Discount in whatever form has to pass test of Section 15 of CGST Act 2017 – All contracts needs to be re-framed to specify the quantum of discount.

In the latest ruling in the case of M/s Ultra Tech Cement Limited, the authority for advance ruling Maharashtra has held that discount in any form shall have to pass the test prescribed under section 15 in order reduce the same from the transaction value. Two Primary questions before the authority were 1) Whether the “rate difference” be allowed to be adjusted from transaction value  and 2) whether the rate difference be allowed as per section 15(3) of the CGST Act 2017.

In the case, taxpayer formed an opinion that till the time final consideration is not decided between the supplier and the recipient, the valuation shall be done as per section 15(1). Section 15(1) deems the amount actually paid or payable by the recipient as the transaction value. The taxpayer referring to section 15(1) submitted that once the post supply rates are settled, only upon then the consideration actually paid or payable is arrived at. Therefore the rate difference which is settled after the supply has been made shall be eligible for reduction in transaction value. Further taxpayer submitted that the discounts have been given as per the discount clause in the agreement entered between them and the recipient.

On the other hand, the Department held that the post supply incentives/discounts/adjustments are specific to section 15(3). This means that adjustments even if called rate difference shall be covered under the purview of Section 15(3). As per section 15(3) the discount/adjustments are allowed only where it has been mentioned in the invoice or by way of an agreement between parties before making the supply. In such a scenario, the rate difference which is settled after making the supply shall have to pass the test of Section 15(3) in order to be eligible for reducing transaction value.

The Authority for advance ruling while deciding the matter in the favour of the department held the following:

In the present case we find that the discount given by the applicant is not as per Section 15(3)(a) of the CGST Act as reproduced above and therefore this Section is not required to be discussed. We find that the applicant is claiming that the discount being given by them is in compliance with Section 15(3)(b) of the CGST Act and therefore the claim of the applicant needs to be examined as per Section 15 (3) (b) of the CGST Act.

We find that the discount that is given after the goods have been sold has to be established in terms of the agreement entered into at or before such supply i.e. the discount that is to be given afterwards has to be mentioned in the terms of the agreement or the criteria for arriving at the quantum or percentage of discount has to be given in the terms of the agreement which is entered into at or before such supply.

The wordings of Section 15 (3) (b) (i) very clearly states that quantum of discount is given after the supply of goods has taken place has to be there in the terms of such agreement i.e. it cannot be open ended not based on any criteria. Thus this discount quantum cannot be arrived at without any basis only at the discretion of the supplier. The supplier has to clearly mention the quantum of discount or percentage of discount which is to be worked out on the basis of certain parameters or certain criteria which may be agreed to between the supplier and the recipient and which are predetermined and mentioned in agreement in respect of supply of the goods.

Thus the bare word 'discount' mentioned in such an agreement without there being any parameters or criteria mentioned with it would not fulfill the requirement of Section 15 (3) (b)(i) of the CGST Act, as the word 'discount' if left open ended or without any qualifications or criteria attached can mean there can be any percentage of discount ranging from bare minimum to even 100% as per discretion of the supplier and certainly such abnormal discounts without any criteria or basis can in no way be considered as fair and at arm's length business transactions and no taxation statute can be construed to be having open ended discount with legislative intent.

In view of the detailed discussions above now when we have a relook at para 24 of the Applicant's agreement with authorized stockists which states that the company will pay discount at such rate as may be decided by the company from time to time on the quantity sold to the authorized stockists in a particular month, we find that there is no basis or criteria or parameter (which may even be of personal relations nature between the parties to the agreement) mentioned in the agreement on the basis of which the quantum of discount to be given on the goods which have already been supplied is mentioned.

Therefore the authority made it vitally clear that merely having the discount clause in the agreement is not sufficient. It should clearly quantify the amount of discount along with criteria and parameters for availing such discounts. It cannot be left at the discretion of the supplier to decide the amount of discount at a later stage. And if such discount is offered without being specifically declared in the contract, it shall not be allowed to be reduced from the transaction value. Further the authority has made it clear that post supply adjustments in the consideration is subject to section 15(3) and not section 15(1).

Thanks and Regards

Keshav R Garg

(B.Com, FCA, CS, ISA(ICAI))

Author: Bharat's GST Ready Reckoner

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