West Bengal Authority for Advance Ruling (‘AAR’) in the case of IN RE: M/S. KANAHIYA REALTY PRIVATE LIMITED [2021 (10) TMI 326 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL] has ruled that supply of goods such as gold coins, refrigerator etc. at nominal price to retailers against purchase of specified units of hosiery goods under a promotional scheme is neither a composite supply nor a mixed supply. AAR has ruled that they are separate supplies under separate invoices and no reversal of ITC availed on purchase of promotional goods is required. Captioned ruling has been analyzed in this update.
- The Applicant intends to manufacture and supply hosiery goods such as vests, briefs etc.
- The Applicant proposed to implement a scheme with the objective of incentivizing its sale of hosiery goods amongst the retailers by offer of sale of unconnected goods at a discounted price on purchase of specified quantity of hosiery goods as per their retail scheme.
B. QUESTIONS BEFORE THE AAR (relevant extracts)
- Whether the supply of various promotional goods to retailers at nominal price against purchase of specified units of hosiery goods would qualify as individual supplies or mixed supply?
- Whether credit of the input tax paid on the items being sold at nominal prices would be available to the applicant?
C. CONTENTION OF THE APPLICANT
- Applicant has submitted that hosiery goods would be sold initially on a separate invoice. Post the retailers, achieving the eligibility criteria specified in retail scheme circular, promotional goods would be offered for sale.
- Sale of promotional goods would be made at reduced/ discounted price under separate invoice. It needs to be noted that retailers have the right to refuse, and they may not proceed to buy the promotional goods even after being eligible to do so.
- Applicant has submitted that the captioned transaction does not fulfill the criteria of Mixed supply attracting higher rate of GST, since neither both the goods are supplied in conjunction with each other nor they are supplied for single price.
- Applicant submitted that a particular thing would qualify as gift if the same is given voluntarily and without any consideration. Therefore, only when a particular thing is given either free of cost or no consideration is charged for the same at all, then only it would qualify as gift and not in applicant’s case.
D. RELEVANT LEGAL PROVISIONS REFERRED
- Section 2(30) - “Composite Supply” means a supply made by a taxable. person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary, course of business, one of which is a principal supply.
Illustration- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
- Section 2(74) - “Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
llustration - A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.
- Section 15(1) - The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
- Section 17(5) (h)- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
E. OBSERVATION AND RULING BY THE AAR
- AAR agreed with the view of applicant that since the hosiery goods would be sold first on a separate invoice and thereafter after being eligible, the specified goods would be sold to retailer under a separate invoice, therefore the supply is not a mixed supply.
- Further AAR observed that the supply shall not fall under Composite supply as well since supply of hosiery goods & promotional goods are not naturally bundled and are not supplied in conjunction with each other.
- AAR stated that since a nominal value shall be assigned to the goods under promotional scheme, so the same are effectively not supplied free of cost and cannot be termed as gift.
AAR finally ruled as under on the stated questions:
- 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.
- Credit of the input tax paid on the items being sold at nominal prices would be available to the applicant.
F. Our comments
AAR has given this ruling based on the fact that promotional goods are sold at nominal / discounted price upon fulfillment of eligibility conditions, and they are not being given free of cost (gift) and thus ITC reversal U/s 17(5)(h) is not warranted. Thus, the captioned ruling can be differentiated from IN RE: M/S. MOKSH AGARBATTI CO. [2020 (4) TMI 593 - AUTHORITY FOR ADVANCE RULING GUJARAT] and IN RE: BIOSTADT INDIA LIMITED [2019 (3) TMI 540 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA] wherein incentives/ promotional goods were given free of cost.
Though the AAR has briefly commented on the valuation aspect of supply of promotional goods while stating that the price is not the sole consideration for this supply, and it needs to be seen in context of supply of hosiery goods. It has further stated that it is not an independent supply rather it entirely depends upon the supply of hosiery goods. Thus, this AAR ruling should not be followed blanketly as the valuation aspect of promotional materials would be prone to dispute by department.
(Author can be reached at dinesh.singhal@snr.company or cadineshsinghal@gmail.com).
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