The Goods and Services Tax Appellate Tribunal (GSTAT), Agra Bench, has held that receipt of a discount or incentive from a supplier does not, by itself, warrant reversal of the recipient’s input tax credit where the supplier has not reduced its taxable value or output tax liability.

The bench of Ajeet Singh (Judicial Member) and Vivek Kumar (Technical Member) clarified that an adjustment disclosed in the annual reconciliation statement, GSTR-9C, cannot automatically justify an output tax demand. The authorities must verify whether the taxpayer actually reduced its outward taxable turnover or output tax liability on account of that adjustment.

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The Bench set aside both the adjudication order and the first appellate order, finding that the matter had not been adequately investigated. It remanded the proceedings for fresh examination within the scope of the existing show-cause notice. 

The dispute concerned the financial year 2017-18 and an adjustment of ₹14,19,144 disclosed by the taxpayer, referred to in the reasoned order as M/s Peoples Automobiles, in Column 5(O) of GSTR-9C under “Adjustment in turnover due to reasons not listed above”.

During scrutiny of the taxpayer’s returns, the department sought an explanation for the adjustment. The taxpayer stated that the amount represented incentives or discounts received from Honda Motorcycle and Scooter India Private Limited.

The taxpayer also initially relied on a payment made through Form GST DRC-03 on February 25, 2023. However, the department found that the benefit of that payment had already been accepted in an earlier appeal involving a discrepancy between GSTR-1 and GSTR-3B.

In those earlier proceedings under Section 73, tax of ₹10,79,624, penalty of ₹1,07,962 and interest of ₹30,721 had been imposed. The appellate authority had recognised the DRC-03 deposit while deciding that appeal on July 18, 2023.

Taking the view that the taxpayer was attempting to obtain the benefit of the same deposit twice, the adjudicating authority initiated proceedings under Section 74, alleging wilful misstatement and suppression of material facts with intent to evade tax.

Although the show-cause notice proposed tax of ₹9,51,128 and an equal penalty, the adjudication order ultimately determined tax of ₹2,55,446, an equal penalty and interest of ₹3,43,403.40.

The first appellate authority decided the matter in the taxpayer’s favour. The Revenue then challenged that decision before the Tribunal.

The department argued that post-supply discounts could be excluded from the value of supply only after satisfying the conditions under Section 15(3) of the GST Act.

According to the department, this required an agreement entered into at or before the time of supply, a specific link between the discount and the relevant invoices, and reversal of the attributable input tax credit by the recipient wherever required.

The department contended that the first appellate authority had allowed the adjustment without properly examining these conditions. It also reiterated its allegation that the taxpayer had sought credit for a DRC-03 payment already considered in the earlier proceedings.

The Revenue further objected to the admission of additional evidence before the first appellate authority without giving the adjudicating authority an opportunity to examine it, invoking the procedural requirements under Rule 112.

The department argued that the incentives were linked to achievement of targets and represented consideration for promotional or marketing services supplied by the dealer to the manufacturer.

The taxpayer maintained that the discounts arose from a pre-existing agreement with the supplier and satisfied the requirements of Section 15(3).

It explained that its earlier reliance on the DRC-03 payment was inadvertent and resulted from a lack of understanding of the statutory provisions during the initial period of GST implementation.

Denying concealment or wilful misstatement, the taxpayer argued that the essential ingredients for invoking Section 74 were absent. It supported its position with agreements and other documents.

The Tribunal identified a fundamental distinction between a discount affecting the supplier’s taxable value and an adjustment affecting the recipient dealer’s own outward turnover.

It explained that Section 15(3) governs the circumstances in which a discount can be excluded from the value of the supplier’s taxable supply. It does not automatically permit the recipient to reduce the value of its own outward supplies.

Consequently, merely establishing that a dealer received a discount or incentive from a manufacturer would not establish a corresponding right to reduce the dealer’s outward taxable turnover.

The tax treatment had to be examined against the actual transaction, the applicable statutory provisions, invoices, credit notes and the treatment adopted by both parties in their GST returns.

The Tribunal therefore found that the authorities should have investigated the nature and return treatment of the incentive, instead of proceeding solely on the adjustment appearing in GSTR-9C.

The Tribunal directed the adjudicating authority to verify whether the supplier had issued credit notes for the discounts or incentives and reported them in its GSTR-1.

The authority must also examine whether the discounts were linked to specific invoices, arose under an agreement entered into at or before the supply, and resulted in a reduction of the supplier’s taxable value and corresponding tax liability.

Where the supplier reduced its taxable value in accordance with Section 15(3), the consequences for the recipient’s input tax credit would have to be determined under the applicable law and supporting documents.

Conversely, the Tribunal held that where the supplier had not reduced its taxable value or output tax liability, receipt of the discount alone would not warrant reversal of the recipient’s input tax credit.

This finding makes verification of the supplier’s tax treatment central to determining the dealer’s corresponding ITC obligation.

The Tribunal separately directed the adjudicating authority to determine whether the ₹14,19,144 was merely disclosed as a reconciliation adjustment or had actually been used to reduce outward taxable turnover or output tax liability.

This required examination of GSTR-1, GSTR-3B and other relevant returns.

If the taxpayer had not reduced its outward turnover or output tax liability, the entry in Column 5(O) of GSTR-9C would not, without further supporting facts, justify an output tax demand.

If a reduction had actually been claimed, the adjudicating authority would have to quantify the resulting tax effect and determine liability in accordance with law.

The Tribunal thus required the department to establish the actual tax consequence of the reconciliation entry before sustaining a demand.

The Tribunal declined to accept the Revenue’s argument that the discounts constituted consideration for promotional or marketing services.

It noted that this allegation had neither been raised in the show-cause notice nor formed the basis of any determination of outward service turnover in the Section 74 adjudication order.

Accordingly, the department could not rely on that argument at this stage of the proceedings. The Tribunal’s finding concerned the scope of the existing notice and adjudication; it did not make a general determination that all dealer incentives fall outside GST on services.

Finding that the subordinate authorities had passed their orders without adequate investigation, the Tribunal set aside both the adjudication order and the first appellate order.

It remanded the matter to the adjudicating officer to examine the agreements, credit notes, invoices, return disclosures and documents produced before the appellate authority and the Tribunal.

The Bench expressly directed that the fresh order must be passed without issuing a new show-cause notice and only on the issues raised in the notice already issued.

The remand therefore leaves the taxpayer’s ultimate liability open for fresh determination. The Tribunal did not finally uphold the alleged duplicate use of the DRC-03 payment or conclusively determine whether the requirements of Section 74 were satisfied.

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