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TMI Blog2019 (6) TMI 1305X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - GST-ARA-115/2018-19/B-43 - - - Dated:- 24-4-2019 - SHRI B. TIMOTHY, SHRI B.V. BORHADE, MEMBER PROCEEDINGS (Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossed on it. The brand embossed on these products serve as an advertisement tool and is a brand reminder. Such products act as reminder of the association with the brand Sanofi so as to promote products of Sanofi. d. In case of Shubh Labh trade loyalty program (Catalogue enclosed as Annexure I), the distributors/ wholesalers get rewards based on the reward points earned on the basis of quantity of goods sold by them. For example: Combiflam Tablet purchased in minimum quantity of 01 shipper/case or 14,040 tablets will be eligible for 01 reward coupon. On activation of one (01) Combiflam coupon, wholesaler will be credited with FIFTEEN (15) reward points and confirmed via text/ SMS to registered mobile number. Further, as per the scheme catalogue the wholesalers who have earned 35000 points will be eligible for Singapore Trip For 2 Persons; 6 Days/ 5 Nights, the wholesalers who have earned 24000 points will be eligible for claiming Raymond Weil 2760-St3-50001 Watch -For Men, etc. e. In the above example, when the wholesaler opts for Raymond watch, the watch is purchased by Sanofi and provided to the wholesaler as per the agreed terms of the promotiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are embossed with Sanofi brand. The brand embossed on these product serves as an advertisement tool and is a brand reminder. Such goods act as reminder of the association with the brand Sanofi so as to promote sales. The exhaustive list of goods distributed as brand reminders is enclosed as Annexure II . iii. As per the provisions of the CGST Act as highlighted above, every registered person is 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. iv. In the present case, the brand reminders are provided to the wholesalers in furtherance of business so as to promote Sanofi brand and its products. Thus, ITC should be allowed of the GST paid on procurement of such products which are given to wholesalers as brand reminders. However, Section 17(5) of the CGST Act covers gifts for the purpose of ineligible credit. v. On a plain reading of the aforesaid provisions it can reasonably be concluded that ITC has to be reversed with respect to any goods disposed off by way of gift or free samples. However, it is important that the ambit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ix. Based on above, it is important to understand whether the brand reminders given by Sanofi free of cost to its wholesalers can be considered as gift and thus, ITC of GST paid on the said products will be disallowed. The sample invoices for procurement of such products distributed as brand reminders are enclosed as Annexure III. x. As we have noted before, it is a settled law that A gift is a gratuity and an act of generosity . Given Indian traditions, Diwali gifts should more or less qualify as a gift within that definition and thus necessitate credit reversal. However, company may often give out various kind of articles like diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name/ product name so that the recipient remembers the brand of the company. Such articles would typically be low cost articles which bear the name of the company and are purely for the promotion of its product/ brand. Clearly, giving of such articles cannot be said to be a gratuity or an act of generosity and to that extent, input credit vis a vis such expenses, it can be argued, does not need to be reversed. xi. The Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c ingredients and inevitable. Moreover, when a business makes a free supply, the cost which the business has incurred is always taken into account by him in fixing the price of the rest of supplies. Thus, the business is not forbearing any loss on distribution of such goods to the wholesalers. Albeit-indirectly, the exchequer will get GST even on the value of the free supplies and there is no revenue loss as such to the government as well. xvii. If business promotion and advertisement expenses are not specifically excluded and are considered as in the course or furtherance of business l then in view of the applicant same treatment is available for free supplies. Thus, the ITC of the GST paid on goods distributed as brand reminders should be available. xviii. We also want the highlight entry (1) of Schedule I to the Central Goods and Services Tax Act, 2017 ( CGST Act ). The said entry in Schedule I to the CGST Act reads the following: ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION 1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets xix. In accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the point on disposal or transfer of business asset, we would like to state that on a reading of the entry 1 along with the heading of Schedule I, the disposal of the asset should be a standalone/ independent transaction being done without consideration - a transaction with consideration cannot be artificially split to invent an activity without consideration within the aforesaid transaction with consideration. In the example given above, the free item doesn t seem to be the one which is being disposed off without consideration, negating the applicability of the entry 1 of Schedule 1 to the CGST Act. The watch is earned on the basis of sales target achieved. xxv. Reference herein can be made to the decision of the Hon ble first tier tax tribunal in United Kingdom in the case of Marks Spencer PLC, wherein under an offer M S was providing free wine for dine in 10 pounds. The Tribunal held that when a commercial common sense approach is adopted, the term free was being used in a marketing sense, but the economic and commercial reality of the offer was that M S was offering a package of four items for 10 pounds, so the price must be allocated across all four item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.05 grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act; (ii) pollution control equipment; (iii) components, spares and accessories of the goods specified at (i) and (ii); (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof; and (vii) storage tank, used- 1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or 2) for providing output service; (B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act; c. Rule 2 (k) input means- i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put services or capital goods which were used for furtherance of business. Thus, the input tax credit of the GST paid on purchase of such promotional items should also be available under the GST regime since the same are for furtherance of business. xxviii. Further, the applicant does reverse the input tax credit wherever it is required by law. For example: Recently in the applicant s office they had kept combiflam cream free samples at their reception which can be taken by employees or any visitor to their office. The company has reversed the input tax credit in relation to the same as the free samples given are pure gift in this case and not in furtherance of business. Similarly, the company gives its products to doctors as free samples for which it does reverse the input tax credit. xxix. Based on above, we request your good self to provide valuable opinion of eligibility of input tax credit in the above cases. Shubh labh 2018: Portfolio : Combiflam Tablet purchase in minimum quantity of 01 shipper/case or 14,040 tablets will be eligible for 01 reward coupon Allegra Enterogermina purchase value of ₹ 3000 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20-35 35 50 Gold 36-60 60 75 Diamond 61-100 100 100 Platinum 101-300 175 150 Titanium 300 300 200 Combiflam Volume Focus: Wholesalers will be rewarded additional bonus of 5 points per case on achieving the 2017 monthly base in addition, wholesalers will be rewarded 10 points per case, on registering the growth in Combiflam Cases on quarterly basis. This will be rewarded Once in a Quarter ICY HOT Secondary Focus: Driving Depth and Distribution (Jan May period) Wholesalers will be eligible to win assured Gift on achieving the Combiflam ICY HOT minimum urchase slab on monthly basis Eligibility Criteria MoM for CFM ICY HOT Second Driv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Dec 2018 will remain same/ equals to the average number of coupons registered during Jan-Nov 2018, for each of the portfolio type Sanofi reserves the right to disqualify the registered wholesaler or withdraw the benefits in eventuality of involvement in any trade hygiene disturbance in the market/s Quarter Definition for each activity will be Jan-Mar, Apr-Jun, Jul-Sep Oct-Dec II Portfolio applicability Combiflam Tablet purchase in minimum quantity of 01 shipper/case or 14,040 tablets will be eligible for 01 reward coupon Allegra Enterogermina purchase value of ₹ 3000 will be eligible for 01 reward coupon (MT coupon) Combiflam ICY HOT Gel/ spray purchase value of ₹ 3000 will be eligible for 01 reward coupon (ICYHOT coupon) Power Brands- Avil Tablee;, Dulcoflex, Buscogast, NU range, Buscogast Tab and festal ₹ 3000 Value purchase will be eligible for 01 reward coupon Classic Brands- Avil Injectibles, Buscogast Injectibles, Soframycin, Combiflam suspension, Seacod and Proctocedyl- ₹ 3000 Value purchase will be eligible for 01 reward coupon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 200 200 200 200 800 Platinum 150 150 150 150 600 Diamond 100 100 100 100 400 Gold 75 75 75 75 300 Silver 50 50 50 50 200 Blue 30 30 30 30 120 Any quarter where wholesaler does not activate Reward coupons OR fails to maintain the average value in a quarter and do not qualify for segment boundary line additional reward points, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to every wholesaler basis the segment in which he/she is in. NO additional bonus/ arrear will be credited in case of upgrade and similarly in case of downgrade, no penalty will be charged. VIII. Combo Bonus Wholesaler will be eligible to earn additional bonus in case of purchase of any 3 types of coupons in a month, which are out of the mentioned 4- Combiflam tab, Combiflam Icy Hot, Allegra/Entero and Power Brands Combo bonus will be segment based- Blue, Silver and Gold segment will be eligible to earn 10 reward bonus points and Diamond, Platinum and Titanium segment will be eligible to earn 20 bonus reward points on monthly basis if the criteria is fulfilled. IX. Redemption Rewards Wholesaler basis his/her accumulated reward points can choose to redeem every month, quarter or at the end of program period i.e after 16th of Dec 2018. Redemption Request to be sent only through Website/ Mobile application Redemption in the form of gift items/ articles will be ONLY as per the shubh Labh program catalogue provided to wholesaler. Sanofi India does not give any warranty/ guarantee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lesale points of Mandi type towns Only. Wholesaler will have to accept the conditions and give his consent to provide a shelf (selected by sanofi FF) exclusively for sanofi CHC OTC in shop visibility activity. Photo will be uploaded on the Shubh Labh dashboard and the wholesaler will be credited 100 reward points on monthly basis. Wholesaler point will be selected by the local sanofi FF/CSM basis the customer footfall and the visibility of the Shelf WS will not use that shelf for any other stocking except CHC OTC portfolio or activity Additional submissions The Applicants herein were granted a hearing with regards the captioned application on 9 April 2019 by the Hon ble Bench. On completion of the hearing the Hon ble Members were pleased to grant liberty to the Applicants to file written submissions . At the outset, The Applicants repeat, reiterate and confirm what is stated in the said Application and pray that the same may be treated as part of this Written Submissions . In addition, the Applicants wish to place on record the following grounds: (a) At the outset, recently a Circul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributor/wholesaler can log-in and redeem the points accumulated. (J) Another unique aspect here is that before logging into the Shubh Labh website/ app, a page of terms and conditions pop up which have to be accepted before they get accesses to the website/app. (k) The Applicants are emphasizing on this to establish that the acceptance of terms and conditions on the website/app creates a contractual obligation between the distributor/wholesaler and the Applicants herein. (L) In fact, the Applicants would like to submit that in light of the terms and conditions which the distributor/wholesaler accept and a contractual obligation is created between the Applicants and the distributor/ wholesaler which would enable either party to a take recourse to a civil suit or action for specific performance of contract on failure to adhere to the terms and conditions. A copy of the Power Point presentation explaining the functioning of the Application is attached herewith as Annexure 2 . (m) The Applicants submit that in light of the aforementioned submissions, it is contended that the articles given by the Applicants through the Shubh Labh Loyalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rance of business. Any interpretation to the contrary would render Section 16(1) of the CGST Act otiose. Further the circular dated 7 March 2019 referred above in regard to treatment of sales promotion schemes was not considered in the said ruling as order was issued prior to issuance of circular. In light of these facts, the Applicants humbly submit that they should be entitled to ITC on GST paid on expenses incurred towards promotional schemes of Shubh Labh Loyalty Programme and goods given as brand reminders. 3 CONTENTION - AS PER THE CONCERNED OFFICER: The submission, as reproduced verbatim, could be seen thus- The applicants above referred application under Section 98 of the Central Goods and Service Tax Act, 2017 read with Rule 104 of CGST, Rules 2017. The applicants are registered within the jurisdiction of respondents under GSTIN no 27AAACH2736F1ZU, The Applicants has filed the subject application for advance ruling on the following questions: Whether input tax credit is available on the GST paid on expenses incurred towards promotional schemes of Shubh Labh Loyalty Program? Comments :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, it there is a consideration for one transaction, it is not gift 1.2.1 The applicant is not signing any formal contract under Shubh Labh Loyalty Program, hence there is no contractual obligation under which goods are supplied. 1.2.2 In the instant case under Shubh Labh Loyalty Program, gifts like watch or reward points are given as incentive and there is no extra commercial consideration and hence since there is no commercial value assigned to the transaction it is to be construed to be Gift. 1.2.3 The applicant themselves have submitted that for anything to be considered as gift, there should not be any contractual obligation or involvement of consideration. In the instant case the applicant give free goods to wholesalers without any involvement of consideration nor is there any written contractual agreement between the company and the wholesaler. Hence, the same is to be considered as Gift. The loyalty program are given voluntarily by the Company and there is no consideration involved in the transaction. Hence it falls in the definition of Gift. 1.3 In any case, the notice is not eligible for ITC in terms of provisions of section 9(1) rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins etc, as the case may be. Therefore, the said free supply is not taxable and chargeable to any GST in terms of Section 9 of the CGST Act, 2017. The said supply merit as exempt supply in terms of provisions of Section 2(47) read with Section 2(78) and therefore, any ITC is not available on the same in terms of inter-alia provisions of Section 17(2) of the CGST Act, 2017. Further provisions of Section 17(5)(h) specifically disallow availment and usage of any credit on goods disposed of by way of gift not withstanding anything whatsoever in sub section (1) of Section (16). Therefore, the question of availment of ITC, on the basis that subject gift were used in furtherance of their business, does not arise. 2.1 The applicant s reliance on provisions of Schedule-I is totally misplaced because it is not their case that subject gift are covered by Schedule-I of the CGST Act, 2017. It may be seen that Schedule-l is applicable to only specified suppliers and the subject gifts by the applicant are not covered by the provisions of Schedule-I. Therefore, the applicant has no occasion to take ITC on the basis of Schedule-I which is irrelevant in their case. Applicant themselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no contractual obligation involved in this situation, as it is completely up to the doctors whether he will prescribe the medicines of the company or not. Doctors are not under any legal obligation to do so. As the consideration is not directly linked with the gift provided to doctors, it is to be considered as gift. 2.3 In any case, the notice is not eligible for ITC in terms of provisions of section 9(1) read with Section 17(2), Section 2(47) and section 2(78), because, there is no dispute that the applicant has made the subject supplies without any consideration on which they have paid any GST. Therefore, the value of subject free supply does not merit inclusions in value in terms of Section 15. Further, the subject supplies merit as exempt supplies of Section 2(47) and hence, the ITC is not available to applicant in terms of Section 17(2). Therefore, it may be seen that ITC is not available even without application of the provisions of Section 2.4 The applicant has contended that subject free supplies have been made in pursuance of their business. However, the fact remains that the same have been made free of cost and therefore, the same are non-taxable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tities 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. Applicant offers various promotional schemes and following schemes are the subject matter of present application namely: 1) Shubh Labh trade loyalty program and 2) Brand reminders products The Broad nature of the schemes are as below: Shubh Labh trade loyalty program: wherein the distributors/wholesalers get rewards based on the reward points earned by them on the basis of quantity of goods sold by them. Instead of opting to give a cash discount to their distributors/wholesalers, and to make it more lucrative and aesthetically appealing, applicant offers reward points against purchases made by the distributors/ wholesalers. These reward points can be redeemed at the end of each month/quarter/year as they may wish to do. The Applicants have annexed to the Application a catalogue from which the distributor/wholesaler can redeem the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis quantity of goods sold by them. Both the schemes are independent of each other. In the first schemes, the products mentioned in the catalogue will be procured from different suppliers, it includes different types of goods and services and since these goods / services are leviable to GST, the applicant has raised the question i.e. whether Input Tax Credit ( ITC ) can be claimed by them on procurement of the said products/ services given on above said promotional basis. As per their submissions, the said products are inputs for them and GST levied on such purchase qualifies to be an input tax for the purpose of Section 16(1) read with Section 2(62) of the CGST Act. The jurisdictional officer has also made submissions and has different view point. He has opined that in the instant case under Shubh Labh Loyalty Program, gifts like watch or reward points are given as incentive and there is no extra commercial consideration and since there is no commercial value assigned to the transaction, it is to be construed to be Gift. He further contended that under promotional goods given as brand reminders, products like pens, notepad, key chains etc. are distributed to the distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts procured for the distribution to the wholesalers are inputs for them and GST levied on such purchases qualifies to be an input tax for the purpose of Section 16(1) read with Section 2(62) of the CGST Act. We find that 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. Clause (h) of Section 17(5) read as, Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope according to us and has its own colour. In all such cases, as in the present case, the statement that promotional goods, in this case, will be given to distributors/ wholesalers who satisfy certain conditions is nothing but assurance of giving away gifts on those conditions being achieved by the customers. At the least we can say that the condition put forth by the applicant to avail or participate in this scheme are nothing but is a measure of particular kind of promotional items meaning thereby that if wholesaler sale more products then he will be eligible for more reward points and further eligible for big offer such as Singapore Trip of 5 D/ 6 Days instead of Raymond Watch. Under the GST laws the intention for non-granting/ denial of setoff is envisaged in situations where there is no tax on output supply. In cases where the goods are procured with levy of input tax and are supplied without tax being paid on such output supplies, the scheme of the GST Act provides no input tax credit, except export. Schedule - I to the CGST Act, 2017 deals with activities to be treated as supply even if made without consideration. As per Entry Number 2 to Schedule I (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly is without consideration i.e. free supply and without payment of output tax. The only conclusion therefore, that can be drawn in the present case is that the distribution of promotional articles by the applicant is nothing but gifts and hence the transaction is covered by the provisions of Section 17(5) of the Act. Relying on Circular issued by the Principal Commissioner GST bearing No. 92/11/2019-GST dated 7 March 2019 for clarifying various doubts related to treatment of sales promotion schemes under GST, submits that discounts offered by the Suppliers to Customers (including staggered discount under Buy more, save more scheme and post supply/volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub-section (3) of Section 15 of the said Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document(s) issued by supplier. He further submit that as per Circular, supplier is entitled to avail the ITC for such input, input services and capital goods used in relation to the supply of goods or services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to increase the sale of the company, Brand Reminder Products like pens, key note pad, key chains etc. are distributed to the distributors and doctors. The said products are embossed with Sanofi Brand. The Brand embossed on this products serve as advertisement and is a brand reminder that promote sales. Further at submission with heading it is stated as ICY HOT Secondary Focus: Driving Depth and Distribution (Jan May period) Wholesalers will be eligible to win assured Gift on achieving the Combiflam ICY HOT minimum purchase slab on monthly basis. Further in the submission with heading it is stated as - IX Redemption Rewards Redemption in the form of gift items/articles will be ONLY as per the Shubh Labh program catalogue provided to wholesaler. Sanofi India does not give any warranty/ guarantee in respect of quality or merchantability of the gift articles offered under this program Gift articles shown in the catalogue are subject to availability and images are for indicative purpose only Redemption will be conducted only in the form of gift items listed on the catalogue and NO for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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