Can discounts/incentives be considered a consideration against any supply of services?

Source: Bloombergquint

The government in clarification has declared that Advertisements or special promotion drives undertaken by the dealer of a company will be now considered as a service, and would be taxed.

As per this clarification, Companies that offer additional discounts to their dealers as incentives and ask them to conduct advertising campaigns to promote their brand/products. These incentives given to dealers shall now be taxed. Dealers will charge GST on the service they provide to companies, for which companies will be eligible to claim ITC.

Taxability of incentives or discounts offered to dealers for undertaking promotional activities would compel organizations to relook their tax liabilities.

The Central Board of Indirect Taxes and Customs has also clarified that if companies offer discounts to dealers for increasing of sales, to be passed on to customers, GST will be payable on the amount including the discount value. For example, if a supplier offers a discount of ₹ 500 to a dealer which was not known at the time of sale, and mandates the dealer to pass it on to the consumer, the dealer will be liable to pay tax on the value of goods including the discount of ₹ 500.

The clarification also said that if a company issues a credit note to a dealer, the latter would be able to claim full ITC on the total tax paid on supply, including the amount for which a credit note has been issued. For example, if a dealer purchases goods worth ₹ 10,000 from a supplier and pays 18% GST (₹ 1,800), and later gets a discount of ₹ 1000 from the supplier in the form of a credit note, he/she will be able to claim ITC on ₹ 1,800. Previously, the industry had doubts if businesses would be eligible to claim any credit on the amount for which a credit note has been issued.

The AAR, Maharashtra in the matter of M/s. MEK Peripherals India Pvt. Ltd., [Advance Ruling No. GST-ARA-59/2020-21/B-56 dated April 27, 2022] has held that incentives received by the Indian reseller of the products for providing marketing services within India for increasing the business of foreign company cannot be considered as trade discount nor it is an export service.

Facts:

M/s MEK Peripherals India Pvt Ltd. (“the Applicant”) is a reseller of Intel products imported from the various distributors of Intel Inside US LLC (“IIUL”) and further sell to various retailers.

The Applicant entered into agreement with IIUL under Intel Authorized Components Supplier Program (“IACSP”) pertaining to a non-biding Plan of Record Target (“POR Target”) under which the Applicant earns certain incentives directly from IIUL as a percentage of performance to quarterly goal on eligible Intel products.

The Applicant submitted that the incentives received from Intel should be considered as trade discount as per Section 15 of the Central Goods and Services Tax Act, 2017 (”the CGST Act”) and thus would not be liable to tax.

Issues:

1. Whether the incentive received from IIUL under IACSP can be considered as trade discount or consideration against supply?
2. Whether the transaction by the Applicant will be considered as supply of service and will qualify as export of service?

Held:

The AAR Maharashtra, in Advance Ruling No. GST-ARA-59/2020-21/B-56 dated April 27, 2022 held as under:

• Noted that, the Applicant purchases the goods from the distributors and is not receiving discounts from the said distributors. Therefore, there is no supply of goods or services or both from IIUL to the Applicant and hence, the incentives received by the Applicant from IIUL will not be covered under the provision of Section 15(3) of the CGST Act.
• Observed that, the only reason for the Applicant to receive incentives are for increasing the business of IIUL and therefore, there appears to be a supply of services, since there is no supply of goods at all between the Applicant and the IIUL.
• Held that, the incentive received from IIUL under IACSP cannot be considered as trade discount.
• Stated that, in the absence of supply of goods, the IIUL is paying consideration in the form of incentives to the Applicant for receiving marketing services which would augment the sale of Intel products in the country. Therefore, there appears to be a supply of services.
• Opined that, the marketing services are provided against goods which are made physically available by the recipient of services i.e. IIUL, through its distributors to the Applicant.
• Further held that, as per Section 13(3)(a) of the Integrated Goods and Services Tax Act, 2017 (“the IGST Act”) the place of provision of services is the location of the supplier of services i.e., the Applicant, who is in India. Thus, the supply of services does not qualify as export of services.

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