GST is a unified tax structure aimed at simplifying indirect taxation in India. While the GST system allows businesses to claim Input Tax Credit (ITC) on tax paid for inputs used in the course or furtherance of business, complications often arise when interpreting the eligibility criteria for ITC, particularly in cases involving sales promotion expenses.
One such area of ambiguity is the eligibility for ITC on expenses incurred to provide foreign travel benefits to customers or distributors. This article explores the ITC implications of such expenses and highlights the considerations for businesses operating through a network of distributors.
Many companies in India operate through a network of distributors to supply their products across the country. To incentivize distributors and promote their business, companies often provide benefits, including foreign travel opportunities, upon achieving specific sales targets.
These schemes aim to:
1. Boost sales and achieve growth targets.
2. Build trust and loyalty among distributors.
3. Strengthen the relationship between the brand and its stakeholders.
When distributors fulfill the specified targets and make payments within the agreed timeline, they qualify for these benefits.
To facilitate these trips, companies procure services from travel agents and pay GST on such services.
To assess ITC eligibility on such expenses, we must examine relevant provisions under the Central Goods and Services Tax Act, 2017 (CGST Act). At first, It is relevant to first analyse whether the services procured by the Company in relation to extending foreign benefits to its customers can be regarded as “inputs” as per the CGST Act. In this regard, we refer to sub-section (59) of Section 2 of the CGST Act which outlines that the term “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;
Notably, in the definition of input, the expression “in the course or furtherance of business” has been used.
The said expression has not been defined under the GST law. Thus, to understand the meaning of the same, reference may be drawn to the order passed by the Hon’ble Gujarat High Court in the case of Cinemax India Limited versus Union of India – 2011 (8) TMI 71, wherein the Hon’ble Court has inter-alia discussed the taxability of renting of immovable property in the course or furtherance of business. Further, the Hon’ble Court elaborating on the meaning of the term ‘furtherance’ held that when a service recipient takes an immovable property on rent for business purpose, it is in the spirit of promotion, progress and advancement of business, thus there is a value addition and the activity is in the course of business. The meaning of ‘furtherance’, as per Black’s Law Dictionary, is “act of furthering, help
forward, promotion, advancement or progress”.
From the above, it can be inferred that the expression “in the course or furtherance of business” has a wide meaning that should be interpreted broadly. It suggests that the term “inputs” is not confined to only those goods or services which are procured specifically in relation to their “output”, but also includes any goods and services used in the conduct, promotion and advancement of business. Since the services related to foreign trips are used by the Companies to enhance the sales of their products through increasing distributors trust and morale, it can be construed that the foreign trips are used in the course and furtherance of business. Therefore, the said display boards should qualify as “inputs” in terms of Section 2(59) of the CGST Act.
Further, the term “input tax credit” is defined under sub-section (63) of Section 2 of the CGST Act, as “input tax credit means the credit of input tax”. The term “input tax” is defined under sub-section (62) of Section 2 of the CGST Act, as under:
“(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes –
(a) The integrated goods and services tax charged on import of goods;
(b) The tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) The tax payable under the provisions of sub-sections (3) and (4) of section 5 of the
Integrated Goods and Services Tax Act;
(d) The tax payable under the provisions of the respective State Goods and Services Tax
Act; or
(e) The tax payable under the provisions of section (3) and (4) of section 7 of the Union
Territory Goods and Services Tax Act, But does not include the tax paid under the composition levy;”
As in the present scenario, One shall pay GST on procurement of the services in relation to foreign trips and the same qualify as inputs as well (as discussed supra), it may be inferred that the tax paid by the Companies on procurement of foreign trips should qualify as input tax.
Now, to examine the eligibility of the Company to avail ITC on the said display boards, we refer to Section 16 of the CGST Act which talks about the “Eligibility and conditions for taking input tax credit” and “Apportionment of credit and blocked credits” respectively.
Section 16(1) of the CGST Act states that “Every registered person shall, subject to such conditions and restrictions as may be prescribed and, in the manner, specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”
Thus, from the above, it is apparent that the ITC is available on the tax paid on goods and services which are used in the course or furtherance of business. Therefore, ITC should be eligible on the goods and services provided to customers at free of cost, if the same is provided in the course or furtherance of his business i.e., in terms of the agreement.
A situation may arise where the provision of foreign travel benefit is not part of the original agreement with the customer and has been agreed later through other modes such as email, pamphlets, brochures etc. Then in such circumstances, it can be argued that there is an underlying contract made by the Company with the customers who opted for the scheme which would be communicated from time-to-time via email, or other modes of conversations. The same can be construed as oral agreement.
The legality, of an oral agreement, cannot be questioned, as it falls under the ambit of the requirements stated in Section 10 of the Indian Contract Act, 1872. This was substantiated by the Hon’ble Delhi High Court in the case of Nanak Builders and Investors Pvt. Ltd. vs. Vinod Kumar Alag AIR 1991 Delhi 315, wherein the Court inter-alia held that even an oral agreement can be a valid and enforceable contract. Therefore, in the strict sense, it is not essential that a contract must be in writing, unless specified by law or the parties themselves contemplate the reduction of terms of agreement to writing.
The same was reiterated by the Hon’ble Supreme Court of India in the case of Alka Bose vs. Parmatma Devi & Ors [CIVIL APPEAL NO(s). 6197 OF 2000], wherein the Hon’ble Apex Court inter-alia held that even a sale agreement can be oral and have the same binding value and enforceability, as a written agreement. The agreement should be in tandem with the essentials listed in section 10 of the Indian Contract Act, 1872 and thus, will have the equal force of evidentiary value, as a written one. Oral agreements are permissible, but also extremely tricky to prove, and depend heavily on corroborating evidence to meet the standard of proof. Thus, it is critical that the behavioral/conduct of the parties make such an (oral) contract apparent.
Considering the above precedents, it can be argued that if the customers opt for the scheme through email, or other modes of conversations, it qualifies an underlying oral contract made by the Company with the customers, which is as equally valid as a written contract.
Therefore, in view of foregoing paras, the Company should be eligible to avail ITC on the GST paid on services procured in relation to provide foreign trips to its customers, if the same is part of an agreement, irrespective of the mode of communication.
In support of above, reference may be drawn to the Advance Ruling in re: M/s Orient Cement Limited – 2023 (10) TMI 472, passed by Ld. Authority for Advance Ruling, Karnataka wherein it has been inter-alia held that the applicant’s obligation to provide goods to the dealers / customers upon they achieve the prescribed target during the scheme period would not be regarded as “goods disposed of by way of gift” and Input Tax Credit (“ITC”) on the same would be eligible.
Relevant para of ruling is as under:
“1. Whether the applicant’s obligation to issue gold coins and white goods to the dealers / customers upon they achieving the stipulated lifting of the material / purchase target during the scheme period would be regarded as “goods disposed of by way of gift” and Input Tax Credit (“ITC”) on the same would be restricted as provided under the Section 17(5)(h) of the CGST Act, 2017? The transaction is taxable as supply of goods, therefore eligible for ITC.”
In the contrary, Ld. Authority for Advance Ruling, Karnataka in the case of M/s Surfa Coats (India) Private Limited – KAR ADRG 28/2019 has inter-alia held that the input tax credit on the services procured (input services) for offering free trips, is not available to the applicant. For reference, relevant paragraphs of observations are as under:
“5.9 In this regard we draw attention to the Circular No.92/11/2019-GST dated 07.03.2019, issued by the CBIC, wherein, at para (A)(ii), it is clarified that “input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. In the instant case the applicant offers free foreign / local trips, as incentives, to the dealers / painters etc., without any consideration. Therefore, the input tax credit on the services procured (input services); for offering aforesaid services of free trips, is not available to the applicant.
In view of the foregoing, we rule as follows: The applicant is not eligible to avail input tax credit on the inward supplies of goods and services which are attributable to the incentives provided in the form of gifts of goods and services to the painters and dealers and other persons under the CGST / SGST / IGST Act.”
In the above-mentioned ruling, Ld. Authority has denied the ITC on the services procured for offering free trips to the customers. While passing the above ruling, Ld. Authority has referred to the Circular No. 92/11/2019-GST dated 7th March 2019 which provides clarification on various doubts related to treatment of sales promotion schemes under GST. In the said Circular, at para (A)(ii), it is clarified that “input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration”.
Considering the above ruling along with the mentioned Circular, the authorities may raise questions on the ITC eligibility under discussion. However, in our perspective, the same can be reasonably defended as the Ld. Authority while passing the above ruling has observed that ITC with respect to services procured for provision of foreign trips is ineligible if the same is provided as gift, but Ld. Authority has not commented upon the aspect of agreement between the Applicant and its customers.
It is important to distinguish between benefits provided under a contractual obligation and those given voluntarily as gifts.
To gain sight on the above difference, we need to understand the definition of ‘gift’. The term “gift” is nowhere specifically defined under GST law. In the absence of any specific definition under GST, we may refer to the Press release dated 10 July 2017 issued by the Ministry of Finance which defines the term “gift” in the context of employer and employee as “gift is something made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift.”
Although the above press release defined “gift” in the context of employer-employee relationship, the same analogy can be applied to the present case. For clarity, we may also refer to the definition provided under Section 2(xii) of the Gift Tax Act, 1958 which defines “gift” as the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth.
On perusal of above definitions, it is evident that the gift is something that is voluntary in nature and provided to someone without charging any consideration. Also, it cannot be demanded willfully by someone as a matter of right.
However, in case where an agreement is in place for the achievement of targets by distributors and provision of foreign trips by the Company and also, the distributors may rightfully demand these foreign trips as per the agreement. In such case, since the provision of said foreign trips would not voluntary and there is a contractual obligation on the Company, the provision of foreign trips would not meet the criteria to be regarded as “gift”.
Thus, it can be reasonably argued that provision of foreign trips by the Company to the dealers does not tantamount to ‘gifts’ as the Company is obliged to do so in terms of the agreement to meet the criteria of the scheme and not voluntary in nature.
Therefore, basis the above analysis, it may reasonably be concluded that the provision of foreign travel benefits to distributors or customers under incentive schemes is a common practice in the distribution business. When such benefits are contractual and in the furtherance of business, the GST paid on related services should qualify for ITC. However, it is advisable that the Companies may be required to check place of supply provisions on case-to-case basis before availing any ITC.
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