NOVEMBER 10, 2020

By S Sivakumar, B.Sc., LL.B., FCA, FCS, ACSI, Advocate

ONE of the most confusing issues in the GST law, relates to the availability of input tax credit ('ITC') on the sale promotion schemes implemented by companies, especially during the festive season. As we know, some of the sales promotion schemes can possibly involve one or more of the following, viz.

- Quantity discounts, viz. Buy more Save more schemes (Buy 1 Take 1 free)

- Cash discounts which can be adjusted against select purchases

- Gifts of consumer durables and jewellery, etc. to dealers/customers based on off-take

- Sponsoring free trips to foreign countries for select dealers who meet the sales targets

- Diwali cracker packets or sweet packets given as gifts along with purchase of garments or other items

- Lucky draw schemes for Diwali from shops located in Malls.

The most interesting and concerning question that would arise is whether companies which implement these sales promotion schemes can avail of ITC paid on goods and services used for these schemes.

Section 17(5) dealing with ITC on these transactions, reads as under:

"Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

…………….

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples"

The Board, in its infinite wisdom, has issued Circular No. 92/11/2019-GST dated March 7, 2019 dealing with ITC on sales promotion expenses.

In this circular, it has been clarified that, while ITC is available in respect of Buy One Get One offers, Discounts including 'Buy more save more' offers and secondary schemes, the said Circular clearly states that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.

The relevant portion of this Circular dealing with the denial of ITC in respect of free samples and gifts, is reproduced below…

Let's see how some of the advance rulings have dealt with the issue involving ITC on sales promotion expenses and gifts, based on this Circular.

Biostadt India Ltd - 2019-TIOL-59-AAR-GST

- In this ruling, the Maharashtra AAR denied ITC on the distribution of gold coins by the company to its customers on achievement of targets fixed by the company

- Applicant took the view that, they were under a contractual obligation to give away these gold coins to customers who had met the purchase targets and consequently, the activity of giving away gold coins cannot be treated as gifts.

- AAR rejected applicant's claim that the gold coins were given under a contractual commitment, as the company did not produce copies of any contracts or written agreements signed by the customers.

- The AAR heavily relied on Section 17(5)(h) and held that, such activity was covered under the activity of giving away of goods as gifts, as these were not given under a contractual obligation.

- AAR further took the view that ITC is not available on disposal of goods as gifts on which no GST is paid.

Surfa Coats (India) P Ltd - 2019-TIOL-331-AAR-GST

- Applicant had given gifts of consumer durables (TVs, Refrigerators, etc) to its dealers/customers who had met the sales targets as formally announced by the applicant.

- AAR held that, ITC is not available on the distribution of consumer durables as gifts to its dealers who have met the sales targets as per the scheme announced, on the basis that such goods so procured and disposed off/ distributed as incentives/ gifts are disposed without any consideration and hence do not qualify to be a supply in terms of Section 7 of the CGST Act. Further no GST was being paid on disposal of the said gift items. AAR had relied on Section 17(5)(h).

- AAR had also relied on Board Circular No. 92/11/2019-GST dated March 7, 2019 which states that "input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration".

Sanofi (India) Limited - 2019-TIOL-182-AAR-GST

- Applicant is a pharmaceutical company and had given gifts to its dealers/customers on the fulfilment of conditions specified in its Shubh Labh Loyalty Scheme, 2018 and had also incurred sales and brand promotion expense.

- AAR took the view that since the applicant had conceded that these goods were distributed without any consideration, these are to be considered as 'nothing but gifts' and hence, ITC is to be denied under Section 17(5)(h).

A study of these rulings indicates the mindset of the Department, inasmuch as, any goods that are distributed by a company without consideration are treated as 'gifts' falling under Section 17(5)(h) and consequently, ITC is to be denied. The Department's view also seems to be that, when goods are given out by a company, they need to suffer either GST as an output supply or suffer ITC reversal in the event no output GST is paid. Their further view seems to be that, unless goods are distributed on a written contract, etc. these cannot be considered as 'gifts'.

Is running a business as simple as this? Can the Department deny ITC without understanding as to what would constitute a 'gift' under the commercial parlance.

A study of Section 17(5)(h) along with the above referred Circular makes it clear that ITC is to be disallowed only in the case of goods or free samples distributed without any consideration. This takes us to the very interesting discussion on whether goods given by companies against sales promotion schemes can at all be treated as 'gifts'.

As we know, the term 'gift' has not been defined in the GST law.

In terms of Section 122 of the Transfer of Property Act, 1882, a gift is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the done, and accepted by or on behalf of the done. Relied on in Shakuntala v State of Haryana, AIR 1979 SC 843 (844).

As per Section 2(xii) of the Gift Act, 1958, "Gift" means 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, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section…

A "gift" is a voluntary transfer of property without compensation or any consideration. A "gift" means a voluntary transfer of property from one person to another without consideration or compensation [Words and Phrases (Permanent Edition) Vol. 18 as cited in Sonia Bhatia v State of UP(1981) 2 SCC 585, 593, p.14]

GIFT : Something that is voluntarily transferred by one person to another without compensation, a voluntary transfer of real or personal property without any consideration or without a valuable consideration - distinguished from sale [WEBSTER'S Third New International DictioCthnary (Unabridged) as cited in Sonia Bhatia v State of UP(1981) 2 SCC 585, 593, p.14]

A Gift is a transfer which does not contain any element of consideration in any shape or form - Love, affection, spiritual benefit and many other factors may enter in the intention of the donor to make a gift but these filial consideration cannot be called or held to be legal consideration as under by law. Sonia Bhatia v State of UP AIR 1981 SC 1274, 1280 [Transfer of Property Act(for of 1882) S.122]

To constitute a "gift", the property should be transferred voluntarily and not as a result of a contractual obligation [Commissioner of Taxation (Cth) v McPhatil (1968) 41 ALJR] - page 2196 of Volume 2 of P Ramanatha Iyer's ADVANCED LAX LEXICON 5 TH Edition.

In BLACK'S LAW DICTIONARY (Ninth Edition), a gift is defined as a voluntary transfer of personal property without consideration. A gift is a voluntary conveyance of land, or transfer of goods, from one person to another, made gratuitously without any consideration. A similar definition has been given in Webster's Third International Dictionary, wherein, a gift has been defined as something that is voluntarily transferred by one person to another without compensation; a voluntary transfer of real or personal property without any consideration or valuable consideration. In HALSBURY's LAWS OF ENGLAND (Third Edition, Volume 18) while detailing the nature and kinds of gift, the following statement is made : A gift inter vivos, (a) may be defined shortly as the transfer of property from one person to another gratuitously. As per Volume 18 of WORDS AND PHRASAS, a "gift" means a voluntary transfer of property without compensation or any consideration.

Will any company which runs its business to earn profits, distribute goods to its dealers or customers, out of love, affection or with a spiritual motive? At least, I am yet to come across such a company. Goods distributed to dealers and customers are indeed towards business purposes, irrespective of whether there is a written agreement for the same.

Therefore, to deny ITC on the basis that there is no written contract or agreement is totally incorrect, as the underlying motive in distributing these goods is nothing but furtherance of business. It would be farcical to argue that companies could distribute goods to their dealers and customers on a voluntary basis and without a business objective and consequently, there is absolutely no merit in seeking to deny ITC on these transactions.

It a common phrase that there is no such thing as free lunch. Thus, with or without a formal sales promotion scheme in place, bought out goods that are distributed to dealers, customers, etc. can, by no stretch of imagination, be treated as 'gifts' within the meaning of Section 17(5)(h) of the CGST Act, 2017. As we know, under the Indian Contracts Act, 1872, even oral contracts are recognized and are enforceable and what is more important is the concept of 'consensus ad idem'. So long as it is agreed that companies distributing these goods are legally obligated to do so, these goods cannot be treated as 'gifts' at all.

Once it is agreed that these goods cannot be treated as 'gifts', as aforesaid, the next question that could arise is whether these goods can be treated as 'free samples' within the meaning of Section 17(5)(h)? The answer is a clear and loud, NO. The said Section denies ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. The term 'samples' used in this section can only cover 'goods' that are used by the company as inventory or stock-in-trade. Thus, distribution of bought out goods that are distributed by a company to its dealers, customers, etc. cannot be treated as either 'gifts' or 'free samples' within the meaning of Section 17(5)(h) and the reliance on this Section by the highly learned members of the AAR to deny ITC, in respect of goods distributed by companies to their dealers, customers, etc. is wholly unjustified and incorrect.

Taking this discussion forward…

Many companies organize free international visits to their select dealers and customers as part of their sales promotion schemes. Is ITC deniable on these expenses? Not at all. Section 17(5)(h) is squarely inapplicable in these cases.

ITC is not deniable in respect of lucky draw schemes implemented by retainers, whether by themselves or as an association or body. Here again, these schemes are run purely for advancement of business and cannot be treated as 'gifts' or 'free samples'.

The Board has, in its Circular dated 7th March 2019 has clearly stated that ITC is available on 'Buy 1 Take 1' or 'Buy more, save more' schemes, primary discounts and secondary discounts and hence, thankfully, there is no issue regarding ITC admissibility in these cases.

[The views expressed are strictly personal.]