matter of course accompanying each
purchase was more in the nature of a contingent benefit. It could hardly be described as a trade
discount. Both the circulars did not make a secret of the fact that they were both surprise and incentive
schemes. At best this was a profit sharing scheme between the petitioners and their customers
on the customers reaching the targets of purchase. Therefore, the petitioners are not entitled to
claim any deduction on account of their said surprise incentive scheme for the year 1983.

In view of the various judicial decisions incentives have escaped taxability under service tax law on the
dominant contention that incentive is a sort of profit sharing agreement or that mere receipt of incentive
does not result in implied existence of promotion and marketing of goods or services. In post GST
regime also these decisions holds an utmost importance, however, the time will tell about the exact
implication of taxability of incentives.

CA Akash Phophalia

9799569294

ca.akashphophalia@gmail.com

By: CA Akash Phophalia - December 14, 2017

Discussions to this article

Kindly update the latest position as on date on Taxibility of Incentives under GST regime.

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7/26/2019 Incentives as Discounts
Rajiv Mathur

By: RAJIV MATHUR

Dated: 14/09/2018

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