DECEMBER 03, 2019

By Dr G Gokul Kishore

ONE of the legacies carried forward from service tax regime to GST regime is the concept of composite supply. It has significant impact on determination of applicable tax rate and valuation of supplies. In particular, certain types of contracts involving substantial stakes beg clarity on this issue. Let us look at a few advance rulings in this 64th part to understand the department's view as those who have not filed application for such ruling but adopting a different practice can prepare for defending themselves if and when show cause notice is issued in the near future.

Supplies made from different States under one contract

A taxpayer may supply goods from his factory in a particular State and provide services of installation and commissioning from a different State where the goods are to be located. The contract in such cases will be one but work orders, invoices, consideration, etc., will be separate. As the general GST rate applicable on services is 18%, issues may arise when the goods supplied attract a lower or higher rate than 18%. The taxpayer would contend such transaction as covered under composite supply if the rate applicable to goods is lesser than 18% and the department would contend to the contrary. Answer may lie in the questions as to whether the supplies are naturally bundled, whether they are supplied in conjunction with each other and which one in the bundle is the principal supply.

On similar facts as noted above, the Authority for Advance Rulings, Maharashtra held that the major part of the contract was for supply of goods (UPS units supplied to DMRC) and without supply of such goods, services of installation, testing and commissioning of substations cannot be provided. Based on such observation, the AAR held that the goods and services are supplied in conjunction with each other and principal supply is that of goods and the entire transaction will be subject to tax rate as applicable to goods. To arrive at such an important conclusion, the Authority devotes two paragraphs in the ruling running to 20 plus pages. The conclusion may be correct as the AAR had the benefit of reading all the terms in the contract. But absence of discussion and finding on such goods and services being naturally bundled deprives the taxpayer of finer understanding of the jurisprudence on this issue [In Re: Vertiv Energy Pvt. Ltd . - 2019-TIOL-313-AAR-GST

Repair under warranty

A very interesting question was posed to Karnataka AAR. Vehicles manufactured by foreign company were sold by an Indian entity and such entity undertook replacement of defective parts and repair services during warranty period. The Indian entity was reimbursed in foreign exchange by the foreign company for such activities. The applicant sought a ruling as to whether the transaction amount to export of service as apparently all the conditions for such treatment were satisfied. The applicant also contended that the place of supply being where goods are made available by the recipient would not apply as the foreign company was the service recipient while the goods were brought for repair by customers in India.

The Authority ruled out coverage under export of service as the service recipient was the Indian customer who bought the vehicles and as to who pays the consideration was immaterial. The Authority has held that this is case of composite of supply of goods or services where the principal supply is that of goods or of services depending on the nature of individual case. We are unfortunate that there is no discussion on the reasons for arriving at the conclusion as composite supply. Also, one is left to assume on what could be the principal supply in such cases. It may be a fact that the applicant did not seek ruling as to whether the supply of replacement parts and repair services was composite supply or not. However, when the Authority arrives at such a conclusion, reasons are expected. Such non-speaking nature of rulings neither provide guidance to taxpayers nor contribute to jurisprudence. Further, this transaction is a common industry practice and a speaking and reasoned order could have been helpful to the taxpayers [In Re: Volvo Eicher Commercial Vehicles - 2019-TIOL-334-AAR-GST .

Repair service along with supply of spares is not composite supply

In contrast to the ruling discussed above, the applicant sought ruling before Kerala AAR on whether supply of spare parts or accessories and repair service to vehicles (navy boats in this case) can be considered as composite supply wherein principal supply would be repair service with tax rate of 18% being applicable on the entire transaction. The rate contract indicated amounts payable for goods and services separately. This routine aspect of a contract was construed by AAR as supply of goods and repair service being distinct and separately identifiable supplies with different rates. The Authority has further noted that work orders have been issued separately and the applicant was also issuing separate invoices indicating value of spare parts and service charges.

Quoting different prices for goods and services or separate work orders cannot be the determinant of supplies being composite or not. Issuance of separate invoice has not been prescribed in the statute to treat transactions as not composite as the definition in CGST Act is anchored on the concept of supplies being naturally bundled. The goods and services were held by the AAR as liable to tax rate separately as applicable to them. It may be relevant to note that some of the parts attracted 28% tax rate and had the supply been treated as composite with repair service being the principal supply, the whole transaction would have been taxed at 18%. This reinforces the notion that majority of the rulings affirm the department's view and the same is more oriented towards maximization of revenue rather than providing an enlightening discussion on intricate issues involved [In Re: Vista Marine and Hydraulics - 2019-TIOL-431-AAR-GST .

A healthy ruling to heal the heart

If one is disheartened to read the above rulings, another ruling of Kerala AAR will gladden taxpayers' hearts. Several questions were posed to the AAR and one among them was whether a hospital is liable to pay GST on supply of medicines and other surgical goods from its pharmacy to in-patients. Two more questions are also relevant - whether GST is payable on supply of incidental services of X-ray and clinical laboratory provided as part of healthcare service and on supply of implants and artificial limbs.

The ruling discusses the circumstances when one gets admitted as in-patient, the expectation from the hospital to provide an array of services, medicines, tests and care which form the bundle. The medicines, implants, room provided on rent, dietary food, etc., are used in the course of providing healthcare services to patients admitted in the hospital and therefore, they are naturally bundled. The ruling further holds that medicines and allied goods supplied to such in-patients are indispensable items for facilitate healthcare services and the supply is covered under 'composite supply'. As healthcare services provided by hospitals are exempted under GST, supply of such goods during the course of treatment also gets the same tax treatment. We expect such rulings not because they are in favour of the taxpayers but because of the analysis of the facts, industry practice and issues involved besides the statutory provisions [In Re: Baby Memorial Hospital Ltd . - 2019-TIOL-430-AAR-GST .

[To be continued…]

[The author is an Advocate. The views expressed are strictly personal.]

See Part 63 .