GEXCOM/SAI/MISC/816/2022-SI-O/o COMMR-CGST-GANDHINAGAR I/2812362/2025

F. No. GEXCOM/SAI/MISC/816/2022-SI 11-03-2025

MODUS OPERANDI CIRCULAR No. 02/2024-25

To,
The Principal Chief Commissioner,
CGST & Central Excise Zone,
Ahmedabad

Sir,

Subject: Non-payment of GST by taxpayers dealing in mobile phones on the

additional consideration/Retail Customer support incentive/Subsidy for outward
supplies received from their Manufacturer/stockist suppliers in the disguise of
Volume discount/post sale incentives schemes for inward supply-matter
regarding.

M/s Phone Wale [GSTIN: 24AAUFP2593H1ZR] was registered in GST for

supply of goods viz. Mobile phones falling under chapter heading 85171110 of the
schedule to the HSN.
2. During investigations, it revealed that M/s Phone Wale had been selling their
goods i.e. mobile phone units at lesser price than that of their purchase price from
their Manufacturer/stockist suppliers which led to nil/negligible tax liability in cash.
In fact, they are paying full GST liability by using ITC only and in Credit Ledger,
ITC balance is accumulating.

2.1 Detailed interrogation revealed that they have been selling Mobile phones at
reduced prices (below purchase cost) based on various discount/incentive schemes of
the suppliers (i.e. Mobile manufacturer or their dealer). The suppliers at the end of
each month, compute total incentive amount on the basis of total sale of various
models as per pre-determined/agreed discounts and transfer this incentive through
commercial credit notes. Such Credit notes (without GST) issued by the suppliers
were adjusted in the next month’s purchase payment due from M/s. Phone Wale,
which means that amount of adjustments made in purchase payments is nothing but
amount of additional consideration received towards the goods sold by M/s. Phone
Wale to its customers during the previous month .
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3. During investigation, the taxpayer admitted of having received post sale

incentives/discounts as per pre-agreed schemes which they further pass on (in some
cases) to their customers, that’s why their selling price is less than purchase prices.
This further passing on of the expected discount to their customers is invoiced in two
different patterns. To illustrate the practice of selling goods at prices lower than
purchase prices can be better understood in the following manner:
i. In first scenario: if taxable value is Rs.100/-, GST is charged [Rs. 6.00 (CGST
@6%) + Rs. 6.00(SGST @6%)] on Rs.100/- hence total amount works out to be Rs.
112 and thereafter gives discount of Rs.20/- to the customers and receives Rs.92/-
from the customer. Here amount of discount i.e. Rs 20/- (expected to be received)
from the supplier as per pre-agreed schemes is mentioned in the invoice, () but after
charging GST on full taxable value of Rs.100, hence no GST implication. In this
invoicing pattern, there is no short payment of GST.
ii. In second scenario: The Distributor’s (M/s Phone Wale) selling/taxable value
is Rs.100/- wherein he deducted discount of Rs.20 and thereafter pays tax on Rs.80/-
[Rs.4.80 (CGST @6%) + Rs. 4.80(SGST @6%)] and receives Rs. 89.6/- from the
customer (80 + GST). Thereafter the Taxpayer M/s Phonewale receives additional
consideration of Rs. 20 as per discount schemes from his Manufacturer/stockist
supplier mobile companies by way of commercial credit notes adjusted in their
purchase payments. Here in the invoice, it is nowhere mentioned that they have been
compensated by the supplier by way of additional consideration. Thus, in fact for this
outward supplies, the taxpayer (M/s Phone Wale) is getting total consideration of Rs.
100 out of which Rs. 80 from the Retail Customers and Rs. 20 from the
Manufacturer/Brand dealer/distributor for this very outward retail supply hence GST
should be paid on total consideration of Rs.100/- and not on Rs.80/-. Hence in this
pattern, GST on Rs.20/- is short paid.
From the above it can be seen that the additional consideration received as per
discount schemes in second scenario has skipped payment of GST.

4. As per Section 15 of the CGST Act, 2017

“Value of Taxable Supply:-
(1)…….
(2) The value of supply shall include-
(e) subsidies directly linked to the price excluding subsidies provided by
the Central Government and State Governments.
Explanation: For the purposes of this sub-section, amount of subsidy
shall be included in the value of supply of the supplier who receives the
subsidy.
From Section 15(2)(e), it is clear that subsidies linked to price shall be
included in the value of taxable supply of the recipient of subsidy i.e.
M/s Phone Wale in the instant case.
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5. The taxpayer has relied on CBIC Circular No. 92/11/2019-GST and argued
that the volume based discount from supplier is not liable to GST. Hence the said
Circular was also analyzed. CBIC vide Para 2(C) of the Circular No. 92/11/2019-
GST dated 07.03.2019 has provided clarification in respect of “Discount including
‘Buy More, save more’ offers”. Vide the above circular, it has been clarified that
sometimes suppliers provide staggered discount/volume based discount on the
purchase of a number of specific units and this is further clarified that such discount
shall be excluded to determine the value of supply provided satisfaction of parameters
laid down in Section 15(3) of the CGST ACT, 2017.

6. Accordingly these discount schemes were examined in light of provisions of

Section 15(2)(e), 15(3) and the above mentioned circular.

6.1 Section 15(3) deals with valuation of the outward supply of the Discount
/incentive provider while Section 15(2)(e) deals with valuation of further outward
supply of the Discount/incentive/Subsidy recipient. Therefore, subsidy for outward
supply of the recipient need to be distinguished from the discount for inward supply
based on volume/quantity of the purchases.
6.2 It is seen that in the instant case, the incentive is not based on their inward
supply/Purchase data/Volume, but on their outward supply to their customers. Since
here we are determining valuation of M/s. Phone Wale, Section 15(3) and Para 2(C) of
the above referred Circular are not relevant. In the instant case, to get the scheme
benefits, the distributor (taxpayer) has to compulsorily provide the selling data to the
supplier (mobile brand owners/manufacturer suppliers) and not the volume of
purchase. The scheme itself mentioned that the benefits will be provided on the
volume of sale of the mobile units i.e. too on the activation of the device.
Therefore, these schemes are clearly the Retailer Support Price Schemes as here the
incentive is not computed on total purchases of the Tax payer. The discounts/incentive
given by the distributor being the assured discounts/subsidies they will be receiving
from their suppliers based on their sales figures, therefore ,the taxpayer ( M/s Phone
Wale) is selling their goods at the price lower than the purchase price thus paying
GST only on the part of consideration received from the Buyer. The additional
consideration is skipped from the GST liability. Further as these discounts/subsidies
are based on sales and not purchase therefore these are not ‘Buy More, save more’
offers which was described vide Para 2(C) of the CBIC circular No. 92/11/2019-GST
dated 07.03.2019. Thus, such discounts/incentives etc. are nothing but subsidies under
various schemes from their suppliers in the form of commercial credit notes and such
entire amount of scheme benefits are the additional considerations for the purpose of
taxation in hand of the subsidy recipient i.e. M/s. Phone Wale.

7. From the above, it is clear that any subsidy/incentive flowing back to the
taxpayer/distributor in the form of commercial credit notes or in any other form of
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financial flow back resulting from incentive schemes announced by the Mobile
companies should form part of the taxable value of the goods supplied by the
distributor/taxpayers and GST is liable to be charged and recovered from such
distributor/taxpayers of Mobile companies. Accordingly, SCN has been issued for the
period July 2017 to December 2021 for demand of Rs. 19,38,29,192/- (CGST+SGST)
along with interest and penalty.

8. Accordingly, all credit notes need to be scrutinized deeply to ascertain exact

nature of the discounts/incentives/additional considerations forming part of taxable
value as discussed above, received by taxpayers/distributors of Mobile phone devices
falling under your jurisdiction. Accordingly, action against Mobile phone distributors
falling under your jurisdiction who have been indulged in evasion of tax by adopting
the modus as discussed above may please be initiated to safeguard the Government
Revenue.

Yours faithfully,

(Kamlesh Kumar Gupta)

Commissioner,
CGST & Central Excise, Gandhinagar.

Copy to:
1. The Principal Commissioner/Commissioner, CGST & Central Excise, (Ahmedabad
North, Ahmedabad South, Rajkot, Bhavnagar, Kutch) for information;
2. The Principal Commissioner/Commissioner, Audit (Ahmedabad/Rajkot) for
information;
3. Guard File