ITC not available on distribution of promotional items - High Court

 This is to update you about an important decision by Hon’ble Madras High Court (‘HC’/’Court’) in the case of ARS Steel and Alloy International Private Limited, WP No 31,33 & 35 of 2024. The court held that Input Tax Credit (ITC’) shall not be allowed on:

 

1.              Gold coins and t-shirts distributed as sales promotion activities

2.              Stock variation found at the time of inspection

 

Facts of the case

 

·            The Petitioner is a manufacturer and exporter of steel products. It distributed ‘gold coins’ and ‘T-shirts’ to their customers as sales promotion activity.

 

·            The Department rejected ITC on such gold coins and t-shirts.

 

·            The Authorities conducted stock audit and found some variation between actual stock and stock reflected in books of accounts. Hence, the Department sought reversal of ITC w.r.t. such stock variation.

 

·            The Petitioner contended that goods were distributed to acquire the customer in furtherance of business and therefore, ITC should be allowed. Regarding stock variation, it was contended that the stock was not counted properly, in accordance with principles of stock audit.

 

HC Decision

 

·            The Hon’ble HC held that GST law is clear in denying ITC on goods distributed by way of gift under Section 17(5)(h) of CGST Act. Hence, ITC cannot be allowed.

 

·            Further, regarding ITC on stock variation, the Court observed that the Petitioner has not made out their case for eligibility and hence, demand of ITC reversal cannot be interfered with.

 

 | Remarks

 

·            The decision of High Court is a timely reminder to taxpayer to keep their ITC balance always reconciled with actual stock. In fact, it is advisable that stock audits must be conducted by a Chartered Accountant or a Cost Accountant in regular intervals.

 

·            Further, stock variation is a question of fact and thus, we believe that the Petitioner should have waited for GST Tribunal before going to High Court.

 

·            For ITC restriction on gifts, the Court has followed the letter of the law without going into the fact whether it can be treated as ‘gifts’ or not.

 

·            Now a days, taxpayers have started offering gifts in form of services like tour packages etc. to avoid the rigour of Section 17(5)(h) of CGST Act.