CA Pardeep Kumar
Earlier in December 2018 the Honâble AAR of Maharashtra vide its Advance Ruling No.GST-ARA-72/2018-19/B-165 dated 20th December, 2018 in the case of Biostadt India Limited ruled against the applicant and held that input tax credit shall not be available for the procurement of âgold coinsâ to be offered under the sales promotional scheme of the applicant company to its customers to encourage them to meet the business targets.
Brief facts of the Ruling
The facts in brief are that the Biostadt India Ltd is a Mumbai based company & is engaged in the business of developing, manufacturing and distributing crop protection chemicals and hybrid seeds. In order to achieve sales and marketing objectives, they have launched a new sales promotion scheme namely âThe kharif Gold Scheme 2018â for its customers and decided to give gold coins (10 grams and 8 grams) on a purchase in the prescribed quantity.
The company approached AAR on whether the aforesaid gold scheme announced by it would allow it to claim input tax credit on procurement of âgold coinsâ which are to be distributed to customers as per the scheme.
Arguments advanced by the applicant before AAR
The company argued that, it is entitled to credit of input tax because the scheme launched by it is linked purely with the advancement of companyâs business & would grant an advantage to it over the competitors. The company further contended that ânothing comes free in businessâ. Each and every act done for business comes with a consideration. Applying same analogy, gold coins are not given away freely to the customers.
The applicant has a contractual arrangement with the customer wherein if he purchases certain amount of companyâs product or makes payment in a prescribed manner then he shall be entitled to a gold coin of specific weight. Gold coin will not be available to the customer unless he satisfies the criteria laid under the scheme. Giving away gold coins to customer cannot be termed as âvoluntaryâ act of the applicant company.
Arguments of the Tax Authorities
The tax authorities argued that the gold coins to be distributed by the applicant do not qualify as âinputsâ & further it is not essential for making of taxable supply for consideration.
Ruling of AAR
The Honâble AAR relying on Section 17(5)(h) of the Central GST Act, which says, âinput credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samplesâ treated the scheme as âgiftâ & held that input tax credit on gifts will not be available when no GST is paid on its disposal .
The AAR observed that gold coins are not given by the applicant under any contractual obligation as no contract/agreement has been signed by customers in writing accepting the scheme floated by the applicant. Accordingly, the gold coins are given by the applicant voluntarily on fulfilment of certain conditions.
Central Board of Indirect Taxes and Custom (CBIC) recent Circular
The Central Board of Indirect Taxes and Custom (CBIC) vide its Circular No. 92/11/2019-GST Dated the 7th March, 2019 has clarified the position regarding the availability of Input Tax Credit (ITC) in connection with sales promotion schemes under GST. These promotional schemes are offered by the taxable persons to increase sales volume and to attract new customers for their products. A brief summary of clarifications regarding availability of ITC on such schemes as per the aforesaid circular is given below:-
|Sr. No.||Nature of promotional offer||Description||Input Tax Credit(ITC)|
|1.||Free samples and gifts||For example providing drug samples to the medicine stockists, dealers, medical practitioners, etc. without charging any consideration.
|No ITC will be available under section 17(5)(h).
However, ITC will be available in case transaction covered in Schedule I.
|2.||Buy one get one free offer||For example, âbuy one soap and get one soap freeâ or âGet one tooth brush free along with the purchase of tooth pasteâ.||ITC shall be available.|
|3.||Discounts including âBuy more, save moreâ offers||(i) Cases where such discounts are shown on the invoice itself. For example- Get 10 % discount for purchases above Rs.5000/-, 20% discount for purchases above Rs.10,000/- and 30% discount for purchases above Rs.20,000/-.
(ii) Cases where such discounts are passed on by the supplier through credit notes. For example- Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of 2% if you purchase 15000 pieces in a year.
|ITC shall be available.|
|4.||Secondary Discounts||For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs.10/- per packet. Afterwards M/s A re-values it at Rs.9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs.1/- per packet.||ITC shall be available.|
As per above stated table the ITC would be available in the case of various sales promotional schemes as cited above, however the same shall not be available in the case of distribution of âgiftsâ or âfree samplesâ.
Keeping in view the aforesaid the circular has settled the issues to a large extent and has cut short the litigation as far as the ITC in connection with various sales promotional schemes, as cited above, are concerned. However, the distribution of âgiftâ or âfree samplesâ will remain a grey areas reason being âwithout considerationâ and âgiftâ very vague. Further, the tax authorities will deny the ITC for the same by relying on aforesaid CBIC circular and the business entities may keep on claiming the same as their genuine âbusiness marketing expenditureâ.