No ITC Reversal on Demo Goods: Kerala AAR

Demo Goods are Distinguished from Physicians Samples – No ITC Reversal Required

Summary : The Kerala Authority for Advance Ruling (AAR), in Dynamic Techno Medicals Private Limited, held that products issued for demonstration purposes by Product Specialists cannot be equated with “Physicians Samples – Not for Sale,” and hence, reversal of Input Tax Credit (ITC) is not required. The applicant, engaged in the manufacture and marketing of health aid products, issued demo units to its Product Specialists for marketing demonstrations at hospitals and clinics. These demo goods were repeatedly used, remained company property, and were later returned as scrap on which GST was paid.

The AAR noted that Physicians Samples involve permanent transfer of ownership without consideration, falling under blocked credits as per Section 17(5)(h) of the CGST Act, 2017. In contrast, demo goods are not transferred or gifted but are used for legitimate business promotion and remain business assets until scrapped. Since there is no disposal or transfer of title at the time of issue, such goods do not fall under the category of free samples or gifts. The Authority, therefore, ruled that the issuance of demo products constitutes business use and does not attract ITC reversal.

The ruling emphasizes the distinction between demo goods and Physicians Samples both in fact and in law, reinforcing that Input Tax Credit remains admissible when goods are used for business purposes and not distributed free of cost. The AAR’s interpretation aligns with Section 17(5)(h) of the CGST Act and CBIC Circular No. 92/11/2019-GST, clarifying that only goods given away as free samples attract blocked credit.

Facts:

Ms. Dynamic Techno Medicals Private Limited (“the Applicant”) is engaged in the manufacture and marketing of various health aid products.

The Applicant issues demo products to Product Specialists for marketing and demonstration to prospective customers at hospitals, clinics, and other medical forums. These demo units are not sold but used repeatedly; once worn out, they are returned as scrap, on which applicable GST is paid.

The Applicant contended that demo products should not be equated with Physicians Samples, which involve free distribution and permanent transfer of ownership, and hence ITC reversal should not be required. The Applicant approached the Authority for Advance Ruling seeking a declaratory ruling on whether demo goods are akin to Physicians Samples for GST procedures and whether ITC reversal is applicable.

Issues:

• Whether products issued for demonstration by Product Specialists are to be treated at par with ‘Physicians Samples – Not for Sale’ for GST procedural compliance.
• Whether any reversal of Input Tax Credit is to be issued for the purpose of demonstration by the product specialists, by treating it at par with issue of physician sample?

Held:

The Kerala AAR in AAR No. KER/22/2025 held as under:

• Observed that, Physicians Samples involve permanent transfer of ownership to medical practitioners without consideration, falling under blocked credit under Section 17(5)(h) of the CGST Act.
• Noted that, demo goods are not permanently transferred or gifted and ownership remains with the Applicant.
• Held that, demo goods are provided exclusively for demonstration and are disposed of as scrap after use, on payment of GST.
• Noted the distinction between demo goods from Physicians Samples factually and legally, emphasizing no disposal or transfer of title at issuance.
• Held that, the issuance of demo goods constitutes legitimate business use and ITC reversal is not warranted.
• Held that, demo goods are not subject to reversal of ITC as they remain business assets until scrapped.
• Held that, the demo products issued to Product Specialists for demonstration purposes are not to be treated as Physicians Samples – Not for Sale for the purpose of GST procedural compliance, and accordingly, no reversal of Input Tax Credit is required for such demo goods.

Our Comments:

This ruling aligns with GST principles where Input Tax Credit is admissible only on goods used for business purposes and blocked on goods disposed of free of cost such as Physicians Samples. The AAR distinguished demo goods from Physicians Samples by focusing on the absence of transfer of title and the business intent.

It relies on Section 17(5)(h) CGST Act 2017, which specifies reversal of ITC for free samples (gifts) but not for goods retained in business assets and ultimately scrapped on payment of GST. Further the CBIC Circular No. 92/11/2019-GST dated March 7, 2019 issued clarification on various doubts related to treatment of sales promotion schemes under GST.

Relevant Provisions:

Section 17(5)(h) of the CGST Act, 2017:

“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; ..”

*****

(Author can be reached at info@a2ztaxcorp.com)