Availability of ITC for expenses incurred towards promotional schemes

Nature of business of Sanofi India Ltd.

1. Sanofi India Limited in India is engaged in business of sale of pharmaceutical goods and services through group entities. Sanofi has its head office in Mumbai and manufacturing unit at Goa and Ankleshwar. Sanofi also gets its products manufactured through Third party manufacturers who manufacture goods on Contract manufacturing basis. Further, Sanofi provides

taxable services and is registered under GST.

Sanofi in its business operations incurs various marketing and distribution expenses with a view to promote their brand/products and enhance its sales. Under various schemes, Sanofi distributes different products among its trade 'channels as promotional items or brand reminders. Further, Sanofi also offers various promotional schemes such as Shubh Labh trade loyalty programme, etc. In case of brand reminders products like pens, notepads, key chains, etc., are distributed for the distributors with their name embossed on it. The brand embossed on these products serve as an advertisement tool and is a brand reminder. Such products act as 'reminders of the association with the brand Sanofi so as to promote products of Sanofi. In case of Shubh Labh trade loyalty programme, the distributors/wholesalers get rewards based on the reward points earned on the basis of the quantity of goods sold by them.

2. Questions

(1)		Whether input tax credit is available of the GST paid on expenses incurred towards promotional schemes of Shubh Labh Loyalty Programme?
(2)		Whether input tax credit is available of the GST paid on expenses incurred towards promotional scheme goods given as brand reminders?

GST key provisions

3.(a)Section 2(59) of the CGST Act, 2017 – "input" means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business; (b)Section 2(60) of the CGST Act, 2017 – "input service" means any service used or intended to be used by a supplier in the course or furtherance of business; (c) As per Section 16(1) of the said Act – "Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person "Thus, credit is available for input tax paid on goods which are used for the furtherance of business. However, as per Section 17(5)(h) of the CGST Act, 2017, "input tax credit shall not be available in respect of the following, namely: goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples." As per the above provision, credit is not available for goods which are given as gifts and free samples.

4. Case Analysis

(1)		As mentioned above, in the case of brand reminders, products like pens, notepad, key chains, etc., are distributed to the distributors and doctors. The said products are embossed with Sanofi brand. The brand embossed on this product serves as an advertisement tool and is a brand reminder. Such goods act as a reminder of the association with the brand Sanofi so as to promote sales.
(2)		As per the provisions of the CGST Act as highlighted above, every registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.
(3)		In the present case, the brand reminders are provided to the wholesalers in furtherance of business so as to promote Sanofi brand and its products. Thus, ITC should be allowed of ~ the GST paid on procurement of such products which are given to wholesalers as brand reminders. However, Section 17(5) of the CGST Act covers gifts for the purpose of ineligible credit.
(4)		On a plain reading of the aforesaid provisions it can reasonably be concluded that ITC has to be reversed with respect to any goods disposed of by way of gifts or free samples. However, it is important that the ambit and scope of "gifts" are understood properly.
(5)		'Gift' has not been defined under the CGST Act. Hence, reference will have to be made to other statutes and the jurisprudence available on the same. Gift, as per the Gift-Tax Act (18 of 1858), has been defined to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money's worth.
(6)		The Australian High Court in the case of Commissioner of Taxation (Cth) v. McPhail[1968] 41 ALJR 346 held that to constitute a "gift" the property should be transferred voluntarily and not as a result of a contractual obligation. In this case a person agreed to give a donation to a school in return of school charging less fees for the education of the child of said person. Hence, the Court held that such donation cannot be termed as "gift" as it was made under a contractual obligation wherein school was required to charge lower fees against the donation made.
(7)		In light of the above, one can reasonably conclude that to constitute a "gift" following elements are required to be satisfied:

(a)		Supply must be made without any contractual obligation. If any supply is made under a contractual obligation it cannot be termed as a 'gift'.
(b)		Supply must be made without any consideration in money or money's worth.

		Hence, supplies made out of love and affection or such other non- legal considerations can only be termed as 'gifts'.
(8)		Based on above, it is important to understand whether the brand reminders given by Sanofi free of cost to its wholesalers can be considered as a gifts and, thus, ITC of GST paid on the said products will be disallowed.
(9)		As we have noted before, it is a settled law that "A "gift" is a gratuity and an act of generosity". Given Indian traditions, Diwali gifts should more or less qualify as a 'gifts' within that definition and, thus, necessitate credit reversal. However, the company may often give out various kinds of articles like diaries, pen sets, calendars, paperweights, injection boxes, etc., embossed with the bold logo of its brand name/product name so that the recipient remembers the brand of the company. Such articles would typically be low-cost articles which bear the name of the company and are purely for the promotion of its product/brand. Clearly, giving of such articles cannot be said to be 'a gratuity' or 'an act of generosity' and to that extent, input credit vis-a-vis such expenses, it can be argued, does not need to be reversed.
(10)		The Company is of the view that the products distributed to its wholesalers are for their brand and, are in furtherance of business and, thus, ITC of the GST paid on such products should beavailable.
(11)		The Oxford dictionary has defined the term "promotion" as an activity that supports or encourages a cause, venture or aim, the publicizing of a product, organization "of venture so as to increase sales or public awareness. Further, the term "furtherance" is defined as the advancement of a scheme or interest. In context of the term "furtherance of business" it means advancement of business of the company.
(12)		The meaning of supply made in course or furtherance of business given in the FAQ on GST released by CBEC says – No definition or test as to whether the activity is in the course of furtherance of business has been specified under the CGST Act.
(13)		Further, in case of Shubh Labh Loyalty programme, as mentioned above, the distributors/wholesaler get promotional items based on the reward points earned on the basis of goods sold by them. Thus, they have earned such reward points on the basis of the target achieved by them.
(14)		In the example provided above, the wholesaler who has earned 24,000 points will be eligible for claiming Raymond Weil 2760-St3-50001 Watch -For Men. The said points are earned on the basis of quantity of the Sanofi products sold by the wholesaler. Thus, the rewards in the form of watch given to the wholesaler is on achieving a particular target as per the scheme and is not in the nature of gift. In fact, the wholesaler has earned the said watch on the basis of the sales target achieved.
(15)		Based on the above, it can be concluded that in case of the Shubh Labh Scheme, the watch given to the wholesaler is not a gift as the watch is given under the contractual obligation under the scheme. It is the consideration for achieving a particular sales target and, hence, input tax credit on purchase of the said watch should be available to Sanofi. Further, the said expenditure is incurred in furtherance of business so as to increase the sales.

First Argument: Whether input tax credit is available on the GST paid on expenses incurred towards promotional schemes of Shubh Labh Loyalty Programme?

5. Reply - It is observed that applicant and its group entities are suppliers of Pharmaceutical goods and services. Under Shub Labh Trade Royalty Programme, the applicant claims that they offer free Singapore Trip or Raymond Weil Watch, as the case may be, to their wholesalers on selling a pre-determined quantity of their pharma-product and the said predetermined quantity is accounted for by way of reward points. In this way, there is not dispute about the fact that applicant does not charge any price or value for the said free supply in terms of free Singapore Trip or Raymond Weil Watch, as the case may be. Therefore, the said free supply is not taxable and chargeable to any GST in terms of Section 9 of the CGST Act, 2017. The said supply merits as "exempt supply"in terms of provisions of Section 2(47), read with Section 2(78) and, therefore, any ITC is not available on the same in terms of, inter alia,provisions of Section 17(2) of the CGST Act, 2017. Further, provisions of Section 17(5)(h) specifically disallow availment and usage of any credit on goods disposed of by way of 'gift! notwithstanding anything whatsoever in sub section (1) of Section (16). Therefore, the question of availment of ITC, on the basis that subject gift were used in furtherance of their business, does not arise.

In the instant case, under Shubh Labh Loyalty Programme, gifts like watches or reward points are given as incentives and there is no extra commercial consideration and, hence, since there is no commercial value assigned to the transaction it is to be construed to be a Gifts. The applicants themselves have submitted that for anything to be considered as gifts, there should not be any contractual obligation or involvement of consideration. In the instant case the applicant gives free goods to wholesalers without any involvement of consideration nor is there any written contractual agreement between the company and the wholesaler. Hence, the same is to be considered as Gift. The loyalty programme is given voluntarily by the Company and there is no consideration involved in the transaction. Hence, it falls in the definition of Gift.

The applicant has contended that subject free supplies have been made in pursuance of their business. However, the fact remains that the same have been made free of cost and, therefore, the same are non-taxable under Section 9, read with Section 2(78) and merit exempted supply under Section 2(47). Further, there is no provision under Section 15 to include the cost of such free supplies in the value of taxable free samples in terms Section 15. There cannot be any dispute that the said supplies are exempted, hence, credit is not allowed in terms of Section 17(2). Further, gifts have to be disallowed in terms of Section 17(5)(h) notwithstanding the fact that the subject supply has been used in course of furtherance of business in terms of Section 16(1). The provisions of Section 17(5)(h) are applicable notwithstanding the provisions of Section 16(1). Therefore, the applicant is not eligible for the ITC.

Second Argument:Whether input tax credit is available of the GST paid on expenses incurred towards promotional goods given as brand reminders?

6. Reply - It is observed that applicant and its group entities are suppliers of Pharmaceutical goods and services. Under promotional goods given as brand reminders, the applicant distributes the products like pens, notepads, key chains, etc., to the distributors and doctors. The said products are embossed with Sanofi brand. In this way, there is not dispute about the fact that applicant does not charge any price or value for the said free supply in terms of free pens, notepads, key chains, etc., as the case may be. Therefore, the said free supply is not taxable and chargeable to any GST in terms of Section 9 of the CGST Act, 2017. The said supply merits as 'exempt supply' in terms of provisions of Section 2(47), read with Section 2(78) and, therefore, any ITC is not available on the same in terms of, inter alia, provisions of Section 17(2) of the CGST Act, 2017. Further, provisions of Section 17(5)(h) specifically disallow availment and usage of any credit on goods disposed of by way of 'gift' notwithstanding anything whatsoever in sub-section (1) of Section (16). Therefore, the question of availing of ITC, on the basis that subject gift were used in furtherance of their business, does not arise.

In the instant case under promotional goods given as brand reminders, products like pens, notepads, key chains, etc., are distributed to the distributors and doctors. The said products are embossed with Sanofi brand are given as incentives and there is no extra commercial consideration and, hence, since there is no commercial value assigned to the transaction, it is to be construed to be Gift.

In the present scenario we will try to understand the word 'gift' in the common parlance as it is also used in the present day. There are several schemes advertised in the market by business houses which promise to give 'assured gifts' to their customers. For eg., In the city of Mumbai and its suburbs, various builders had floated advertisements stating that the first x numbers of buyers of flats in their residential construction projects would be given a car/100gms Gold coins, etc. Similarly, malls in Mumbai also offer assured gifts on purchase above certain amounts by their customers. Hence,in the present context the word 'gift' has an enlarged scope according to us and has its own colour. In all such cases, as in the present case, the statement that promotional goods, in this case, will be given to distributors/wholesalers who satisfy certain conditions is nothing but the assurance of giving away gifts on those conditions being achieved by the customers. At the least we can say that the condition put forth by the applicant to avail of or participate in this scheme is nothing but is a measure of particular kind of promotional items, meaning thereby that if wholesaler sells more products then he will be eligible for more reward points and further eligible for big offers such as Singapore Trip of 5 D/6 Days instead of Raymond Watch.

Under the GST laws the intention for non-granting/denial of setoff is envisaged in situations where there is no tax on output supply. In cases where the goods are procured with levy of input tax and are supplied without tax being paid on such output supplies, the scheme of the GST Act provides no input tax credit, except export.

Further, under Section 17(5), no ITC on any goods can be availed, if they are given as gifts, whether or not in course of furtherance of business. As a corollary, if it is considered that gifts have some commercial consideration, then GST shall be paid at the time of giving away or disposal of the same and in such cases, only ITC will be available To sum up, ITC on "gifts" will not be available when no GST is being paid on their disposal. Just because the applicant submits that they have satisfied Section 16 (1) of the CGST Act 2017 does not mean that they are entitled to credit since Section 17(5) starts with "Notwithstanding anything contained in sub-section (1) of Section 16……..". The implication is that in the subject case even if it seems, as per the applicant, that Section 16 (1) is applicable in their case and allows them credit, Section 17(5) shall block such credits.

Conclusion

7.Since both the arguments involved a common point of determination, hence, taken together for decision in this proceeding as below:

Taking into account applicant's contention that the subject free supplies have been made in pursuance of their business, jurisdictional officer submits that the fact remains that the same have been made free of cost and, therefore, the same are non-taxable under Section 9, read with Section 2(78) and merits to be treated as exempt supply under Section 2(47). Further, there are no provisions under Section 15 to include the cost of such free supplies in the value of taxable free samples. There cannot be any dispute that the said supplies are exempted, hence, credit is not allowable in terms of Section 17(2). Further, gifts have to be disallowed in terms of Section 17(5)(h), notwithstanding the fact that the subject supply has been used in course of furtherance of business in terms of Section 16(1). The provisions of Section 17(5) (h) are applicable notwithstanding the provisions of Section 16(1). Therefore, the applicant is not eligible for the ITC as the promotional products/services to be distributed as mentioned above, are not inputs and, hence, GST paid on such a purchase does not qualify to be an input tax for the purpose of Section 16(1), read with Section 2(62) of the CGST Act 2017.

We find that the applicant has floated the subject scheme for the period from 2018 to Jan 2019 only, by way of which reward points which are linked with different products to be given to those customers who lifted certain quantity of Pharmaceutical goods. The basic condition is to purchase a certain quantity of products and sale thereof. Thus, it is seen that only those specific customers who fulfil the conditions would be able to avail of the benefit of the subject scheme of "Shubh Labh Loyalty Program". The applicant has submitted that the said products procured for the distribution to the wholesalers are inputs for them and GST levied on such purchases qualifies to be an input tax for the purpose of Section 16(1), read with Section 2(62) of the CGST Act.

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

We will first discuss whether the different promotional products in the present case can be treated as a gifts or not.. The word "gift" has not been defined in the CGST Act. However, the Gift-Tax Act (18 of 1858) has defined the word gift to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money's worth. It is seen from the definition that the transfer, i.e., the gift given in such a case has to be voluntary. The applicant has submitted that they have a contractual arrangement with the customer wherein if he purchases certain amount of company's product and uploads details of information by customer login on the companies prepared software on the website wherein specific terms and conditions are mentioned for the participation in the Subha Labha Loyalty scheme, then he will be said to have accepted the terms and conditions and is entitled to a promotional products on the basis of reward points attributed on monthly/quarterly/yearly basis. A contractual arrangement implies especially in view of the magnitude and area of the applicant's business that it should also be agreed by the customer in writing to such scheme floated by the applicant. We find that they have not submitted any such contract/agreement and in support of their contention, but they have only submitted a scheme of Shubh labh Loyalty is available on companies website and interested customers can Login with details to avail of the benefit of scheme from 2018 to Jan, 2019. Hence, we find that the promotional products are not given to their customers under any contractual obligation and are voluntarily given on certain conditions achieved by their customers. Applicant is not eligible for ITC.