DISPUTE OVER SERVICE TAX ON DISCOUNTS / INCENTIVES IN AUTOMOBILE SECTOR

[Dr. Sanjiv Agarwal]

Introduction

The retail sale of various motor vehicles, which include two wheelers, three wheelers, four wheelers, various types of passenger cars, commercial vehicles and tractors etc. is done in India through a large network of automobile dealers. The retail sale of vehicles is done by dealers on a principal to principal basis by engaging in retail trade (buying from O&M suppliers and willing to ultimate customers, such activities are trading activities for the dealers.

As a normal trade practice,  in order to promote business, various sales promotion schemes are adopted and followed by the companies under which discounts and/or incentives called by different names are offered to the dealers who may or may not inturn pass it on to the customers based on their sole discretion / market competition.

Types of discount prevalent

Trade / commercial discounts are a part of normal business activity in auto industry.

These discounts are called by different names such as :

• Trade Discount
• Quantity Discount
• Target Discount
• Target Incentive
• Royalty bonus and so on

The automobile have dealers a practice of giving the following schemes:

• Dealer Trade Discount Scheme.
• Quarterly Bonus/Incentive Scheme.
• Annual Consistency Bonus.
• Star Bonus

The manufacturers of motor vehicles may offer Target and Non-Target based discounts to its dealers as agreed upon. The dealer who achieves the target of purchase/sale in case of Target based discount and who passes on the discount as per circulars issued to end customer in case of Non-target based discounts, gets quantity discount/ trade discount/ reimbursement and accounts for in its books of accounts under the income as ‘other operating income’. This does not relate to any taxable service, whatsoever, rendered by the dealers to its customers or to the manufacturers.

The manufacturers provide such discounts by way of credit notes wherein amounts are credited to dealer's account after verification of documents and details of each dealer.

In the credit notes issued to eligible dealers, manufacturer specifies certain amount of bonus/discount for specific vehicle which has accrued to dealer models. Observing and implementing such scheme by dealer is as per the obligation stipulated in dealership agreement, and the dealer was required to implement these schemes while selling the vehicles, and in return the dealer received certain pre-fixed discounts / incentives from manufacturer subject to the verification of claim made by dealer. Discount provided by the manufacturer is related to sales only and has nothing to do with services.

It is a fact that the activities between manufacturer and dealer are pure trading services of sale and purchase of vehicles and there is no service element involved therein.

Taxability under service tax regime

The scope of service as defined in section 65B (44) of Finance Act, 1994 does not include trading activities and service tax is leviable only on taxable services in terms of charging section 66B of the Finance Act, 1994. The sum and substance of the transaction has nothing to do in service and as such, any discount or incentive attributable to such trading activity cannot be considered as consideration which is ineligible to service tax. If at all, any service element is three, these are otherwise already taxable as authorized service station category.

The issue revolves around discount which is neither a consideration nor attributable to any rendering of service, whatsoever. According to charging section 66B, since no taxable service is involved, any amount of discount, even if it is assumed for a moment to be a consideration, it will not be liable to Service Tax.

According to section 65, service tax can be levied only if charging section is attracted i.e., there exists an activity which can be covered under the scope of service under section 65B(44) of Finance Act, 1994, there is a consideration under section 67, there is a co-relation between the activity and consideration and two parties are present : service provider and service recipient.

The dealers provides services on principal to principal basis which is evidenced by the fact that the dealer is engaged in trading activities and not as an agent of the manufacturers of the vehicles. Further, the dealer is showing the purchase from manufacturers in its Trading and Profit & Loss Account and the balance as closing stock after the sale of such vehicles which clearly proves that such discount / incentive is not income for the dealers. In the present case, neither there is a supplier of service nor a recipient of service and even any consideration is missing and therefore, charging section under Service Tax is not at all attracted.

These discounts are being shown as discount under ‘Other Income’. Merely by following an acceptable accounting practice, the amount of discount doesn’t become a consideration in any form and the activity doesn’t become a taxable service. The nature of transaction has to be governed by facts and any different recording can’t change the color of transaction.

Taxability under GST Regime

Treatment of discounts under GST laws (section 15 of CGST Act, 2017 read with rules 28 to 35 of CGST Rules, 2017) can be summarized as under:

Discount is given	Allowed as deduction from transaction value?
On or before time of supply and recorded in tax invoice	Yes
After supply but it was known before/at time of supply and can be linked to relevant invoice	Yes
Given after supply but it was not agreed upon before/at time of supply (whether or not traceable to relevant invoice)	No

In case of supply of motor vehicles by dealers or for that purpose for any supply, discounts do not form part of transaction value. The law therefore, is very clear under the GST regime so far as taxability of discounts is concerned.