GST on discount given by the manufacturer to distributor for supplies made to the customers

[Shilpi Jain]

GST on discount given by the manufacturer to distributor for supplies made to the custo

There are different kinds of discounts that are offered by various suppliers, being manufactures, as per their marketing/business promotion requirements. In this article we are examining one such discount being offered by the manufacturers to its distributors, which is given on a condition that it has to be passed on to the customer. In some cases it is reimbursed by the manufacturers only after the proof of passing the discount to the customer is provided.

Say for instance, a manufacturer has sent certain goods to the distributor at ₹ 75 per unit to be sold to the customer at ₹ 100. However, due to technological advancements the said product is worth not more than ₹ 90 in the market and thereby the manufacturer states that the product be sold at ₹ 90 to the customer and this additional ₹ 10 discount offered to the customer would be reimbursed by the manufacturer by way of a commercial credit note. Now the question that arises here is whether the distributor would be liable to pay GST on sale made to the customer on ₹ 90 or entire ₹ 100?

The Kerala AAR in the case of M/s. Santosh Distributors = 2019 (11) TMI 223 - AUTHORITY FOR ADVANCE RULING, KERALA has ruled that the distributor would be liable to pay GST on entire ₹ 100 for the reason that the discount offered by the manufacturer is in the nature of consideration for the supply made to the customers.

However, a contrary conclusion emanates from the examination of the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the Act), as discussed below. In this case the question that arises is whether reimbursement of the discount by the manufacturer to the distributor is actually a consideration received by the distributor for the sale made to the customer and thereby such distributor is liable to pay GST on such reimbursed amount as well?

1. 1. Section 15 of the Act: Value of taxable supply in terms of section 15(1) of the Act would be the transaction value, which is the price actually paid or payable for the said supply and where
      1. The price is the sole consideration, and
      2. The supplier and recipient are not related parties.

In the event of non-satisfaction of any of the above two conditions, a reference to the CGST Rules, 2017(hereinafter referred to as ‘Rules’) would have to be made in terms section 15(4) of the Act (extracted as Annexure 16) to identify the value of the supply.

In the present case, the supply for which valuation is being examined is the supply between the distributor and the customer. Assuming that the distributor and the customer are not related persons, the value of supply would be the price actually paid or payable i.e., transaction value, for the said sale.

Further, w.r.t. the question whether the other condition of the price being the sole consideration is satisfied or not, it is to be noted that the terms ‘price’ and ‘sole consideration’ are not defined under the Act. Another aspect to be noted here is that the section 15(1) of the Act does not anywhere refer to the term ‘consideration’ hence reference to the definition of ‘consideration’ as defined in section 2(31) of the Act is not required (whereas it is to be noted that the advance ruling referred to above has arrived at its conclusion only on the basis of the definition of ‘consideration’).

Price

The term ‘price’ as per the Black’s Law Dictionary:

“The amount of money or other consideration asked for or given in exchange for something else, the cost at which is something brought or sold”.

From the above definition, it can be seen that price is something given in return for something. In the instant case, the amount paid by the customer would be the price which is actually the amount paid in exchange for the product. The discount received by the distributor cannot be considered as the price for the product sold to the customer. It is very important to note in this regard that there are 2 transactions involved in the present case:

1. Sale of goods by manufacturer to the distributor, and
2. Sale of goods by the distributor to the customer.

The discount offered by the manufacturer is in relation to the first supply referred above and it cannot be mixed with the second supply and taxed in the hands of the distributor. Hence, it can be said that the proposition to add the discount received from the manufacturer, by treating it as a consideration received from any person, to the value of supply is not founded in the law and thereby not correct.

Sole consideration

Now let us examine what ‘sole consideration’ means. Since there is no legal precedent under GST reference to earlier law could give some insight. Under section 4 of CE Act, the goods are sold by the assessee, for delivery at the time and place of removal, the assessee and the buyer are not related and the price is the sole consideration then such price would be the transaction value for valuation purpose. As this provision relating to valuation is similarly worded to the corresponding GST provision we would look at some precedent under the CE. From the analysis, it can be said, whether the price is the sole consideration or not has to be seen only looking at whether any other amounts are flowing between the supplier and recipient. Amounts flowing from any other person will not affect this position. Similar is the view held in the case of Coramandel International Ltd. Versus C.C.E., CUS. & S.T., Vishakhapatnam = 2014 (8) TMI 775 - CESTAT BANGALORE

However, there are contrary judgments in the following cases which have not attained finality as they are pending before the Supreme Court:

• Kochi Refineries Ltd Vs Commissioner of Central Excise, Cochin = 2017 (4) TMI 323 - CESTAT BANGALORE
• Hindustan Insecticides Ltd Vs Commissioner of C.Ex., Delhi-I = 2017 (4) TMI 149 - CESTAT NEW DELHI

Redundancy

It is further to be noted that, if the intention of the law was not to treat the price to be a sole consideration if there is existence of any discount, incentive or any other amount flowing from anyone, say even by way of a subsidy, then the clause e) to section 15(2) of the Act, which states that the value of supply would include “subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.”, would become redundant for the reason that in cases of a subsidy being given (assuming it would amount to price not being sole consideration), the condition in section 15(1) of the Act would automatically be violated thereby leading to determining the value as per the Rules in terms of section 15(4) of the Act (provision extracted as Annexure 8). However, that is not the case for the reason that even in case of a supply being made where there is a subsidy flowing from a third party, the price between the supplier and recipient is considered to be the sole consideration and the value of subsidy gets added as per section 15(2)(e) of the Act. Thereby, it can fairly be concluded that any other amounts flowing from third parties would not negate the condition of the price being the sole consideration between the supplier and recipient.

Thereby, it can be said that the valuation for the sale made by the distributor to the customer would be as per section 15(1) of the Act i.e. transaction value only, being only the price paid or payable by the customer in respect of the sale in question.

b. Subsidy

Now another aspect to be looked into is whether the discount given by the manufacturer is in the nature of a ‘subsidy’ requiring addition to the price in terms of section 15(2)(e) ibid? The said term is not defined under GST.

However, in general parlance, it can be understood that subsidy would mean the benefit flowing from the third party which leads to a fall in price. In general, it is not provided by the person supplying the product itself but by an unrelated person who wishes the welfare of the customer. In the instant case, the discount is flowing from the manufacturer who has supplied the product to the distributor. Hence it cannot be in the nature of subsidy but would be treated as a part of the transaction that has already occurred between the manufacturer and the Distributor i.e., it is not a separate activity but a part of the sale that has already taken place between the manufacturer and the distributor. Thereby valuation for the sale made by the distributor to the customer would be unaffected.

Thus, only the amount paid or payable by the customer to the distributor should be included in the value of supply and not the discount offered by the manufacturer as it does not violate the conditions specified in section 15(1) of the Act and also that the same is not in the nature of a subsidy. However, it is to be noted that there could be a contrary view taken by the department and thereby it is recommended that a suitable intimation be made to the department giving details of the discounts offered or received, understanding of the client and the treatment under GST adopted.