JANUARY 15, 2021

By Dr G Gokul Kishore

SALES promotion is not only desirable but also necessary for the very existence of a business enterprise. Tax laws of today are oriented towards promoting business given the obvious spin-off effect on the economy. But the proclamation on law promoting business becomes an empty slogan when Section 17(5) of CGST Act bars or places restrictions on availing input tax credit on goods or services used for promotion of business but physically not retained by the taxpayer. Though lot of discussion has taken place on this issue, the trigger for this Part-95 comes from an advance ruling.

Essential facts

A very brief mention about the facts and questions is necessary before the issue is discussed. The applicant sought to know from the Authority for Advance Rulings (AAR) as to whether input tax credit (ITC) would be available on various sales promotion / marketing items like advertisement material (hoardings, danglers and banners), carry bags, posters, materials used for display of products like cupboards, racks, stands and hangers, uniform to sales staff, gifts like leather bags, pens, diaries and calendars (with brand name embossed / engraved). These items are either transferred from the applicant's premises on delivery challan or delivered to distributor by obtaining invoice in the name of applicant's office with goods being delivered at the distributors' premises. They are used in a variety of places like applicant's own showroom, exclusive brand showrooms, distributors' premises, franchisees' place and at the premises of retailers. Some of the gift items are meant for distribution to customers.

Used in the course or furtherance of business

The vanilla argument of the applicant was that since the goods and services are used for promoting brand and products and, therefore, in the course or furtherance of business, as per Section 16(1) of CGST Act, ITC will be available. To fortify, it was further contended that though the items are given free, they are not gifts as the distributors are under obligation to promote the brand and products as per agreement. Not transferring title of the goods and applicant retaining ownership of such items were also highlighted.

Half victory for taxpayers?

The AAR introduced a "new" concept by classifying the sales promotion items into two - non-distributable goods and distributable goods. Non-distributable goods are those items which are given to distributors, franchisees and retailers and used in their premises and ownership of such items is retained by the applicant. They are shown and they remain in the books of account of the applicant as assets. The AAR has noted that the applicant has not produced proof of return of such items after use and, therefore, proceeded to further classify such goods into two - those which are returned and those which are not returned. Items which are returned may be used further or disposed and items which are not returned, may be written off. These items are capitalized as per facts and depreciation is claimed as per Income Tax Act. This point has been emphasized in the ruling to hold that such items are classifiable as capital goods and not as inputs. This is not very relevant for the present discussion.

The AAR holds that non-distributable goods are used for the purpose of business by the applicant and ITC will be available on such goods. Requirement to reverse such ITC will arise if they are written off or destroyed or lost. Distributable goods have been held to be those which are transferred without consideration to distributors and franchisees (who are termed as "related persons" of applicant) and therefore, GST is payable on such transfer with ITC on procurements being protected [Page Industries - 2020-TIOL-300-AAR-GST].

The ruling holds that as long as goods are retained in the books by the taxpayer even if they are used elsewhere at the premises of distributors and other sales partners, ITC will continue to be available. They serve the business purpose of the taxpayer and there is no doubt over credit. However, if they are not returned or if they are destroyed or written off, then the axe of reversal will fall. This may be interpreted as half victory for taxpayers.

Protecting ITC on promotional items

Advance ruling is obviously not binding on taxpayers other than the applicant but this ruling offers an important takeaway. Taxpayers may have to ensure that sales promotion materials are, to the extent possible, shown in their inventory / books, transferred by way of delivery challan and returned to them after use to ensure ITC availed is beyond scrutiny by the department. In practice, items like racks, stands and cupboards, after use, become useless and they are scrapped at distributor's end for which sometimes, a nominal amount is debited by the taxpayer-supplier or no amount is recovered. Such instances may be objected by the department if credit is retained. However, if the item is treated as capital goods and it has been used for more than five years and it is scrapped without any further supply, then proportionate credit reversal may not arise. Otherwise, on scrap value, payment of GST will ensure credit is not disturbed.

This calls for amendment to CGST Act and CGST Rules so that an item which has served the business of a taxpayer, should not be an irritant in respect of ITC balance. The department may prescribe a time-limit beyond which an item should be deemed as having completed its service to business purpose. This will ensure freedom from unnecessary hassle of ITC reversal. Requirement to pay tax on transaction value when an item is sold even as scrap is materially different from not seeking reversal of ITC to an item with the fixed-use period.

[The author is an Advocate, Gokul & Subha Advocates, Chennai. Views expressed are personal. ]

See Part 94.