Pharmaceutical company denied input tax credit under Section 17(5)(h) for importing free drug samples for clinical trials

AAR Maharashtra ruled that the applicant cannot claim input tax credit on IGST paid for importing sample drugs supplied free to hospitals/clinics for clinical trials. The authority held that since sample drugs are provided without consideration under DCGI license conditions, they constitute free samples under Section 17(5)(h) of CGST Act. Consequently, ITC is denied on IGST paid directly by applicant, IGST paid by logistics provider under DDP model where applicant remains importer on record, and CGST paid on customs house agent and logistics services related to such free sample supplies.

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The core legal questions considered by the Authority for Advance Ruling (AAR) Maharashtra in this matter are:

(a) Whether the Applicant is entitled to claim input tax credit (ITC) of Integrated Goods and Services Tax (IGST) paid on import of sample drugs under section 3(7) of the Customs Tariff Act, 1975 read with section 5(1) of the IGST Act, 2017, as per section 16(1) of the CGST ActRs.

(b) Whether the Applicant can claim ITC of IGST paid by the logistics service provider under the Delivered Duty Paid (DDP) model of shipment, where the Applicant is the importer on record, under the same statutory provisionsRs.

(c) Whether the Applicant is entitled to claim ITC of Central Goods and Services Tax (CGST) paid for services of Customs House Agent (CHA) engaged for customs clearance, under section 16(1) of the CGST ActRs.

Issue-wise Detailed Analysis

1. Eligibility of ITC on IGST paid on import of sample drugs by the Applicant (Question 1)

Legal Framework and Precedents: The IGST Act (Section 5(1)) mandates payment of IGST on import of goods, which is deemed an inter-state supply under Section 7(2). Section 20 of the IGST Act applies provisions of the CGST Act mutatis mutandis for input tax credit on integrated tax. Section 16(1) of the CGST Act entitles a registered person to take credit of input tax charged on goods or services used or intended to be used in the course or furtherance of business. Definitions of "goods," "services," and "business" under Sections 2(52), 2(102), and 2(17) of the CGST Act respectively, indicate a wide ambit for eligibility of ITC.

Precedents cited by the Applicant include rulings by various Advance Ruling Authorities and Tribunals recognizing ITC eligibility on IGST paid on imported goods used in business, including clinical trial inputs and testing materials. Notably, rulings such as KARDEX INDIA STORAGE SOLUTION and UMAX PACKAGING supported eligibility of ITC on IGST paid on imports used in furtherance of business.

Court's Interpretation and Reasoning: The Applicant argued that the imported sample drugs are used in the course or furtherance of its taxable business of clinical trial management services. The Applicant is the licensed importer under DCGI and coordinates supply of these drugs to hospitals/clinics conducting trials. The Applicant contended that the IGST paid on import is therefore eligible as input tax credit under Section 16(1).

The jurisdictional officer, however, relied on Section 17(5)(h) of the CGST Act which disallows ITC on goods disposed of as free samples or gifts, and on CBIC Circular No. 92/11/2019 clarifying that free samples supplied without consideration do not constitute "supply" under GST and ITC is not available on such goods. The officer emphasized that the sample drugs are supplied free of cost to hospitals/clinics and no commercial invoice or consideration is involved. The license under DCGI also does not permit supply of sample drugs for consideration.

The AAR noted that Section 17(5) is a non-obstante clause overriding Section 16(1), and specifically excludes ITC on goods disposed of as free samples. The drugs imported and supplied free of cost fall within this exclusion. Hence, despite the wide scope of Section 16(1), the statutory bar under Section 17(5)(h) applies.

Key Evidence and Findings: The Applicant's import documents, bills of entry, and license from DCGI were examined. The fact that sample drugs are delivered free of cost to hospitals/clinics without any consideration was undisputed. The CBIC Circular and relevant judicial precedents on free samples and gifts were considered authoritative.

Application of Law to Facts: The IGST paid on import of sample drugs, which are supplied free of cost and do not constitute a "supply" under GST law, cannot be claimed as ITC by the Applicant. The nexus between input and output is negated by the statutory bar on ITC for free samples under Section 17(5)(h).

Treatment of Competing Arguments: The Applicant's argument on wide interpretation of Section 16(1) and reliance on precedents allowing ITC on inputs used in business was weighed against the express statutory exclusion in Section 17(5)(h) and CBIC Circular. The AAR gave precedence to the specific bar on ITC for free samples over the general entitlement under Section 16(1).

Conclusion: The Applicant is not entitled to ITC of IGST paid on import of sample drugs supplied free of cost to hospitals/clinics.

2. Eligibility of ITC on IGST paid by logistics service provider under DDP model (Question 2)

Legal Framework and Precedents: The DDP model involves the logistics service provider paying customs duties including IGST on behalf of the Applicant, who remains the importer on record as per DCGI license. The legal provisions regarding ITC eligibility remain the same as in Question 1.

Court's Interpretation and Reasoning: The Applicant contended that since it is the importer on record and the imported sample drugs are used in furtherance of its taxable business, ITC of IGST paid by the logistics service provider should be available.

The jurisdictional officer considered the facts incomplete and treated the question as hypothetical. However, the AAR applied the same reasoning as for Question 1, emphasizing that the sample drugs are supplied free of cost and fall within the exclusion under Section 17(5)(h).

Key Evidence and Findings: The bills of entry filed by the logistics service provider, payment of IGST by them, and the Applicant's status as importer on record were considered. The nature of supply as free of cost was undisputed.

Application of Law to Facts: The statutory bar on ITC for free samples applies regardless of who pays the IGST. The Applicant's status as importer on record does not confer ITC entitlement when goods are disposed of as free samples.

Treatment of Competing Arguments: The Applicant's reliance on import status and business use was outweighed by the express exclusion in Section 17(5)(h) and CBIC Circular.

Conclusion: The Applicant is not entitled to ITC of IGST paid by the logistics service provider under the DDP model.

3. Eligibility of ITC on CGST paid on Customs House Agent (CHA) services (Question 3)

Legal Framework and Precedents: Section 16(1) of the CGST Act allows ITC on input services used in the course or furtherance of business. CHA services are taxable services under Section 7 read with Section 9 of the CGST Act. Earlier CENVAT Credit Rules permitted credit on CHA services. Judicial precedents such as KEMWELL BIOPHARMA and CHAMUNDI TEXTILES recognized credit on CHA services.

Court's Interpretation and Reasoning: The Applicant argued that CHA services are availed for customs clearance of imported sample drugs used in furtherance of business and hence ITC is eligible.

The jurisdictional officer contended that since the sample drugs are supplied free of cost and thus treated as free samples, ITC on services used for disposal of such goods is also barred under Section 17(5)(h). The AAR agreed with the officer, observing that input services directly related to disposal of goods as free samples are also ineligible for ITC.

Key Evidence and Findings: The CHA invoices, GST payments, and the linkage of CHA services to import and clearance of free sample drugs were examined. The CBIC Circular and rulings on ITC denial on services related to non-taxable or free supplies were considered.

Application of Law to Facts: Since the underlying goods are free samples, ITC on CHA services used for their clearance is also disallowed under Section 17(5)(h). The rationale is that ITC is not available on inputs or input services used for non-supply or exempt supplies.

Treatment of Competing Arguments: The Applicant's argument on business use and prior CENVAT credit regime was considered but found overridden by the specific bar in Section 17(5)(h) and CBIC Circular clarifications.

Conclusion: The Applicant is not entitled to ITC of CGST paid on CHA services for clearance of sample drugs supplied as free samples.

Significant Holdings

The Authority for Advance Ruling held as follows:

"Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely :- (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples."

"Samples which are supplied free of cost, without any consideration, do not qualify as 'supply' under GST, except where the activity falls within the ambit of Schedule I of the said Act. Accordingly, 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."

"Since the drugs supplied to hospitals are without consideration and acquire the colour of free sample or gift, any input services provided in respect of such disposal of goods would also be covered by the provisions of section 17 (5) (h). Therefore, input tax credit in respect of the tax paid on CHA services or logistic services availed would not be available."

The final determinations on each issue are:

1. The Applicant is not entitled to take credit of IGST paid on import of sample drugs supplied free of cost to hospitals/clinics.

2. The Applicant is not entitled to take credit of IGST paid by the logistics service provider under the DDP model where the Applicant is importer on record.

3. The Applicant is not entitled to take credit of CGST paid on Customs House Agent services used for clearance of such sample drugs.

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