2019 (6) TMI 1305 - AAR - GST

Input Tax credit of GST paid - expenses incurred towards promotional schemes of Shubh Labh Loyalty Program - expenses incurred towards promotional schemes goods given as brand reminders - Scope of 'Gift' - HELD THAT - The applicant, a registered person under GST ACT is engaged in business of sale of pharmaceutical goods and services through group entities during the course of which they incur various marketing and distribution expenses, with a view to promote their brand/ products and to enhance their sales under various schemes .The applicant distributes different type of products among its trade channels as promotional items or brand reminders. The applicant is mainly dealing and supplying of Pharmaceutical goods and services and in order to achieve sales and marketing objectives, they have launched various target based - sales incentive schemes for their distributors/ wholesalers to achieve a specified target and in turn helps the company to achieve their targets. The present subject application is in respect of a sales promotion scheme known as Shubh Labh Loyalty Program 2018 and promotional products which has been floated by them for their customers. In the first case, their distributors/ wholesaler Customers who purchased certain products over and above a certain quantity would be entitled to get reward points. In the second scenario, applicant is giving Brand reminder products like pens, notepad, key-chains to the distributors or Doctors, which serve as an advertisement tool. The brand reminders are distributed to the distributors or doctors with their name embossed on it to promote the brand for sales. Taking into account applicant s contention that the subject free supplies have been made in pursuance of their business, jurisdictional officer submit that the fact remains that the same have been made free of cost and therefore, the same are non-taxable under Section 9 read with Section 2(78) and merits to be treated as exempt supply under Section 2(47). Further, there are no provisions under Section 15 to include the cost of such free supplies in the value of taxable free samples. There cannot be any dispute that the said supplies are exempted, hence credit is not allowable in terms of Section 17(2). Further, gifts has to be disallowed in terms of Section 17(5)(h), notwithstanding the fact that the subject supply has been used in course of furtherance of business in terms of Section 16(1). The provisions of Section 17(5) (h) are applicable notwithstanding the provisions of Section 16(1). The applicant is not eligible for the ITC as the promotional products/ services to be distributed and are not inputs and hence, GST paid on such a purchase does not qualify to be an input tax for the purpose of Section 16(1) read with Section 2(62) of the CGST Act 2017. The provisions of ITC are governed by Sections 16 and 17 of the CGST Act, 2017. In order to avail ITC, two basic provisions need to be complied with, i.e. Section 16 and Section 17. As per Section 16, a taxpayer is entitled to take credit of input tax charged on any supply of goods or services to him which are used in the course or furtherance of his business. i.e. this section disallows ITC against input goods/ services used for non-business purposes. Section 17 (5) of the CGST Act deals with Blocked credits and begins with a non obstante clause, which means even if Section 16 (1) allows ITC, Section 17(5) shall block in respect of certain cases. Whether the different promotional products in the present case can be treated as a gift or not? - HELD THAT - A contractual arrangement implies especially in view of the magnitude and area of the applicant s business that, it should also be agreed by the customer in writing to such scheme floated by the applicant. We find that they have not submitted any such contract/ agreement and in support of their contention, but they have only submitted a scheme of Shubh labh Loyalty is available on companies web site and interested customers can Login with details to avail the benefit of scheme from 2018 to Jan, 2019 - Hence we find that the promotional products are not given to their customers under any contractual obligation and are voluntarily given on certain conditions achieved by their customers. A gift is normally seen as an enticement to customers as in the subject case which would bear heavily on the customers in making purchase of particular quantities and above or in making payments of certain values and above. This act on behalf of the applicant if it is not excluded from the scope of being a supply, then the provisions of the Valuation Rules come into play. In other words if the giver of the gift does not pay output tax on the same then the compensation to the department would be the foregoing of the ITC on such gifts. ITC on gifts will not be available when no GST is being paid on their disposal. Just because the applicant submits that they have satisfied Section 16 (1) of the CGST Act 2017 does not mean that they are entitled to credit since Section 17(5) starts with Notwithstanding anything contained in sub-section (1) of Section 16..'' - The implication is that in the subject case even if it seems, as per the applicant, that Section 16 (1) is applicable in their case and allows them credit, Section 17(5) shall block such credits, The transaction is nothing but a gift - The Applicants should not be entitled to ITC on GST paid on expenses incurred towards promotional schemes of Shubh Labh Loyalty Programme and goods given as brand reminders.

Summary

Issues Involved:
1. Availability of Input Tax Credit (ITC) on GST paid for expenses incurred towards promotional schemes of Shubh Labh Loyalty Program.
2. Availability of ITC on GST paid for expenses incurred towards promotional goods given as brand reminders.

Detailed Analysis:

Issue 1: ITC on Promotional Schemes of Shubh Labh Loyalty Program

Applicant's Contentions:
- Sanofi India Limited (the applicant) distributes products through promotional schemes such as the Shubh Labh Loyalty Program to promote their brand and enhance sales.
- Under this program, distributors/wholesalers earn rewards based on the quantity of goods sold, which can be redeemed for items like trips and watches.
- The applicant claims ITC on GST paid for these promotional items, arguing that these expenses are in furtherance of business as per Section 16(1) of the CGST Act.
- The applicant argues that these items are not "gifts" as they are given under a contractual obligation and thus should not fall under the restriction of Section 17(5)(h) which disallows ITC on goods disposed of by way of gift or free samples.

Authority's Observations:
- The authority noted that the promotional items given under the Shubh Labh Loyalty Program are not accompanied by any formal contractual obligation and are given voluntarily, thus qualifying as "gifts."
- The authority referred to the definition of "gift" from other statutes and jurisprudence, concluding that promotional items given without consideration are gifts.
- The authority emphasized that as per Section 17(5)(h), ITC is not available for goods disposed of by way of gift, notwithstanding the provisions of Section 16(1).

Decision:
- The authority ruled that ITC is not available on the GST paid for expenses incurred towards the Shubh Labh Loyalty Program, as these items are considered gifts and fall under the restriction of Section 17(5)(h).

Issue 2: ITC on Promotional Goods Given as Brand Reminders

Applicant's Contentions:
- Sanofi distributes items like pens, notepads, and key chains embossed with their brand name to promote their products.
- The applicant claims ITC on GST paid for these promotional goods, arguing that these items are used in the course of business and should be eligible for ITC under Section 16(1) of the CGST Act.
- The applicant contends that these items are not gifts as they serve as advertisement tools and are given to promote sales.

Authority's Observations:
- The authority noted that the promotional goods given as brand reminders are distributed without any formal contractual obligation and are given voluntarily, thus qualifying as "gifts."
- The authority referred to the definition of "gift" and concluded that promotional items given without consideration are gifts.
- The authority emphasized that as per Section 17(5)(h), ITC is not available for goods disposed of by way of gift, notwithstanding the provisions of Section 16(1).

Decision:
- The authority ruled that ITC is not available on the GST paid for expenses incurred towards promotional goods given as brand reminders, as these items are considered gifts and fall under the restriction of Section 17(5)(h).

Conclusion:
- The authority concluded that ITC is not available for the GST paid on expenses incurred towards both the Shubh Labh Loyalty Program and promotional goods given as brand reminders, as these items are considered gifts and are subject to the restrictions of Section 17(5)(h) of the CGST Act.