ITC ELIGIBILITY ON FOC PROMOTIONAL GOODS VS GIFTS

by CA Mayank A Jain

Introduction:

It is a general practice in many industries to distribute carry bag, table calendar, wall calendar, dairy, leather bags, book labels, shirts, pants, sweaters, bags, etc. to its customers, distributors, retailers, employees, etc. Normally, these goods have the details of the brand, their logo, etc printed or embossed on them. The businesses treat this as business promotional expenses and claims input tax credit of GST paid on such goods. However, the GST department is more likely to disallow such ITC on the grounds that these are given free of cost which are to be treated as gifts and ITC on gifts is restricted under section 17(5)(h) of the CGST Act. In this article, the author has tried to examine the issue on ITC eligibility on such FOC promotional goods vis-à-vis gifts.

Relevant GST provision:

• Section 17(5)(h) of the CGST Act restricts ITC in respect of the following:        

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

• Section 16(1) of the CGST Act provides as follows:

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Meaning of used or intended to be used in the course or furtherance of business

Definition of business: Section 2(17) of CGST Act defines the term “business” to include:

“(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);”

The inclusive definition expands the meaning of the words. In the case of CIT v. Taj Mahal Hotel [1971] 82 ITR 44, the Hon. Supreme Court observed as follows:

“The word ‘includes’ is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include“.

As per black law’s dictionary, ‘includes’ means:

Including may, according to context, express an enlargement and have the meaning of and or in addition to, or merely specify a particular thing already included within general words theretofore used.

Meaning of supply in course of business: The meaning of supply made in course or furtherance of business is not defined under the GST law however it has been given in the FAQ on GST released by CBEC. It clarifies as follows:

No definition or test as to whether the activity is in the course of furtherance of business has been specified under the CGST Act. However, the following business test is normally applied to arrive at a conclusion whether a supply has been made in the course or furtherance of business:

a. Is the activity, a serious undertaking earnestly pursued?

b. Is the activity, pursued with reasonable or recognizable continuity?

c. Is the activity, conducted in a regular manner based on sound and recognized business principles?

d. Is the activity, predominantly concerned with the making of taxable supply for consideration/ profit motive?

In summary, what is usually done in the ordinary routine of a business by its management is said to be done in the “course/furtherance of business”.

Meaning of gift:

The term ‘gift’ has not been defined under the GST Law. It has been analysed as under:

1. As per Oxford Dictionary of English is a thing given willingly to someone without payment; a present.
2. Webster’s Third New International Dictionary (Unabridged) where the author defines gift as: “Something that is voluntarily transferred by one person to another without compensation; a voluntary transfer of real or personal property without any consideration or without a valuable consideration- distinguished from sale.
3. Volume 38 of Corpus Juris Secundum states that: A gift is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation or compensation therefore without any consideration or compensation thereof. A gift is a gratuity, and an act of generosity , and not only does not require a consideration but there can be none; if there is consideration for the transaction it not a gift.
4. The Supreme Court cited the definition of ‘gift’ from Corpus from Juris Secundum, Volume , 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 or property by one to another, without any consideration or compensation therefore.
5. In the case of Federal Commissioner of Taxation v. McPHAIL (1968) 117 CLR 111 26 March 1968, the Hon’ble High Court of Australia has provided that to constitute a “gift”, the property should be transferred voluntarily and not as a result of a contractual obligation and no advantage of material character was received by transferor.

“6. But it is, I think, clear that to constitute a “gift”, it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.”

In a press release dated 10.07.2017 issued by the CBIC regarding the taxability of gifts given to employees, the characteristics of gift has been summarised as follows:

“In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift.”

Analysis:

Whether the promotional items are said to be gifts?

‘Gift’ is something which is given out of love affection. There would not be any further obligation even on the part of the person who accepts the gift. However, where promotional goods are given to customers, distributors, retailers, employees, etc., the specific intention is to market and promote the brand and its products in the market. The promotional goods are given with a specific object of marketing and not as a gratitude or a generous act. The ultimate objective is to market and promote the brand, its goods and generating more sales and revenue.

There have been rulings under the erstwhile regime where credit has been held to be eligible:

• In the case of Coca Cola India Pvt Ltd [2009 (242) E.L.T. 168 (Bom.)], it was held that service tax paid on advertisements, sales promotion and market research admissible as credit for payment of excise duty particularly when such expenses form part of price of final product on which excise duty is paid.
• In the case of Coca Cola India Pvt Ltd [2009 (242) E.L.T. 168 (Bom.)], it was held that service tax paid on advertisements, sales promotion and market research admissible as credit for payment of excise duty particularly when such expenses form part of price of final product on which excise duty is paid.
• In the case of SAS and Company [2010 (258) E.L.T. 253 (Tri. – Chennai)], it was held that credit on service provided in relation to advertisement for sales promotion of product is eligible.

These rulings of erstwhile regime could have persuasive value under GST.

Based on the above, in the view of the author, ITC of GST paid on promotion products and marketing materials is not restricted under Section 17(5).

Whether the promotional goods are said to be used in the course or furtherance of business?

Promotional products and marketing materials are activities integrally related to business and used in the business and normally has direct nexus with the revenue of the business. Consequently, such expenses are said to be used in the course or furtherance of business. Even though such goods are not directly forming part of the finished product, ITC could be availed as these are used for smooth running and growth of business and its profitability.

There have been rulings under the erstwhile regime on similar aspect:

• In the case of Coca Cola India Pvt Ltd [2009 (242) ELT 168 (Bom.)], it was held that all and any activity relating to business would be covered under input service provided there is relation between manufacture of concentrate (goods manufactured by the applicant) and such activity.

• In the case of Maruthi Suzuki India Ltd [2017 (49) STR 261 (P&H)], it was discussed that expenditure incurred to promote sales and for efficient running of business was said to be related to business. Hence, assessee was entitled to avail Cenvat credit of Service Tax paid thereon.

• In the case of Escorts Limited [2010 (254) E.L.T. 38 (P & H)], it was held that Inputs/material used in or in relation to manufacture of final products whether directly or indirectly and whether contained in final product or not is eligible for credit. Similarly held by the SC in the case of Escorts Mahle Ltd reported in 2003 (154) ELT 321 (SC).

• Similarly, in the case of Dalmia Cement (Bharat) Ltd [2016 (341) ELT 102 (Mad.)], it was held that goods in respect of which credit is claimed need not necessarily be used in final product. The credit of duty paid on goods used in relation to manufacture of final product allowable.

• In the case of Maruthi Suzuki Ltd [2009 (240) ELT 641 (SC)], it was held as follows:

“14. ………. Moreover, the said expression, viz, “used in or in relation to the manufacture of the final product” in the specific/substantive part of the definition is so wide that it would cover innumerable items as “input” and to avoid such contingency the Legislature has incorporated the inclusive part after the substantive part qualified by the place of use. For example, one of the categories mentioned in the inclusive part is “used as packing material”. Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product.

These rulings of erstwhile regime could have persuasive value under GST.

In the view of the author, promotional goods and marketing items are used in the course or furtherance of business as the intention generally is to increase brand presence, make the brand familiar with the audience and ultimately increase the value of its business in terms of sales, profits and valuation. This is clearly evident from the brand logo/presence on the products. Further, there is a saying that ‘there are no free lunches in the world’, therefore, the cost incurred for these promotional goods is ultimately forming part of billings made to the customers on which applicable GST is already paid. Consequently, denial of ITC would lead to double taxation which is not allowed.

Relevant advance rulings:

The appellate authority of advance ruling, in the case of Page Industries Ltd. [AAAR [2021-TIOL-17-AAAR-GST] held that the promotional products/materials and marketing items used by the Appellant in promoting their brand and marketing their products can he considered as “inputs” as defined in Section 2(59) of the CGST Act, 2017. However, the GST paid on the same cannot be availed as input tax credit in view of the provisions of Section 17(5)(h) of the CGST Act, 2017 as these were held to be gift.

Similarly in the case of Sanofi India Ltd [2019 (26) G.S.T.L. 374 (A.A.R. – GST)] it was held that ITC will not be available on the GST paid in expenses incurred towards promotional expenses as these were nothing but gifts.

In terms of Section 103 of the CGST Act, the advance ruling pronounced would be binding only on

• Applicant who has sought it and
• The concerned officer or jurisdictional officer in respect of the applicant.

However, it is important to understand the implications of the ruling. In the author’s view, the above rulings are not well reasoned and not at all in line with the GST law as the definition of non-taxable supply and true concept of what is said to be “gift” vs sales promotion has not all been examined in detail. Hence, the above rulings should not be considered. Further, since an advance ruling is issued by Joint commissioner and is applicable only to the assessee who has applied for and got the ruling, it has limited persuasive value for other assesses.

Conclusion:

In the view of the author, promotional goods such as carry bag, table calendar, wall calendar, dairy, leather bags, etc. with brand printing, brand presence, is not a gift when given to distributors, customers, retainers, employees, etc. Therefore, ITC on such goods is not restricted under section 17(5)(h). Further, these promotional goods are said to be in the course or furtherance of business as the cost is ultimately incurred for the growth of business and not for charity. In the absence of any branding, ITC may be disputed and lead to litigation. Businesses should take sufficient safeguards while claiming ITC on such promotional goods to optimise the credit with low risk of ITC denial.

In case of any clarifications/doubts, the author may be reached at camayankajain@outlook.com.

This article is a part of Article Writing Competition 2025.