JANUARY 14, 2020

By Dr G Gokul Kishore

WHEN goods and services are taxed under a single statute, certain concepts restricted to services in the pre-GST regime have become relevant to goods as well as transactions involving both goods and services under the GST law particularly when the taxman is eager to perceive the same as an additional means for revenue optimization. Composite supply is one such concept. In this 69th part, a judgment is discussed on the same to discern the emerging jurisprudence.

Kerala High Court judgment

The petitioner, a pharmaceutical company was transporting medical equipment / instruments to hospital / laboratories. These are days of e-way bill system but physical checking on the roads by stopping conveyances is widely reported. The above said movement of goods was thus checked and absence of tax invoice was noticed. The goods were seized and later released on furnishing security. The petitioner sought to know before Authority for Advance Ruling as to whether such movement of instruments amounted to supply or merely transportation of goods not involving supply as in the former, tax invoice is required and in the latter, delivery challan would suffice. The instruments were meant for being placed in the hospitals / laboratories and they were not 'supplied' i.e. they were not sold. The AAR perused the agreement between the petitioner and the hospitals and noticed that the terms also included purchase of reagents, chemicals and disposables by the hospitals from the distributor of the petitioner. [See - 2018-TIOL-186-AAR-GST].

The AAR ruled that the above transaction i.e. 'placing' the instruments by the petitioner apparently without monetary consideration and supply of reagents / chemicals by the distributor constituted 'composite supply' as per GST law. Providing instruments was held as taxable as right to use goods and the same was the principal supply with supply of reagents by distributor being ancillary supply. Therefore, the AAR concluded that though reagents as such attracted 5% GST, along with supply of service of right to use instruments, the entire transaction would be liable to 18% GST. The Appellate AAR also upheld this ruling. [See - 2019-TIOL-11-AAAR-GST].

The petitioner contended before Kerala High Court that the question whether the transaction amounted to composite supply or not was not referred to AAR for ruling and, therefore, the ruling pronounced was without jurisdiction and the finding on composite supply being without any evidence / material, was based on presumption. The High Court accepted the same and set aside the rulings with direction to AAR to rule on the question posed in the application. However, the High Court further went into the issue of composite supply and expressed its view. [Abbott Healthcare Pvt. Ltd. v. Commissioner of State Tax, Kerala - W.P. (C) No. 17012 of 2019 (B), Judgment dated 7-1-2020] - 2020-TIOL-40-HC-KERALA-GST.

Supply by two different persons not covered under composite supply

The department argued that the instrument supplied by the petitioner cannot function without the reagents and, therefore, supplies effected by the petitioner and the distributor had to be clubbed to ascertain the real supply made by the petitioner. The AAR's ruling expresses the departmental view in more unequivocal terms as it viewed the arrangement of supplies as per the agreement as a scheme to avoid payment of tax at a higher rate. The terms of the agreement provided that the hospitals shall be liable to pay the deficit amount if they fail to purchase minimum committed quantity of reagents from the distributor. Based on this fact, the AAR held that the supply of medical instruments was for deferred consideration as the overall price realised from the hospitals included the rent for the instrument also.

The High Court noted the definition of 'composite supply' as contained in CGST Act and held that when supplies are made by two different taxable persons, the same cannot be brought under composite supply. It relied on UK VAT cases wherein it was held that the concept of composite supply would not be applicable when there was more than one supplier. It further held that in the case before it, the two supplies cannot be held as naturally bundled in the ordinary course of business as the business model followed had held the field for a considerable period of time and the supplies are not bundled in the ordinary course of business. According to the Court, supplies as effected at a given point of time on "as is where is" basis should be taken into account when the issue of composite supply is considered.

Analysing transactions on 'as is where is' basis

This series is not per se intended to discuss elaborately judgments as our interest and concern lie in issues emerging out of the same. First, certain guidance and training in judicial processes and passing of orders should be provided by the department to AARs so that the questions referred alone are answered. It may be an issue worth in-depth examination by the departmental officers as to whether the agreement between the petitioner and hospitals whereby instruments are stated as placed without consideration while the chemicals to run the instruments are supplied by distributors but a penalty for failure on minimum off-take is collected by the petitioner-company is a scheme to avoid payment of tax. If it is perceived that there is a veil and it requires to be pierced, then adequate statutory backing along with evidences need to be marshalled before a case is made out. However, AAR can hardly undertake such an exercise.

An important issue highlighted by the judgment is that before the question of composite supply is addressed, whether the transaction is one of taxable supply is to be seen. The definition of composite supply applies to two or more taxable supplies. In the present case, placing the instrument in hospitals without consideration may not be taxable supply if one were to refrain from advancing the argument that granting permission to keep the instrument in hospital's premises amounted to consideration.

By definition, supply includes all forms of supply made or agreed to be made for a consideration. Similar to the service tax regime, the agreement or contract between the parties would determine whether there is a supply. In the case of the petitioner, it may be said that at the time of movement of the instruments, no supply is contemplated or agreed upon. Consideration, if understood as per contract law, must be one which induces the other to do or abstain from an act. The petitioner obtains permission from the hospital and some incidental benefit may accrue to him if the hospital uses the instrument. However, such incidental benefit cannot qualify as consideration for the movement and subsequent 'placing' of the instrument. The judgement states that transactions have to be analysed on 'as is where is' basis which probably suggests that at the time the 'supply' is said to take place, agreement terms between parties and consideration must be crystallised. A subsequent transaction, for instance, the supply of reagents in this case, cannot convert providing the instruments into a supply when none was contemplated.

The judgment lays down the proposition that nature of supply and valuation need to be distinguished as two supplies may be clubbed for valuation purpose, two independent supplies cannot be clubbed to notionally alter the nature of such supplies. Considering the grey areas surrounding the concept of composite supply, CBIC should issue guidance note for departmental officers so that such provisions are not applied without proper examination.

[To be continued…]

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

See Part 68