FACTS OF THE CASE

The Applicant is engaged in the manufacturing activity and was selling these products through Franchisees and distributers/retailers. For the purpose of brand promotion, the applicant was procuring promotional items and was distributing them to its franchisees and distributers free of cost.

ISSUE

” Whether in the facts and circumstances of the case the Promotional Products/Materials & Marketing items used by the Applicant in promoting their brand & marketing their products can be considered as “inputs” as defined in Section 2(59) of the CGST Act, 2017 and GST paid on the same can be availed as input tax credit in terms of Section 16 of the CGST Act, 2017 or not?”

FINDINGS OF THE CASE

There are three ways by which the Applicant carries out the promotion and marketing of their products.

The point for determination is only with regard to the promotional items mentioned at (a) and (b) above and whether the same can be considered as “inputs” and eligible for input tax credit by the Applicant in arms of Section 16 of the CGST Act.

The lower Authority has concluded that the promotional items mentioned at (b) are in the nature of capital goods since the ownership of these goods is retained with the Applicant.

But it is evident from the agreements that

• These goods remain in the ownership of the applicant and physically lies at the place of Distributers.
• These promotional items are not capitalised in their books of accounts but are always treated as revenue expenditure and hence they cannot be considered as ‘capital goods’. Thus, the promotional items purchased by the Applicant and provided to the EBOs/franchisees, distributors and retailers are ‘inputs’ which are used in the course or furtherance of business.

ELIGIBILITY OF INPUT TAX CREDIT ON NON-DISTRIBUTABLE GOODS

• The franchisees and distributors are independent entities and are not related to the Applicant in any of the ways mentioned in the Explanation to Section 15 of the CGST Act, so clause (b) of schedule l is not applicable here.
• Since the promotional items mentioned in (b) i.e., non-distributable goods are not assets of the Applicant, clause(a) of Schedule I will also be not applicable to the Applicant’s case.

Therefore, the provision of promotional materials free of charge by the Applicant to the franchisees and distributors is neither covered within the scope of a taxable supply as defined in Section 7 of the CGST Act nor is it a supply covered under the ambit of Schedule I of the said Act.

The activity of providing the promotional items can be termed as an ‘non-taxable supply’ as defined in Section 2(78) of the CGST Act.

In view of the above provisions, it is that 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.

ELIGIBILITY OF INPUT TAX CREDIT ON DISTRIBUTABLE GOODS

It is observed that in the case of the distributable goods embossed/engraved with the brand name and which are distributed to the EBOs/distributors/retailers for the purpose of giving away to the customers-

• There is no contractual obligation on the part of the Applicant and it is voluntarily done with the sole intention of promoting their brand and increasing the sales of their products.
• These distributable/give away items are supplied at will, free of cost to the EBOs/franchisees, distributors and retailers.

While this supply is also a non-taxable supply and ineligible for input tax credit, there is an additional disentitlement in terms of Section 17(5)(h) which provides that goods which are disposed of by way of gift are not eligible for input tax credit where Section 2(xii) of the Gift Tax Act 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.

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, it is held that 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.

ORDER

The Promotional Products/Materials & Marketing items used by the Applicant in promoting their brand & marketing their products can he 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.

Disclaimer:“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”