Clarification on GST and ITC in Respect of Free Samples etc.

Clarification on GST and ITC in Respect of Free Samples, Stolen, Discount, Theft and Loss of Goods Gifts to incentivize Distributors Gifts or samples for Marketing Distribution of Samples through Branches

As per section 7 supplies refers to all form of supply made or agreed to be made FOR CONSIDERATION in the course of furtherance of business

hence in case of ABSOLUTE (NOT COMPOSIT OR MIXED SUPPLY) free samples, gifts, lost or stolen goods no ITC will be available as it will be out of the purview of definition of supply as defined in section 7.

exception to the above provided by 7(1)(c) read with Para 2 of schedule 1 which provides that SUPLLY made or agreed to be made WITHOUT CONSIDERATION, IS A SUPPLY UNDER GST

— Supply between related persons will be treated as supply Even If Made for without Consideration

— Thus ABSOLUTE free sample, gift to unrelated person: NO GST, NO ITC SECTION 17(5)(h)

— ABSOLUTE free sample, gift to related person: GST shall be Levied, ITC will be Available.

FURTHER Para 1 of schedule 1 provides that the permanent transfer or disposal of business asset where input tax credit (hereinafter referred to as ITC) has been availed is treated as supply EVEN IF MADE FOR WITHOUT CONSIDERATION. The term Business Assets has not been defined under the Act. The term Business Asset is of very wide connotation applying the literal interpretation to the said term, Business Asset, It includes every asset of the business including capital goods, finished goods etc. accordingly assesse would start taking credit of all assets even if made for without consideration as this clause includes free supplies between both related and unrelated person. Hence here rule of reasonable construction should be apply because literal interpretation is resulting absurdity

As per our understanding, such clause shall cover, (only capital goods) on which credit has been taken, following types of situations:

(a) Disposal of Old Machinery to NGO – A company has purchased machinery and has availed input tax credit in respect of GST paid on such procurement. Further after few years, company disposed of such machinery by transferring it to NGO. Such transfer shall be considered as supply in terms of Para stated above. Thus, GST shall be levied on the transfer of such assets on the value as determined under Section 15 of CGST Act, 2017 read with CGST Rules, 2017.

(b) Disposal of old machinery to related person / distinct person without consideration can also be covered under the said Para as there is no restriction to the same and consequently the same shall be considered as supply in terms of Para 1 and Para 2 of Schedule I to the CGST Act, 2017.

IN OUR OPINION, BUSINESS ASSETS SPECIFIED IN PARA 1 SHALL INCLUDE ONLY THOSE CAPITAL ASSETS WHICH ARE BEING USED IN THE COURSE OR FURTHERANCE OF BUSINESS. THUS, INPUT TAX CREDIT REVERSAL IS NOT REQUIRED IN THE SAID CASE. HOWEVER, TRANSFER AND DISPOSAL OF SUCH ASSETS SHALL BE CONSIDERED AS SUPPLY AND GST IS LEVIABLE ON THE SAME. 

Further in term of Section 17(5)(h) of CGST Act, 2017, notwithstanding anything contained in Section 16(1) and Section 18(1) of CGST Act, 2017, input tax credit in respect of goods, destroyed, written off or disposed of by way of gift or free samples shall not be available accordingly input tax credit in respect of them has to be reversed.

Gifts to incentivize Distributors

These are marketing strategy adopted by various companies. Gifts provided to Distributors include:

(a) Goods which are manufactured by company itself or goods in which they are dealing on their own

(b) Goods purchased from other vendors

A conjoint reading of Section 17(5)(h) of CGST Act, 2017 and Schedule I to CGST Act, 2017 demands harmonious interpretation of law. Such harmonious interpretation clearly indicates that if the goods are disposed of by way of gift, section 17(5)(h) of CGST Act, 2017 shall be applicable and accordingly input tax credit in respect of the same shall not be allowed. However, if such goods are disposed of by any way other than gift, then the same shall be considered as supply in terms of Para stated above and accordingly shall be exigible to GST and reversal of credit shall not be required.

According to our opinion, goods distributed to distributors free of cost are a sales promotion expense in the hands of the companies, thus it cannot be considered as gift. In this regard, we would like to refer to the case of FEDERAL COMMISSIONER OF TAXATION v. McPHAIL (1968) 117 CLR 111 26 March 1968 wherein Hon’ble High Court which has provided that to constitute a “gift”, the property should be transferred voluntarily and not as a result of a contractual obligation and no advantage of material character was received by transferor.

Goods distributed to distributors as gifts are benefitting the companies in promoting their sales. Thus, the same shall not be considered as gift. Hence, input tax credit should be available in respect of such goods. But the department may litigate on the ground of section 17(5)(h) and urge to reverse ITC in respect of such gifts.

Such gifts of goods to in incentivize Distributors is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices. Or we can say turnover based discount agreement should be entered between the parties to treat them as discount as per section 15. In such a case, companies shall be eligible to avail input tax credit of such goods gifted without any fear of litigation.

Gifts for Marketing

Companies offer various schemes in the market so as to increase the sale of the products such as buy 2 get 1 free or Mattress with Cushions

Here we would like to mention that such gifts are in the nature of discounts. One may also refer the decision of Hon’ble Supreme Court in CCE Vs. Hindustan Lever Ltd (2002) (142) ELT 513 (SC).

In terms of Section 15 of CGST Act, 2017, such value of discount, shall not be included in the value of supply which is given—

(a) Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) After the supply has been effected, if-

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) Input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

However, in terms of Section 17(5)(h) of CGST Act, 2017, such goods provided free of cost can be considered as gift and department may ask for the reversal of the credit in respect of the same. But we can present a ground that INVOICE VALUE INCLUDES VALUE OF ALL GOODS INCLUDING THOSE SUPPLIED FREE. IN SUCH CASES, ITC IS NOT REQUIRED TO BE REVERSED. Thus, in our opinion it is recommended that in the invoice under such schemes, companies shall reduce the value of the product provided free of cost, as a trade discount, from the total value of the products including the product which is to be provided as gift. In such a case, companies shall be eligible to avail input tax credit of such goods sold without any fear of litigation.

Distribution of Samples through Branches

Further, we would like to deal a scenario where a company distributes free samples through its branches. In such a case, transfer of free samples to the branch, being related person, shall be exigible to GST and further input tax credit in respect of such samples shall be allowed. However, branch needs to reverse the input tax credit of GST paid on such samples to the company. With reference to 7(1)(c) read with Para 2 of schedule 1

The views expressed in this article are of the Team P&B Consultants. Reader may not necessarily subscribe to the views expressed by us. The information cited in this article has been drawn from various sources. While every effort has been made to keep the information cited in this article error free, Team P&B Consultants does not take the responsibility for any typographical or clerical error which may have crept in while compiling the information provided in this article. Please feel free for any discussion or suggestion.