2019 (11) TMI 223 - AAR - GST

Distributor's Input Tax Credit & GST Liability clarified by recent ruling

The ruling clarified that the distributor could avail input tax credit based on the original invoice value, even if the Principal Company did not reduce ... Value of taxable supply - deduction of discounts under Section 15(3) of the CGST/SGST Act - input tax credit - commercial credit note - principal reimbursed discount treated as consideration - reversal of input tax credit - eligibility to claim ITC under second proviso to section 16(2) of the CGST/SGST ActInput tax credit - inward invoice - Entitlement of the applicant to claim input tax credit of GST shown in inward invoices received from the principal company or its stockist. - HELD THAT: - The Authority examined the supply chain and billing arrangement under which the principal issues invoices to the distributor and the distributor pays tax and avails ITC. Since the supplier (principal) has not reduced its original tax liability in relation to the scheme discounts by issuing commercial credit notes that satisfy the conditions of Section 15(3), the distributor remains entitled to claim the input tax credit reflected in the inward invoices received from the principal or its stockist. The factual finding that the principal continues to charge and account for tax on the original supply supports the distributor's entitlement to ITC.The applicant/distributor is eligible to avail ITC shown in the inward invoice received from the supplier/principal company.Principal reimbursed discount treated as consideration - value of taxable supply - deduction of discounts under Section 15(3) of the CGST/SGST Act - Whether the additional discount/scheme discount reimbursed by the principal to the distributor attracts GST at the hands of the distributor (i.e., whether it forms part of the distributor's taxable value). - HELD THAT: - The Authority found that the distributor has no control over pricing, customer categories, or quantum of discounts; the principal determines these and the distributor implements them via the principal's mandatory software. The discounts given by the distributor are fully reimbursed by the principal by way of commercial credit notes. In these circumstances the reimbursed amount represents consideration flowing from the principal to the distributor for the distributor's supply to customers. Accordingly, that reimbursed discount must be added to the consideration payable by the customer to the distributor for computing the distributor's taxable value under Section 15. The Authority also noted that because the distributor invoices customers at the reduced price and the reimbursed amount augments the distributor's consideration, the amount is taxable in the hands of the distributor.The additional discount reimbursed by the principal is liable to be added to the distributor's consideration and is subject to GST at the distributor's end.Commercial credit note - reversal of input tax credit - Whether the commercial credit note issued by the principal to the distributor necessitates proportionate reversal of input tax credit by the distributor. - HELD THAT: - The Authority observed that the principal, by issuing commercial credit notes, did not satisfy the conditions in sub section (3) of Section 15 so as to reduce its original tax liability. Because the supplier has not reduced its original tax liability, there is no basis for the recipient (distributor) to reverse ITC attributable to those commercial credit notes. The distributor's entitlement to ITC therefore remains unaffected by receipt of the commercial credit notes in the facts of this case.The distributor is not liable to reverse input tax credit attributable to the commercial credit notes issued by the principal.Consideration for supply - eligibility to claim ITC under second proviso to section 16(2) of the CGST/SGST Act - Whether the amount received by the distributor as reimbursement of discount/rebate from the principal attracts any tax liability under GST. - HELD THAT: - Given the Authority's conclusion that the reimbursed discount constitutes consideration flowing from the principal to the distributor for supplies made by the distributor to customers, the amount received by way of reimbursement is liable to GST. The Authority further observed that a registered customer would be eligible to claim ITC only to the extent of tax actually paid by that customer to the distributor, in accordance with the second proviso to section 16(2). Thus the reimbursement increases the distributor's taxable consideration and attracts GST at the applicable rate.The applicant/distributor is liable to pay GST on the amount received as reimbursement of discount/rebate from the principal company.Final Conclusion: The Authority ruled that (a) the distributor may avail ITC shown in inward invoices from the principal; (b) discounts reimbursed by the principal to the distributor constitute consideration for the distributor's supplies and must be added to the distributor's taxable value and are taxable; (c) because the principal did not reduce its original tax liability by satisfying conditions of Section 15(3), the distributor need not reverse ITC on receipt of commercial credit notes; and (d) the distributor is liable to pay GST on reimbursements of discounts/rebates received from the principal. Issues involved:1. Tax liability of the applicant for transactions with Principal Company2. Tax implications of discount provided by Principal Company to dealers through the applicant3. Proportionate reversal of input tax credit on Commercial Credit notes issued by Principal Company4. Tax liability on amount received as reimbursement of discount or rebate from Principal CompanyIssue 1: Tax liability of the applicant for transactions with Principal CompanyThe applicant, an authorized distributor, sought an advance ruling on their tax liability for transactions with a Principal Company involving the supply of lubricants. The distributor raised invoices to dealers based on pre-fixed rate schemes by the Principal Company, with subsequent reimbursement of discounts as Commercial Credit Notes. The ruling clarified that the distributor could avail input tax credit based on the original invoice value, even if the Principal Company did not reduce the tax liability. The distributor was not required to reverse input tax credit proportionately.Issue 2: Tax implications of discount provided by Principal Company to dealers through the applicantThe ruling determined that the additional discount given by the applicant to customers, as directed by the Principal Company, was reimbursed by the Principal Company. This reimbursement was considered as consideration flowing from the Principal Company to the distributor for the supply made to customers. The additional discount amount was to be added to the consideration payable by the customer to the distributor for determining the value of supply under GST laws.Issue 3: Proportionate reversal of input tax credit on Commercial Credit notes issued by Principal CompanyRegarding the Commercial Credit notes issued by the Principal Company for discounts provided by the distributor, the ruling clarified that the Principal Company could not reduce its original tax liability. As a result, the distributor was not liable to reverse the input tax credit attributable to the Commercial Credit notes received from the Principal Company.Issue 4: Tax liability on amount received as reimbursement of discount or rebate from Principal CompanyThe ruling stated that the distributor was liable to pay GST on the amount received as reimbursement of discount or rebate from the Principal Company, as per the written agreements between the Principal Company, dealers, and distributors. The distributor was required to pay GST at the applicable rate on such reimbursements.In conclusion, the ruling provided clarity on the tax implications of transactions between the distributor and the Principal Company, ensuring compliance with GST laws and outlining the distributor's tax liabilities and entitlements in various scenarios involving discounts, reimbursements, and input tax credits.