In a recent ruling, the Madras High court has ruled that the Input Tax Credit ( ITC ) is not available under the Goods and Services Tax ( GST ) for the goods purchased for the sales promotion activities. Justice C. Saravanan noted that jurisprudence under the Central Excise Act, 1944, or other earlier tax enactments, does not influence the interpretation of GST provisions.
The Karnataka and Telangana Advance Rulings further supported this interpretation, though they apply only in personam under Section 98(4) of the GST Act. The petitioner, ARS Steels and Alloy International Private Limited challenged the denial of input tax credit availed on goods viz., “Gold Coins” and “T-shirts” purchased by the petitioner for sales promotion of the goods manufactured by the petitioner for the respective Assessment Years. Complete Draft Replies of GST ITC Related Notices, Click Here
The counsel appeared for the petitioner submitted that he sales promotional activity are in relation to the business activity and therefore in terms of Section 16(1) of the respective GST Enactments, the petitioner was entitled to take “Input Tax Credit” charged on the supply of both goods or services or both which were used or intended to be used in the course or furtherance of the business. It was also stated that sales promotional activities have been acknowledged by authorities under both the Tamil Nadu Value Added Tax (TNVAT) Act, 2006, and the Central Excise ( CE ) Act, 1944. Moreover, this position has been firmly established through numerous decisions of the Supreme Court of India.
Thus, it was pleaded that the denial of ITC on the tax paid on Gold Coins and T-shirts which were offered to intermediate dealers/retail dealers to promote the sales of products of the petitioner ought to have been allowed and ought not to have been disallowed. Complete Draft Replies of GST ITC Related Notices, Click Here On the contrary, the government counsel submitted that although Section 16(1) of the CGST Act, 2017 allows an Assessee to avail Input Tax Credit, it is subject to Limitation under Section 17(5) of CGST Act, 2017. It also drew attention to the Section 17(5)(h) of CGST Act, where there is a specific ban on the assessee from availing the ITC not only goods lost but also stolen, destroyed, written off or disposed of by way of gift or free samples. It was therefore submitted that the question of petitioner having unfettered right to avail ITC on solitary reading of Section 16(1) of the CGST Act, 2017 is incorrect. Apart from the earlier submission, the counsel of the department also added that that restriction under Section 17(5) of CGST Act, 2017 particularly in Section 17(5)(h) stares at the petitioner and therefore the Impugned Order which upheld the Order passed earlier on 29.11.2019 insofar as denial of Input Tax Credit on the sales promotional activity is liable to be upheld. Complete Draft Replies of GST ITC Related Notices, Click Here The bench noted that under Section 16(1) of the GST enactments, an assessee is entitled to claim credit for input tax paid on goods or services used or intended for business purposes. This credit is reflected in the Electronic Credit Ledger, subject to prescribed conditions and restrictions under Section 49. However, Section 17(5) of the GST enactments imposes exceptions, including restrictions on apportionment and blocked credits, overriding Section 16(1) and Section 18(1).
The court observed that Section 17(5)(h) of GST Act specifically prohibits ITC on goods lost, stolen, destroyed, written off, or disposed of as gifts or free samples. This restriction applies uniformly to all goods, whether manufactured or traded. The petitioner’s claim for ITC on T-shirts and gold coins used in sales promotional activities falls under this embargo, stated the bench. The Section 17(5)(h) of CGST/TNGST Act is as follows : “(1) ….. (2) ….. (3) ….. (4) ….. (5)Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:— …… (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”
The court provided the clarity of Section 17(5)(h) of the GST Acts, which explicitly disallows ITC for items disposed of as gifts or free samples, regardless of their use in promotional activities. Consequently, the petitioner’s claim for ITC on T-shirts and gold coins was found untenable under the law. The writ petitions were dismissed accordingly.