Businesses can claim ITC on goods procured for distribution to dealers for achieving sales target: GST AAR

Businesses can claim input tax credit on items, like gold coins and white goods, procured for distribution to dealers upon achieving pre-specified sales targets as part of promotional schemes, a GST advance ruling authority has ruled.

The Karnataka-bench of the AAR (Authority for Advance Ruling) ruled that ITC can be availed on taxes paid for procurement of white goods or gold coins for the purpose of incentive to dealer as it is a supply.

Orient Cement Ltd had approached the AAR seeking ruling in whether ITC can be claimed on distribution of gold coins and white goods to its dealers upon achieving a specified target fixed under the scheme. The company also offers various promotional schemes "Monthly/ Quarterly Quantity Discount Scheme", etc. 

The said sales promotion scheme helps the company in achieving their sales and collection targets.

The AAR noted that the applicant is issuing these gold coins and white goods so procured as incentives as per the agreement reached between himself and the recipients. It is only issued subject to the fulfilment of certain conditions and stipulations. "Gift is something which is given without any conditions and stipulations and hence the same cannot be covered under the scope of 'gift'," it said.

The applicant's obligation to issue gold coins and white goods to the dealers/ customers upon achieving the stipulated lifting of the material/purchase target during the scheme period would not be regarded as "goods disposed of by way of gift" and input tax credit would not be restricted, the AAR said in its order dated August 24.

EY Tax Partner Saurabh Agarwal said in the matter of Orient Cement Ltd, the Advance Ruling Authority of Karnataka has held that the credit on inputs received for promotional expenses, such as distributing of gold coins, Godrej digital safe lockers etc., to dealers should not be categorized as gifts as it is associated with certain conditions and not voluntary. Furthermore, it clarifies that the distribution of promotional materials should be considered a supply, even if done without any consideration, falling under Schedule 1 i.E. Permanent transfer or disposal of business assets when input tax credit has been claimed on those assets.

"This ruling contradicts with previous judgments and industry should awaits further clarification from the GST Council on this matter," Agarwal said.

KPMG Partner and National Head, Indirect Taxes, Abhishek Jain said this ruling upholds distinguishment of target driven promotional products qua gifts and accordingly, allows input tax credit on such gifts.

"Separately, with contrary Advance Rulings (where it has been held as gift and ITC has been disallowed) and different on ground positions by adjudication authorities, the government could consider issuing a proactive clarification on the said issue to avoid unwarranted disputes," Jain added.