2024 (7) TMI 1344 - AAR - GST

Differential dealer margin paid by petroleum companies to retail dealers constitutes taxable service under GST

The AAR, Kerala ruled that differential dealer margin paid by petroleum companies to retail dealers constitutes a taxable service under GST. The margin ... Consideration for agreeing to the obligation to refrain from an act - post sales discount versus separate consideration for a service - necessary and sufficient nexus between supply and consideration - classification of 'agreeing to refrain from doing an act' under Heading 9997 (Service Code 999793) - taxability of dealer incentives as supply of serviceConsideration for agreeing to the obligation to refrain from an act - post sales discount versus separate consideration for a service - necessary and sufficient nexus between supply and consideration - Whether differential dealer margin paid by the oil company to the retail dealer is taxable under GST as a supply of service - HELD THAT: - The Authority found that the differential dealer margin is paid by HPCL when the dealer's sales fall below a mutually agreed level so that the dealer continues to run the outlet despite low volumes. That payment is in substance consideration for the dealer's agreeing to continue the dealership (i.e., to refrain from closing or abandoning the business), and therefore falls within the activity in Schedule II treating 'agreeing to the obligation to refrain from an act' as a supply of services. The Authority rejected the applicant's contention that the margin is a post sales discount governed by section 15(3)(b)(i): section 15(3) deals with valuation of discounts on the taxable supply of goods or services, whereas the present payment is consideration for a distinct supply (the agreement to continue operations), and not a reduction in the price of the petroleum supply. The Authority also relied on the clarification that there must be a necessary and sufficient nexus between the supply and the consideration: the differential margin is contractually linked to the dealer's low sales and is payable only to dealers (and ceases if sales reach the agreed level or the dealer exits), establishing the requisite nexus with the separate service. [Paras 7]Differential dealer margin is taxable under GST as a supply of service.Classification of 'agreeing to refrain from doing an act' under Heading 9997 (Service Code 999793) - tax rate applicable to classified service - If taxable, the rate of GST applicable to the differential dealer margin - HELD THAT: - The Authority observed that the service of 'agreeing to refrain from doing an act' is classified under Section 9, Heading 9997, Service Code 999793 of Notification No. 11/2017 Central Tax (Rate). As per the notification entry relied upon by the Authority, the service is taxable at 18% (CGST 9% and KSGST 9%). [Paras 7]The differential dealer margin is taxable at 18% (CGST 9% and KSGST 9%).Scope of advance ruling under section 97(2) - Whether the Authority would provide a ruling on the justification for bringing the payment under GST (as framed in question 2) - HELD THAT: - The Authority noted that the second question as framed by the applicant does not fall within the matters on which an advance ruling is to be given under section 97(2) of the Act, and accordingly declined to give a ruling on that specific framed question.No ruling is provided on question 2 as it does not fall under section 97(2).Final Conclusion: The Advance Ruling Authority held that the differential dealer margin paid by the petroleum company to the retail dealer is a taxable supply of service (being consideration for agreeing to refrain from an act) and is taxable at 18% (CGST 9% and KSGST 9%); the Authority declined to rule on the separately framed question regarding justification as not falling under section 97(2). Issues Involved:1. Whether the 'differential dealer margin' provided by petroleum companies to retail dealers is taxable under GST as a supply of serviceRs.Analysis:The applicant argued that the 'differential dealer margin' is not a consideration for agreeing to do an act and hence not taxable under GST. However, the Authority observed that the margin is a consideration for refraining from closing down the dealership due to low sales volume, falling under the definition of supply of service. The margin is linked to sales volume and is given based on an agreement, making it taxable under GST.The applicant also contended that the margin is an incentive provided after the supply has been made, and hence not subject to GST. However, the Authority clarified that the margin is a consideration for agreeing to refrain from an act, not a discount on the supply of petrol. Therefore, the provisions of Section 15(3) regarding taxability of discounts do not apply in this case.Regarding the argument that petroleum products are not taxable under GST, the Authority differentiated between the supply of petrol/diesel and the service of agreeing to refrain from an act, which is taxable under GST. The service falls under Section 9, Heading 9997, and is subject to an 18% tax rate.In conclusion, the Authority ruled that the 'differential dealer margin' provided by the petroleum company is taxable under GST as a supply of service at an 18% rate (CGST @ 9% and KSGST @ 9%).This thorough analysis considered the applicant's contentions, relevant legal provisions, and precedents to arrive at a well-reasoned ruling on the taxability of the differential dealer margin under GST.