No ITC on Gift of Gold Coins to customer at end of Scheme : AAR

RULING

(Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

1. The Present application has been filed under section 97 of the Central Goods and Services Tax Act 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as ”the CGST Act and MGST Act”] by BIOSTADT INDIA LIMITED, the applicant seeking an advance ruling in respect of the following questions.

1.1. The question or issue before Your Honor for determination is whether 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?

1.2. The question or issue before Your Honor is not restricted to the said scheme only. The applicant notifies schemes with similar conditions periodically. So whether the ITC can be claimed in all such similar schemes.

At the outset we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act/MGST Act would be mentioned as being under the “GST Act”.

2. FACTS AND CONTENTION – AS PER THE APPLICANT

The submissions, as reproduced verbatim, could be seen thus-

STATEMENT OF THE RELEVANT FACTS HAVING A BEARING ON THE QUESTION(S) ON WHICH THE ADVANCE RULING IS SOUGHT

“1. This Application is being filed by M/s. Biostadt India Limited (‘the Applicant’/the Company’). The Applicant, having Good and Service Tax (GST’) Registration No. 27AACCB1830G123 is inter alia engaged in the business of developing, manufacturing and distributing crop protection chemicals and hybrid seeds.

2 Biostadt India Limited has been serving the farming community for over three decades. The company provides a helping hand to the farmers by providing them with top-of-the-line agricultural inputs and services.

3. Over a period of time, the applicant has diversified into a range of seaweed-based biotechnological inputs using fermentation technology, under the well-known brand ‘Biozyme’. They also deal in crop protection chemicals – insecticides and pesticides and has made its foray in hybrid seeds market.

4. The manufacturing facilities of the applicant are multi-locational and are very well-equipped with state-of-the-art technology and testing equipment which produce quality products.

5. In order to ensure availability of various products and services, the applicant has extensive network which includes 3 mother depots, 22 stock points and a network of more than 2000 distributors and above 25000 retailers across the country. Such a closely held network of distributors and retailers has constantly helped the company in achieving their long-term vision

6. It is a well proven fact that the channel of distribution plays a pivotal role in achieving the marketing objectives of the company. In order to achieve sales and marketing objectives, the applicant has launched various target based – sales incentive schemes for their distributors and retailers (customers). These schemes help the customers to be motivated to achieve a specified target and in turn helps the company to achieve their targets.

7. The applicant has PAN-India presence and has operations spread out in more than 15 states. The Applicant was erstwhile registered under Central Excise law, Service tax legislation and respective state Value Added Tax laws and now is registered under Good and Service Tax (GST).

8. This Application is being filed by M/s. Biostadt India Limited which inter-alia has launched a new sales promotion scheme namely the “Kharif Gold Scheme 2018” for their customers. The said sales promotion scheme helps the company in achieving their sales and collection targets.

9. The terms and conditions of the scheme are as under:

10. The above mentioned scheme is in force. The applicant will be procuring gold coins from jewelers which are to be distributed at the end of the scheme. As per notification 1/2018 – CGST (Rate) dtd. 28.06.2017, gold is leviable to GST at the rate of 3 percent.

11. The applicant intends to maximize their sales and minimize their outstanding collection through the operation of “Kharif Gold Scheme 2018”.

Statement of relevant facts having a bearing on the question(s) raised.

1. ISSUE FOR DETERMINATION

1.1 The question or issue before Your Honor for determination is whether 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?

1.2 The question or issue before Your Honor is not restricted to the said scheme only. The applicant notifies schemes with similar conditions periodically. So whether the ITC can be claimed in all such similar schemes.

STATEMENT CONAINING THE APPLICANTS INTERPRETATION OF LAW AND/OR FACTS, AS THE CASE MAY BE, IN RESPECT OF THE QUESTION(S) ON WHICH THE ADVANCE RULING IS SOUGHT

2 .SUBMISSIONS OF THE APPLICANT

The applicant submits the following in their support:

2.1 Section 16(1) of CGST Act states that every registered person, subject to such conditions and restrictions as may be prescribed and in manner specified, shall be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of business.

2.2. Section 16(1) is an empowering section which creates a vested right upon the registered person to claim credit of input tax on goods or services or both procured by him provided they are used or intended to be used in the course or furtherance of his business.

2.3. Following are the important limbs to the qualifying section 16(1):

• Registered Person:

Section 2(94) of the CGST Act states that registered person means a person registered under Section 25 of the CGST Act.

As stated earlier, the applicant is registered under the GST law.

Input Tax:

Input tax as defined under section 2(62) of the CGST Act includes CGST, respective SGST and UTGST, IGST and so on.

Section 2(63) of the CGST Act defines Input tax credit as the credit of input tax.

Inputs is defined under Section 2(59) of the CGST Act to mean any goods other than capital goods which are used or intended to be used by a supplier in course or furtherance of business.

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.

In course or furtherance of business:

The notable requirement under Section 16(1) of the CGST Act is that the credit of input tax claimed on a supply of goods or services should be used in course or furtherance of the business. While the term business is defined under CGST act, the phrase “in course or furtherance of business” is not defined in the law.

Dictionary meaning of the term “furtherance” implies advancement, promotion of scheme, etc. Therefore furtherance of business would imply advancement of business, promotion of business. Any activity carried on with a purpose to achieve business objectives, business principles, business continuity and stability would per se amount to an activity in course or furtherance of business.

The applicant has launched Kharif Gold scheme with an intention to maximize the sales and collections of the company. The scheme so implemented grants an advantage to the applicant over other competitors in the market. These schemes ensure brand loyalty and market loyalty which are the important aspects of any business. Hence it would be reasonable to conclude that the scheme launched by the applicant is “in course or further of applicant’s business”.

2.4. Section 16(2) of the CGST Act provides for conditions which need to be satisfied for claiming 1TC on supply of goods or services or both. These conditions are with respect to possession of tax invoice, receipt of goods, payment of tax and filing of returns.

The applicant contends that he has satisfied the conditions as laid down in Section 16(2) and is eligible to claim ITC on purchase of gold coins.

2.5. In accordance with the above paras, applicant strongly feels that he is eligible to claim ITC on procurement of gold coins as the requirements of Section 16(1) and 16(2) have been fulfilled. The only criteria that’s need to be evaluated is the restrictions laid down in Section 17 which provides for apportionment of credits and blocked credits.

2.6. Section 17(5) of the CGST Act provides for blocked credits. Section 17(5) contains a non-obstante clause with respect to Section 16(1) of the CGST Act. Hence if any of the clause under Section 17(5) is satisfied then ITC shall be specifically disallowed even if it was eligible at the first stage i.e. under Section 16(1).

2.7. The applicant reproduces the relevant extracts of Section 17(5) as under:

“17(5) – Notwithstanding anything contained in subsection (1) of section 76 and sub-section (1) of section 18, input tax credit shall not be available in respect of’ the following namely:

2.8 In a plain reading of aforesaid provisions, one may reasonably conclude that ITC needs to be reversed in respect of gold coins which are disposed of by way of gifts or free samples. However it is imperative to understand the ambit of term “gifts”.

2.9. The term gift is not defined under CGST Act. Hence reference needs to be made to other statutes or jurisprudence available on the same.

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.

The Honorable Supreme Court cited the definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in the case of Sonia Bhatia v. State of UP [1981] 2 SCC 585) as follows:

“A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. A ‘gift’ is a gratuity and an act of generosity and does not require a consideration, but there can be none; if there is a consideration for the transaction, it is not a gift.”

2.10. On the basis of above jurisprudence, one can reasonable conclude that gift is a gratuity and does not require any consideration. If a consideration is attached to a transaction, then it cannot be termed as a gift. Emotional consideration such as love, affection, etc. may be attached to a gift but there cannot be a monetary consideration to a gift.

It may also be noted that gift cannot arise out of a contractual obligation. If a supply is made under a contractual obligation then it cannot be termed as gift.

Supplies made out of non-legal considerations such as love, affection, etc. can only be termed as gifts.

2.11. The applicant has launched a sales promotion scheme. These sales linked scheme are 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.

2.12. The applicant strongly contends that the gold coins distributed to customers at the end of scheme period cannot be qualified as “gift”. Since they cannot be qualified as gift, disallowance under Section 17(5) will not be attracted. Hence, the applicant should be entitled to claim ITC of gold coins purchased for effective implementation of the scheme.

3. PRAYER

In light of the above, a Ruling is sought from the Honorable Authority on eligibility of ITC on procurement of gold coins for distribution to customers under the sales promotion scheme.

Kharif Gold Scheme 201 8

Scheme Period June to Aug 2018

Terms & Conditions:

THE CENTRAL GOODS AND SERVICE TAX ACT (CGST), 2017

Relevant provisions under CGST Act, 2017:

1. inputs [Section 2(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.

2. Input Tax [Section 2(62)]:

“Input tax” in relation to a registered person, means the central tax. State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes

3. Input Tax Credit (Section 2(63))

“Input tax credit” means the credit of input tax

4. Registered Person (Section 2(94):

“Registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number;

5. Eligibility for taking input tax credit (Section 16(1):

6. Conditions for taking input tax credit (Section 16(2):

7. Blocked credits (‘Section 17(51))

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 the following, namely:

Explanation.—For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes —

THE GIFT TAX ACT, 1958

Relevant provisions under the Gift Tax Act, 1958:

1. Gift (Section 2(xii)):

“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;

[Explanation.-A transfer of any building or part hereof referral to in clause (iii), clause (iiia) or clause (iiib) of section 27 of the Income tax Act, by the person who is deemed under the said clause to be the owner thereof made voluntarily and without consideration in money or money’s worth, shall be deemed to be a gift made by such person;]

Additional submissions dated 19.11.2018

We reiterate our submissions dated 23.08.2018, 10.09.2018 & in the course of preliminary hearing wherein we sought ruling on admissibility of input tax credit of tax paid on purchase of gold coins for our sales incentive scheme.

Without prejudice to written submissions dated 23.08.2018, we further submit that:

• Tax paid on purchase of Gold coins qualifies as Input Tax:

• Gold coins not given away as gift:

Considering the above conditions, we earnestly request your good offices to consider our application for allowability of Input Tax Credit on gold coins distributed as per terms and conditions of a scheme.

• Value of Gold coins is not to be included in the value of goods:

Hence reading Section 15 in conjunction with Section 2(31) it is abundantly clear that value of coin distributed as per terms of a scheme are not to be included in value of goods.

Without prejudice to the above submissions, we would place on record that the application has been filed for ruling on allowability of Input Tax Credit and not the valuation.

We hereby fervently pray your good office to take cognizance of the above referred submissions and submissions dated 29.08.2018 & 10.09.2018 and accord much awaited justice to law abiding taxpayer.

3. CONTENTION – AS PER THE CONCERNED OFFICER

The submission, as reproduced verbatim, could be seen thus-

It is submitted that, Issue on which advance ruling is required:

Reference Application No:72 Dated 23.8.2018

1. Annexure-II contains ‘Issues for Determination’. This office offers no comments.

Para 2.1: No comments,

Para 2.2: No comments.

Para 2.3 & Para 2.4 :

4. HEARING

The Preliminary hearing in the matter was held on 18.09.2018, Sh. Parag Mehta, C.A. along with Sh. Jinesh Shah, C.A. and Sh. Prashant Nagar, manager appeared and requested for admission of application as per details in their application. During hearing Jurisdictional Officer Sh. Vivek Anand Assistant Commissioner, Division-VIII, CGST & C. Ex., Mumbai Central GST Commissionerate appeared and stated that they would making submissions in due course.

The application was admitted and called for final hearing on 11.12.2018, Sh. Parag Mehta, C.A. along with Sh. Jinesh Shah, C.A. and Sh. Prashant Nagar, manager appeared made oral and written submissions. The Jurisdictional Officer Sh. Vivek Anand Assistant Commissioner, Division-VIII, CGST & C. Ex., Mumbai Central GST Commissionerate appeared made written submissions.

5. OBSERVATIONS

We have gone through the facts of the case. The issue put before us is in respect of a future transaction which would be on the lines thus —

The applicant is 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 jewelers and since gold is leviable to GST at the rate of 3 per cent 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 them 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 jurisdictional officer has also made submissions and has opined that the ‘Gold coins’ to be distributed as mentioned above, are not inputs and hence, GST paid on such a purchase does not qualify to bean input tax for the purpose of Section 16(1) read with Section 2(62) of the CGST Act, 2017 (hereinafter referred to as ‘the Act’). It has been submitted that the gold coins are not inputs because the said Distribution of gold coins is not in line with the basic business model, the gold coins are not essential for continuity in supply and the distribution of gold coins are not concerned with the making of taxable supply for consideration unless the distribution is looked as a hidden discount.

We find that the applicant has floated the subject scheme for the period June, 2018 to August, 2018 only, by way of which gold coins of different denominations would be given to those customers who lifted a certain quantity of products or made a certain amount of payment. Thus it is seen that it is only those specific customers who fulfil the conditions would be able to avail the benefit of the subject scheme. The applicant has submitted that the said Gold coins are inputs for them 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.

We find that the provisions of ITC are governed by Sections 16 and 17 of the CGST Act, 2017. In order to avail ITC, two basic provisions need to be complied with, i.e. Section 16 and Section 17. 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 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.

We will therefore first discuss whether the gold coins in the subject case can be treated as a gift or not. 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. The applicant has submitted that they have 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. A contractual arrangement implies especially in view of the magnitude and area of the applicant’s business that, it should also be agreed by the customer in writing to such scheme floated by the applicant. We find that they have not submitted any such contract/agreement and in support of their contention, as Exhibit ‘A’ they have only submitted a brochure/writeup/invitation with the heading Kharif Gold Scheme 2018. Hence we find that the gold coins are not given to their customers under any contractual obligation and are voluntarily given on certain conditions achieved by their customers.

In the present scenario we will try to understand the word ‘gift’ in the common parlance as it is also used in the present day. There are several schemes advertised in the market by business houses which promise to give ‘assured gifts’ to their customers, for e.g. In the city of Mumbai and its suburbs various builders had floated advertisements stating that the first x numbers of buyers of flats in their residential construction projects would be give a car/100gms. Gold coins, etc. Similarly malls in Mumbai also offer assured gifts on purchase above certain amounts by their customers. Hence in the present context the word ‘gift’ has an enlarged scope according to us and has its own colour. In all such cases, as in the present case, the statement that goods, in this case gold coins, will be given to customers who satisfy certain conditions is nothing but assurance of giving away gifts on those conditions being achieved by the customers. Under the GST laws the intention for non-granting/denial of set off is envisaged in situations where there is no tax on output supply. In cases where the goods are procured with levy of input tax and are supplied without tax being paid on such output supplies, the scheme of the GST Act provides no input tax credit, except export.

Schedule I to the CGST Act, 2017 deals with activities to be treated as supply even if made without consideration. As per Entry Number 2 to Schedule I (2), 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.

The above provisions and Section 17(5)(h) stipulate that any goods disposed off, by way of gift are not eligible for ITC and that even if supply is in course or furtherance of business between related or distinct persons, it shall be considered as supply except to the extent of fifty thousand rupees in a financial year, when given by an employer to its employee.

Further under Section 17(5), no ITC on any goods can be availed, if they are given as gifts, whether or not in course of furtherance of business. As a corollary if it is considered that gifts have some commercial consideration, then GST shall be paid at the time of giving away of disposal of the same and in such cases only ITC will be available. A “gift” is normally seen as an enticement to customers as in the subject case which would bear heavily on the customers in making purchase of particular quantities and above or in making payments of certain values and above. This act on behalf of the applicant if it is not excluded from the scope of being a supply, then the provisions of the Valuation Rules come into play. Thus in such cases it can safely be assumed that the purchase value and output supply value of the ‘gift’ shall be the same and therefore the ITC would be the same as the output GST payable. In other words if the giver of the gift does not pay output tax on the same then the compensation to the department would be the foregoing of the ITC on such gifts.

In the instant case it is seen that the applicant has assigned a value to the gold coins to be given as gifts and the value is Rs. 3,200/- per gm. They have not explained as to how they have arrived the value because value of gold changes everyday. Secondly the Scheme announced by them states that “customers who lifted the products as per the scheme and made payments as per the scheme are invited for the meeting.

We now deal with one of the contention of the applicant that they have a contractual arrangement with the customer wherein if the distributor 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. This can be inferred as if the distributor of the applicant is providing services of increased sale for which consideration is in the form of a gold coin. As per Section 7 of the CGST Act, disposal, or the case may be, barter, made or agreed to be made for a consideration in the course or furtherance of business is supply liable to tax. We find in the present application, the applicant has not shown proof of payment of output tax. The only conclusion that can be drawn in the present case is that the distribution of gold coins by the applicant is not but gifts and hence the transaction is covered by the provisions of Section 17(5) of the Act.

To sum up 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.

In view of all above deliberations, the questions can be answered thus –

6. In view of the extensive deliberations as held hereinabove, we pass an order as follows :

ORDER

(Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

For reasons as discussed in the body of the order, the questions are answered thus –

Question :- The question or issue before Your Honor for determination is whether 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?

Answer :- In view of the discussions made above the applicant cannot claim ITC on procurement of Gold coins which are to be distributed to the customers

Question :- The question or issue before Your Honor is not restricted to the said scheme only. The applicant notifies schemes with similar conditions periodically. So whether the ITC can be claimed in all such similar schemes.

Answer:- Answered in the negative in view of answer to Q. No. 1 above.