Corporate Governance SOP for Demo Goods Management and Input Tax Credit Protection. M/s. Dynamic Techno Medicals Pvt. Ltd., 2025 (9) TMI 1053 – Kerala AAR ruling (Part 2 of 2)

Below is a concise, compliance-oriented summary of the In Re: M/s Dynamic Techno Medicals Private Limited - 2025 (9) TMI 1053 - AUTHORITY FOR ADVANCE RULING GOODS, KERALA, followed by a risk analysis useful for tax teams, internal audit, and GST compliance officers.

A. Executive Summary for Compliance Memo

1. Core Holding

The Kerala AAR held that demo goods issued to Product Specialists are not equivalent to physician samples, and therefore do not attract ITC reversal under Section 17(5)(h) of the CGST Act.

2. Key Determinants

• No transfer of title occurs when demo goods are issued.
• Goods are returned or scrapped after use; GST is paid on scrap.
• Goods are used in the course of business for demonstrations and customer education.
• Demo goods are not “gifts” or “free samples” within the meaning of Section 17(5)(h).

3. Practical Compliance Position

• ITC on demo goods remains fully admissible.
• No supply is deemed to occur upon issuance, provided records show that:
  • Goods remain company property,
  • They are used for demonstration,
  • They are periodically returned or scrapped,
  • GST is paid on the scrap value.

4. Documentation Requirements

To rely on the ruling, companies should maintain:

• Demo goods movement registers;
• Field Specialist issuance logs;
• Return and scrapping registers;
• Scrap sale invoices showing GST payment;
• Internal SOP governing handling of demo units.

B. Risk Analysis & Advisory Note

1. Territorial Applicability Risk

AAR rulings are binding only on the applicant and jurisdictional officer.
However, the reasoning is persuasive and likely to be relied upon elsewhere unless contradictory AARs exist.

Risk Level: Low to Moderate (depending on State).
Mitigation: Maintain strong documentation and adopt internal SOPs consistent with the ruling.

2. Substance vs. Form Risk

If demo units are not returned or are routinely “lost” in the field, the department may argue:

• There is a constructive disposal analogous to a free sample.
• ITC reversal becomes applicable.

Risk Level: Moderate.
Mitigation:

• Enforce strict return policies;
• Require periodic audits of demo kits;
• Document scrap disposal meticulously.

3. Mischaracterization Risk

If demo units are in fact used as:

• Free distribution,
• Doctor gifting,
• Promotion stock,
  the tax authority may recast them as physician samples, thereby triggering ITC blockage.

Risk Level: High if misused.
Mitigation:

• Segregate “demo use stock” from “promotional stock”;
• Label units distinctly (“Demo Unit – Property of Company”).

4. Sector-Specific Compliance Risk

Healthcare products, medical devices, and pharma fall under heightened scrutiny regarding:

• Physician interactions,
• Marketing practices,
• Sample distribution.

Authorities often check whether “demo” is being used as a proxy route for gifting.

Risk Level: Moderate.
Mitigation:

• Maintain contemporaneous evidence of demo activity (photos, event logs, training reports).
• Obtain periodic confirmations from Product Specialists that goods remain company property.

5. Litigation Risk

Although this ruling favours taxpayers, GST audit teams may take a contrary view because:

• Section 17(5) is a blocking provision interpreted strictly,
• Tax officers may treat any non-saleable item as a free sample by default.

Risk Level: Low to Moderate, but manageable.
Mitigation: Strong documentation will be decisive.

C. Recommended Internal SOP (1-page model).

Below are fully drafted, ready-to-use annexure templates (A1–A7) consistent with the SOP previously issued.
They are formatted in formal corporate-legal style and can be placed directly into the Company’s internal manuals.

• Classification of demo goods,
• Issuance and return protocols,
• Scrapping procedures,
• ITC defense documentation

A1 – DEMO GOODS REQUISITION FORM

Document Code: DG–REQ/____/2025
Department: ______________________________
Date: ___ / ___ / ______

1. Details of Requesting Employee

• Name: _____________________________________________
• Designation: _________________________________________
• Employee ID: _________________________________________
• Contact No.: __________________________________________

2. Purpose of Requisition

• ustomer Demonstration
• Hospital/Clinic Visit
• Conference/Exhibition
• Internal Training
• Other (specify): ________________________________________

3. Details of Demo Goods Requested

4. Justification

(Explain business need)

5. Approvals

• Department Head:
  Name: _____________________ Signature: ______________ Date: __________
• Finance/GST Compliance:
  Name: _____________________ Signature: ______________ Date: __________

6. Stores Acknowledgment

Requisition Received On: ___ / ___ / ______
Processed By: ____________________________ (Stores Manager)

A2 – DEMO GOODS ISSUANCE SLIP

Document Code: DG–ISS/____/2025
Date of Issue: ___ / ___ / ______

1. Issued To (Custodian)

• Name: __________________________________
• Employee ID: _____________________________
• Department: ______________________________
• Mobile No.: ______________________________

2. Details of Goods Issued

3. Purpose

(As approved in Requisition Form)

4. Custodian Declaration

I acknowledge receipt of the above demo goods. I agree that the goods remain the property of the Company and shall be returned/scrapped strictly as per SOP.

Signature of Custodian: ____________________
Date: ___ / ___ / ______

5. Issued By (Stores)

Name: ________________________
Signature: _____________________
Date: ___ / ___ / ______

A3 – DEMO REGISTER FORMAT

Document Code: DG–REG/2025

Maintained by Stores/Logistics. To be updated for every movement.

A4 – DEMO GOODS RETURN SLIP

Document Code: DG–RET/____/2025
Date of Return: ___ / ___ / ______

1. Returned By (Custodian)

• Name: __________________________________
• Employee ID: _____________________________
• Department: ______________________________

2. Details of Goods Returned

3. Comments (if any)

4. Custodian Confirmation

I confirm that the above goods are being returned as per SOP.
Signature: ______________________ Date: ___ / ___ / ______

5. Stores Verification

Verified By: ____________________________
Signature: ______________________________
Date: ___ / ___ / ______

A5 – SCRAP DISPOSAL REPORT (SDR)

Document Code: DG–SDR/____/2025
Date: ___ / ___ / ______

1. Item Details

2. Justification for Scrapping

(Technical or usage-based explanation)

3. Approvals

• Department Head:
  Name: _____________________ Signature: ______________ Date: ________
• Finance Head:
  Name: _____________________ Signature: ______________ Date: ________
• GST Compliance Officer:
  Name: _____________________ Signature: ______________ Date: ________

4. Disposal Details

• Method:  Scrap Sale  Destruction
• Scrap Buyer (if applicable): ______________________________
• Scrap Invoice No.: _______________________
• GST Charged:  ___________________________

5. Stores Officer Certification

I confirm that scrapping/destruction was executed as per SOP.
Signature: ________________________ Date: ___ / ___ / ______

A6 – CUSTODIAN UNDERTAKING FORMAT

Document Code: DG–CU/2025

UNDERTAKING

I, ___________________________________ (Name), Employee ID ____________________,
working as _______________________________ (Designation), hereby acknowledge and agree to the following:

1. The demo goods issued to me remain the exclusive property of the Company.
2. I shall use them only for authorised demonstration purposes.
3. I shall not gift, transfer, or permanently leave the goods with any customer or third party.
4. I shall maintain the goods in good condition and return them upon demand.
5. Any loss, theft, or damage shall be immediately reported in writing.
6. I accept that the Company may hold me accountable for negligence in handling demo goods.
7. I agree to fully comply with the Company’s Demo Goods SOP.

Signature of Employee (Custodian): __________________________
Name: ________________________________________
Date: ___ / ___ / ______

Accepted By (Department Head): _____________________________
Date: ___ / ___ / ______

A7 – QUARTERLY AUDIT CHECKLIST

Document Code: DG–QAC/2025
Quarter: Q1 / Q2 / Q3 / Q4
Financial Year: 20____–20____

1. Physical Verification

• ll demo goods physically verified
• Serial numbers match register
• Condition adequate for continued use
• Missing or untraceable items escalated

2. Documentation Compliance

• Requisition Forms properly approved
• Issuance Slips complete and signed
• Return Slips available for completed cycles
• Demo Register updated without gaps
• Scrap Disposal Reports correctly approved
• Scrap invoices reconciled with sales records

3. SOP Adherence

• Demo goods not used as free samples
• No permanent transfer to customers
• Goods properly tagged “DEMO UNIT – NOT FOR SALE”
• Custodian Undertakings on record

4. GST Compliance

• ITC trail verifiable
• Scrap sale invoices reflect GST
• No breach of Section 17(5)(h) conditions
• Demo goods usage aligns with “business purpose”

5. Observations & Corrective Actions

Checked By (Internal Audit):
Name: _________________________ Signature: _________________ Date: __________

Reviewed By (Finance/GST):
Name: _________________________ Signature: _________________ Date: __________

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