#GSTCase-107-Eligibility of Input Tax credit on Incentives given in kind to Distributors treated as “Gift”-Whether Circular No. 8/2005 Dated 29th August 2005 by CBDT brings in a different perspective
Surfa Coats (India) (P.) Ltd.  110 taxmann.com 204 (AAR – KARNATAKA)
Whether the applicant is eligible to claim the GST Input tax credit on gift items purchased for furtherance of business?
The manufactured paints are marketed through their sales offices spread across in Southern and Western India. The applicant frames incentive schemes, depending on the market conditions, to motivate dealers to lift their products. The titles of the schemes read as Painters Schemes, Dealers Incentive Schemes, Gold Schemes, Foreign and Local Trip Schemes etc. The incentives are given subject to fulfilment of terms laid down in each such scheme. The incentive, once computed in terms of above schemes, is given mostly in kind. The applicant purchases TVs, Refrigerators, Washing machines, Mixers, Wet Grinders, Watches, Mobiles, Gold Coins, Bed Sheets, Rice bags, T-Shirts, Rain Coats, etc., for distribution to Painters and dealers in connection with the above said incentive schemes. Various Schemes offered by applicant were:
- Painter Scheme: To capture each of the painter’s purchase, in general, every company introduces paint scheme. Whenever paint is marketed through a painter then details of such painter is tracked through a scheme called “Painter Scheme”. Once in a given period, the points accumulated by each of the painters are computed and compensated them suitably (according to their liftings) by way of giving them promotional items as indicated above.
- Gold Scheme: The applicant also explained that they also have a Gold Scheme in which gold is given to dealers once the scheme is over as per actual sale in terms of targets fixed. The quantum of gold is specified in the incentive scheme in line with actual sales done by the dealers.
- Foreign Trips: The applicant also offers foreign and local trip schemes as incentives, for which they procure various tax suffered services.
- Observation by AAR:
Goods and services so procured and disposed off/distributed as incentives/gifts are disposed without any consideration and hence do not qualify to be a supply in terms of Section 7 of the CGST Act. Further no GST is being paid on disposal of the said gift items.
Section 17(5)(h) of CGST Act 2017 does not allow credit on any goods disposed by way of gift or free samples, whether or not in the course or furtherance of business. It is an admitted fact that the applicant herein purchases the items to be disposed as gifts under various incentive schemes to dealers/painters etc. Therefore, the applicant is not entitled to avail ITC on such items.
Circular No.92/11/2019-GST dated 07.03.2019, issued by CBIC, Para (A)(ii) clarifies that “input tax- credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration” In the instant case the applicant offers free foreign / local trips, as incentives, to the dealers / painters etc., are without any consideration and therefore ITC is not available on the services procured (input services), for offering aforesaid services of free trips, is not available to the applicant.
The applicant is not eligible to avail input tax credit on the inward supplies of goods and services which are attributable to the incentives provided in the form of gifts of goods and services to the painters and dealers and other persons under the CGST / SGST / IGST Act.
The critical issue herein is what is meant by Gift and whether goods given to the person achieving a target is actually a gift or not. Whether achieving a target against a scheme framed by the company lacks consideration and whether it is appropriate to treat the same as gift? Although this issue would have a long list of litigation to its credit, but it seems that clarification by CBDT on the erstwhile Provisions of Fringe Benefit Tax under the Income Tax Act, might throw a light that why such incentives are not “Gift” nor “sales promotion” but a selling cost.
One similar issue came under the Income Tax Act, 1961 wherein Gift were treated as part of Fringe Benefits. Section 115WB was introduced in the Income Tax Act, which detailed out what is meant by “Fringe Benefits” for levy of tax on Fringe Benefits under Chapter XII-H. CBDT in the given context then issued a Circular No. 8/2005, dated 29-8-2005 for the purpose of what is covered by Fringe Benefits and what’s not covered. The circular also covered the aspect of “Gifts”. The relevant entries for the purpose of coverage of the issue being discussed are as under:
(D) sales promotion including publicity but excluding specified expenditure on advertisement;
The relevant Questions on the Scope of Gifts were as follows:
Whether expenditure on gifts under trade schemes or for promotion of company’s products to distributors/retailers is liable to FBT?
- Ordinarily, a gift is defined as anything given or presented without consideration. Therefore, expenditure on gifts under trade schemes or for promotion of company’s products to distributors/retailers, falls within the scope of the provisions of clause (O) of sub-section (2) of section 115WB and, accordingly, is liable to FBT.
Does a gift to customer fall under sales promotion or gift?
- In terms of the rules of interpretation of a statute, a specific provision in law overrides a general provision. Therefore, a gift to a customer, even though for the purposes of sales promotion, would fall within the scope of the specific provision of clause (O) of sub-section (2) of section 115WB relating to gift.
Whether expenditure incurred on gifts provided to employees, on the occasion of marriage, liable to FBT?
- Any expenditure incurred on gifts provided to employees, whether on the occasion of marriage or otherwise, falls within the scope of clause (O) of sub-section (2) of section 115WB and, accordingly, is liable to FBT.
Although Question 97 provided that expenditure for promotion of company’s products is gift but differentiated it from incentive linked with meeting of Targets in Question 61. Question 61 clarified the scope why incentives linked with meeting targets are selling costs and why it does not fall under the scope of sales promotion. Although the question did not specifically provide that these expenditures are also not covered as gift but on a larger perspective provided that such expenditures are not Liable to FBT. Thereby indirectly clarifying, that such expenses also do not fall under the purview of “Gifts” as well.
Whether expenditure on incentives given to distributors for meeting quantity targets (including free goods for achieving certain sales target like, 100 free televisions for achieving a target sale of 10,000 televisions and cash incentives adjustable against future supplies) is liable to FBT?
- Incentives given to distributors for meeting sales targets (including free goods given as incentive to distributors for achieving certain sales and cash incentives adjustable against future supplies) are in the nature of performance-based commission. Such performance-based commission is in the nature of ordinary selling cost. Therefore, expenditure incurred for the purpose of providing incentives given to distributors for meeting sales targets (including free goods for achieving certain sales target and cash incentives adjustable against future supplies) do not fall within the scope of clause (D) of sub-section (2) of section 115WB and, therefore, not liable to FBT.
The circular thus differentiates between a “Gift”, “Sales Promotion Expenditure” and a “Selling Cost”.
Conclusion: The applicability of Circular might itself be challenged but IT does seem to suggest otherwise than what has been held by AAR. In the hindsight, it can be argued that target linked incentives are not devoid of consideration and non-compliance of any of the terms of conditions subsequent to achievement of the targets can be enforced through a Court of Law.