2025 (9) TMI 1053 - AAR - GST

Issuing demo units isn't disposal like 'physicians' samples' under Section 7/17(5)(h) CGST; no ITC reversal

In Re: M/s Dynamic Techno Medicals Private Limited

AAR held that issuance of demo items does not constitute disposal akin to 'physicians' samples' under Section 7/17(5)(h) CGST. Demo units remain ... Issuance of demo items qualifies as disposal akin to “Physicians' Samples - Not for Sale” - reversal of Input Tax Credit (ITC) on goods issued for demonstration purposes. Issuance of demo items qualifies as disposal akin to “Physicians' Samples - Not for Sale” - HELD THAT:- The issuance of demo items is not made for any consideration, nor does it fall within the ambit of “sale, transfer, barter, exchange, licence, rental, lease or disposal” as contemplated under Section 7 of the CGST Act, 2017. Physicians' samples typically involve a one-time, irrevocable distribution of goods free of cost, resulting in the transfer of ownership to the recipient. The demo items in the present case are provided exclusively for demonstration and educational purposes, and are not distributed to customers or any third party. The Product Specialists merely use these goods as representatives of the applicant, and the goods continue to remain the property of the applicant throughout their lifecycle. Once worn out through repeated use, such items are recorded as scrap in the stock register and cleared on payment of applicable GST. Therefore, since there is no transfer of ownership or disposal at the stage of issuance, the act of issuing demo items cannot be equated with the distribution of physicians' samples. Legally, the first and only point of “supply” in terms of GST occurs when the goods are finally scrapped and cleared with tax payment. As such, the issuance of demo units does not amount to disposal under GST law and cannot be treated on par with 'Physicians' Samples - Not for Sale'. Reversal of Input Tax Credit (ITC) on goods issued for demonstration purposes - HELD THAT:- In the case of physicians' samples, which are supplied free of cost without any expectation of return and involve a permanent transfer of ownership, the provisions of Section 17(5)(h) of the CGST Act, 2017 are attracted, as such goods are considered to be “disposed of by way of gift or free samples,” rendering the corresponding ITC ineligible. This position has also been clarified by the CBIC in Circular No. 92/11/2019-GST, which treats free samples as being outside the scope of eligible business use for ITC purposes. However, there is a material difference in both the purpose and business treatment of demo goods issued by the applicant. Unlike free samples, these items are intended for use in the course or furtherance of business specifically for live demonstrations to prospective customers or institutions with the ultimate aim of generating taxable sales. The demo items are not consumed or retained by-the recipient; instead, they remain under the ownership of the applicant and form part of the business asset pool until they are scrapped, at which point GST is duly paid on the scrap value - the Input Tax Credit on such demonstration items is not barred under the GST framework, and the requirement to reverse ITC does not arise. ISSUES PRESENTED AND CONSIDERED 1. Whether goods issued to product specialists for demonstration/marketing purposes are to be treated as 'Physicians' Samples - Not for Sale' for the purposes of GST procedural compliance. 2. Whether Input Tax Credit (ITC) claimed on goods issued for demonstration by product specialists must be reversed on the ground that such issuance is equivalent to distribution of free/physicians' samples under Section 17(5)(h) of the CGST Act. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of demo goods as 'Physicians' Samples - Not for Sale' Legal framework: The concept of supply (including sale, transfer, barter, exchange, licence, rental, lease or disposal) is governed by Section 7 of the CGST Act. Section 17(5)(h) disallows ITC on goods disposed of by way of free samples or gifts. Applicable CBIC guidance (Circular No. 92/11/2019-GST) treats free samples as not eligible for ITC. Precedent treatment: The Authority considered the statutory scheme and administrative guidance treating free/physicians' samples as a permanent gratuitous transfer entailing blocked credit; no specific judicial precedents were invoked or overruled in the ruling. Interpretation and reasoning: The Authority distinguished demo goods from physicians' samples on the basis of transfer of title and the nature of use. Physicians' samples are described as goods permanently relinquished to a medical practitioner and labelled 'Physician's Sample - Not for Sale', constituting a disposal without consideration. By contrast, demo goods remain the property of the supplier, are entrusted to product specialists as custodians/agents for repeated demonstrations, are not distributed to customers or third parties, and are ultimately recorded as scrap and cleared on payment of GST. Issuance for demonstration is, therefore, custodial and for the furtherance of business rather than an irrevocable transfer of ownership. The Authority held that there is no 'supply' at the time of issuance; the only taxable event envisaged is the eventual clearance of scrap with tax payment. Ratio vs. Obiter: Ratio - The central legal proposition adopted as binding within the ruling is that absence of transfer of title means demo goods are not disposals akin to physicians' samples for GST purposes, and issuance does not amount to supply under Section 7. Obiter - Observations contrasting marketing dynamics and hygiene-driven single-use disposals are explanatory and contextual, supporting the primary ratio. Conclusion: Demo goods issued to product specialists for demonstration and returned or scrapped by the supplier are not to be treated as 'Physicians' Samples - Not for Sale' for GST procedural compliance. Issue 2: Requirement to reverse ITC on demo goods issued to product specialists Legal framework: Section 16 and Section 17 of the CGST Act regulate eligibility and reversal of Input Tax Credit. Section 17(5)(h) specifically excludes ITC on goods disposed of by way of gift or free samples. CBIC circulars clarify treatment of free samples vis-à-vis ITC eligibility. Precedent treatment: The Authority relied on statutory text and administrative clarification distinguishing free/physician samples (blocked ITC) from bona fide business assets used in the course of business; no judicial decisions were applied or displaced. Interpretation and reasoning: Because demo goods remain the supplier's property and are used exclusively for demonstrations intended to generate taxable sales, their issuance constitutes use 'in the course or furtherance of business.' The disposal that triggers the blocking provision in Section 17(5)(h) occurs only where there is an irrevocable gratuitous transfer (e.g., free samples/gifts). Here, since title is not transferred at issuance and the taxable event is the eventual scrapping/clearance (on which GST is paid), the conditions for disallowance under Section 17(5)(h) are not met. The Authority emphasized the difference in business treatment and purpose between free samples and demo assets, noting that demo assets are part of the business asset pool until scrapped. Ratio vs. Obiter: Ratio - ITC on inputs/inputs contained in demo goods issued to product specialists need not be reversed because issuance does not amount to a disposal or free supply triggering Section 17(5)(h). Obiter - References to hygiene-related single-use items being disposed of after each use and the practice of scrapping on tax payment serve to illustrate application but do not expand the legal rule beyond the ratio. Conclusion: No reversal of Input Tax Credit is required for goods issued to product specialists for demonstration purposes, provided such goods remain the supplier's property and are not permanently transferred as free samples or gifts; tax liability arises, if any, upon final scrapping/clearance when GST is paid. Cross-references and practical implication The conclusions on both issues are interdependent: the determination that issuance of demo goods does not transfer title (Issue 1) is dispositive of the ITC reversal question (Issue 2). The Authority's approach treats the issuance as custodial business use until final scrap clearance, and not as a taxable 'supply' or a free disposal for the purposes of Section 17(5)(h).