2021 (4) TMI 839 - AAAR - GST

Input Tax Credit - Inputs - Promotional Products/Materials Marketing items used by the Appellant in promoting their brand marketing their products - Section 16 of the CGST Act, 2017 - KARNATAKA AAR held that GST paid on the procurement of non-distributable products qualify as capital goods and not as inputs and the applicant is eligible to claim input tax credit on their procurement, but in case if they are disposed by writing off or destruction or lost, then the same needs to be reversed under Section 16 of the CGST Act read with Rule 43 of the CGST Rules - challenge to AAR decision - HELD THAT - It is evident from the agreements that the ownership of the promotional items remains with the Appellant at all times. It is seen from the said agreements that the Appellant Company has undertaken to provide the promotional materials to the EBOs and distributors and the same will continue to be used by the EBO and distributors as long as the agreement is in force. It is also expressly stated in the agreements that on termination of the agreements, it is the responsibility of the EBOs and distributors to return the promotional materials to the Appellant. This fact was reiterated by the authorised representative during the course of the personal hearing when a specific query in this regard was posed by the Member. Therefore, it is evident that the title of the promotional items remains with the Appellant and is not transferred to the EBO or the distributor. In terms of Section 17(2) of the CGST Act, where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the IGST Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. In other words, Section 17(2) provides that input tax credit shall be allowed only when the goods and services or both are used for business purposes or for making a taxable supply (including zero-rated supply). When the goods or services or both are used towards making an exempt supply, then input tax credit is not allowed. As per Section 2(47) of the CGST Act, the term 'exempt supply' also includes non-taxable supply - the GST paid on the procurement of promotional items supplied to the EBOs/franchisees and distributors free of charge will not be eligible for input tax credit since the said supply is a non-taxable supply. The goods procured on payment of GST which are disposed of by way of gifts are barred from being eligible for input tax credit in terms of Section 17(5)(h), even if they are used in the course or furtherance of business. Therefore, the input tax credit is not eligible on the promotional items distributed as give away items on the grounds that the same is blocked by virtue of the provisions of Section 17(2) and Section 17(5)(h) of the CGST Act. The Promotional Products/Materials Marketing items used by the Appellant in promoting their brand marketing their products can be considered as inputs as defined in Section 2(59) of the CGST Act, 2017. However, the GST paid on the same cannot be availed as input tax credit in view of the provisions of Section 17(2) and Section 17(5)(h) of the CGST Act, 2017. The decision of AAR set aside.

Summary

Issues Involved:
1. Classification of promotional products/materials as "inputs" under Section 2(59) of the CGST Act, 2017.
2. Eligibility of GST paid on promotional products/materials for input tax credit under Section 16 of the CGST Act, 2017.
3. Treatment of promotional items distributed to franchisees, distributors, and retailers.
4. Consideration of franchisees and distributors as "related persons" under the CGST Act, 2017.
5. Applicability of Section 17(5)(h) of the CGST Act, 2017 to promotional items.

Detailed Analysis:

1. Classification of Promotional Products/Materials as "Inputs":
The Appellant argued that promotional products/materials used for brand promotion and marketing should be considered as "inputs" under Section 2(59) of the CGST Act, 2017. The lower Authority had classified these items as capital goods, which was contested by the Appellant. The Appellate Authority concluded that these promotional items are indeed used in the course or furtherance of the Appellant's business and should be classified as "inputs" rather than capital goods.

2. Eligibility of GST Paid on Promotional Products/Materials for Input Tax Credit:
The Appellant contended that GST paid on promotional items should be eligible for input tax credit under Section 16 of the CGST Act, 2017. However, the Appellate Authority held that while these items qualify as "inputs," the GST paid on them cannot be availed as input tax credit due to the provisions of Section 17(2) and Section 17(5)(h) of the CGST Act, 2017. Section 17(2) restricts input tax credit for non-taxable supplies, and Section 17(5)(h) disallows credit for goods disposed of by way of gift.

3. Treatment of Promotional Items Distributed to Franchisees, Distributors, and Retailers:
The Appellant distributed promotional items to franchisees, distributors, and retailers for brand promotion. The lower Authority had allowed input tax credit for items distributed to franchisees and distributors but disallowed it for items given to retailers, considering them as gifts. The Appellate Authority found that these items are used in the course or furtherance of business but held that the GST paid on them is not eligible for input tax credit due to their classification as non-taxable supplies and gifts under Section 17(2) and Section 17(5)(h).

4. Consideration of Franchisees and Distributors as "Related Persons":
The lower Authority had treated the Appellant and their franchisees/distributors as "related persons," thereby considering the transfer of promotional items as a supply. The Appellant argued that franchisees and distributors are independent entities. The Appellate Authority agreed with the Appellant, concluding that franchisees and distributors are not related persons as defined under the CGST Act.

5. Applicability of Section 17(5)(h) to Promotional Items:
The Appellant argued that promotional items distributed to customers should not be considered as gifts and thus should not fall under the purview of Section 17(5)(h). The Appellate Authority disagreed, stating that these items, given without consideration, qualify as gifts and are therefore ineligible for input tax credit under Section 17(5)(h).

Conclusion:
The Appellate Authority set aside the lower Authority's ruling and concluded that while promotional products/materials used by the Appellant qualify as "inputs" under Section 2(59) of the CGST Act, 2017, the GST paid on these items cannot be availed as input tax credit due to the provisions of Section 17(2) and Section 17(5)(h) of the CGST Act, 2017. The appeal was disposed of on these terms.