2019 (4) TMI 1943 - AAR - GST

Gift - Consideration - certain customized lifestyle goods procured by BMW India either from a third party local supplier or imported from outside India for supply of goods during promotion/marketing events organized by the Company - whether goods will qualify as used in the course or furtherance of business in terms of the provisions of the Central Goods and Services Tax Act, 2017? - input tax credit - goods supplied under the marketing events - Section 17 (5) of the CGST Act - HELD THAT - Section 16 (1) of the CGST Act provides 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 . The applicant has drawn a clear distinction between goods given as gifts and goods given on free of cost basis. The applicant also draws a sharp contrast between gift which is transferred voluntarily and not as a result of contractual obligations and free of cost (FoC) supplies which are intended to strengthen the customer base. The applicant further holds that these free of cost supplies are made with an intention to receive consideration (in case or in kind) and has accordingly held that a clear distinction should be drawn between a gift and free cost of supply - So, as per the applicant these marketing events are advertisement, sales and promotion activities organized to earn consideration in the form of reciprocity from customers and increase in sales and brand value of the company and these items provided in the promotional events are not in the nature of gifts. What is consideration? - HELD THAT - The consideration could be monetary as well as non-monetary. This payment can be in advance or after the supply has been made. This payment may be made by the recipient or by any other person. A consideration may be the monetary value of any act or forbearance i.e. the monetary value of doing something or refraining from doing something. But this payment made or to be made or any such act or forbearance must be in respect of or in response to or for the inducement of the supply of goods and services or both - As far as the supply of goods to the potential customers is concerned, the issue of consideration does not arise because the potential customers may not be actual customers/ buyers of the applicant company s motor cars and motor bikes. The company has itself maintained that these free of cost supplies are made with an intention to earn consideration. This statement itself reflects that there is no consideration involved at the time of making of these free of cost supplies. It is also important to refer to the proviso to the definition of consideration as provided under the CGST Act. It contains that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply. It is not the case of the applicant that any part of the amount received or to be received from the existing customers or the potential customers, as the case may be, at the time of supply of taxable products by the applicant company is applied to the goods provided on free of cost basis in these promotional events. The types of supply mentioned under the GST Act are taxable supply, exempted supply and nil rated supply. There is no provision of supply on free of cost basis under the CGST/SGST Act. The supply of goods on free of cost basis might be a part of company s policy but certainly not in conformity with the provisions of the CGST/SGST Act and a company s policy cannot override the provisions of law. The items distributed in the promotional events are gifts and section 17 (5) (h) bars credit of input tax with respect to gifts made by a registered person.

Summary

Issues Involved:
1. Whether the goods supplied during promotion/marketing events qualify as being used in the course or furtherance of business.
2. Whether the company is eligible to avail input tax credit for such goods supplied under the marketing events.

Issue-Wise Detailed Analysis:

1. Qualification of Goods as Used in the Course or Furtherance of Business:
The applicant, BMW India Private Limited, organizes various marketing and sales promotion events to enhance brand loyalty and attract potential customers. These events include the distribution of BMW-branded lifestyle accessories such as duffle bags, golf balls, t-shirts, caps, diaries, keychains, and passport holders on a free-of-cost (FOC) basis. The company records the expenditure for these events as sales promotion and marketing expenses.

The applicant argued that these supplies qualify as being used in the course or furtherance of business as defined under Section 2(17) of the Central Goods and Services Tax Act, 2017 (CGST Act). They cited that "business" includes any activity undertaken with the intent and purpose of value addition to one's business, which encompasses marketing, advertisement, and sales promotions.

The ruling confirmed that the goods procured and supplied during these events do qualify as being used in the course or furtherance of business, aligning with the definitions and provisions under the CGST Act.

2. Eligibility to Avail Input Tax Credit:
The applicant sought clarity on whether they could avail input tax credit for the goods supplied during these promotional events. Section 16 of the CGST Act provides for the credit of input tax paid on any supply of goods or services used in the course or furtherance of business. However, Section 17(5) of the CGST Act lists supplies for which input tax credit is not allowed, including goods disposed of by way of gift or free samples.

The applicant contended that the distributed items do not fall under the category of gifts, drawing a distinction between gifts and FOC supplies. They argued that gifts are voluntary, occasional, and made without consideration, whereas FOC supplies are made with an intention to receive consideration in kind, such as increased brand loyalty and potential sales.

Despite these arguments, the ruling emphasized that the distributed items are indeed gifts as they are given without direct consideration at the time of supply. The consideration mentioned by the applicant (increased sales and brand value) is indirect and not immediate. The ruling highlighted that the CGST Act does not recognize FOC supplies as a separate category and that company policies cannot override statutory provisions.

Consequently, the ruling concluded that the company is ineligible to avail input tax credit for such goods supplied during the marketing events due to the bar under Section 17(5)(h) of the CGST Act, which restricts credit of input tax with respect to gifts.

Ruling:
1. The goods procured by BMW India and supplied during promotion/marketing events qualify as being used in the course or furtherance of business in terms of the CGST/HGST Act, 2017.
2. The company is ineligible to avail input tax credit for such goods supplied in the marketing events owing to the bar of clause (h) of sub-section (5) of section 17.

Ordered accordingly.