2020 (1) TMI 338 - HC - GST

Supply or not - specified medical instruments by the Applicant to unrelated parties like hospital(s), Lab (s), for uses without any consideration - whether constitutes a supply or whether it constitutes movement of goods otherwise than by way of supply as per provisions of the CGST/SGST Act, 2017? HELD THAT - There was no occasion for the AAR to go into the issue of whether the supply effected was a composite supply or not. I also find that its findings on the said issue are at any rate legally untenable. The concept of enhancement of utility of the instrument through the supply of reagents/calibrators/disposables, 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. A distinction has to be drawn between the nature of a supply and the valuation thereof. While clubbing of two independent supplies may be resorted to for the purposes of valuation of each of those supplies, there is no scope of clubbing of two independent supplies so as to notionally alter the very nature of each of those supplies as they existed in fact, at the relevant point in time. Natural bundling of services - HELD THAT - 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. As regards composite supply must take into account supplies as effected at a given point in 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. Matter remanded back to the AAR for a fresh decision on the query raised before it by the petitioner company - petition allowed by way of remand.

Summary

Issues Involved:
1. Jurisdiction of the Authority for Advance Ruling (AAR) and Appellate Authority.
2. Determination of "composite supply" under the CGST/SGST Act, 2017.
3. Taxability and valuation of supplies under the agreement.

Detailed Analysis:

1. Jurisdiction of the Authority for Advance Ruling (AAR) and Appellate Authority:
The petitioner contended that the AAR and the Appellate Authority acted without jurisdiction by rendering findings on the issue of composite supply, which was not raised before them for clarification. The court observed that the AAR went beyond the terms of reference by embarking on an enquiry as to whether the supplies under the agreement constituted a composite supply. This was deemed beyond their jurisdiction, as the primary query was whether the provision of medical instruments without consideration constituted a "supply" or "movement of goods otherwise than by way of supply."

2. Determination of "Composite Supply" under the CGST/SGST Act, 2017:
The AAR held that the placement of medical instruments for use without consideration, in conjunction with an agreement containing minimum purchase obligations, constituted a "composite supply." The principal supply was identified as the transfer of the right to use the instruments, taxable under Notification No.11/2017 Central Tax (Rate). Consequently, the reagents, calibrators, and disposables were taxed at the higher rate applicable to the instruments. The court, however, found this determination legally untenable. It emphasized that for a supply to be considered composite, it must meet the definition under Section 2(30) of the CGST Act, which requires the supplies to be naturally bundled and supplied together in the ordinary course of business by the same taxable person. The court noted that the supplies were made by different taxable persons (the petitioner and its distributor), and there was no evidence that they were naturally bundled in the ordinary course of business.

3. Taxability and Valuation of Supplies under the Agreement:
The AAR's findings suggested that the supply of instruments was for deferred consideration, as the minimum purchase obligation ensured the overall price included the rent for the instruments. The court disagreed, stating that the concept of enhancing the utility of the instrument through the supply of reagents/calibrators/disposables is relevant for valuation but not for determining the nature of the supply as composite. The court highlighted that supplies by different taxable persons cannot be clubbed to alter their nature and must be assessed individually based on their factual existence at the time of supply.

Conclusion:
The court quashed the orders of the AAR and the Appellate Authority, remitting the matter back to the AAR for a fresh decision on the original query regarding the nature of the supply of medical instruments without consideration. The AAR was directed to pass fresh orders within six weeks, considering the observations made in this judgment. The writ petition was disposed of accordingly.