AAR Karnataka – ITC Eligibility on Goods given as Incentives to Dealers

• The Applicant is registered under GST in the State of Karnataka and engaged in the manufacturing of cement
• The Applicant is offering various target/ performance-based sale promotion schemes to achieve sales target. Under these schemes, the dealers are credited with the discount amount on achieving targets. Based on the credit lying in dealer’s account, the Applicant distributes gold coins or white goods (‘the Goods’) worth the total discount amount
• The Applicant contended that the Goods given to the dealers are part of promotional schemes and are a contractual obligation. Accordingly, the same cannot be termed as gift or transfer of business assets and thus they are eligible to avail Input Tax Credit (‘ITC’) on purchase of the Goods

1. Whether the transaction can be termed as “goods disposed of by way of gift” and ITC on the same would be restricted as provided under the Section 17(5)(h) of the Central Goods and Services Tax Act, 2017 (‘the CGST Act’)?
2. Whether the said transaction can be termed as “permanent transfer or disposal of business assets where ITC has been availed on such assets” and would be treated as a supply even if made without consideration as per entry 1 of schedule I of the CGST Act?

• The Applicant’s promotional and incentive schemes involve supplying the Goods to dealers as rewards for achieving specified targets, according to a predetermined arrangement. The quantity of the Goods given under the scheme is based on achieving these targets and as per terms and conditions of the scheme documents
• A gift is something which is given without any conditions and stipulations. Hence, the transaction cannot be covered under the scope of “Gift’ and the ITC is not restricted under Section 17(5)(h) of the CGST Act
• Achievement of marketing targets set by the Applicant is an inducement from the dealer or in other words non-monetary consideration paid by the dealers for supply of the Goods. Since the transfer of the Goods from Applicant to the dealers is made for a consideration, it is covered under the definition of ‘supply’.
• Even, if the same is not covered under the term ‘consideration’, the Goods are permanently transferred to the dealers and ITC has been availed on such goods
• According to entry 1 of the Schedule I of the CGST Act, “permanent transfer or disposal of business assets where ITC has been availed on such assets” would include the activity of distribution of the Goods as incentive and hence would be treated as a supply of the Goods as per clause (c) of Section 7(1) of the CGST Act.