Supply of promotional items is taxable at individual rate and ITC is admissible on same

Held by Hon’ble Authority of Advance Ruling, West Bengal 

In the matter of M/S. KANAHIYA REALTY PRIVATE LIMITED (Case No. 12 of 2021 Dated.- September 30, 2021)

M/S. KANAHIYA REALTY PRIVATE LIMITED (The Applicant) is a manufacturer and supplier of hosiery items such as Vests, Briefs, etc… To promote supply, the applicant has provided promotional goods such as gold coins, refrigerators, split air conditioners,s etc at a discounted rate for the retailers who have purchased a specified quantity of hosiery goods. The applicant sought advance ruling on:

1. whether supply of promotional goods would be taxable as “Mixed Supply” or Individual supply.
2. whether ITC of taxes paid on promotional foods is admissible or not?

1. Nature of Supply:

The Applicant contended that supply of hosiery goods and promotional goods is not “Mixed Supply” as two of conditions are not satisfied and also not “Composite Supply”. Hon’ble AAR held that separate invoices are raised for both supplies. As single consideration is not charged for both supplies therefore it does not qualify as “Mixed Supply”. Further, both supplies are not naturally bundled and not made in conjunction with each other. Therefore, such supply does not qualify as “Composite Supply”.

Therefore, the supply of hosiery goods and promotional goods shall be considered as individual supply and the applicable rate of GST shall apply.

2. Admissibility of ITC:

Promotional goods are supplied to enhance business of the applicant and therefore can be said to be made in course and furtherance of business. Further, promotional goods are supplied at a nominal rate and not free of cost and the same can’t qualify as a gift. Therefore, restriction applicable u/s 17(5)(h) is not applicable and applicant is entitled to claim ITC.

1. Brief facts of the case

• The applicant (M/S. KANAHIYA REALTY PRIVATE LIMITED) is engaged in the business of manufacturing and supplying of hosiery goods including Vests, Briefs, etc. 
• To promote sales of hosiery goods, the applicant has implemented an incentive  scheme. In this incentive scheme, when a retailer purchases certain units of hosiery goods, the applicant provides unconnected goods to such retailers at discounted rate. However, the retailer would be at the option not to purchase goods offered under the promotional scheme.
• Unconnected goods the applicant sells under incentive schemes at discounted rates are like gold coins, refrigerators, coolers, split air conditioners, etc. 
• E.g., a retailer who buys 1300 boxes of hosiery goods would be eligible to buy a split air conditioner at INR 50 only.

2. Question before Hon’ble AAR

• Now with respect to sale of goods under the promotional scheme, the applicant sought Advance ruling regarding applicability of GST and admissibility of ITC on goods provided under the incentive scheme. 

• The following questions have been raised:

1. Whether the supply of unconnected goods at discounted rate at nominal price would qualify as individual supplies, i.e., GST rate applicable on such unconnected goods would apply, or would qualify as mixed supply, i.e., highest GST rate would apply, in light of the fact that the hosiery goods and unconnected goods are sold under separate invoices with separate prices.
2. Whether credit of the input tax paid on such unconnected goods would be available to the applicant or not.

3. Relevant Legal Extracts 

Relevant legal provisions have been reproduced below for your ready reference:

Section 17: Apportionment of credit and blocked credits

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

…

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

…”

Section 8: Tax liability on composite and mixed supplies 

“8. The tax liability on a composite or a mixed supply shall be determined in the following manner, namely: –

* * * * * * * * *

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”

As per 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.

Illustration. – 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;”

Definition of “Business” is given under Section 2(17) of CGST Act which is reiterated below:

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction…”

4. Submission of the Applicant

The applicant has submitted his case in detail with peculiarities along with the interpretation of the law.  Extraction of the submission made by the applicant are as follows:

1. Initially, the hosiery goods would be provided to the retailers under a separate Invoice on which GST is charged at applicable rate.
2. If the retailer qualifies the criterion of incentive scheme,  then unconnected goods offered under scheme, such as gold coins, refrigerator, mixer grinder, cooler, split air conditioner, etc,  are offered to such retailer at discounted/reduced price.  For sale of promotional goods, the applicant raises a separate invoice at a discounted rate.
3. However, the retailer has an option to buy such promotional goods, i.e., he may refuse if they do not want to buy.
4. The goods offered in the scheme are bought by the applicant from the open market. The applicant makes payment of GST charged on such invoices. 
5. Now, the applicant wants to avail Input Tax Credit of GST paid on purchase of such goods as per section 16 read with Section 17 of CGST Act.
6. The applicant submitted that the GST Authorities may consider promotional goods, offered at discounted price, as gifts and denies the credit on the same by virtue of Section 17(5)(h) of CGST Act.
7. Further, GST authority may also try to classify sale of hosiery goods and promotional goods as mixed supply as per section 2(74) read with section 8(b) of the CGST Act, 2017.
8. Mixed Supply or not

The applicant submitted the following reasoning and provisions in relation to considering the sale of promotional goods and hosiery goods as “mixed supply”:

• If the supply of promotional items and hosiery items are considered as mixed supply then it shall be considered as supply of such goods which attracts the highest rate of GST. In the given cases, supply of hosiery goods and split air conditioner will be considered as sale of split air conditioner as it attracts a GST rate of 28%.
• Further, both supplies are separate as supply of promotional item would be subsequent to supply of hosiery goods once criteria of purchase of hosiery goods are qualified. 
• Any supply would qualify as “mixed supply” under Section 2(74) of CGST Act only when it qualifies the following conditions cumulatively:
  • There must be two or more individual supplies or combinations of such supplies made in conjunction with each other.
  • The said supplies must be made for a single price.
  • The said supplies must not qualify as a composite supply.
• As per the above conditions mentioned in above points should be met cumulatively to be qualified as ‘mixed supply’. It means only fulfilment of one or two conditions will not be sufficient to call the supply as mixed supply.
• The applicant submits that none of the criteria mentioned above are met in the present case. 
• In the given case, very first condition, i.e., supply of two or more individual supplies or combination of such supplies are made in conjunction with each other, of mixed supply is itself not qualified on following grounds:
  • Applicant argues that the supply of hosiery goods and promotional goods are individual supplies because the supply of promotional scheme goods will take place only after the criteria of purchase of hosiery goods is met.
  • Hosiery goods and promotional goods can not be made together; rather the supply of promotional goods depends on the criterion to be fulfilled by retailers. Supply of promotional goods would be contingent upon supply of hosiery goods.
  • Further, supply of promotional goods does not necessarily take place. Only If retailer opts to buy promotional goods then only sale of such goods would trigger. 
  • Therefore, the very first condition of supply made “in conjunction with each other” is not met. 
• Second condition,i.e., supply must be made for a single price, is also not qualified in the given case. In the present case, supply is made for two different prices therefore it does not qualify as a ‘mixed supply’. The applicant also contended following points:
  • The applicant relied on precedence of In Re: Columbia Asia Hospitals Pvt. Ltd, 2019 (20) GSTL 154 (AAR-GST) in relation to mixed supply. In this case, Hon’ble AAR held that:
    • Where two or more goods/services do not make a composite supply but are still supplied for a single price, then they would make a mixed supply and be taxed as per section 8 of CGST Act 2017.
    • Where supplies of medicines, food and drinks and healthcare services, are not supplied in a single price and form separate and independent supplies then such supplies are taxed separately ar the applicable rate.
  • Therefore, relying on precedence of Columbia Asia Hospitals Pvt. Ltd, 2019 (20) GSTL 154 (AAR-GST), the supply of the hosiery goods and supply of said goods are for different prices and the invoices are raised separately for them. Hence, it is not covered under the mixed supply of goods.
• The applicant discusses the fulfilment of the third condition,i.e., the supply under discussion must not qualify as “Composite Supply”, as follows:
  • Term “Composite supply” is defined u/s 2(30) of CGST Act  as two or more taxable supplies which are made in conjunction to each other and are naturally bundled in the course of business and one of the supplies is a principal supply. 
  • In the present case, the applicant submitted that the supply of promotional goods and hosiery goods would not qualify as a ‘composite supply’ as they are not supplied “in conjunction with each other” and they are not naturally bundled in the ordinary course of business.
• In the given cases, only one of the three conditions of “Mixed Supply” are qualified and other two conditions are not fulfilled. Therefore, the supply of promotional goods and hosiery goods do not qualify as “Mixed Supply”.
• Supply under discussion is neither “composite supply” nor “Mixed Supply”. Therefore, both supplies are to be treated as individual supplies and applicable rate of GST should be charged.

9. Admissibility of Input Tax Credit.

With respect to the issue of Admissibility of ITC on purchase of a promotional item, the applicant makes the following submission:

• As per section 16(1) of CGST Act, the registered person is entitled to take credit of any input tax charged to him on the supply of goods or services which are used or intended to be used in the course or furtherance of business. Therefore, important condition for claiming ITC is that such goods must be used “in course or furtherance of business”.
• Phrase business is defined u/s 2(17) of CGST Act which is reiterated above for reference. Term “Business” is defined in the widest possible manner to include any form of activity, trade or adventure. The sale of promotional goods at a discounted rate is carried out to promote sale of hosiery goods. Therefore, such sales would undoubtedly qualify as an activity which is incidental and undertaken in the course or furtherance of business.
• Further, ITC may be inadmissible under Section 17(5)(h) of CGST Act by classifying sale of promotional goods as “Gifts”. Term “Gift” is not defined under CGST Act. Therefore, reference should be given to definitions provided under any other statute. As per definition of gift given under Gift Tax Act, 1958, any particular thing would qualify as “Gift” only if the same is given voluntarily and without any consideration. Same essence of gift is also provided by Hon’ble Supreme Court in the matter of Naramadaben Maganlal Thakker v Pranjivandas Maganlal Thakker & Ors, 1997 (2) SCC 255. 
• In the given case, the applicant is not providing promotional goods on free of cost basis rather a nominal amount of consideration is charged for same. Therefore, inadmissibility given u/s 17(5)(h) is not applicable to promotional goods and the applicant is entitled to claim ITC.

5. Observations & Findings of the AAR

The Hon’ble AAR has made following observations and findings in the given case:

• Determination of Nature of Supply
  • On the issue of determination of nature of supply, “mixed supply” and “composite supply” are mutually exclusive, i.e., conditions provided for composite supply must not be present in mixed supply.
  • As per the scheme of applicant, hosiery goods would be sold first under a separate invoice and once the retailer meets the eligibility criteria, the promotional goods are sold under a separate invoice. So, the supply of hosiery and promotional goods are not “made for single price” and accordingly, such supply does not meet the second condition of “Mixed Supply”.
  • Therefore, such supply is not a “Mixed Supply”.
  • With respect to qualifying such supply as “Composite Supply”, supply of hosiery goods and promotional goods supply is not naturally bundled and also not supplied in conjunction with each other. Therefore, it does not qualify as “Composite Supply”.
  • Therefore, supply of hosiery goods and promotional goods would be considered as individual supply and applicable rate of GST would apply.

• Admissibility of ITC on promotional items
  • With respect to admissibility of ITC of tax paid on promotional items, contention of the applicant that promotional goods are provided to enhance sales and therefore, same can be said to be in the course or furtherance of business.
  • Also, promotional goods are provided for nominal consideration and therefore, same has not been provided on free of cost basis and can’t be termed as “Gift” and accordingly, inadmissibility given under section 17(5)(h) of CGST Act is not applicable.
  • However, value of supply of promotional goods shall be determined as per Section 15 read with Rule 27 of CGST Act as price is not the sole consideration for the supply.

6. Conclusion

1. Supply of promotional goods to retailers for nominal value if they qualify the retailers to buy certain amounts of hosiery goods would qualify as individual supplies and shall be taxable as per the rates for their individual category.
2. Credit shall be allowed to be taken on the items sold for nominal amount.