The taxpayers are normally under dilemma on whether input tax credit can be availed on the distribution of promotional products to distributors / franchisees / customers free of cost. In this regard a recent ruling of Karnataka AAR is relevant which will be deliberated upon in this article. Readers can also read / download the copy of order after reading the article.
The Karnataka Authority of Advance Ruling ( AAR ) in its recent ruling in the case of M/s Page Industries Ltd has held that the Input Tax Credit (ITC) can be availed on the distribution of promotional products to distributors or franchisees free of cost as a promotional activity. However ITC cannot be availed when such products are given free of cost to retailers.
Facts of the case:
- The applicant, M/s Page Industries Ltd. is engaged in the manufacture, distribution marketing of Knitted and Woven Garments under the brand name of “Jockey”, Swimwears and Swimming Equipments under the brand name of “SPEEDO”.
- The applicant also gets the said garments manufactured from their job workers.
- The applicant market or sell their products through their own outlets and also through their distributors or dealers.
- The applicant , to promote their brands & to market their products , is availing the services of advertisement agencies such as ads in the print media , electronic media , outdoor advertising etc. He is also procuring the promotional products and marketing materials for use in displaying their products at the point of purchase i.e. their showrooms & showrooms of their distributors / dealers . On availment of such advertisement services & procurement Promotional Products / marketing materials , the applicant is paying applicable GST thereon .
- The applicant is procuring various materials classified as promotional material and is distributing them to the distributors and franchises free of cost . The applicant states that they are supplied free of cost and are to be used only for the promotion of their brand and products in the showrooms of the distributors and retailers . They have stated that they are supplying uniforms for the sales personnel of the distributors and franchisees to be worn by them at their outlets and even this is for sales promotions . The applicant has classified them under the following heads a ) Display Items b ) Display Boards for Retailers c ) Uniforms for Sales Personnel d ) Posters e ) Gifts for brand operators , retailers , staff and sales personnel at outlets and also to customers f ) Outdoor Hoardings g ) Carry bags.
- There are two types of materials:
a. those which are delivered to the distributors , franchisees and retailers but the ownership lies with the applicant but the same are used in their premises (Non-distributable goods).
b. those which are delivered free of cost to the distributors , franchisees and retailers to be distributed to their employees and customers (distributable goods).
Issue on which Ruling was sought:
The applicant has sought the advance ruling on the issue whether the promotional products or Materials and Marketing Items used by the Applicant in promoting their brand and marketing their products can be considered as “inputs” as defined under 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.
Ruling of Karnataka AAR:
The coram consisting of Dr. M.P. Ravi Prasad and Mashood Ur Rehman Farooqui ruled that the ITC on GST paid on the procurement of the “distributable” products which are distributed free of cost to the distributors, franchisees , is allowed as the said distribution amount to supply to the related parties which is exigible to GST (as per para 2 of the Schedule I of the CGST Act).
The AAR, further clarified that the “distributable” products delivered to the retailers free of cost for their use cannot be claimed as gifts to the retailers or to their customers free of cost and hence ITC of GST paid on such procurement is not allowed as per Section 17(5) of the GST Acts. (It may be noted that such delivery of products will also not be subject to GST and thus no benefit of ITC can be availed).
The Authority also held that the GST paid on the procurement of “non-distributable” products qualify as capital goods and not as “inputs” and the applicant is eligible to claim the input tax credit on their procurement, but in case if they are disposed of by writing off or destruction or lost, then the same needs to be reversed under Section 16 of the CGST Act, 2017 read with Rule 43 of the CGST Rules, 2017.
READ / DOWNLOAD ORDER:
Also Read: All about nine amendments in CGST Act applicable from 1 Jan, 2021
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
