Kerala’a Appellate Authority for Advance Ruling has upheld that additional discount reimbursed by a company to its distributor will be added to the consideration payable by the customer to the distributor. This sum will attract GST in the hands of the distributor.

Experts feel that as there are divergent views on applicability of GST on dealer discount, detailed clarification from Finance Ministry is warranted to minimise disputes.

The appellant, Kottayam-based Santhosh Distributors, is an authorised distributor of Castrol, a global company engaged in industrial and automotive lubricants. The appeal mentioned the distributor is paying the tax due as per invoice value issued by them and availing the input tax credit (ITC) shown in the inward invoices received by them from the company or from stockist.

What the appeal says

According to the appeal, Castrol has two types of dealers — normal dealers and workshops and both get supply from distributor like the appellant. Through its distributor, the company gives discounts based on SKU or quantity to workshops. Discounts are also available for normal dealers through distributor. While the distributor is obliged to pass on the discount, he is also entitled to receive them from the company in addition to discount/rebate of 4.3 per cent, as mentioned in the agreement. Here the scheme in question is SKU discount offered by the company in relation to sale by its distributor.

In 2019, he filed an application with the Authority for Advance Ruling (AAR) with three queries — whether discount provided by the company to their dealers through distributor attracts GST, whether the amount shown in the Commercial Credit note issued to the distributor by the company attracts proportionate reversal of ITC and will the amount received as reimbursement of discount/rebate attract GST.

What AAR ruled

AAR held that additional discount given by the supplier through the applicant (distributor), which is reimbursed to the applicant, is a special reduced price for the customer. Hence, the amount represents consideration paid for supply of goods to the customer. Therefore, “this additional discount reimbursed by the supplier of goods/principal company to the distributor/applicant is liable to be added to the consideration payable by the customer to arrive at the value of supply under section 15 of GST law at the hands of distributor/applicant.”

Further, it said that commercial credit is not eligible for reduced tax liability. It held that the applicant is liable to pay GST in the amounts received as reimbursement of discount/rebate from the company. Aggrieved by the ruling, the applicant appealed before AAAR. However, going through all the facts and arguments, the appellate authority upheld the AAR ruling.

According to Harpreet Singh, Partner with KPMG, whether discount given by a company to their dealers is part of consideration received by dealers from their customers, is a circumstantial question with no straight-jacket answer. The answer would depend upon how the transaction is structured, agreement between the company and dealers, documentation etc.

“In view of divergent views and resultant diverse practices being followed, Government may consider coming up with Clarifications on all kind of pre/ post-sale discounts and reimbursements. The same would not only ensure consistent approach, but also avoid unwarranted litigations,” he said.

 

Source: Business Line