AAR have no jurisdiction to go beyond issues referred: Kerala High Court

Abbott Healthcare Private Limited Vs Commissioner of State Tax Kerala (Kerala High Court); W.P(C).No.17012 of 2019(B); 07/01/2020

Facts:-

♣ It is the case of the petitioner that as per the business model operated by it in the State of 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 the supply of medical instruments to the hospital/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 the 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. When a consignment of instruments was being transported to a laboratory without any consideration, pursuant to the agreement entered into between the parties, the same was seized by the Assistant State Tax Officer, Kozhikode, on the ground that the goods were not accompanied with a tax invoice but were being transported under a delivery challan.

♣ Although the detained goods were subsequently released consequent to the petitioner furnishing a bank guarantee and a bond as provided under the CGST Act and Rules, the petitioner thought it appropriate to obtain an Advance Ruling from the Authority for Advance Ruling and which held that – 2018-TIOL186-AAR-GST 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, disposables etc. for a specified period constituted a “composite supply”. 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 Sl.No.17(iii). Heading 9973 of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017; that supply of reagents, calibrators, disposables etc., became taxable at the rate of tax applicable to the instruments, namely, 18% [9% CGST + 9% SGST]. The appellate authority for Advance Ruling upheld this order, hence the petitioner is before the High Court.

The Hon’ble High Court held as under:-

• There was no occasion for the AAR to go into the issue of whether the supply effected was a composite supply or not and, therefore, 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.
• Transactions envisaged under the agreement entered into between the petitioner and its customer hospitals/laboratories militate against viewing them as a composite supply. Firstly, the supplies are made by two different taxable persons; the supply of of instrument being by the petitioner and the supply of the reagents, calibrators and disposables being 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. Secondly, 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“.
• 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.A finding as regards composite supply must take into account supplies as effected at a given point in time on “as is where is” basis – 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 – matters 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 remitted back to the AAR for a fresh decision on the query raised before it by the petitioner company – AAR shall pass fresh orders in the matter, after hearing the petitioner, within a period of six weeks.