2021 (10) TMI 326 - AAR - GST

Tax Ruling: Supply Nature & Input Tax Credit on Promotional Items

The case involved determining the nature of supply and the admissibility of input tax credit regarding a promotional scheme for hosiery goods. The ... Mixed supply - composite supply - transaction value - valuation under section 15 read with rule 27 - input tax credit - blocked credits under section 17(5)(h) - course or furtherance of businessMixed supply - composite supply - transaction value - Nature of supply: whether goods supplied at a nominal price under a promotional scheme constitute individual supplies or a mixed supply (or composite supply). - HELD THAT: - The Authority examined whether the supplies of hosiery goods and the discounted promotional goods satisfy the cumulative conditions of mixed supply - (i) two or more individual supplies made in conjunction with each other, (ii) supplied for a single price, and (iii) not constituting a composite supply. The applicant issues separate invoices and separate prices; the promotional goods are supplied only upon fulfilment of eligibility criteria and the retailer may refuse the promotional supply. Consequently the supplies are not made for a single price and are not naturally bundled or supplied in conjunction with each other in the ordinary course of business, so they do not constitute a composite supply or a mixed supply. The Authority therefore treated each supply as a separate taxable supply and held that tax shall be charged at the rate applicable to each item individually. (Reasons recorded at paras 4.3-4.7.) [Paras 4]Supply of hosiery goods and the goods supplied at nominal price under the promotional scheme are separate individual supplies and taxable at the rates applicable to each item.Input tax credit - blocked credits under section 17(5)(h) - valuation under section 15 read with rule 27 - course or furtherance of business - Admissibility of input tax credit on items sold at nominal price under the promotional scheme. - HELD THAT: - The Authority accepted that the promotional scheme is an activity incidental to and in furtherance of the applicant's business, satisfying the requirement for availing input tax credit under section 16. Clause (h) of sub section (5) of section 17 restricts credit where goods are disposed of as gift or free samples; however, the promotional goods are supplied for a nominal consideration and not 'free of cost' pursuant to the scheme, and therefore do not qualify as 'gift' under the tested understanding. The Authority observed that because price is not the sole consideration in the facts (supply is contingent on prior purchases), the value of such promotional goods will have to be determined as per the transaction value provisions, namely section 15 read with rule 27, but this requirement of valuation does not by itself deny entitlement to input tax credit. On these bases the Authority held that input tax credit on the items sold at nominal prices is available to the applicant. (Reasons recorded at paras 4.8-4.13.) [Paras 4]Input tax credit on items supplied at nominal price under the promotional scheme is admissible to the applicant, subject to valuation as per section 15 read with rule 27.Final Conclusion: The Authority ruled that (i) supplies of hosiery goods and promotional goods at nominal price are distinct individual supplies taxable at the rates applicable to each item, and (ii) input tax credit on the promotional items is available to the applicant, with valuation to be determined under section 15 read with rule 27 where price is not the sole consideration. Issues Involved:1. Determination of nature of supply.2. Admissibility of input tax credit.Detailed Analysis:1. Determination of Nature of Supply:The applicant intends to manufacture and supply hosiery goods and proposes a promotional scheme where retailers can purchase items like gold coins, refrigerators, coolers, split air conditioners, etc., at a nominal price upon buying a specified quantity of hosiery goods. The key question is whether these transactions constitute individual supplies or a mixed supply under Section 2(74) read with Section 8(b) of the CGST Act, 2017.The applicant contends that the supply of hosiery goods and promotional items should not be classified as a mixed supply because:- The supplies are not made in conjunction with each other.- They are not made for a single price.- They do not constitute a composite supply.The Authority agrees with the applicant, noting that:- Mixed supply requires two or more individual supplies made for a single price, which is not the case here as separate invoices are issued for each supply.- Composite supply requires the supplies to be naturally bundled and supplied in conjunction with each other, which is also not applicable here.Therefore, the supply of hosiery goods and promotional items are considered separate supplies, and tax will be levied at the rate applicable to each item as notified by the Government.2. Admissibility of Input Tax Credit:The applicant seeks to avail input tax credit on items sold at nominal prices under the promotional scheme. Section 16 of the GST Act entitles a registered person to take credit of input tax charged on any supply of goods or services used in the course or furtherance of business. The applicant argues that the promotional scheme is intended to boost sales, qualifying it as an activity undertaken in the course or furtherance of business.However, Section 17(5)(h) of the GST Act restricts input tax credit on goods disposed of by way of gift or free samples. The applicant contends that the promotional items are not gifts since they are sold at a nominal price and not given voluntarily without consideration. The Authority agrees, stating that since the goods are sold for a consideration, even if nominal, they do not qualify as gifts, and the restriction under Section 17(5)(h) does not apply.The value of the promotional items must be determined as per Section 15 read with Rule 27 of the CGST/WBGST Rules, 2017, as price is not the sole consideration for the supply.Ruling:1. Supply of goods at nominal price to retailers against purchase of specified units of hosiery goods pursuant to a promotional scheme would qualify as individual supplies taxable at the rates applicable to each of such goods as per Section 9 of the GST Act.2. Credit of the input tax paid on the items being sold at nominal prices would be available to the applicant.