Enquiry:

We are an IT export oriented Public Unlisted Company (registered in Pakistan). The query is related to discount/ rebate given by our Company to one of its USA customer.

One of our USA customers has entered into an agreement with us for delivery of some specific software development related services.

There is only one legal agreement by the name of Master Corporate Service Agreement (MCSA) dated 01st February 2015 and there are two amendments in this MCSA effective from 1st February 2016 (10% quarterly rebate) and effective from 1st May 2016 (20% quarterly rebate) respectively. On 30th June 2016, 100% work has been delivered and 100% amount has been received against work done.

1. From agreement and amendment it is not clear that why we are paying this rebate, however, BOD is of the opinion that we are paying this amount as commission because we are getting business from them. NCR, our customer is procuring our services for one of its customer. It is emphasized that we have no direct link with that customer. We are delivering our work to NCR and receiving our all payments from NCR.

2. Payment on quarterly basis is the payment methodology/ timing whereas we are following accrual basis of accounting and we are booking rebate amount whenever we generate invoice (definition of liability is fulfilling) which means in any case we need to pay the rebate amount as agreed in amendment.

We have not yet paid any discount/ rebate amount to customer. As per agreement, this is rebate and there is no mention of ‘commission amount’. However, we are required to pay this rebate in cash to our customer.
The Institute is requested to give its opinion about the treatment of this amount as rebate (whether should it be deducted from gross sales) or as Commission expense (should become part of selling and marketing expense).

Opinion:

The Committee would like to refer clause 2 (a) of Part III “Requirements as to Profit & Loss Account” of the 4th schedule of the Companies Ordinance 1984 which states that Profit & Loss Account shall disclose the turnover after deduction of discount and sales tax.

Academically any reduction given to the customer on sales invoice (trade discount) is shown as a deduction from gross sales whereas cash discount (not mentioned on the invoice and arisen due to subsequent events like early payment by customer etc.) is shown separately as expense. In the given case although the rebate is not shown on the sales invoice but it is not dependent on a future event either.

In case of Commission, tripartite agreement shall be there where one is agent, one principal and one is customer/consumer. Since in this case, amount is payable to the same customer under a bilateral agreement, therefore, the Committee is of the view that it may be shown as a deduction from the gross sales and will not be treated as commission expense. Further, as the amount has not been paid so far to the customer, therefore, it would be accounted for on accrual basis as ‘payable’.

(October 20, 2016)