In re M/s Randox Laboratories India Private Limited (GST AAR Karnataka)
(1) Whether the applicant is liable to pay GST on the machines given to the customers under RRC/PRC models ?
The applicant is liable to pay GST on the machines / equipments given to the customers under the PRC Model but is not liable to pay GST on the machines / equipments given to the Customers under the RRC model.
(2) Whether the supply of reagents along with tile machine rental and services in a RRC/PRC contract is a separate supply or a mixed supply or composite supply? If considered as composite supply, what is principal supply ?
The supply of reagents along with the machine rental services in both RRC and PRC contract is a separate supply independent of machine rental services supplied, if any.
(3) What is the rate of tax for the service of machine under RRC/PRC models ?
The rate of tax for the supply of rental service of equipments is 9% CGST and 9% KGST.
(4) What is the value on which GST has to be paid in case of RRC / PRC model and what is the time of supply ?
The value on which GST has to be paid and the time of supply are,-
a. in case of RRC Model,-
i. for the supply of reagents – at the time of supply of reagents on the transaction value
ii. for the supply of services in the nature of “an act agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” for which a consideration is received – at the time of supply of such services on the transaction value
b. In case of PRC Model,-
i. For the supply of rental services in equipments – at the time of supply of the equipments on the amount of non-refundable payment received or invoiced
ii. for the supply of reagents – at the time of supply of reagents on the transaction value
iii. for the supply of services in the nature of “an act agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” for which a consideration is received – at he time of supply of such services on the transaction value.
(5) Whether the applicant is eligible for the input tax credit on the purchase of machinery for use in RRC / PRC contracts ?
The applicant is eligible for the input tax credit on the purchase of equipment for use in RRC / PRC contracts.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, KARNATAKA
ORDER UNDER SECTION 98(4) OF THE CENTRAL GOODS & SERVICES TAX ACT, 2017 AND UNDER 98(4) OF THE KARNATAKA GOODS & SERVICES TAX ACT, 2017
1. M/S Randox Laboratories India Private Limited, (called as the ‘Applicant’ hereinafter), KIADB Industrial Area, 191-195, Bommasandra Jigani Link Road, Bengaluru 560105, having GSTIN number 29AADCR0074KIZ7, has filed an application for Advance Ruling under Section 97 of CGST Act, 2017, KGST Act, 2017 read with Rule 104 of CGST Rules 2017 & KGST Rules 2017, in form GST ARA-01 discharging the fee of Rs.5,OOO-OO each under the CGST Act and the KGST Act.
2. The Applicant is a Private Limited Company and is registered under the Goods and Services Act, 2017. The applicant has sought advance ruling in respect of the following questions:-
(1) Whether the applicant is liable to pay GST on the machines given to the customers under RRC/PRC models?
(2) Whether the supply of reagents along with the machine rental and services in a RRC/PRC contract is a separate supply or a mixed supply or composite supply? If considered as composite supply, what is principal supply?
(3) What is the rate of tax for the service of machine under RRC/PRC models?
(4) What is the value on which GST has to be paid in case of RRC / PRC model and what is the time of supply?
(5) Whether the applicant is eligible for the input tax credit on the purchase of machinery for use in RRC / PRC contracts?
The applicant has also asked seven more questions relating to proposed new models of business which he is thinking of introducing. But since these questions are not related to the activities undertaken, they are withdrawn at the time of hearing.
3. The applicant furnishes some facts relevant to the stated activity:
a. The applicant states that he is in the business of trading of medical diagnostic reagents and diagnostic equipment. He also provides services / spares relating to such equipment. The applicant imports equipment, reagents and spares from their group company. Only certain spares are procured domestically. Majority of the sales are made to the diagnostic centres across India through authorised distributors who purchase the reagents from the applicant and sell the same to end-customers.
b. In some cases, the equipment is sold outright separately to end customers and the GST implications in these cases are clear and no questions on such direct sales are raised in this application for advance ruling.
In other cases, the equipment is also supplied in conjunction with supply of reagents on a rental basis. Currently the equipment is given on rental basis to the customers typically under two types of contracts as under:-
(i) The Reagent Rental Placement Contracts (‘RRC’) wherein the contract is for supply of equipment, reagents, controls and services, in conjunction. The equipment is supplied on returnable basis, i.e. the title in such equipment shall remain in the hands of Randox at all times, unless agreed to be sold to the customer at the end of the contract period. In consideration for the supplies of machines and reagents and services, the customer agrees to procure reagents at minimum levels stated in the agreement for predefined period (for eg. 5 years). If the minimum levels as stated in the contract is not met, the applicant can recover penal charges from the end customers as per the agreement.
Though, the RRC agreements are entered into with end customers, for sake of trade convenience, the reagents are sold by the applicant to distributors in different states who shall in turn sell the goods to the end-customers.
c. The other model is the Part Reagent Rental Placement Contract (‘PRC’) wherein the contract is worded akin to the contract in the RRC model except for the fact that an additional upfront non-refundable deposit is obtained from the end-customer.
d. The applicant’s main objective is to sell the reagents which are profitable to the applicant. As the reagents can be used only with the help of the analyser equipment, the applicant provides these machines to the customer for a fixed period as per the agreement with a condition that the minimum reagents are procured from the applicant by the customers. The applicant states that it can be observed from the contract document that the main objective of the applicant is to sell the reagents for which the machine is placed in the customer’s premises for the use of the reagents. Further, the title to the machine remains with the applicant unless it is specifically mentioned in the agreement that title gets transferred after the conditions have been fulfilled. As the title is with the applicant, they are forming part of the fixed assets in the balance sheet of the applicant on which depreciation is being claimed under the Income Tax Act, 1961.
e. The equipment given by the applicant is classifiable as services under GST Law as the title to the goods remain with the applicant. The SAC code of the service provided by the company fall under 997319 Leasing or rental services concerning other machinery and equipments with or without operator. The applicable GST rate as per the Central Tax rate notification number 11/2017-CGST (rate) dated 28th June, 2017 is “same rate of central tax as on the supply of like goods involving transfer of title in goods”. The machines provided by the applicant falls under the HSN Code 90278090. The relevant entry as per the tariff is as under:-
“INSTRUMENTS AND APPARATUS FOR PHYSICAL OR CHEMICAL ANALYSIS (FOR EXAMPLE, POLARIMETERS, REFRACTOMETERS, SPECTROMETERS, GAS OR SMOKE ANALYSIS APPRATUS); INSTRUMENTS AND APPARATUS FOR
– Other instruments and apparatus:
– – – Other.
The applicable tax rate is 18% as per the central tax notification no. 1/2017- CGST (rate) dated 28th June 2017 vide entry number 417 as per schedule Ill to the said notification. Accordingly, the rate of GST for renting of such machines shall also be 18% in terms of the entry in notification 11/2017-CGST (rate) stated above.
f. The reagents sold by the company are classified under the HSN Code 3822 0090. The relevant entry as per the tariff is as under:-
DIAGNOSTIC OR LABORATORY REAGENTS ON A BACKING, PREPARED DIAGNOSTIC OR LABORATORY REAGENTS WHETHER OR NOT ON A BACKING, OTHER THAN THOSE OF HEADING 3002 OR 3006; CERTIFIED REFERENCE MATERIALS
– Diagnostic or laboratory reagents on a backing, prepared diagnostic or laboratory reagents whether or not on a backing, other than those of heading 3002 or 3006; certified reference materials:
– – – Other
The applicable tax rate on reagents is 12% as per the central tax rate notification no. 1/2017-CGST (rate) dated 28th June 2017 vide entry number 80 as per schedule Il to the said notification
The company also performs maintenance services for the machine along with spares required for the machine.
4. Regarding the Question (1) relating to “Whether the applicant is liable to pay GST on the machines given to the customers under RRC/PRC models?” the applicant submits that the agreements contains certain clauses which can be extracted as under:
4.1 Extracts of the agreements:
(a) RRC/PRC contracts are entered into with end-customers, who are generally laboratories providing diagnostic services. Few key extracts of the agreement are provided below:-
“2. In conjunction with the supply of the System, the Company agrees to sell Reagents, Calibrators, Controls and Wash Solutions (collectively referred to as Reagents) at prices at prices specified . .
3. All the reagents specified to be used with the System will be supplied exclusively by the Company’s authorised distributor during the period.
4. The Customer agrees to purchase Reagents from the Company at the prices mentioned in the agreement or at prices as revised from time to time as stated .
5. The Customer and the Company agree that subject to clause 11, the System will be returned promptly to the Company at the end of the period of 5 years unless the agreement is renewed on mutual terms. The system shall remain at all times and in all material respect the property of the Company.”
The above extracts are from a typical RRC contract.
Under the PRC model, the contracts are similarly worded -additionally, a non-refundable deposit is obtained from the customer upfront. A typical contract in this case would state as,-
“2. In conjunction with the supply of the System, the Customer agrees to pay upfront, the Company, a sum of Rs.xxx. as non-refundable payment, forming a part of the contract while the Company agrees to sell Reagents, Calibrators, Controls and Wash Solutions (collectively referred to as Reagents) at prices specified………….”.
Since both RRC and PRC contracts are materially similar to each other, the tax implications stated below are considered together for both RRC and PRC contracts.
(b) The applicant has quoted the provisions of section 9, section 7 and section 2(31) and has stated in his case, he is supplying machine rentals, reagents and services under the RRC/ PRC agreement for a consideration, which shall undoubtedly be taxable under GST Laws.
5. Regarding the second question as to “Whether the supply of reagents along with the machine rental and services in a RRC/PRC contract is a separate supply or a mixed supply or composite supply? If considered as composite supply, what is principal supply?” the applicant has made the following submissions:
5.1 Once the condition for supply has been met, it has to be analysed whether it is a mixed supply, composite supply or the reagents and the machine are separate supplies. He has quoted the provisions of section 2(30) and section 2(90) and states that for any supply to be treated as a composite supply, the following conditions have to be fulfilled:-
(a) It must be consisting of two or more taxable supplies of goods or services or both, which are naturally bundled;
(b) It must be consisting of two or more taxable supplies of goods or services or both, which are supplied in conjunction with each other; and
(c) One of such supply constitutes predominant element to which other supply is ancillary.
5.2 Reagent Rental Contracts (RRC) are entered into by the applicant for supply of machines, reagents, services and spares in conjunction with each other in consideration of the customer purchase minimum agreed quantities of reagents over a period of 5 years. This model ensures that the customer is no burdened with high investment incurred on the cost of the machine. At the same time, it promotes the sales of reagents by fixing minimum commitments from the customer, which is the primary product of the applicant. RRC contracts are necessitated out of business requirements owing to the nature of the customers, who would not prefer to be burdened with high upfront investment on the machine. The reagents can be used only with the diagnostic machinery and cannot be used independently by itself. This is an indication that the supply of reagents with the machine is naturally bundled in the course of business of the applicant.
5.2.1 Since the words “naturally bundled” is not defined under the GST laws, the applicant refers to the Education Guide to Service Tax released by the CBEC in July 2012, and a flier on composite supplies released by NACEN , the following can be extracted:-
“9.2.4 Manner of determining if the services are bundled in the ordinary course of business
Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which the services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below,-
