The Authority for Advance Ruling in Karnataka
M/s Page Industries Ltd. v. The Commissioner of Central Tax, Bangalore East Commissionerate, Bengaluru
Advance Ruling No. KAR ADRG 54/2020 | Dated: 15.12.2020
The Applicant is engaged in manufacturing, distributing, and marketing of knitted and woven garments and swimwear. The Applicant has filed an application for Advance Ruling under Section 97 of Central Goods and Services Act (“CGST Act”), 2017 read with Rule 104 of the Central Goods and Services Rules, 2017 (“CGST Rules”) and Section 97 of the Karnataka Goods and Services Act (“KGST Act”), 2017, read with Rule 104 of the Karnataka Goods and Services T Rules, 2017 (“KGST Rules”).
The Applicant has been availing the services of advertisement agencies as well as procuring the promotional products and marketing materials for use in displaying their products.
The Applicant is paying the applicable GST on such goods and services under Section 16 of CGST Act, 2017 as input tax credit (“ITC”). The input services have been defined under Section 2(60) of the CGST Act, 2017.
The Applicant filed the present application to determine the admissibility of ITC on tax paid and pleaded that the promotional items sent to point-of-purchase will qualify as input.
ISSUE BEFORE THE AAR
Whether the promotional products/Materials and Marketing Items in promoting the brand and marketing of products can be considered as “inputs” as defined under Section 2(59) of the CGST Act, 2017 and GST paid on the same can be availed as input tax credit in terms of Section 16 of the CGST Act, 2017?
CONTENTIONS OF THE APPLICANT
The Applicant contended that as per Section 16 of CGST Act, 2017, every registered person, subject to terms and conditions specified in Section 49 of CGST Act, is entitled to avail the same ITC on the GST paid by him on supply of goods and services which are used in the course of business.
The Applicant also contended that Section 16 deals with the eligibility and conditions for taking ITC. The Applicant submitted that the goods used in the course of furtherance of business will qualify as ‘inputs’ as defined under Section 2(59)of CGST Act, 2017 and services will qualify as ‘input services’ as defined in Section 2(60) of CGST Act.
The Applicant further contended that the activities of promoting and marketing product will form an integral part of the business and such goods in business will qualify as input in terms of Section 2(59) of CGST Act, 2017.
That further, the goods used in promoting the brand and marketing of the products will also qualify as input in terms of Section 2(59) of CGST Act, 2017.
For the above submissions, the Applicant relied on decision of the Supreme Court in Mazagon Dock Limited vs. Commissioner of Income Tax and Excess Profit Tax [1958 AIR 861, 1959 SCR 848]wherein the Court examined the scope of word ‘business’ and held as under:
‘business is some real/ substantial and systematic/ organised course of activity of conduct with the set purpose’.
The Applicant also relied on the decision of the Bombay High Court in Coca Cola India Private Limited vs. CCE, Pune- III [2009 (15) STR 657 (Bom.)] wherein the Court interpreted the phrase ‘relating to businesses’ used in the definition of input services as:
‘an integrated activity and is not confined to or restricted to manufacture of the product’.
DECISION AND FINDINGS
The Authority for Advance Ruling (“AAR”) observed that the Applicant is procuring various materials classified as ‘promotional materials’ and is distributing them.
The Applicant is also using some materials like display boards, posters, outdoor hoardings, etc. and these goods remain in the Applicant’s own account. Therefore, these goods need to be treated as capital goods as there is no transfer of ownership of these materials.
The AAR further observed that there are two types of materials concerned; distributable goods and non- distributable goods. ‘Distributable goods’ are those which are delivered free of cost to distributors or retailers for distributing them to their employees and customers. Whereas ‘Non- distributable goods’ are those which are delivered to the distributors or retailers but the ownership lies with the Applicant.
In view of the above, the AAR held that the goods such as display boards, posters, outdoor hoardings, etc. are shown in the account of the Applicant and are not transferred; therefore they are covered under the ambit of Non- Distributable goods. These goods cannot be treated as ‘input’ and are ‘capital goods’ as defined under Section 2(19)of CGST Act, 2017.
Further, the AAR also observed that the taxes paid by the Applicant on supply of these goods or services qualify as Input tax credit.
Also the goods distributed to the distributors can be said to be input goods and the Applicant is entitled to discharge applicable GST on distributable supplies to avail input tax credit.
The goods distributed to the retailers for use cannot be held under Input tax credit as GST paid on such requirement is not allowed as per Section 17(5) of the CGST Act, 2017.
In the present case, the AAR divided the promotion items as distributable and non-distributable items and differentiated the related parties and distributors/ franchises and retailers.
The AAR held that the GST paid on procurement of distributable products distributed to franchise/ distributors is eligible for ITC. The AAR further held that the GST paid, on procurement of products distributed to retailers/ customers and the non- distributable products, is not eligible for ITC.