The back-end rebates issued by vendors to authorized partners have come under the scanner of the service tax department, and notices have been issued to hundreds of authorized partners and sub-distributors of major vendors in Tamil Nadu to cough up service tax on all incentives, price protection discounts and rebates received since 2004. Apart from the service tax, interest for the delayed period, plus penalties, are expected to be levied. There is also news that, in a few days, all major partners across the country will receive similar notices.

This is the biggest issue to hit channels in the country, and it has come at the wrong time because markets are struggling in the wake of the recession. Vendors have been controlling the market operating price through back-end rebates, and this mode of incentivization has been questioned not just by the service tax department but also by the VAT (sales tax) department, said P N Prasad, President, Confed-ITA, the umbrella network of channel associations in south India.

It all started with the VAT department in Tamil Nadu questioning the negative transactions of partners who were billing products at less than their purchase price. The inquiry and discounting the rebates and other incentives arrived at the conclusion that all incentives are subject to service tax because it was interpreted that rebates are a service which the partner is doing to the vendor to move stocks. There was further confusion since the billing is through a distributor, and the rebates are pay-outs from vendors. It is hence difficult to prove that vendor pay-outs are discounts passed on bills issued by distributors, explained Prasad.

With rebates and incentives accounting to anything from 4 to 8 percent of the turnover of authorized partners, some of the partners are facing penalties that could run into crores of rupees.

A partner doing business of Rs 1 crore a month gets on an average 5 percent as a rebate from his vendors. Hence, in a year, the partner takes home around Rs 60 lakh of incentives. At 12.36 percent, this amounts to around Rs 7.40 lakh. Penalties on delaying service taxes are levied on a daily basis; there is also the interest levied on delayed payment. There are distributors whose monthly billings are over Rs 5 crore, and pay-outs more than Rs 30 lakh-40 lakh. The cumulative penalties and interest over five years are expected to cost them in croresand some of them have not even booked profits close to that figure over past few years, Prasad added.

Confed-ITA has sought legal opinion, is asking vendors to take a stance to resolve the matter, and has sent notices to all vendors.

From the following three elements of legal opinion supposedly provided by a vendor to a partner, and received by Confed-ITA, it is clear that the entire process of back-end rebates will attract service tax.                                                               

1. Only the payments received by the Channel Partner (CP) from the National Distributor (ND) for the price difference can be treated as a reduction in the purchase price and therefore will NOT be liable for service tax levy. This is subject to the condition that the perfect linking of the price difference debit note with the purchase invoice is available on CP records and mentioned in both the documents.

2. However, any incentive / commission / price difference payments received by the CP from any person (from whom the goods are NOT purchased even if it is from the manufacturer, etc) shall be subject to service tax levy payable by the CP. In such cases, the CP has to raise the invoice for such incentive / commission along with service tax, and collect the same from such other person from whom the goods are NOT purchased.

3. The above is irrespective of whether the incentive / commission payments (2nd part alone above) is or is not more than Rs 10 lakh in a financial year because the CP is the user of the brand name of others such as TVSE dealer, HP partner, Samsung, Lenovo stores, etc.

 We have received the notices, and we are seeking legal opinion, said a sub-distributor based in Chennai. The amount, along with the penalties and interest, is running into such a high figure that we are not even in a position to pay it under protest. We are hopeful that our vendors will bail us out, and that the government will offer some relief.

Elsewhere the situation is different. In Kerala we are yet to hear about the complaint, said P K Harikrishnan, President of ACKMADA. However, a year or so back there was a query from the department, and when we sought legal opinion it was clear that, along with rebates, partners need to collect service tax. Since there was no real progress on that query, the issue died down. Still, we will discuss this issue with members to devise a strategy as and when notices get issued to them.