AAR Ruling: ITC Eligibility for Promotional Items & Gift

The Authority for Advance Ruling (AAR) determined that promotional items were categorized as non-distributable goods (capital goods) and distributable goods (gifts). For non-distributable goods, the applicant could claim Input Tax Credit (ITC) but must reverse it if written off. Distributable goods given to related parties allowed ITC, as it constituted a taxable supply. However, for unrelated retailers, ITC was not permitted under section 17(5) of the CGST Act, 2017. Additionally, GST on non-distributable goods was eligible for ITC, subject to reversal if lost or destroyed.

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Issues Involved:
1. Whether promotional products/materials and marketing items used by the applicant in promoting their brand and marketing their products can be considered as "inputs" as defined under section 2(59) of the CGST Act, 2017.
2. Whether the GST paid on such promotional products/materials and marketing items can be availed as input tax credit (ITC) in terms of section 16 of the CGST Act, 2017.

Issue-wise Detailed Analysis:

1. Classification of Promotional Products/Materials and Marketing Items as Inputs:

The applicant is engaged in the manufacture, distribution, and marketing of garments and swimwear under specific brand names. To promote their brands and market their products, the applicant procures various promotional products and marketing materials, such as display items, display boards, uniforms, posters, gifts, outdoor hoardings, and carry bags. These items are used at their showrooms and the showrooms of their distributors/dealers. The applicant contends that these items are used in the course or furtherance of their business, thus qualifying as "inputs" under section 2(59) of the CGST Act, 2017.

The term "input" is defined under section 2(59) of the CGST Act, 2017 as any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. The applicant argues that since these promotional items are used to promote their brand and market their products, they fall within this definition.

2. Eligibility to Avail Input Tax Credit (ITC) on Promotional Products/Materials and Marketing Items:

The applicant seeks to determine the admissibility of ITC on the GST paid for these promotional items. Section 16 of the CGST Act, 2017 stipulates that every registered person is entitled to take credit of input tax charged on any supply of goods or services used or intended to be used in the course or furtherance of business. The applicant argues that since these promotional items are used in the course or furtherance of their business, they should be eligible for ITC.

The applicant cites various judicial precedents, including the Supreme Court's interpretation of the term "business" in fiscal statutes, which is of wide import and includes all activities related to the functioning of a business. They also refer to the Bombay High Court's rulings in the cases of Coca Cola India Pvt. Ltd. and Ultratech Cement Ltd., which support the view that activities related to business promotion qualify for ITC.

Findings and Discussion:

The Authority for Advance Ruling (AAR) examined the issues and noted that the promotional items can be categorized into two types: non-distributable goods (items retained by the applicant but used in distributors' premises) and distributable goods (items given free of cost to distributors and customers).

Non-Distributable Goods:

1. These goods remain in the applicant's account and are treated as capital goods.
2. Since they are capitalized in the books of accounts, they do not qualify as "inputs" under section 2(59) of the CGST Act, 2017.
3. The applicant is eligible to claim ITC on these capital goods, but if they are written off, destroyed, or lost, the ITC claimed must be reversed as per Rule 43 of the CGST Rules, 2017.

Distributable Goods:

1. These goods are given free of cost to distributors and customers and are treated as gifts.
2. As per section 17(5)(h) of the CGST Act, 2017, ITC is not available for goods disposed of by way of gift or free samples.
3. For franchisees (related persons), the distribution of these goods is considered a supply under Schedule I of the CGST Act, 2017, making the applicant eligible to claim ITC.
4. For other retailers (unrelated persons), the distribution is not considered a supply, and thus, ITC is not allowed.

Ruling:

1. ITC on GST paid for distributable products given to related parties (franchisees) is allowed as these distributions amount to supply exigible to GST. For unrelated retailers, ITC on GST paid for such products is not allowed as per section 17(5) of the CGST Act, 2017.
2. GST paid on non-distributable products qualifies as capital goods, and the applicant can claim ITC on their procurement. However, if these goods are written off, destroyed, or lost, the ITC claimed must be reversed under section 16 of the CGST Act, 2017, read with Rule 43 of the CGST Rules, 2017.

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