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PJ/Case Law/2020-2021/3570

Issues regarding availability of ITC
Moksh Agarbatti Co. GUJ/GAAR/R/14/2019 dated 23/08/2019
Brief Facts:-The Applicant is engaged in the business of manufacturing various types of incense sticks.
Issue: - 1.Certain questions were raised before the authority w.r.t availability of Input                      Tax credit?
  • inputs used in manufacture of Dhoop or procured from third party vendor, which is given free of cost along with supply of Agarbatti?
  • As a part of sales promotion, pressure cooker given to distributors?
  • one free unit of Agarbatti given to customers to encourage purchase of full carton?
  • premium paid on insurance / maintenance of motor vehicles used for transport of director and employees
2. Whether supply of pressure cooker would amount to supply of goods to the         distributor?
Applicant Contention: -The applicant contended that in order to increase sales and to survive in the competitive world, they offers freebies and gifts to distributors / end customers. The applicant also contended that the restriction imposed by sec 17 (5) (h) is not applicable in this case due to certain reasons which are as follows-
‒ Dhoop is offered free of cost instead of reducing the price of Agarbatti. Further, there is a direct link between the Agarbatti purchased and Dhoop offered free of cost. Therefore, ITC on Dhoop should be available, irrespective of whether these are manufactured or purchased from a third party.
‒target based non-monetary discounts are not fresh supplies but are obligations arising out of a predetermined commitment and are promotional schemes floated in advance. Hence, these are not gifts, but contractual obligations and accordingly credit should be allowed on the same. Further, such products given to dealers do not amount to supply as such offerings do not involve any fresh consideration. Non-monetary discounts have a lasting impact as compared to monetary discounts.
‒one unit of Agarbatti is given free in order to encourage purchase of full carton boxes. Further, it helps in saving cost of packing material and other admin overhead costs are avoided;
‒section 17(5)(a) does not restrict credit on car insurance / servicing charges. Further, the premium paid on motor vehicle is not expressly disallowed and there is an obligation under the law which does not permit usage of motor vehicle unless insurance is obtained. Expenses incurred are used in relation to business, the credit of the same should be available to the applicant.
 
 
Reasoning of the Judgement: -The Authority ruled that no ITC would be available in all the three cases as mentioned above owing to the restriction provided u/s 17(5)(h) of the Act. The AAR considered this sales promotion campaign as gift/free samples without looking into the aspects of gifts/incentives given to buyer on some condition or fulfilment of some obligation
The Authority also states in their judgement that after analysing the provisions of section 17(5)(a) and 17(5)(h) of the CGST Act, 2017 the contentions of the applicant are rejected.
Held: -The Authority for Advance Ruling has held that the Input Tax credit shall not be available to the Applicant as per the restrictions imposed by Sec 17(5)(h) and  also in case of insurance and maintenance charges paid for the motor vehicle in terms of section 17(5)(a) of the CGST Act, 2017.
Comment: - The Authority did not comment on the question as to whether supply of pressure cooker qualified as supply of goods to the distributor; since the issue of ITC in case of promotional schemes has been a matter of dispute and is critical to examine each such schemes framed by businesses to determine the taxability and availability of ITC.
AAR has been very choosy in giving their opinion on matters under consideration. Moreover, an indepth analysis of the contentions by the applicant may change the ruling in favour of assessee.
 
 
 Prepared By- CA Kartik Singhvi
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Query

 
PRADEEP JAIN, F.C.A.

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Address :
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Phone No. :
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E-mail :pradeep@capradeepjain.com