AAR holds goods distributed under target-based schemes as supply while confirming ITC eligibility

This Tax Alert summarizes a recent ruling of the Karnataka Authority for Advance Ruling (AAR) pertaining to Goods and Services Tax (GST) implication on goods distributed to dealers as part of target-based incentive schemes.

Applicant in the given case is engaged in the business of manufacture of cement. In order to achieve sales and marketing objectives, it launched various target-based promotional schemes wherein it would distribute gold coins and other white goods to its dealers, free of cost, on achieving specified targets laid down in the schemes. Accordingly, it sought advance ruling in respect of ITC admissibility and taxability on goods so distributed. 

The AAR ruled that:

• The goods are issued to dealers subject to fulfilment of pre-agreed conditions and stipulations. Gift is something which is given without any conditions or stipulations and hence, the above transaction cannot be covered under the scope of “goods disposed of by way of gift”. Accordingly, ITC on the same is not restricted under Section 17(5)(h) of the Central Goods and Services Tax Act, 2017 (CGST Act).
  
  
• Achievement of marketing targets set by the applicant is a non-monetary consideration paid by the dealers for the issuance of incentives. Since, such transfer is made for a consideration, the same is covered in the definition of supply as per Section 7 of the CGST Act and hence, taxable.
  
  
• Even if the above transaction is not treated to involve consideration, the same will get covered under Entry 1 of Schedule I to the CGST Act (i.e., permanent transfer or disposal of business asset on which ITC has been availed) and hence, will be treated as supply as per Section 7(1)(c) of the CGST Act.
  

Comments:

• In the past, various AARs have treated goods distributed free of cost under promotional schemes as “gift” and hence, disallowed ITC on the same.
  
  
• AAR’s observation that achievement of marketing targets by the distributor becomes consideration for supply of in-kind incentives by the supplier needs to be legally evaluated.
  
  
• Although the AAR has held that transfer of goods under incentive schemes will be covered under Entry 1 of Schedule I, it is silent on the valuation mechanism to be adopted for such transactions.
  
  
• Even from distributor’s perspective, under the erstwhile service tax regime, there are various judgements to hold that target-based incentive (in the form of rebates, discounts etc.) cannot be treated as consideration for provision of any service by the distributor