GST on Supply of Demo Products from HO to branch & vice versa & among branches

Issue : Supply of Demo Products from  head office to branch offices and vice versa and among  the branch offices

Θ As per  Section 2(83)  of CGST ACT, 2017-  “outward supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business;

A perusal of above reveals that  every supply has been covered under the above definition including supply of demo goods by head office to branch offices, vice versa and among the branch offices.

Θ According to Clause (a) of Sub-section 1 of Section 7 of CGST, Supply includes:

All forms of supply of goods or services or both such as

• Sale,
• Transfer,
• Barter,
• Exchange,
• License,
• Rental,
• Lease or
• Disposal made or
• Agreed to be made

for a consideration by a person in the course or furtherance of business.

It means, whatever supply by a person for a consideration in the course or furtherance of business shall be taxable under GST Laws.

Θ According to Schedule I of CGST – Matters to be treated as supply even if made without consideration:

2nd paragraph of this schedule – “Supply of goods or services or both among related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business”

Θ Distinct Person – Provision related to distinct person are given under section 25(4) of CGST Act:

 “A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.”

Observation: After considering the above provisions in relation to supply of Demo Goods between related persons or distinct persons even at zero value shall be considered as supply of goods and GST shall be paid on the said transaction.  However, this transaction should not be taxable because there is no further supply of goods. These goods are transferred by one related person to another related person just for demo of goods / product and actual supply shall be made by its head office on the basis of purchase order to be received by the particular sales offices. Needles to say demo goods are not meant for sale as these only makes the people aware about the quality and other special features of the product. Thus these lay the foundation for sale and does not involve ‘sale’ at all.  Provisions should be made to exclude demo goods out of the definition of ‘Supply’. Definition of ‘supply’ with or without consideration creates hurdle in promotion and marketing of the products. The GST Acts are silent on the issue inasmuch as there is no logic to pay GST dispatching the goods for demo especially in the event goods are not being dispatched to the buyer. These goods are to be received back after demonstration is completed. So the demo goods should be allowed to be cleared without payment of GST.

 Θ Supply includes every kind of supply as mentioned in

• the definition of outward supply under section 2(83),
• meaning of supply under Clause (a) of Sub-section 1 of Section 7 and
• supply covered under 2ndparagraph of Schedule I

of CGST Act and would be covered the supply of the Demo Goods / product between related person or distinct person.

Θ Sale on Approval Basis – As I understand, the company can’t supply of demo goods to its sales offices under sale on approval basis due to having the same Permanent Account Number (PAN). This provision is only applicable when supply of goods to clients not in case where supply between distinct persons.

Illustration Suppose if A Ltd. is manufacturing company and its principal place of business is in Delhi (Manufacturing Unit located in Delhi). The company has more than one sales office in India such as Haryana, Uttar Pradesh and Punjab etc. However, A Ltd. supplies the goods from Delhi only. There is no supply of goods from any sales offices except Delhi.  A Ltd. (Delhi) supplies the Demo goods to its sales offices from where there is no supply of goods to any clients of the company. The goods supplied to sales offices for demo purpose only. However, GST is levied on the said transaction which impose the additional burden of tax on the company and the company will also fulfill all the compliance under GST Laws i.e totally hardship for them.

Suggestion: In the light of the above discussion, GST Laws are silent in relation to this particular transaction. It is cause of hardship in the business scenario that they are paying the tax on those transactions which should not be taxable under the GST regime. The relaxation should be provided by the GST Council on this issue.

The GST Council should understand this practical problem and provide any clarification or make necessary amendment in the GST Laws such as they have already provided the relaxation in case of Job Work and Sale on Approval Basis.

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