Differentiating Demo Samples from Physician Samples under GST: Insights from the Dynamic Techno Medicals AAR (Part 1 of 2)

Below is an article on In Re: M/s Dynamic Techno Medicals Private Limited - 2025 (9) TMI 1053 - AUTHORITY FOR ADVANCE RULING GOODS, KERALA along with a rigorous comparison between demo samples and physician samples under GST.

Legal Analysis: In re M/s Dynamic Techno Medicals Pvt. Ltd. — AAR, Kerala

I. Introduction

In the case In Re: M/s Dynamic Techno Medicals Private Limited - 2025 (9) TMI 1053 - AUTHORITY FOR ADVANCE RULING GOODS, KERALA, the Kerala Authority for Advance Ruling (“AAR”) addressed a contentious issue in the context of Goods and Services Tax (GST): whether goods issued for marketing demonstrations (so-called “demo goods”) to product specialists should be treated on par with physician samples (“Physicians’ Samples – Not for Sale”) and whether such issuance triggers reversal of Input Tax Credit (ITC) under Section 17(5) of the CGST Act, 2017.

II. Factual Matrix

1. Business Activity: The Applicant, Dynamic Techno Medicals Pvt. Ltd., is engaged in the manufacture and marketing of health-aid products (such as varicose vein stockings, surgical corsets, maternity pads, bandages, cannula fixators, etc.).
2. Demo Goods: The Applicant issues non-saleable units (“demo samples”) to its Product Specialists for the purpose of demonstration to potential customers (hospitals, clinics, conferences, medical professionals).
3. Ownership and Return: These demo goods remain the property of the Applicant; they are not sold, transferred permanently, or gifted. After repeated use (or upon becoming worn out), they are returned to the factory as scrap, and GST is paid on the scrap value.
4. Application to AAR: The Applicant sought an advance ruling on (i) whether issuance of demo samples should be regarded as a “supply” akin to physician samples under Section 7 of the CGST Act; and (ii) whether ITC reversal is required, treating demo samples at par with free physician samples.

III. Legal Issues

The AAR identified and addressed two core legal issues:

1. Whether demo goods constitute a “supply” akin to physician samples, i.e., whether there is a disposal or transfer of title under GST law when these goods are issued to Product Specialists.
2. Whether Input Tax Credit must be reversed under Section 17(5)(h) of the CGST Act, 2017 in respect of the demo goods, assuming they are analogous to physician samples.

IV. Legal Reasoning and Findings

The AAR’s reasoning rests on a clear factual and legal distinction between demo samples and physician samples:

1. Distinction in Title Transfer
   • The AAR observed that physician samples typically involve a permanent transfer of ownership, often as a “gift” or “free sample,” with no consideration paid by the recipient.
   • By contrast, in the present case, the demo goods remain the property of the Applicant throughout their lifecycle. There is no transfer of title at the point of issuance to the Product Specialists, who merely act as custodians.
   • Consequently, the issuance of demo goods does not amount to a “disposal” under GST law as contemplated by Section 7 of the CGST Act.
2. ITC Reversal under Section 17(5)(h)
   • Section 17(5)(h) of the CGST Act disallows ITC for goods “disposed of by way of gift or free samples.”
   • The AAR referred to Circular No. 92/11/2019-GST, issued by the CBIC, which treats “free samples” as outside the ambit of eligible business use for ITC purposes.
   • Given that the demo items are used in the furtherance of business (marketing, customer education), remain the company’s assets, and are ultimately scrapped (on which GST is paid), the AAR concluded that no reversal of ITC is required.
   • The AAR emphasized that the act of issuance of demo goods is for legitimate business use, not as a gratuitous disposal.
3. Conclusion (Rulings)
   • Ruling on Issue 1: Products issued for demonstration by Product Specialists are not to be treated on par with “Physicians’ Samples – Not for Sale” for the purposes of procedural GST compliance.
   • Ruling on Issue 2: No reversal of Input Tax Credit is required for items issued for demonstration by Product Specialists, even if treated similarly to physician samples; because the legal and factual nature differs materially.

V. Implications of the AAR Ruling

1. Precedential Value: Though AAR orders are binding only on the applicant (and the relevant tax authorities), this decision provides clarity for medical-device manufacturers and other health-aid product firms that issue demo units in the field.
2. Input Tax Credit Preservation: The ruling safeguards the applicant’s right to claim full ITC on inward supply of goods that are used for demonstration, so long as the goods remain the company’s property and are not distributed permanently free of cost.
3. Tax Compliance Simplification: Companies can design their product-specialist programs (demo models, demonstration kits) without fear that the mere issue of such units will trigger ITC reversal, provided they maintain control over title and document the return or scrapping appropriately.
4. Policy Alignment: The AAR’s approach aligns with the principle that GST should not penalize genuine marketing practices, especially when products are not “given away” but are used to generate business.

Comparative Analysis: Demo Samples vs. Physician Samples

To further crystallize the legal distinction, a comparative table and discussion follow:

Critical Legal Observations

1. Substance Over Form: The AAR’s reasoning underscores the primacy of substance over form — it is not sufficient that goods are “given out” physically; the nature of title, ability to return, and control over the goods are determinative.
2. GST Policy Coherence: By distinguishing between demo samples and physician samples, the AAR avoids penalizing legitimate business practices under GST, while preserving the integrity of blocked-credit provisions under Section 17.
3. Record-Keeping Imperative: For taxpayers, this ruling places a premium on rigorous documentation — demonstration registers, stock ledgers, movement records, scrap records — to substantiate that demo goods remain company property and are eventually scrapped, not permanently disposed.
4. Risk Mitigation: The ruling reduces tax risk for businesses that deploy demonstration models in the field, by clarifying that such deployment does not automatically lead to irreversible ITC reversal.

Conclusion

The Dynamic Techno Medicals AAR is a landmark ruling that delineates a clear legal boundary between demo goods and physician samples. The AAR’s decision reflects a balanced interpretation of the GST statute (particularly Section 17(5)(h)), administrative guidance (such as CBIC Circular 92/11/2019), and the commercial realities of health-aid product marketing. By holding that no ITC reversal is required for demo goods that remain company property, the AAR has provided valuable certainty to manufacturers and marketers of medical devices.