1.  Which agreement type I should consider, is this custmer rebate(0003), material rebate(0002) or Rebate on the basis of sales volume(0005), because here client is not offering rebate on Sales volume in rupees or dollar. He is only concerned with totat sales in kiloleter(Quantity). As per rebate agreement concern rebate is offered in percentage. Please guide me for  my scenario.

If your distributors are fewer (far less than 900 materials) then you should go for only customer rebate.

2. Guide me for conditions types and scale basis for maintaining condition records.

When creating customer rebates (T:VB01) select customer rebate, there you will see a header tab: Conditions , click it add how many customers you want. For each customer you can create scale based conditions (under the heading tab :Scales).

3. Is it necesary to maintain condition record for every material and every customer defining the scale? Because in this scennario client is going for incentives scheme for each material and each customer (distrbutor).

No need to create condition record for every material if you create customer rebate.

Customer Master

How to create the customer master?

The following are the T-codes for central creation of customer master.

        XD01    Create Customer (Centrally)
        XD02    Change Customer (Centrally)
        XD03    Display Customer (Centrally)
        XD04    Customer Changes (Centrally)
        XD05    Block customer (centrally)
        XD06    Mark customer for deletion (centr.)
        XD07    Change Customer Account Group
        XD99    Customer master mass maintenance
        XDN1    Maintain Number Ranges (Customer)

You need to identify various parameters within each Account group based on which the reco account is identified within the customer master.

Customer master is basically divided into 3 tabs.
- General - General master details, Juristiction codes, Region, Transportation zone, export data,  etc.
- Company data - payment terms, account management, reco account, insurance etc.
- Sales data -  Sales product attributes, sales office, sales group, customer pricing procedure, Cust. Statistical grp, 
   - Shipping data 
   - Billing data
   - Partner functions.

You can create a customer based on 3 views:
1. For Account purpose
FD01/FD02/FD03 etc
2. Sales purpose
XD01/XD02/XD03 etc.
3. Centrally 
VD01/VD02/VD03 etc.

What is the Function of item category and item category group?
Item Category determines the processing of any Item/material that we enter in a sales order and in this way it also effects the procesing of any sales doc in which it is used.

Item Category Group is one of the component which along with the Sales Doc Type, The Item Usage and Higher Level Item Category decide about the Item Category in a sales doc. w