West Bengal Authority for Advance Ruling (‘AAR’) in its recent ruling in the case of M/s Kanahiya Realty Private Limited has ruled that supply of goods such as gold coins, refrigerator etc. at nominal price to retailers against the purchase of specified units of hosiery goods under a promotional scheme is neither a composite supply nor a mixed supply but a separate supply.
It has further been adjudged that no reversal of ITC availed on purchase of promotional goods is required.
Facts of the Case:
- The applicant M/s Kanhaiya Realty Private Limited intends to manufacture and supply hosiery goods such as Vests, Briefs, etc. The applicant further proposes to implement a scheme with the objective of incentivizing its sale of hosiery goods amongst the retailers whereby it would offer unconnected goods for sale at a discounted price to such retailers who have bought a certain unit of hosiery product from it as would be prescribed in its retail scheme circular. However, the retailers will be at liberty not to purchase the goods offered under the said promotional schemes.
- The applicant submits that under the said retail scheme, various products like gold coins, refrigerators, coolers, split air conditioner, etc. (promotional goods) would be offered at reduced! discounted prices to such retailers who purchase specified units of hosiery goods. For example, the retailer would be eligible to buy a split air conditioner for Rs. 50 only against purchase of 1300 boxes of hosiery goods.
Issues on which ruling was sought:
The applicant has sought ruling on following issues:
(1) Whether the supply of promotional goods at nominal price to retailers against purchase of specified units of hosiery goods pursuant to a scheme would qualify as individual supplies taxable at the rates applicable to each of such goods as per section 9 of the CGST Act or mixed supply taxable at the highest GST rate.
(2) Whether credit of the input tax paid on the items being sold at nominal prices would be available to the applicant.
Arguments of the applicant:
- Applicant argued 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 also argued 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.
Order of AAR: Deliberation and Ruling
- AAR observed that supply of hosiery goods followed by the supply of goods under promotional scheme shall not take place for a single price. As the supply of the aforesaid two items shall be made for different prices, it doesn’t satisfy the condition of being „made for a single price‟ and the supplies, therefore, cannot be regarded as mixed supply.
- AAR further noted that the supply shall not fall under the category of „composite supply‟ since supply of hosiery goods and goods under promotional scheme cannot be considered as naturally bundled and supplied in conjunction with each other in the ordinary course of business.
- Thus AAR held that supply of hosiery goods and goods under promotional scheme are separate supply and tax on the supply shall be levied at the rate of each such item as notified by the Government.
- AAR also observed that the retail scheme circular which is proposed to be floated by the applicant is aimed and intended to boost the sale of its hosiery goods. So, the provision of providing said goods under the retail scheme circular would undoubtedly qualify as an activity undertaken in the course or furtherance of business.
- AAR noted that a nominal value shall be assigned to the goods under promotional scheme. So, the same shall not be supplied free of cost and therefore cannot be termed as „gift‟. However, AAR was of view that in the given scenario, the value of the said goods shall be required to be determined as per provision of section 15 read with rule 27 of the CGST/ WBGST Rules, 2017 as it was found that here price is not the sole consideration for the supply.
- AAR also observed that the applicant would therefore certainly not make any supply of the said goods at such reduced price where the retailers fail to achieve the target or do not opt for the scheme. Supply at a very nominal price is therefore not an independent supply rather it entirely depends upon the supply of hosiery goods under certain conditions.
In view of above deliberations the AAR held as under:
i. 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.
ii. Credit of the input tax paid on the items being sold at nominal prices would be available to the applicant.
Our view:
The above ruling seems to be a favorable one. However, we need to note that as per AAR the value of promotional goods needs to be worked out as per Section 15 of the CGST Act as here price is not the sole consideration for the supply. This may pose issues especially where a recipient is a related person like sole distributor.
Relevant Statutory Provisions:
Section 2(30) of the CGST Act
“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) of the CGST Act
“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) of the CGST Act
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) of the CGST Act (blocked credit)
Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
