GST Caselaw

#GSTCase-108-Making Peace with Section 17(5)(h)- Whether Free services as “gift” attract reversal of Input Tax Credit under Section 17(5)(h)?

#GSTCase-108-Making Peace with Section 17(5)(h)- Whether Free services as “gift” attract reversal of Input Tax Credit under Section 17(5)(h)?

 

Surfa Coats (India) (P.) Ltd. [2019] 110 taxmann.com 204 (AAR – KARNATAKA)

 

In the given matter free foreign / local trips were provided as incentives, to dealers / painters etc. AAR held that the above services have been given as “gift” and are without any consideration and therefore ITC on the services procured (input services), for offering aforesaid services of free trips, is not available to the applicant.

Yesterday’s post discussed whether at all goods or services distributed on the achievement of target-based incentive can be treated as a “gift” within the meaning of Section 17(5)(h) of CGST Act, 2017. Link to the Article is 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

Today’s article carries an alternative argument, starts with a premise that provision of Foreign Trips/Local Trips on achievement of Target Based Incentive is a “gift” and whether provision of services without consideration (other than applicability of Schedule I) would fall under Reversal of Input Tax Credit under Section 17(5)(h) of CGST Act, 2017.

 

  1. Section 16(1) of the CGST Act 2017

Section 16(1) of the CGST Act, 2017 provides that a person would be entitled to take credit of input tax charged on any supply of goods or services or both provided such supplies are used or intended to be used in the course or furtherance of his business. Therefore, if the primary condition of supplies being used or intended to be used in the course or furtherance of business is satisfied, a person would be entitled for Input Tax Credit subject to fulfilment of other conditions as prescribed under the law.

 

  1. Conditions as prescribed under Section 17(5): Overrides Section 16(1)

On a conjunctive reading of the provisions of Section 17(5)(h) and Section 16(1), we find that the provisions of Section 17(5)(h) override the provisions of section 16(1). Thus, any credit of input tax although eligible under the provisions of section 16(1) would be disallowed by virtue of provisions of section 17(5)(h). However, if the inward supply would not have been in the course or furtherance of business, then such entitlement would itself have been rejected by virtue of provisions of section 16(1) and there would have been no requirement to apply provisions of section 17(5)(h).

 

  1. Provisions of Section 17(5)(h) of CGST Act, 2017-

 

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

 

The provision covers following instances for the purpose of reversal of Input Tax Credit:

  • goods lost,
  • goods stolen,
  • goods destroyed,
  • goods written off or
  • goods disposed of by way of gift or
  • goods disposed by off free samples

 

  1. Whether provisions of Section 17(5)(h) are applicable on provision of free services or service provided by way of gift

There are many instances in business wherein services are provided without consideration like Free Outstation Trips to customers, Free Movie Tickets to Customers, Free Subscription to a Website to clients etc. Given expenses first need to satisfy the primary condition of Section 16(1) i.e. in the course or furtherance of business. However, moot question is that if the given expenses satisfy conditions as laid down in Section 16(1), whether they are hit by provisions of Section 17(5)(h) of CGST Act, 2017.

On reading provisions of Section 17(5)(h), it is clearly applicable on goods disposed of by way of “gift” or “free samples”. The provision of Section 17(5)(h) are not applicable on services. Just to reflect on the intent of the legislature, when they intended to cover both goods and services they have done so. Reference to provisions of Section 17(5)(g) highlight the given fact wherein it clearly provides that “goods or services or both used for personal consumption;”.

Therefore, when the legislature has referred to only goods in Section 17(5)(h), they are only applicable to Goods and not services. Any services provided without consideration or even as a “gift” subject to satisfaction of provisions of Section 16(1) are not covered by provisions of Section 17(5)(h).

 

Conclusion: There might be an alternative argument to observation of AAR when they hold that free foreign / local trips were provided as incentives, to dealers / painters is hit by provisions of Section 17(5)(h).

It can be argued that Section 17(5)(h) covers only goods and once such target-based incentives satisfy the condition of Section 16(1), then even though such free trips might be treated as a “Gift” but still they would not be hit by provisions of Section 17(5)(h). Further, there are no express provisions under the CGST Act, 2017 other than Section 17(5)(h) which provide for reversal of input tax credit on supplies provided free of cost in the course or furtherance of business but then it only covers goods and not services. There might be provisions of Schedule I but then they are also not applicable on every situation and have limited applicability broadly on transactions between related persons and distinct persons.

Therefore, free foreign / local trips provided as incentives and without consideration to dealers even after being treated as “gift” are not hit not by Section 17(5)(h) and on a broader note only disposal of goods as “gifts” are covered by Section 17(5)(h) and not provision of free services.

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