NATIONAL LAW UNIVERSITY, JODHPUR

CRITICAL APPRAISAL OF ACTIVITIES TREATED AS SUPPLY EVEN IF MADE

WITHOUT CONSIDERATION
(Project towards the fulfilment of mid-term in the subject of Indirect Taxation)

Submitted By: Submitted To:

Eva Verma (1881) Dr. Manoj Kumar Singh

Simran Awasthi (1946) Associate Professor

IX- Semester Indirect Taxation

National Law University, Jodhpur

Summer Session
(August-November, 2024)

1
 TABLE OF CONTENTS

Abstract ...................................................................................................................................... 3

Introduction ................................................................................................................................ 4

Concept of supply ...................................................................................................................... 5

Transactions treated as supply even if made without Consideration ......................................... 7

I. Permanent transfer or disposal of business assets........................................................... 7

II. Supply between related persons or between distinct persons, in the course or
furtherance of business ........................................................................................................ 8
1. Meaning of Related Persons: ................................................................................... 8

2. Value of Supply Between Related Persons ............................................................. 9

III. Supply of goods either by a principal to his agent or by an agent to his principal...... 9

IV. Import of services by a taxable person from a related person or from any of his other
establishments outside India, in the course of or furtherance of business ......................... 10
Looming Uncertainty on certain transactions .......................................................................... 12

I. Ambiguity relating to Business assets given as gifts .................................................... 12

II. Free Samples ............................................................................................................. 12

III. Free of cost supplies under various Sales Promotional and marketing schemes ...... 13

IV. gifts provided in order to maintain good relations .................................................... 14

GST Circular on sales promotion schemes: Much Awaited Clarification? ............................. 15

I. Free samples and gifts ................................................................................................... 15

II. Buy One Get One Free Offer .................................................................................... 15

III. Buy More Save More Offers ..................................................................................... 16

IV. Secondary Discounts ................................................................................................. 16

Appraisal of Situation in the wake of the Circular: Misery Continues? .................................. 17

Conclusion and Suggestions .................................................................................................... 19

2
 ABSTRACT

There are many debatable issues under the present Goods & Service Tax Regime, an issue
which has been in the limelight is the issue of taxability and credit eligibility of goods or
services supplied free of cost ‟or as free samples”. A common marketing strategy for
attracting customers is to provide goods/service for free or as sample products especially
in FMCG and pharmaceutical sector. Free supplies under GST regime continues to be an
issue in certain aspects even after the CBIC GST Circular of March 7, 2019,
interspersed with divergent views and consequent litigation in the long run.

It is in this context that we will try to examine and analyze the concept of supply and the
exception to the consideration requirement enshrined under Schedule I of the Act. We will
also delve into the uncertainties regarding free supplies and sample. Further we will
examine circular on scheme pertaining to sales promotional and appraise the challenges
existing in the present regime. We will then conclude the project along with some important
recommendations.

3
 INTRODUCTION

The Goods and Services Tax Act, (GST)1 replaced the previous regime of indirect
taxation in India. Prior to GST, there was multiplicity of indirect taxes which made
compliance very cumbersome for small-scale producers and enterprises. In light of these
problems there was a need to have a unified and integrated system of indirect tax. Thus, the
Goods and Services Tax Act was passed, which provided for a system of taxation that is
comprehensive, multi-stage, destination based and is levied at every value addition.2

Under GST, supply is considered a taxable event for charging tax. The liability to pay
tax arises at the time of supply.3 Thus, determining whether a transaction falls under the
meaning of supply is important in order to decide on the applicability of GST. Usually supply
has to complemented with consideration for the purpose of taxability under the GST Act.
However, there are certain situations under when supply without consideration can be a
taxable event under GST.4 In view of the above, this project will attempt to analyse
the conditions under which supply without consideration can be considered as a taxable
event under the Indian GST Regime in Schedule 1 of the Central Goods and Services
Tax Act, 2017.5 We will also analyze the conditions laid down under the said Schedule, in
which supply without consideration will be a taxable event after which we will proceed to
give our opinion on improvement of the present taxation system to make it more robust.

1
Central Goods and Services Tax Act, 2017.
2
“Goods and Services Tax GST (India)‟ (ClearTax 28 April, 2020) <https://cleartax.in/s/gst-law-goods-and-
services-tax> last accessed on September 6, 2021.
3
Section 12 of the Central Goods and Services Act, 2017.
4
Schedule 1 of the Central Goods and Services Tax Act, 2017.
5
Id.
4
 CONCEPT OF SUPPLY

“The Constitution of India defines GST as any tax on the supply of goods or
services or both.6 Thus, the taxable event in GST is supply of goods or services or both.7
With the introduction of the GST regime, various taxable events such as manufacture, sale,
purchase, rendering of service etc., have been done away in favor of only one event, that
is, supply.8 Thus, understanding the term supply becomes imperative for the purposes of
taxability under GST.

Section 7 of the Central Goods and Services Act, 2017 (CGST Act) provides for the
scope of the term “supply”.9 Section 7(1)(a) of the CGST Act10 states that “all forms of
supply of goods or services or both” which are made “for a consideration by a person in the
course of furtherance of business” will constitute supply.

The term consideration as defined under Section 2(20) of the CGST Act is an
inclusive definition wherein “any payment made or to be made, whether in money or
otherwise, in respect of, in response to, or for the inducement of, the supply of goods and/or
services, whether by the person or by any other person.”11 Further Section 7(1)(c) of the
CGST Act12 clarifies that activities provided under Schedule 1 made or agreed to be made
without consideration will also be considered as supply. In addition to the above, Section
7(1)(b)13 provides that import of services for a consideration regardless of it being in the
course of business is to be considered as supply while activities referred to under Schedule
II14 and Schedule III15 including transactions undertaken by the Central or State Government
or any Local authority is to be included within the meaning of supply.16

The abovementioned authorities will have simultaneous powers to levy GST on intra-
state supply. However, the definition provided in Section 7 is a non-exhaustive definition by

6
Article 366(12A) of the Constitution of India, 1950.
7
GST (Goods and Services Tax) the Meaning and Scope of Supply, Government of India <https://cbic-
gst.gov.in/pdf/e-version-gst-fliers/eflier-meaning-scopeofsupply14062017.pdf> last accessed on September 6, 2021.
8
Id.
9
Section 7 of the Central Goods and Services Tax Act, 2017.
10
Section 7(1)(a) of the Central Goods and Services Tax Act, 2017.
11
Section 2(20) of the Central Goods and Services Tax Act, 2017.
12
Section 7(1)(c) of the Central Goods and Services Tax Act, 2017.
13
Section 7(1)(b) of the Central Goods and Services Tax Act, 2017.
14
Section 7(1)(d) of the Central Goods and Services Tax Act, 2017.
15
Section 7 (2)(a) of the Central Goods and Services Tax Act, 2017.
16
Section 7(2)(b) of the Central Goods and Services Tax Act, 2017.
5
 virtue of the presence of the term “includes” in the definition.17 This principle has been
reiterated in the cases of Bharat Cooperative Bank Mumbai v. Employees Union18 and CIT v.
Taj Mahal Hotel.19 Thus the definition of supply has been kept very wide in order to prevent
tax evasions and increase compliances. In the subsequent chapters of this project, we will
analyse the conditions under which supply without consideration is treated as a taxable event
as provided under Schedule I of the CGST Act.20”

17
Id.
18
Bharat Cooperative Bank v. Employees Union, WP 323/2003 (Bom HC).
19
CIT v. Taj Mahal Hotel, AIR 1972 SCC 168.
20
Schedule 1 of the CGST Act, 2017.
6
 TRANSACTIONS TREATED AS SUPPLY EVEN IF MADE WITHOUT
CONSIDERATION

“Schedule 1 of the CGST Act, 2017 provides for transactions that are treated as
supply even if made without consideration. The following is provided in said schedule:

(1) Permanent transfer or disposal of business assets where input tax credit has been
availed on such assets,

(2) Supply of goods or services or both between related persons or between distinct
persons as specified under Section 25, when made in the course or furtherance of business.
However, gifts that do not exceed fifty thousand rupees in value in a financial year by an
employer to an employee will not be treated as supply of goods and services,

(3) Supply of goods either by (a) a principal to his agent where the latter undertakes
to supply such goods on behalf of the former or (b) by an agent to his principal where the
former undertakes to receive such goods on behalf of the former,

(4) Import of services by a taxable person from a related person or from any of his
other establishments outside India, in the course of or furtherance of business.

We will elaborate on the aforementioned provisions in subsequent paragraphs.

I. PERMANENT TRANSFER OR DISPOSAL OF BUSINESS ASSETS

“Input tax credit means the claiming of credit for GST paid on the purchase of goods
and services which are used for the furtherance of trade and business.21 This mechanism is
the backbone of this tax regime and is one of the most important reasons for its
introduction. GST is applicable on the transfer or sale of business assets only and is not
applicable to the transfer or sale of personal land/building and other personal assets.22

However, this entry is applicable only in cases where business assets are transferred or
disposed of after availing input tax credit. If said credit is not availed, there would not be any
GST applicable on such disposal.23 Further, it is also imperative that the goods are

21
“GST Input Tax Credit (ITC) – Explained with Examples” (Chartered Club) <https://www.chartersclub.com> last
accessed on September 8, 2021.
22
“Transactions Treated as Supply Under GST Even if Made Without Consideration‟, (ClearTax 28 November
2019) <https://cleartax.in/s/transactions-between-related-parties-treated-as-supply-under-gst-even-if-made- without-
consideration> last accessed on September 8, 2021.
23
Abhutpurv Shukla, “Activities to be Treated as Supply, Even if Made Without Consideration Under GST”
7
 permanently transferred, that is, they are transferred without any intention of return. For
instance, goods sent for testing/certification would not come within the ambit of this entry.24”

II. SUPPLY BETWEEN RELATED PERSONS OR BETWEEN DISTINCT

PERSONS, IN THE COURSE OR FURTHERANCE OF BUSINESS

“Transactions between related parties are given special focus since there is a possibility
of prices being controlled and manipulated.25 In order to prevent such anomalies and
manipulation, the Central Government has provided certain guidelines which control the
valuation of goods and services. The implementation of these guidelines results in a regulated
and accountable transaction between a buyer and a seller. Thus, in order to analyse this entry,
it is important to understand the meaning of related persons and also understand the
Government guidelines around valuation of supply made between related persons.

1. Meaning of Related Persons:

The meaning of related party under GST is provided under Section 15 of the CGST Act.26
The following are considered as related persons:

 Persons who are officers or directors of one another’s businesses;

 Persons legally recognized as partners in business;

 Such persons are employer and employee;

 Any person directly or indirectly owns, controls or holds twenty-five per cent or more
of the outstanding voting stock or shares of both of them;
 One of them directly or indirectly controls the other;

 A third person directly or indirectly controls both of them;

 Together they directly or indirectly control a third person;

 They are members of the same family;

Under GST, “related persons” (used interchangeably with distinct persons) also includes

(TaxGuru 15 October 2018) <https://taxguru.in/goods-and-service-tax/deemed-supply-consideration-

activities.html> last accessed on September 8, 2021.
24
“Transactions Treated as Supply Under GST Even if Made Without Consideration”, (ClearTax 28 November
2019) <https://cleartax.in/s/transactions-between-related-parties-treated-as-supply-under-gst-even-if-made- without-
consideration> last accessed on September 8, 2021.
25
Id.
26
Section 15 of the CGST Act, 2017.
8
 legal persons who are associated in the business of one another. One is the sole agent or sole
distributor or sole concessionaire, of the other.27
However, all transactions between related persons would not attract the provisions of this
entry. It is clarified in the proviso that gifts given by an employer to an employee shall not be
treated as supply without consideration for the purposes of GST, provided that the value of
the gift does not exceed Rs. 50,000 in the concerned financial year”.

2. Value of Supply Between Related Persons

The method of determining the value of supply between Related Persons is to be

understood in two contexts:

a. Supply other than to/from agent

The open market value28 of the product or services is to be considered as the value of
the supply between related persons.29 However, in situations where the open market value of
the goods cannot be determined, the value of like quality and kind of goods and services is to
be considered.30 Further, if the value of supply cannot be determined using the
aforementioned methods, then the value of the goods and services have to be determined
either by cost or residual method as provided under Rules 30 and 31.

b. Supply to/from the agent

The open market value of the product or the service is to be considered when supplied
between a principle and an agent. However, if the open market value cannot be ascertained,
then 90% of the value charged by recipient to buyer is considered for taxability. Further, if
the value cannot be ascertained by aforementioned methods, the value is to be determined as
per Rules 30 and 31.31

III. SUPPLY OF GOODS EITHER BY A PRINCIPAL TO HIS AGENT OR BY

AN AGENT TO HIS PRINCIPAL

27
“Value of Supply – Related Party Transactions under GST‟ (India Filings)
<https://www.indiafilings.com/learn/value-of-supply-related-party-billing-under-gst/> last accessed on September
12, 2021.
28
Open market value is the value of the supply between two unrelated entries: „Transactions Treated as Supply
Under GST Even if Made Without Consideration‟, (ClearTax 28 November
2019).
<https://cleartax.in/s/transactions-between-related-parties-treated-as-supply-under-gst-even-if-made-without-
consideration> last accessed on September 18, 2021.
29
“Supply Without Consideration under the GST and its Taxability‟ (Masters India 24 December 2018) <
https://www.mastersindia.co/gst/supply-without-consideration-gst/> last accessed on September 18, 2021.
30
Id.
31
Rule 30 and 31, CGST Rules, 2018.
9
 “The term agent has been defined under Section 2(5) of the CGST Act.32 It is defined as a
person who is a factor, broker, commission agent, arhatia, de credere agent, auctioneer or any
mercantile agent, by whatever name called, and who carries on the business of supply or
receipt of goods or services or both on behalf of another.

From the definition given in this Section, the key ingredients that emerge are that the term
is defined on the basis of various activities being carried out by the person concerned in the
principal-agent relationship and the supply of goods and services has to be taken up by the
agent on behalf of the principal.33 Further, it can also be understood that the crucial element
for covering a person within the meaning of agent under CGST Act is corresponding to the
definition of agent under the Indian Contract Act, 1872.34

It is also important to understand that all activities between a principal and an agent does
not fall within the scope of this entry. Supply of goods and services between the principal and
the agent and vice versa would fall outside the scope of the entry and would necessarily
involve consideration to be considered supply and be liable for tax under GST.

For the purposes of this entry, the principal-agent relationship under GST can be
understood by whether the invoice for further supply of goods on behalf of the principal is
being done by the agent in his name. If this question is answered in the affirmative, the
provision of goods from the principal to the agent would fall within the ambit of the entry.
Similarly, when the goods are being procured by the agent on behalf of the principal and are
invoiced in the name of the former, then the same would fall under the scope of this entry.
Thus, the crucial point is whether the agent has the authority to receive or pass the title of the
goods on behalf of the principal.35 Z jointly as well as severally to pay GST.36 The individual
paying GST can claim input tax credit. Further, the value of the supply in such cases is based
on the method adopted for valuation of supply between related persons.37”

IV. IMPORT OF SERVICES BY A TAXABLE PERSON FROM A RELATED

PERSON OR FROM ANY OF HIS OTHER ESTABLISHMENTS OUTSIDE
INDIA, IN THE COURSE OF OR FURTHERANCE OF BUSINESS

32
Section 2(5) of the Central Goods and Services Tax Act, 2017.
33
Id.
34
Section 182, Indian Contract Act, 1872.
35
Id.
36
“Transactions Treated as Supply Under GST Even if Made Without Consideration‟, (ClearTax 28 November
2019) <https://cleartax.in/s/transactions-between-related-parties-treated-as-supply-under-gst-even-if-made-
without-consideration> last accessed on September 18, 2021.
37
Id.
10
 Provisions related to GST for import of service from related persons are extremely wide
ranging in nature. They cover all transactions even if consideration is not involved as is
provided by this entry. Valuation of imported services continues to be a major problem in
cases where no consideration is involved and can also lead to litigation.38

An example of a transaction coming under this entry would be a subsidiary Company B

registered under the Companies Act, availing consultancy services from its holding company,
Company A registered in the USA. This is an importation of service and Company B would
be liable to pay GST”.

38
Deeksha Sharma, „Import of Services from Related Persons under GST‟ (TaxGuru 26 May 2017) <
https://taxguru.in/goods-and-service-tax/import-services-related-person-gst.html> last accessed on September 18,
2021.
11
 LOOMING UNCERTAINTY ON CERTAIN TRANSACTIONS

I. AMBIGUITY RELATING TO BUSINESS ASSETS GIVEN AS GIFTS

“As per Schedule I, permanent transfer or disposal of business assets where input
tax credit (ITC) has been availed on such assets is an exception to the Section 7 of the
CGST Act, wherein consideration is a pre-requisite to constitute a supply. Moreover, the term
business asset has not been defined anywhere in the act. According to meaning rule, words
must be given their plain, ordinary and literal meaning. Thereby, they can be understood in
common parlance to include assets of the business which are on a Company’s balance sheet
and include tangible items such as inventories, equipment and machines etc. Additionally,
Section 17(5)(h) specifically imposes the restriction on availment of credit with respect to
goods disposed of by way of “gift” or “free samples”. Again, the term gift is not defined under
the CGST Act and recourse has to be taken to the Gift Tax Act, 1858 which defines gift as:

“Gift” means the transfer by one person to another of any existing movable or
immovable property voluntarily and without consideration in money or money’s worth and
includes transfer or conversion of any property referred in Section 4, deemed to be a gift
under that section.39

As per the definition, transfer of any existing movable or immovable property voluntarily
and without consideration shall be considered as “Gift” and accordingly, reversal of ITC in
respect of such goods has to be initiated. In light of the above-mentioned interpretation, there
seems to be a disparity in the GST provisions in relation to tax treatment of “goods” supplied
free of cost i.e. gift/samples. Since, the “goods” supplied as a “gift” or as free “sample” could
also be a business asset for a taxpayer, there is an ambiguity on whether ITC needs to be
reversed or GST needs to be paid on such supplies”.

II. FREE SAMPLES

“In case of goods marked as “free samples” (especially in pharmaceutical sector),

ITC would be liable for reversal considering the specific ITC restriction provision. The
interpretation can be made in the backdrop of the Sectoral FAQs released by the CBIC
wherein the following query was addressed:

39
Section 2 (xii), Gift Tax Act, 1858.
12
 “Question - What are the requirements for clearance of physician samples distributed
free of cost?
Answer - In case of clearance of physician samples distributed free of cost, ITC availed
on the said samples has to be reversed in view of the provisions under Section 17(5)(h) of the
CGST Act, 2017. No tax is payable on clearance of physician samples distributed free of cost
as the value of supply is zero and no credit has been availed.”40

However, ambiguity persists relating tax treatment of the goods not marked as “samples”
but given as free samples i.e. to pay tax on the outward supply or to reverse ITC.”

III. FREE OF COST SUPPLIES UNDER VARIOUS SALES PROMOTIONAL

AND MARKETING SCHEMES

“In order to boost sale of product or to penetrate a new market, companies offer varied
sales promotional or marketing schemes. Some of them include:

1. Additional units of a product supplied free with paid products. Example – Buy one get
two at the price of one
2. Additional free quantity supplied at a price of standard package. For example – 20%
extra quantity at the price of 100 ml/100 gm.

Both the above scenarios appear to be in the nature of trade discounts where supplier is
offering additional units or quantity at the price of single unit or standard quantity, as part of
one package or a container, as the case may be. Therefore, a view can be taken that where
GST is charged on the value of entire package it includes the free supplies as well and hence,
ITC reversal is not required in that case. Similar interpretation was also given in one of the
CBIC‟s Sectoral FAQ wherein:

“Question - How the Invoicing should be done for free goods given along with sale so
that corresponding input tax credit is not required to be reversed for products under scheme?

Answer - Invoice Value would include value of all goods including those supplied free. In
such cases, ITC is not required to be reversed.”41

The uncertainty still remains as to the possibility of tax authorities alleging reversal of
ITC attributable to goods supplied as free of cost. In fact, there is news of notice being served

40
43 FAQ 2, Drugs and Pharmaceuticals, Sectoral FAQs, CBIC, available at https://cbic-gst.gov.in/sectoral-
faq.html.
41
FAQ 8, Invoice & Returns, Sectoral FAQs, CBIC, available at https://cbic-gst.gov.in/sectoral-faq.html.
13
 on FMCG companies and pharma companies requiring reversal of ITC on free of cost goods
supplied along with paid goods have been making rounds.42”

IV. GIFTS PROVIDED IN ORDER TO MAINTAIN GOOD RELATIONS

“Gifts” are provided by Companies to their distributors or clients on certain occasions

such as Diwali etc. Such gifts may be given out of the product manufactured by the Company
itself or procured from some other vendors.43

In the case of In Re Sanofi India Limited, the question before the AAR Maharashtra was
whether input tax credit is available of the GST paid on expenses incurred towards

promotional schemes of Shubh Labh Loyalty Program.47 The AAR took the stance that
the contention of the applicant that the promotional items are supplied as a contractual
obligation, e.g. watch is given under the contractual obligation under the scheme with an
intention to increase the sale of the company, serve as an advertisement tool and brand
reminder to promote sale, then in view of section 7 of the GST Act it is a supply in the nature
of barter i.e. supply of promotional goods against supply of services such as increased sale,
advertisement of products and sales promotion. On the contrary appellant has accepted that
impugned supply is without consideration. We therefore conclude that the transaction is
nothing but a gift.

One may have a contrary view, the goods distributed to distributors free of cost is a part
of sales promotion expense in the hands of the companies, thus it cannot be considered as
gift. In this regard, we would like to refer to the case of Federal Commissioner of Taxation v.
McPhail wherein Hon’ble High Court has provided that to constitute a “gift”, the property
should be transferred voluntarily and not as a result of a contractual obligation and no
advantage of material character was received by transferor. Goods distributed to distributors
are benefitting the companies in promoting their sales. Thus, the same shall not be considered
as gift. Hence, input tax credit should be available in respect of such goods.44”

42
https://cleartax.in/s/gst-applicability-free-samples-supplies.
43
CA Devam Sheth, Gst Implications on Sales Promotional Schemes, Tax Bulletin April, 2019 Volume - 38 -
The Institute of Cost Accountants of India, available at
https://icmai.in/TaxationPortal/upload/IDT/Article_GST/99.pdf.
44
Federal Commissioner of Taxation v. McPhail , (1968) 117 CLR 111.
14
 GST CIRCULAR ON SALES PROMOTION SCHEMES: MUCH AWAITED
CLARIFICATION?

“The Central Board of Indirect Taxes and Customs (CBIC) has issued a circular
clarifying the leviability of GST on sales promotion schemes such as free samples,
discounts, buy one get one sale etc.45 There are several promotional schemes which are
offered by taxable persons to increase sales volume and to attract new customers for their
products. Some of these schemes have been examined and clarification on the aspects of
taxability, valuation, availability or otherwise of Input Tax Credit in the hands of the supplier.

I. FREE SAMPLES AND GIFTS

Providing free samples and gifts is a common practice across various sections of trade
and industry. It was clarified that as per Section 7(1)(a), “supply” includes all forms of supply
of goods or services or both to be made for a consideration by a person in the course of or in
furtherance of business. It was therefore clarified that samples which are supplied free of
cost, without any consideration, such as drug samples, do not qualify as “supply” under GST
unless the activity falls within the ambit of Schedule I of Act.

Furthermore, it was also clarified that Input Tax Credit shall not be available for 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, by virtue of Section
17(5)(c). However, where such activity falls within the scope of “supply” by virtue of
Schedule I of the Act, supplier can avail Input Tax Credit.

II. BUY ONE GET ONE FREE OFFER

With respect to such offers, it was clarified that even though it may appear that one item
is being supplied free of cost and without any consideration, it is, actually, a case of two or
more individual supplies where a single price is being charged for the entire supply. These
offers include examples such as “buy one soap and get one soap free”. Taxability of such
supplies will depend on whether it qualifies as a composite or a mixed supply, rate to be
determined vide Section 8. It was also clarified that Input Tax Credit will be available to
suppliers with respect to such offers.

45
Clarification on various doubts related to treatment of sales promotion schemes under GST, Circular No.
92/11/2019-GST dated March 7, 2019, CBIC.
15
III. BUY MORE SAVE MORE OFFERS

It was clarified that discounts that would be eligible for deduction from the taxable value
of the supplier include:
i. Upfront discounts offered by suppliers (e.g. discounts on the invoice based on the
quantity/ value, which may be higher for high quantity/ value procurements); or
ii. Periodic discounts based on the total quantum of purchases, when established in
the terms of agreement entered into at or before the time of supply.
The recipient would need to reverse the ITC as is attributable to the discount on the basis
of the document issued by the supplier. Furthermore, the supplier will be eligible for availing
full ITC on inputs, input services and capital goods used in relation to the supply of goods or
services or both on such discounts.

IV. SECONDARY DISCOUNTS

These discounts are one which are not known at the time of supply or are offered after the
supply is already completed. For such schemes, the supplier can issue commercial credit
notes. However, such discounts would not be eligible for any deduction from the value of the
supply under section 15(3)(b) of the CGST Act, as it was not known at or before the time of
supply. Further, there would not be any impact on the ITC in the hands of the supplier.”

16
 APPRAISAL OF SITUATION IN THE WAKE OF THE CIRCULAR: MISERY
CONTINUES?

“This circular has provided a much-needed clarity with respect to treatment of various
sales promotion schemes under GST. However, all is still not well as some aspects remain
unclear. The clarification is silent on the situations where secondary sales promotion schemes
potentially being treated as subsidies. In addition to that, the scope of schemes included under
the circular is narrow and discourages the use of unique marketing programs due to the fear
of not being able to claim ITC for supply made through such schemes.46

This issue can be highlighted by the help of two cases, Biostadt India Ltd. and Sanofi
India Ltd. In Biostadt India Ltd., the applicant had launched a sales promotional scheme to
incentivize its distributors and retailers to achieve company’s targets. The scheme was of two
types: the first component stated that customers would be entitled to one 10g gold coin if they
purchased products above certain quantities, and the second involved rewarding them with
one 8g gold coin if they made certain minimum payments after receiving the products from
the company. As the applicant had to procure the coins from the jewelers, a question was
raised as to whether ITC can be claimed on this account. As a result, recourse was taken to
section 17(5), which discusses the treatment of gifts under GST. Since no tax was being paid,
the AAR held that ITC could not be availed for the coins, as they were little more than gifts
to the customers.47 While this ruling was given before the Circular was issued, it is
questionable whether the clarification would have helped even if it had been in force during
the time. The provision of gold coins as incentives for customers does not fall within any of
the recognized schemes in the Circular, and it is unlikely that its presence would have altered
the verdict.

In the case of Sanofi India, the applicant expected to benefit by incentivising

customers and doctors to promote its business. This had two components: the first involved
giving customers reward points and allowing them to claim certain products from the
applicant; and the second involved provision of products like pens, notepad, key-chains to
distributors or doctors, which served as advertisement tools for the company. Since the
scheme involved procurement of both the catalogued items as well as the promotional

46
Manasvin Andra, Examining the Issues with Free Supplies under GST, August 2020, IndiaCorpLaw, available at
https://indiacorplaw.in/2020/08/examining-the-issues-with-free-supplies-under-gst.html.
47
In re Biostadt India Limited (GST AAR Maharashtra), Advance Ruling No.GST-ARA-72/2018-19/B-165 dated
20th December, 2018.
17
 products, the question of whether the applicant could avail ITC was raised. The tribunal in
this case concluded that this amounted to a gift and a claim for ITC was barred by the
provisions of section 17(5). The applicant in this case relied on the circular and tried to
establish that the scheme in question was along the lines of “Buy more, save more” offers.
However, the tribunal held that facts in the scheme explained by the circular were totally
different from the present case, and hence, were of no avail.48

The aforementioned instances justify the scope of the circular being questioned. The
current COVID –19 pandemic has affected consumer spending, and thereby increased the
need for incentivization. In such a scenario, expanding the ambit of the government’s circular
to cover a variety of promotional offers will help businesses. Favorable tax treatment of such
schemes will act as a stimulating factor for consumers to resume spending and allow
businesses to float newer and more innovative promotional schemes”.

48
Anita Rastogi, GST on Promotional Schemes- The Misery Continues, July 10, 2019, Sutra, available at
<http://gstsutra.com/experts/column?sid=557> last accessed on September 8, 2021.
18
 CONCLUSION AND SUGGESTIONS

The intention behind introduction of the GST Regime in India was simplification of
the flawed system of indirect taxation in India. Thus, a wide scope given to the meaning of
supply under Section 7 of the CGST Act49 to the extent of even including of transactions
without consideration under the GST regime. However, to further simplify the Indian GST
regime, certain changes have to be made in the Indian GST regime as a whole.

Given the benefits of marketing schemes in improving sales, it is submitted that

businesses should be allowed to claim ITC for inputs used in promotional schemes. Even
though section 17(5)(h) bars ITC on gifts and free supplies, it is necessary to view
promotional schemes as being in the course and furtherance of business, as they often aid
businesses in direct and empirically observable ways. Whether an input is being used in the
course of a business can be assessed on a case- b y - c a s e basis, which will provide the
applicant with a chance to demonstrate the benefits of the scheme to their business. This
entails a move away from the current position, which places a narrow interpretation on the
concept of promotional offers.

The substance of the transaction and not the form should be the driving force to
analyze the transaction. So, in case, the underlying facts depicts and expresses that indeed the
transaction qualify as a discount and both the parties to the transaction are also treating the
same, the fact that it is indeed a discount cannot be ruled out. And, if the intention proves
otherwise, it may be considered as gift, provided all the general parameters of gift are getting
satisfied. Similarly, if there is no intention to render a service in a contract, it cannot be
simply assumed that the same exists. Accordingly, it is utmost important that the pith and
substance of the transaction should be considered in order to determine the taxability.
Looking at the current situation, it is necessary that the government should issue an
appropriate clarification, in order to avoid unnecessary litigation.

Keeping in mind the hardships brought about by the pandemic, a breathing space
must be provided to the suppliers and dealers on account of a steep dip in the economy.
Further the transactions must be made more certain for meeting expectations of the
registered persons.

49
Section 7 of CGST Act, 2017.
19
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