CBIC Circular on Discounts Treatment - Non-Binding & Rocking the Boat!

The common man would understand that discount is a reduction in the price of the goods or services procured by him from the vendor. It is not necessary that all discounts are identified and known at the time of the transaction of supply. When discounts are given post-supply, they are naturally linked with some factors such as volume, or year end or special scheme or season or product obsolesce or target achievement. It requires a great degree of imagination to envisage that a dealer has effected a supply of ‘service’ to his supplier in the supply chain when the dealer receives additional discount on account of a special sale drive or advertisement campaign, etc.

CBEC Circular No.105/24/2019-GST dated 28th June 2019 in one stroke has rocked the boat which has the danger of capsizing the boat itself. When the supply chain across goods in the country has understood GST and all the players in the chain have got into the mode of compliance and discharge applicable GST on their respective supplies, imagining a service in a discount would only result in notices and enquiries on number of distributors and dealers apart from pressure from Auditors in the context of GST Audit perceiving the Circular as the last word on the issue. The Circular has been addressed to all Principal Chief Commissioners / Chief Commissioners / Principal Commissioners / Commissioners of Central Tax / Principal Director Generals and Director Generals, and para 6 provides that suitable trade notices maybe issued to publicize the contents of the Circular.

Firstly, at best the power to issue instructions can only flow from Section 168 of the CGST Act. The said provision does not confer any power on the Board or the Commissioner to identify taxability or direct that a particular transaction should be treated as a service liable to GST. The power conferred is only to issue orders or instructions or directions for the purpose of uniformity in implementation of the Act. The language used in Section 168 of the CGST Act is identical to the erstwhile Section 37B of the Central Excise Act.

The Supreme Court in the case of Orient Papermills vs. Union of India AIR 1979 SC 48 has held that the assessing authorities exercise quasi-judicial functions and they have duty cast on them to act in a judicial and independent manner. If their judgment is controlled by the directions given by the Collector it cannot be said to be their independent judgement in any sense of the word. An appeal then to the Collector becomes an empty formality.

The Supreme Court in the case of Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1 has held that the Board cannot pre-empt a judicial interpretation of the scope and ambit of a provision of the Act by a Circular and that the task of interpretation of laws is the exclusive domain of the Courts.

It is relevant to note that Section 119 of the Income Tax Act is specifically structured whereby the proviso to Section 119(2) provides that no order or instruction or direction can require the income tax authority to make a particular assessment or to dispose a particular case in a particular manner. The Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 has held that the circulars contemplated cannot be adverse to the assessee.

In the past when the CBDT issued a Circular where it clarified that service contracts would cover the services of lawyers, doctors, engineers, advertising agencies, etc. and TDS under Section 194C is applicable, the said Circular was held as erroneous by the Bombay High Court in the case of Chamber of Income Tax Consultants vs. CBDT (1994) 209 ITR 660; Madras High Court in the case of Madras Bar Association vs. CBDT (1995) 216 ITR 240 as well as many other courts across the country.

When a Circular was issued under Section 119 by the CBDT stating that ex-gratia payment under voluntary retirement scheme should be treated as capital expenditure, the same was struck down by the Madras High Court as being adverse to the assessee in the case of Madura Coats vs. DCIT (2005) 273 ITR 32.

Secondly, when GST is considered as the natural extension of the pre-GST laws and supply was considered to encompass manufacture, sale and service, it is unfortunate that the safety valves built in the pre-GST laws have not been built in the GST Act. Section 37B of the Central Excise Act has a proviso which provides that the instruction cannot require an assessing officer to make a particular assessment or dispose a particular case in a particular manner or interfere with the discretion of the First Appellate Authority. Similar proviso exists in Section 119 of the Income Tax Act as well as in Section 115A of the Customs Act.

Thirdly, while GST is understood as one nation and one tax in reality for an intra-state supply there is a Central GST and a State GST. Can a CBEC Circular issued under Section 168 bind an officer of the state administering GST? Would a Circular issued for the purpose of valuation under CGST Act automatically indicate a similar inference for valuation under SGST Act?

Fourthly, each of the elements identified as taxable in the Circular have already been examined by Courts in the past and have been considered as non-taxable from VAT and Service Tax perspective.

Fifthly, in a supply chain, the supplier and the dealer have a seller-buyer relationship. Any additional discount provided by the supplier would only go on to reduce the purchase price in the hands of the dealer. Further from an accounting perspective, all these discounts would be reduced from sales in the hands of the supplier. In such a relationship, it is impossible to determine a service provider-service receiver relationship merely because the dealer is compelled to sell at a lower price or has to offload stock as part of a scheme or launches a campaign for attracting sales.

The Board should stop issuing Circulars creating fresh liability or declaring transactions as supply and identifying the taxability of the same. It is a settled position of law that beneficial circulars are binding on the Revenue but circulars which create a liability or has the effect of prejudicing the assessee are not binding on the assessee. A circular which is contrary to the statutory provisions has really no existence in law is the law laid by the Constitution Bench of the Supreme Court in the case of CCE vs. Ratan Melting & Wire Industries (2008) 231 ELT 22.


Published in Taxsutra