Karnataka Advance Ruling in case of Orient Cements has held that giving Gold Coins, white goods Free of cost to Dealers upon achieving targets, will be considered as Supply of Goods, and accordingly, GST needs to be discharged by the Taxpayer.
In this regards, Summary of Questions and Answers Given by the Authority along with Comprehensive Analysis of Decision is being discussed below (Copy of Order is also attached in the end of article) :
Question & Answers:
1. Whether the applicant obligation to give gold coins, white goods to the dealer upon they achieving stipulated lifting of material/purchases will consider as “goods supplied of by way of gift” and ITC on the same would be restricted under Section 17(5)(h)
2. Whether such activity will falls under “Permanent transfer or disposal of business assets where ITC has been availed on such assets” and accordingly, will be considered as Supply under Schedule-I.
3. Whether such activity will be considered as supply under Section-7
Analysis/Basis of Decision (Our Interpretation of the Decision)
Areas Covered in the Article
c. Discussion about Assessee Submissions
d. Basis of Decision of Authority
A. Brief Facts of the Case
Assessee is in the business of manufacturing of Cement. In order to enhance the sales, he gives incentive on achieving targets by the Dealers as decided by the Assessee. At the end of quarter, instead of giving such incentive in the form of Credit Notes or adjustment from payments, it issues Free Gold Coins, White Goods (equivalent to discount amount) to the Dealers. He purchases such items from market and availed ITC on the same.
B. Discussion about Relevant Legal Concepts
1. Definition of Supply-Section 7:
Scope of supply.—
(1) For the purposes of this Act, the expression ―supply includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;.....
For Supply, Consideration from Recipient to Supplier is an important constituent without which transaction can’t become Supply, except for the transactions covered in Schedule-I.
2. Definition of Consideration-Section 2(31):
(31) ―consideration in relation to the supply of goods or services or both includes–
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:....
From this, it can be inferred that it is not necessary that Consideration should mandatorily be in monetary form. In can either be in the form of inducement also.
3. Transaction Covered under Schedule-I.
1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets...
In this term “Business Assets” needs to be interpreted.
4. Section 17(5)(h) (scenario when ITC is not available)
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
C. Now, we will discuss the Key- submissions of the Assessee
1. Issuance of Free Gold Coins, White Goods do not fall in the definition of Gifts as Gifts means anything being given voluntarily without any contractual obligation. As in instant case, issuance of Free Gold Coins & White Goods is provided out of Contractual Obligation of the Company on fulfilment of Terms and Conditions by the Dealers. Therefore, it can’t be covered into the definition of Gifts. Accordingly, he is not required to reverse the ITC under Section 17(5)(h).
2. Since, this activity is for increasing sale, hence can be termed as Business Promotion. Therefore, he should be allowed ITC on the purchase of such Gold Coins/ White Goods as the same are used for furtherance of business of him in terms of Section 16.
3. Since, there is no consideration is flowing from Dealer to him against issuance of Gold Coins, White Goods and the same is provided Free of Cost to the Dealers, this activity does not cover in the definition of Supply as per Section-7.
4. As per Schedule-I, only Business assets are covered which means assets which are capitalised into Books of Account as Balance Sheet Items. Revenue Expenditure is not covered in the definition of Business Assets.
5. If we cover the inventory also in the definition of Business Assets as per Schedule-I, then every transfer of Goods without consideration even to Un-related Persons will be considered as Supply, thereby making concept of consideration itself redundant.
D. Now, we will discuss the Basis of the Decision
1. It has been agreed that the said transaction is not covered under the definition of Gift, accordingly, he is not required to reversed ITC in terms of Section 17(5)(h).
2. As far as Consideration is concerned, non monetary consideration even in form of inducement is covered. In instance case, achievement of marketing targets set by the Assessee is an inducement from the dealer or in other words non-monetary consideration paid by the Dealers for supply of Gold Coins/White Goods. Accordingly, the said transaction is covered in definition of Supply as per Section-7.
3. Even if considered to be not covered in the definition of consideration, the Term “Asset” includes inventory also. Nowhere, it is mentioned in Schedule-I that it should be capitalised in the Balance Sheet.
Therefore it is “Permanent transfer or disposal of business assets where input tax credit has been availed on such assets”. Accordingly, the same is covered in definition of Supply in terms of Section 7(1)(c) read with Schedule-I.
Therefore, Assessee is required to discharge GST on issuance of Free Gold Coins/White Goods to its Dealer.
Disclaimer: We did interpretation of Respected Authority Decision for purely academic purpose. In case, there is any mistake in understanding of the order, we are apologised to the Authority.