ITC paid on Promotional Products used in promotion of own Brand not eligible under GST
What is Section 17(5) of the CGST act?
Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.
Certain situations when ITC cannot be claimed:-
1. A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)
2. A person cannot claim ITC for the tax paid for the following:-
i. Food and beverages
ii. Outdoor catering
iii. Beauty treatment
iv. Health services
v. Cosmetic and plastic surgery
3. Services of general insurance, servicing, repair and maintenance
4. Sale of membership in a club, health, fitness centre
5. Rent-a-cab services, life insurance, health insurance
6. Travel, benefits extended to employees on vacation such as leave or home travel concession.
7. Works contract services for construction of immovable property
8. Construction of immovable property on own account
9. Composition scheme
10. Non residents
11. Supply for personal use
12. Free samples and goods destroyed
13. Restaurant services
Fact of the case
The Appellant is engaged in the manufacture, distribution and marketing of Knitted and Woven Garments under the brand name “JOCKEY” and swimwear and swimming equipment under the brand name “SPEEDO”. The Appellant also gets the garments manufactured from job workers. The Appellant market/sell their products through their franchisees and distributors/dealers. To promote their brands and to market their products, the Appellant is availing advertisement agency services such as ads in the print media, electronic media, outdoor advertising, etc and also procuring the promotional items and marketing material such as display boards, uniforms to staff, posters, gifts and hoardings, etc to use in displaying their products at the point of purchase i.e Exclusive Brand Operator’s showrooms and retail show rooms. The Appellant is paying GST on the procurement of the advertisement services and promotional products/marketing materials.
Issue of the case
Whether 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 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.
Observation of the Authority
On going through the records, tribunal find that there are three ways by which the Appellant carries out the promotion and marketing of their products viz.,-
a) They procure items such as gondola racks, wall shelves and panels, POP items such as mannequins and half busts, storage units, hangers, signages, posters, display stands, etc which are used in their Exclusive Brand Outlet (EBO)/franchisee showrooms and by their distributors and retailers for display and advertising of their products. These items are purchased by the Appellant from various suppliers on payment of GST. The items are sent to the point of purchase i.e the showrooms of the EBO/franchisees, distributors and retailors under cover of a delivery’ challan. In certain cases, these items are sent directly from the supplier’s premises to the point of purchase on a bill to ship to basis. The promotional items are supplied by the Appellant free of cost to the franchisee I distributor I retailer as per the terms of the agreement and the title of the said items remains with the Appellant and the same is not transferred to the franchisee or distributor or retailer. These promotional items continue to remain with the franchisee/ distributor / retailer until the termination of the agreement between the Appellant and the franchisee/ distributor / retailer. The Appellant is availing input tax credit on the procurement of these promotional items by treating them as “inputs”.
b) They procure items such as carry bags, calendars, dairies, pens, etc with their brand name embossed/engraved from various suppliers on payment of GST and distribute these items free of cost to the showrooms of their franchisees, distributors and retailers for the purpose of giving away to customers who buy their products. In this case also, the title of the goods remains with the Appellant and the Appellant is availing input tax credit on these give away items by treating them as “inputs”.
c) They procure the services of advertising agencies for ads in the print media, electronic media and outdoor advertising. These services are procured on payment of GST and credit is availed by the Appellant as an input service.
The point for determination by us 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 Appellant in terms of Section 16 of the CGST Act. The term “input” is defined in Section 2(59) of the CGST Act as follows:-
2(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.
With regard to the promotional items such as gondola racks, wall shelves and panels, POP items such as mannequins and half busts, storage units, hangers, signages, posters, display stands, etc, tribunal find from the copies of the agreements furnished by the Appellant that there is a contractual obligation on the part of the Appellant to provide their EBO/franchisees and distributors promotional materials. The purpose of providing the EBO/franchisees and distributors with these promotional items is to enhance the sales of their products. Thus, tribunal have no hesitation in concluding that these promotional items (referred to by the lower Authority as ‘non-distributable goods’) are indeed used in the course or furtherance of the Appellant’s business.
It was found that the lower Authority has concluded that these promotional items (referred to by the Authority as non-distributable goods) are in the nature of capital goods since the ownership of these goods is retained with the Appellant. 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 normal accounting standards, the cost incurred for promotional activities and procurement of promotional items is an expense for the Company. Such promotional expenses are incurred with the objective of generating more revenue for the Company. The Appellant has also urged before the tribunal that 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’. This is in tune with the normal accounting practices. The tribunal therefore, disagree with the finding of the lower Authority and hold that the promotional items purchased by the Appellant and provided to the EBOs/franchisees, distributors and retailers are not capital goods but ‘inputs’ which are used in the course or furtherance of business.
16. As regards the eligibility of input tax credit on these promotional items, the same is governed by the provisions of Chapter V (Sections 16 to 19) of the CGST Act. Section 16 states that a registered person shall be entitled to take input tax credit of the tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of business. Section 17 restricts the entitlement of input tax credit when the goods and services or both are used for non-business purposes or exempt/non-taxable supplies. Further, notwithstanding the entitlement conferred by Section 16, certain goods and services and certain forms of supply, as mentioned in Section 17(5) of the CGST Act, are expressly denied input tax credit. In the background of the above provisions of law, let us examine the Appellant’s eligibility to input tax credit on the promotional items. The tribunal observe that the promotional materials are provided to the franchisees and distributors free of charge. As per Section 7 of the CGST Act, a transaction is termed as a supply only when it is made for a consideration. However, the transactions specified in Schedule I of the CGST Act can be treated as a supply even if they are made without any consideration. One such transaction mentioned in clause (b) of Schedule I is a supply of goods or services or both made between related parties or distinct persons, in this case, tribunal find that the franchisees and distributors are independent entities and are not related to the Appellant in any of the ways mentioned in the Explanation to Section 15 of the CGST Act. Another transaction made without consideration which amounts to a supply is mentioned in clause (a) of Schedule I and it applies to the permanent transfer and disposal of business assets where input tax credit has been availed on such assets. The Tribunal has already held that these promotional items are not assets of the Appellant and hence this clause will also be applicable to the Appellant’s case. Therefore, the provision of promotional materials free of charge by the Appellant 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 which reads as follows: “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act 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. In view of the above provisions, tribunal hold 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.
The tribunal also observe that in the case of the promotional items such as carry bags, calendars, diaries, pens, etc embossed/engraved with the brand name and which are distributed to the EBOs/distributors/retailers for the purpose of giving away to the customers (referred to by the lower Authority as ‘distributable goods’), there is no contractual obligation on the part of the Appellant to provide these promotional items for distribution. It is voluntarily done by the Appellant 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. It is important to understand the meaning of the term “gift”. The GST law has not specifically defined the term “gift”. Hence one must turn to the definition provided under 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. Thus, it can be said that in this case, these give away promotional items which are distributed at the sole discretion of the Appellant without any contractual obligation or consideration, acquires the character of gifts.
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, tribunal hold 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.
18. The Appellant has placed reliance on the decision dated 22nd October 2019 given by the Maharashtra Appellate Authority for Advance Ruling in the case of Sanofi India Ltd to substantiate their claim that the promotional items are not gifts and hence will not be hit by the provisions of Section 17(5)(h) of the CGST Act. The tribunal have gone through the said decision and observe that the Members of the Maharashtra Appellate Authority differed in their decision on the points in appeal and hence, in terms of Section 101(3) of the CGST Act, it was deemed that no advance ruling can be issued in respect of the question under appeal. The Appellant in this case has placed reliance only on the opinion expressed of the Member (CGST) in Sanofi India Ltd case. In view of the fact that there is no ruling in the appeal filed by M/s Sanofi India Ltd, the case does not have any persuasive value.
The authority set aside the ruling dated 15/12/2020 passed by the Advance Ruling Authority and answer the question of the Appellant as follows:
The Promotional Products/Materials & Marketing items used by the Appellant 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.
The appeal filed by M/s Page Industries Ltd, Cessna Business Park, Tower-1, 3rd Floor, Umiya Business Bay, Kadubeesanahalli Village, VarthurHobli, Saijapur Marathahalli Outer Ring Road, Bangalore 560103, is disposed of on the above terms.
Read the full order of AAAR from belowITC-paid-on-Promotional-Products-used-in-promotion-of-own-Brand-not-eligible-under-GST