Synopsis: The Hon'ble AAR, Karnataka in the case of M/s Kwality Mobikes (P) Ltd. inAdvance Ruling No. KAR ADRG 7/2019 decided on September 24, 2019 has held that volume discount received on purchases and sales through credit note without any adjustment of GST is not liable for GST. Further, since amount received in the form of credit note is actually a discount and not a supply by Applicant to Authorized supplier, the Applicant need not issue tax invoice for this transaction.
M/s Kwality Mobikes (P) Ltd. ('the Applicant') is in the business of supplying motor vehicles. He is the authorised dealer for Harley-Davidson India ('Authorised supplier')who manufactures high end two-wheeler motorcycles. The Applicant in its regular course of business, purchases the vehicles from the authorised supplier wherein it charges 28% GST plus applicable Cess.
The Authorised supplier allows credit period of 30 days and also fixes sales targets to the Applicant. Besides, on purchase of vehicles which are over and above the limit fixed on regular purchases, the Applicant is also eligible for volume discount, which is paid on monetary terms.
Hence, the Applicant is eligible for volume discount on retail i.e., sales commission and on purchases over and above the target. To give effect to the above, the Authorised supplier issues credit note to the Applicant which is not affecting the purchase price or sale price and hence there is no adjustment of GST.
• Whether the volume discount received on purchases and
sales is liable for GST? If yes, under which HSN/SAC?
• Whether the Applicant has to issue taxable invoice to this effect?
The Hon'ble AAR, Karnataka in Advance Ruling No. KAR ADRG 7/2019 decided on September 24, 2019 held as under:
• When the Applicant makes more purchases it is eligible for the volume discount on purchases and a credit note is issued by the Authorised supplier and no adjustment of price is made in respect of the goods already sold nor any adjustment of GST is made in the credit note. The applicant is also not claiming any reduction in ITC already claimed by him as it does not affect the price of the goods sold. Hence, the amount received by the Applicant is in the form of an incentive provided by the authorised supplier and does not affect the sale price of the goods already sold and hence there is no liability to charge GST on the same.
• Further, the Applicant when sells more than his target, is eligible for the incentive which is provided by the Authorised supplier in the form of a credit note without affecting the sale price of the goods purchased or sold. Even this is in the form of incentive and no adjustment of price nor tax is done either by the Applicant or the Authorised supplier. Hence, the amount received by the Applicant is in the form of an incentive provided by the Authorised supplier and does not affect the sale price of the goods already sold and hence there is no liability to charge GST on the same.
• Since the credit note is issued as a post-sale event, the same is not covered under the Section 15(3)(a) of the CGST Act, 2017 ('CGST Act'). Further, since the Applicant has not reversed the ITC attributable to the discount received in the form of credit note from the Authorised supplier, the same cannot be covered under Section 15(3)(b) of the CGST Act. The credit note issued by the Authorised supplier in the pertinent case does not have any effect on the value of supply and hence is only a financial document for account adjustment for the incentive provided and therefore, there is no effect on the GST.
Citation:  110 taxmann.com 369 (AAR - KARNATAKA)
In view of the stringent conditions mentioned for adjusting post supply discount under Section 15(3)(b) of the CGST Act, Financial/ Commercial Credit Note without charging GST is also seen as a viable option for passing on benefits of post-supply incentives/ discounts.
The above view is also fortified by the CBIC in its Circular No. 92/11/2019-GST dated March 7, 2019('Circular 92'). The CBIC while discussing secondary discounts, amongst others, has clarified that a Financial/ Commercial Credit Note(s) can be issued by the supplier even if the conditions mentioned in Section 15(3)(b) of the CGST Act are not satisfied. In other words, Credit Note(s) can be issued as a commercial transaction between the two contracting parties. However, such Credit Notes shall not have any impact on value of supply and corresponding ITC.
Relevant extract of Circular 92 is reproduced hereunder for ease of reference:
D. Secondary Discounts
i. These are the discounts which are not known at the time of supply or are offered after the supply is already over. For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Re. 1/- per packet.
ii. The provisions of sub-section (1) of section 34 of the said Act provides as under:
'Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.'
iii. Representations have been received from the trade and industry that whether credit notes(s) under sub-section (1) of section 34 of the said Act can be issued in such cases even if the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.
iv. It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.
v. In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.
vi. There is no impact on availability or otherwise of ITC in the hands of supplier in this case.'
Note: To settle the haze surrounding on treatment of post-supply discounts under GST, the CBIC issued a Circular No.105/24/2019-GST dated June 28, 2019('Circular 105') captioned 'Clarification on various doubts related to treatment of secondary or post-sales discounts under GST'. Amongst other clarification(s), Para 3 and 4 of Circular 105, inter alia, stated the following as regards secondary or post-sales discounts under GST:
• If the additional discount given by the supplier of the goods to the dealer is the post-sales incentive requiring the dealer to do some act like undertaking special sales drive, advertisement campaign, exhibition etc., then such transaction would be a separate transaction subject to GST.
• To augment the sales, the manufacturer gives a special discount in the form of reduced price by the dealer to customer. Such an additional discount represents the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to consumer and hence, is subject to GST.
In the light of matter being represented with the CBIC and GST Council, vide Circular No. 112/31/2019-GST dated October 3, 2019, CBIC has ab-initio withdrawn Circular 105.
Section 15(3) of the CGST Act
'(3) The value of the supply shall not include any discount which is given, -
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if -
(i) such discount is established in terms of an agreement entered into at or
before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.'