No hay ITC disponible bajo el GST para artículos promocionales suministrados a distribuidores o minoristas de forma gratuita.

El solicitante se dedicaba a actividades de fabricación y vendía estos productos a través de franquiciados (que solo comercializaban la marca del solicitante) y distribuidores/minoristas (que también comercializaban otras marcas).

Con el fin de promocionar la marca, el solicitante adquiría artículos promocionales como bolsas (con el nombre del solicitante impreso), calendarios, blocs de notas, paneles de exhibición, vallas publicitarias exteriores, uniformes para empleados, etc., y suministraba dichos productos a sus franquiciados y distribuidores sin coste alguno.

El solicitante acudió ante la Honorable AAR para determinar si los artículos promocionales adquiridos por él son «insumos» según la Ley CGST y si tiene derecho a reclamar el crédito fiscal por insumos (ITC) sobre los mismos.

El solicitante sostuvo que, dado que los gastos de publicidad son una parte integral del coste del producto final, equivalen a un uso en el negocio o en el curso del desarrollo del mismo.

Por lo tanto, el gasto en artículos promocionales es un «insumo» según la Ley CGST. Además, estos artículos no se proporcionan de forma gratuita (FOC) a los distribuidores, sino que se entregan con la obligación de promocionar la marca del solicitante. Por consiguiente, el ITC correspondiente no es inelegible según la sección 17(5)(h) de la Ley CGST.

La Honorable AAR dividió los artículos promocionales en 2 categorías, a saber:

A. Artículos de distribución, es decir, aquellos que se distribuyen a clientes y empleados de forma gratuita (FOC) y no se devuelven al solicitante, y

B. Artículos no destinados a la distribución, es decir, aquellos en los que la titularidad no se transfiere a los distribuidores y se devuelven o destruyen al finalizar el periodo de uso.

Además, los franquiciados están «vinculados» al solicitante según la sección 15(5)(c) de la Ley CGST.

Por lo tanto, la AAR determinó que:

1. La transferencia de artículos de distribución a franquiciados sin contraprestación constituye un «suministro» según el Anexo I de la Ley CGST. Por lo tanto, dicha transferencia está sujeta al GST. Además, el solicitante tiene derecho a reclamar el ITC correspondiente.
2. Los artículos de distribución transferidos al distribuidor de forma gratuita (FOC) no son elegibles para el ITC según la sección 17(5)(h) de la Ley CGST, tal como se aclaró en la Circular n.º 92/11/2019-GST de fecha 7 de marzo de 2019.
3. Los artículos no destinados a la distribución son «bienes de capital» y no «insumos». Por lo tanto, el solicitante tiene derecho a reclamar el ITC. Sin embargo, el ITC correspondiente debe revertirse cuando dichos artículos se den de baja o se destruyan al finalizar su periodo de uso, de acuerdo con la Regla 43 de las Reglas CGST.

1. Brief Facts of the Cases

1. M/s Page Industries Limited («El Solicitante») se dedica a la fabricación, distribución y comercialización de prendas de punto y tejidas, trajes de baño y equipamiento para natación.
2. El solicitante también subcontrata la fabricación a terceros.
3. Además, el solicitante vende sus productos a través de sus propios puntos de venta o mediante distribuidores y concesionarios.
4. El solicitante lleva a cabo la publicidad de sus productos de las dos formas siguientes:
   • Contratando servicios de agencias de publicidad para anuncios en medios impresos, medios electrónicos, publicidad exterior, etc.
   • Adquiriendo productos promocionales para su exhibición en sus puntos de venta y en los de sus distribuidores.
5. Las agencias de publicidad cobran el GST al emitir las facturas al solicitante.
6. Para promocionar la marca, el solicitante exhibe sus productos en el punto de venta. El solicitante compra dicho material POP y el proveedor cobra el GST correspondiente.
7. El solicitante traslada dicho material POP a su punto de venta y al de sus distribuidores bajo el amparo de una nota de entrega sin cobrar ningún GST; es decir, la titularidad del material no se transfiere al distribuidor. En algunos casos, el solicitante solicita al proveedor que entregue dicho material directamente al distribuidor bajo la modalidad de «facturar a, enviar a».
8. Para promocionar la marca, el solicitante fabrica diversos artículos de marketing, como bolsas con el nombre del solicitante impreso, bolígrafos, calendarios de pared, agendas, etc. El fabricante cobra el GST al suministrar dichos artículos al solicitante.
9. El solicitante, a su vez, distribuye dichos artículos a sus distribuidores y clientes para promocionar su marca.
10. Para promocionar sus productos en el extranjero, el solicitante también exporta dichos artículos a sus distribuidores internacionales bajo el amparo de una Carta de Compromiso, es decir, sin el pago del IGST.
11. Además de los artículos promocionales, el solicitante también suministra el siguiente material en salas de exposición de operadores exclusivos de la marca y salas de exposición minoristas para promocionar su nombre comercial:
    • Artículos de exhibición
    • Panel de exhibición para tiendas minoristas
    • Uniformes
    • Carteles
    • Regalos
    • Valla publicitaria exterior
    • Bolsa

2. Pregunta: ¿Pueden considerarse los productos/materiales promocionales como «insumos»?

Sobre la base de su presentación, el solicitante planteó la siguiente pregunta ante la Honorable AAR:

1. ¿Pueden los productos/materiales promocionales y artículos de marketing utilizados por el solicitante para promocionar su marca y comercializar sus productos considerarse «insumos» según la Ley CGST de 2017?
2. Además, ¿tiene el solicitante derecho a reclamar el ITC sobre dicha adquisición según la sección 16 de la Ley CGST?

3. Extractos legales pertinentes

1. La sección 16(1) de la Ley CGST de 2017 se reitera a continuación:

«16 Elegibilidad y condiciones para obtener el crédito fiscal por insumos.—

(1) Toda persona registrada tendrá derecho, sujeto a las condiciones y restricciones que puedan prescribirse y de la manera especificada en la sección 49, a obtener el crédito del impuesto sobre los insumos cargado en cualquier suministro de bienes o servicios, o ambos, que se utilicen o estén destinados a ser utilizados en el curso o desarrollo de su negocio, y dicho importe se acreditará en el libro mayor de crédito electrónico de dicha persona.

..”

2. El extracto pertinente de la sección 17(5) de la Ley CGST de 2017 se reitera a continuación:

«(5) No obstante lo dispuesto en el subapartado (1) de la sección 16 y el subapartado (1) de la sección 18, el crédito fiscal por insumos no estará disponible con respecto a lo siguiente, a saber:—

…

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

3. Definition of “Input” and “Capital Goods” are reiterated below:

“(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; “

“(19) “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business”

4. Entry No. 3 of Schedule I of CGST Act is reiterated below:

“3. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: 

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both”

4. Contention of the Applicant

The applicant made following submissions:

1. The applicant has considered all POP material and promotional items as “Inputs” as defined under section 2(59) of CGST Act. Therefore, the applicant has claimed Input Tax Credit (“ITC”) on such procurement under section 16 of CGST Act.
2. Major condition of claiming ITC under section 16(1) of CGST Act is that procured goods or services or both should be used in course or furtherance of business.
3. The applicant contended that the term “used in the course or furtherance of business” has a very wide meaning. It does not include only goods or services procured in relation to “Output” but it includes any goods or material used in course or furtherance of business.
4. The applicant placed reliance on precedence of Hon’ble Apex Court in the matter of Mazagon Dock Limited Vs CIT wherein it was held that the term “business” should be construed in broader sense rather than narrow sense. Further, the word business connotes “some real, substantial and systematic or organised course of activity or conducted with a set of purpose”.
5. Further, the applicant also relied on judgement of Hon’ble Bombay HIgh Court in the matter of M/s Coca Cola Private Limited Vs CCE wherein it meaning of word “relating to business” used in “Input Services” was defined. Hon’ble High Court held that:
   • Business is a continuous activity and the same is not limited to mere manufacturing of products.
   • Therefore, activity in relation to business can cover all the activities that are related to the functionality of a business such as manufacturing, entering into Franchise agreement, promotion of brand name etc.
   • Further, advertisement service can be said to be input service as long as manufacturers can demonstrate the connection between advertisement service and manufacturing of final product. In that case, manufacturer can avail the credit of service tax paid on input service.
   • Cost incurred on advertisement is added to the cost of the final product and it establishes a connection between advertisement and final product.

6. Above discussed View of Hon’ble Bombay High Court was upheld in the case of M/s CCE, Nagpur Vs. Ultratech Cement Limited. Hon’ble Bombay High Court held that where input service is integrally connected with manufacturing of final product and cost of Input service forms part of cost of final product then credit with respect to such input service shall be allowed.
7. Relying on above mentioned judgements, the Applicant contended that expense incurred on promotional items is an integral part of business and it tantamount to use of such goods in business or furtherance of business. Therefore, same qualifies as “Input” under CGST Act, 2017 and the applicant is entitled to claim ITC on same under Section 16 of CGST Act.
8. As per Section 17(5)(h) of CGST Act, 2017, no ITC is available with respect to goods distributed by way of gift or free samples.
9. However, The applicant contented that he has not transferred title in such goods to its distributors. Also, goods are not sent on a Free of Cost basis rather the same are sent with an obligation of promoting the brand of the applicant. Distributors are not allowed to use them for personal purposes.
10. In case of gift distribution, there is no further obligation on the part of the recipient of the gift. However, in the given case, distributors have obligations vide agency/dealership agreement.
11. Promotional Items are sent under cover of delivery challan and not tax invoice. Further, expense on promotional items is a kind of advertisement expense. Therefore, same is qualified as “Input” under CGST Act.
12. Also, sending promotional items to the distributors is neither a “supply” nor there is a gift. Therefore, provision of Section 17(5)(h) of CGST Act shall not apply at all.
13. Therefore, expenditure on promotional items is considered as “Input” under CGST Act and ITC shall be available on the same.
14. With respect to other items such as carry bags, pamphlets etc. the applicant has taken the same view that he has not transferred ownership in goods to the distributors and the same is used for promoting the brand. Therefore, same is qualified as “Input” under CGST Act and ITC is available on same.

5. Solution: Analysis by Hon’ble AAR

Hon’ble Authority of Advance ruling discussed following points:

Hon’ble AAR has divided all promotional items in following 2 categories:

1. Non-Distributable Goods: Goods which are delivered to the distributors, franchisees and relatails but they remain in ownership of the applicant and are used at distributor’s location e.g. outdoor hoarding etc.
2. Distributable Goods: Goods which are sent to the distributors, franchisees and retailers on Free of Cost basis and same in turn are given to the employees or customer without charging any cost. E.g. Carry Bag

5.1 ITC on Non-Distributable Goods

With respect to Non-Distributable Goods, Hon’ble AAR discussed following points:

1. These goods remain in ownership of the applicant and physically lies at the place of Distributors. However, these are returnable items. It emerges following 2 scenarios:
   • Goods are returned back to the applicant and same are either destroyed or take in the further use; or
   • Goods are not returned to the applicant and are eventually written off.

2. In case of non-distributable goods, in all the scenarios, the applicant is capitalising such goods in his books of accounts and claiming depreciation on the same till the date of disposal. 
3. Definition of “Input” excludes capital Goods. In the given case, such goods are capitalised in books of accounts. Therefore, they can’t be treated as “Inputs”.
4. Further, as per Section 17(5)(h) of CGST Act, 2017, no ITC is admissible for goods lost, destroyed, written off or disposed off by the way of gift or free sample. The Non-distributable items are used by the applicant for the purpose of business, however, the same is written off or destroyed at the end of usage period. Therefore, the applicant is required to reverse ITC claims with respect to non-distributable items as per Rule 43 of CGST Rules, 2017.

5.2 ITC on Distributable Items

1. Distributable items are used for business Promotion. These items are distributed free of cost and no consideration is received for the same.
2. Since transfer is carried out without any consideration, Schedule I of CGST Act, 2017 should be referred to check whether such transaction is still qualified as “Supply”.
3. Further, treatment on Free samples and gifts is given by CBIC vide Circular No. 92/11/2019-GST Dated 7th March, 2019.
4. As per Entry No. 3 of Schedule III, supply of goods between related party is considered as supply even if the same is made without consideration. In the given case, distributable items are transferred to following two categories:
   • Franchisees (Exclusive Showrooms)
   • Other shops/retailers (all brand stores)
5. As per Section 15(5)(c) of CGST Act, 2017, “persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.”
6. In the given case, Franchisees and the applicant are associated in the business of one another. Therefore, franchises and the applicant are related party as per Section 15(5)(c) of CGST Act.
7. Accordingly, any supply of distribution items to Franchisees shall be considered as supply vide Entry No. 3 of Schedule I of CGST Act. Therefore, the applicant is liable to pay GST on distribution items sent to the Franchisees without any consideration and also eligible to claim the corresponding ITC.
8. Goods distributed to the retailers, shall not be considered as supply as transfer is made without any consideration and retailers are not related party. As per Circular No. 92/11/2019-GST dated 7th March, 2019, such transfer shall be considered as “Gift” and the applicant shall not be entitled to claim ITC on the same.

6. Conclusion

Matter decided by Hon’ble AAR is as follows: