M/s. Biostadt India Limited (“the Applicant or the Company”) engaged in the business of developing, manufacturing and distributing crop protection chemicals and hybrid seeds and in order to achieve sales and marketing objectives, they have launched various target based – sales incentive schemes for their distributors and retailers (customers) to achieve a specified target and in turn helps the company to achieve their targets.

The subject application is in respect of a sales promotion scheme known as “Kharif Gold Scheme 2018”, which has been floated by them for their customers and is of two types. In the first case, their Customers who purchased certain products on or above a certain quantity would be entitled to one 10 grams Gold coin. In the second scenario, their customers who, after lifting the products from the applicant, made certain minimum payments and above would be entitled to one 8 grams Gold coin.

Both the schemes were to be independent of each other. For both the schemes gold coins will be procured from jewellers and since gold is leviable to GST at the rate of 3 percent the applicant has raised the question i.e whether Input Tax Credit (“ITC”) can be claimed by them on procurement of the said Gold coins. As per their submissions, the said Gold coins are inputs for the applicant 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 Applicant has sought advance ruling in respect of the following questions:

Whether the Input Tax Credit (“ITC”) can be claimed by the Applicant on procurement of Gold coins which are to be distributed to the customers at the end of scheme period for achieving the stipulated lifting or payment criteria?

Whether the ITC can be claimed in all such similar schemes?

Applicant’s Interpretation of law: The applicant contended that he is eligible to claim ITC on procurement of gold coins as the requirements of Section 16(1) and 16(2) of CGST Act, 2017, have been fulfilled.

The only criteria that need to be evaluated is the restrictions laid down in Section 17 of the CGST Act, 2017 which provides for apportionment of credits and blocked credits.

Further as per Section 17 of the CGST Act, 2017, the ITC needs to be reversed in respect of gold coins which are disposed of by way of gifts or free samples.

Further the applicant has launched a sales promotion scheme which is linked scheme purely for advancement of company’s business. It is a known principle that “nothing comes free in business”. Each and every act done for business comes with a consideration.

Applying same analogy,

gold coins are not given away freely to the customers.

The applicant has a contractual arrangement with the customer wherein if he purchases certain amount of company’s product or makes payment in a prescribed manner then he shall be entitled to a gold coin of specific weight. Gold coin will not be available to the customer unless he satisfies the criteria laid under the scheme.

Giving away gold coins to customer cannot be termed as “voluntary” act of the applicant.

The Hon’ble AAR of Maharashtra vide its Advance Ruling NO.GST-ARA-72/2018-19/B-165 dated December 20, 2019 observed that the provisions of ITC are governed by Sections 16 and 17 of the CGST Act, 2017.

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, 2017 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) deals with ITC on gifts and as per Section 17(5)(h), “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.

However, the word ‘gift’ has not been defined in the CGST Act and the Gift-Tax Act (18 of 1858) had defined the word gift to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth.

It is seen from the definition that the transfer i.e the gift given in such a case has to be voluntary.

Therefore, the authority stated that the 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.

Citation: [2019] 103 taxmann.com 127 (AAR – MAHARASHTRA)