Maharashtra AAAR: 18% GST By Incentives on Targets

The Maharashtra bench of the GST-Appellate Authority for Advance Rulings (AAAR) has ruled that the incentive received by the reseller from a US firm cannot be considered a “trade discount.” As a result, the reseller will be liable to pay an 18% GST on the incentive, as it was based on meeting quarterly goals for products of Intel which are eligible.

The US organisation sold its products through distributors, and the appellant, a private firm named MEK Peripherals, purchased these products from the distributors to sell them to retail shops. MEK Peripherals argued before the AAAR that both common law and GST law do not prohibit the trade discount should flow from the immediate vendor only, while it can also originate directly from the original manufacturer (a US corporation).

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The AAAR panel supported the earlier decision of the authority for advance rulings and stated that the incentive did not qualify as a trade discount for several reasons. One of the main justifications provided was that a contractual agreement between the seller (distributor) and the buyer (MEK Peripherals, the reseller) is required for incentives to be classified as trade discounts. Chartered accountant Sunil Gabhawalla clarified that, in this case, the US manufacturer and the reseller were the parties involved in the arrangement.

Furthermore, the appellant argued that since the payment was considered a supply of services rather than a trade discount, it should be eligible for export as a service. However, this argument was rejected by the AAAR, as it deemed that India served as the point of supply for the marketing services provided by the reseller.

Gabhawalla acknowledged that the AAAR’s conclusion regarding the source of supplies could potentially be contested. However, he noted that this particular case is unique because, in general, the incentive is routed to the reseller through an Indian distributor. In such scenarios, the reseller usually exercises caution and charges the distributor GST, who then seeks credit for the applicable tax.