Facts of the case
- The petitioner is a company having its registered office in Mumbai and is engaged in the sale of pharma products, diagnostic kits etc. It is registered under GST in the State of Kerala. As per the business model operated by it in the Kerala, it places its diagnostic instruments at the premises of unrelated hospitals, laboratories etc. for their use for a specified period without any consideration. The petitioner also enters into Reagent Supply and Instrument Use Agreements with various hospitals, laboratories etc., whereunder, the arrangement between the parties is for supply of medical instruments to the hospitals/laboratory concerned, for their use, without any consideration for a specified period and for the supply of specified quantities of reagents, calibrators, disposables etc. at the prices specified in the agreement, through its distributors on payment of applicable GST.
- It is stated that, as per the agreement, while ths supply of instruments is by the petitioner, the supply of reagents, calibrators and disposables are effected by its distributor, who purchases the said products from the petitioner on principal to principal basis. When the distributor supplies the reagents, calibrators and disposables to the hospitals/laboratories concerned, the distributor discharges the applicable GST on the price charged for supply of the said products. In other words, there is no direct sale/supply of the reagents, calibrators and disposables by the petitioner to the hospitals/laboratories in question.
- It is also stated that the value of instruments placed at the premises of the hospitals/laboratories compared to the total turnover of supply of reagents, calibrators and disposables by the distributor over the contract period, is small and would only be around 20% of the turnover of supply of reagents, calibrators etc. The agreement entered into between the parties also contains a clause which provided that if the hospital fails to purchase specified minimum quantum of reagents, calibrators etc., then the petitioner is entitled to recover from the hospital an amount equal to the deficit in the actual purchases, vis-a-vis, the minimum purchase stipulated under the contract.
- The petitioner raised the question before the Advance Ruling Authority as follows:-
"Whether in the facts of the present case, the provision of specified medical instruments by the Applicant to unrelated parties like hospitals, labs etc. for use without any consideration, constitutes a "supply" or whether it constitutes "movement of goods otherwise than by supply" as per the provisions of the CGST/SGST Act, 2017?"
- The AAR held that the placement of specified medical instruments to unrelated customers like hospitals, laboratories etc. for their use without any consideration in the backdrop of an agreement containing minimum purchase obligation of products like reagents, calibrators etc. for a specified period constitutes a "composite supply". It thereafter found that the principal supply in the said composite supply was of the transfer of right to use goods for any purpose which was liable to GST under SI.No.17)iii)- Heading 9973 of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017. As a consequence of the said ruling, the supply of reagents, calibrators, disposables etc. which is otherwise taxable @ 5% became taxable at the rate applicable to the instruments i.e. 18%.
- Aggrieved by the order of AAR, the petitioner filed a writ petition against which the following judgement was placed.
Observation of High Court
- The AAR has examined the query in the backdrop of the agreement entered into between the peititoner and the hospitals/laboratories concerned, and opined that the petitioner was effecting two supplies, namely, of medical instruments and of reagents/ calibrators/ disposables etc. to be used along with the instrument. Since, the instrument supplied had no utility to the customer unless he also bought the reagents/calibrators/disposables, the supply of the instrument and the reagents etc. had to be seen as naturally bundled to form a composite supply. The AAR went on the observe the supply of instrument as principal supply in the said composite supply. The arrangement of supplies by the petitioner through the agreement was seen as a scheme to avoid payment of tax at higher rate. As regards valuation of the said supply, the AAR found that in terms of the agreement, the petitioner had, in fact, supplied the medical instrument for deferred consideration since, according to it, the minimum purchase obligation in respect of reagents etc. under the agreeement, ensured that the overall price realised from the customer subsumed within it, the rent for the instrument as well.
- On a consideration of the facts and circumstances of the case and the reasonings of the AAR, it is of the view that it may have been open to the AAR to enquire, based on the terms of the agreement, whether the supply of the medical instruments to the customer, although styled as a free supply, was in fact one for valid consideration, its findings as regards a composite supply are wholly without jurisdiction.
- The concept of enhancement of utility of the instrument through the supply of reagents/calibrators/dipsosables, while relevant for the purposes of valuation of the supply of instruments, cannot be imported into the concept of composite supply under the GST Act.
- For a supply to be seen as a composite supply, it must answer to the definition of the term "composite supply" at the time of its supply. As per 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. - Many aspects of the transactions envisaged under the agreement entered into between the petitioner and its customer hospitals/laboratories militate against viewing them as a composite supply as defined above. Firstly, the supplies are made by two different taxable persons; the supply of instrument being by the petitioner and the supply of reagents, calibrators by his distributor who purchases it from him on principal to principal basis. Although, it could be argued that there is a relationship between the said persons that influences the valuation of the supply, the same does not take away from the fact that the supplies are, in reality, made by two different taxable persons. Supplies by two different suppliers could not be treated as principal and ancillary supplies.
- Further, the two supplies do not answer to the description of being "naturally bundled and supplied in conjunction with each other in the ordinary course of business". While they were not bundled together as a matter of fact, in the instant case, there is also no material to suggest that they are so bundled and supplied in conjunction with each other in "the ordinary course of business". In fact, the business model followed by the petitioner appears to have held the field for a considerable period of time and would show that in the ordinary course of business, the supplies are not bundled.
Judgement
- A finding as regards composite supply must take into account supplies as effected at a given point of time on "as is where is" basis. In particular instances where the same taxable person effects a continuous supply of services coupled with periodic supplies of goods/services to be used in conjunction therewith, one could possibly view the periodic supply of goods/services as composite supplies along with the service that is continuously supplied over a period of time.
- These however, are matters that will have to be decided based on the facts in a given case and not in the abstract as was done by the AAR. I therefore, allow the writ petition and remit the matter back to the AAR for a fresh decision on the query raised before it by the petitioner company.
- The AAR shall pass fresh orders in the matter, based on the observations in this judgement.
You may refer detailed judgement as follows:-
(KER-HC) 2020 ITL (GST) 1: Abbott Healthcare (P.) Ltd. v. Commissioner of State Tax
W.P. (C) No. 17012 OF 2019 dated 07-01-2020
