REFERENCE is invited to the Circular 92/11/2019-GST in terms of which CBIC has issued clarification on various doubts related to treatment of sales promotion schemes under GST.
2. With regard to free samples and gifts, paras A (i) and (ii) of the said circular read as under:
A. Free Samples and gifts
(i). It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. As per subclause (a) of sub-section (1) of section 7 of the said Act, the expression "supply" includes 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. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as 'supply' under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that 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.
(ii). Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that 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. However, where the activity of distribution of gifts or free samples falls within the scope of 'supply' on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC."
In this regard, it needs to be pointed out that the word ‘goods' used in sections 16 and 17 of the CGST Act 2017 invariably refers to the goods on which ITC is to be allowed or disallowed. In other words, the word "goods" in these sections does not refer to the final product, (i.e. the goods or services manufactured or produced by using the "goods" referred to in the said sections as inputs).
This is evident from the underlined expressions used in these sections as illustrated below:
"16(i) 1) 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.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-
(b) he has received the goods or services or both.
Thus it is evident that the words "goods' or "in respect of goods" used in section 16 ibid refer to goods on which (or in respect of which) ITC is to be allowed/not allowed.
Similarly, in section 17 ibid the words "goods" or "in respect of the goods" refer to the goods on which ITC is to be allowed or not allowed as is evident from the following underlined expressions used in the said section:
S. 17(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act …..
(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:-
(b) the following supply of goods or services or both-
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
(f) goods or services or both received by a non-resident taxable person except on goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
As is evident, the expressions "goods" or "in respect of goods" used in section 17 ibid refer only to goods on which ITC is to be allowed or disallowed.
3. From the foregoing, there remains no doubt that the word "goods" used in section 17(5)(h) refers only to the goods on which credit is taken (and not to the (final) product which comes into existence by use thereof as inputs). Thus in the context of the captioned circular, the only possible interpretation of the said clause (h) is that ITC on the "goods" shall not be available if the same are disposed of as free samples or gifts. In other words, clause (h) does not disallow ITC on goods merely because they have been used as inputs for the final products which are cleared as free samples and gifts (i.e. as non-supply).
4. In view of the foregoing analysis, CBIC's clarification as contained in para A(ii) of the captioned circular is not legally correct and warrants correction.