2018 (10) TMI 598 - AAR - GST

Composite Supply Tax Ruling: Medical Instrument Placement & Minimum Purchase Obligation

The court ruled that the placement of medical instruments without consideration, coupled with a minimum purchase obligation for products, constitutes a ... Composite supply - principal supply - transfer of right to use any goods - naturally bundled supplies - subsidiary or ancillary supply - merger of consideration - minimum purchase obligation / monopoly purchase obligation - Section 8 of the GST Acts - taxability at rate of principal supplyComposite supply - principal supply - transfer of right to use any goods - minimum purchase obligation / monopoly purchase obligation - merger of consideration - Section 8 of the GST Acts - Whether placement of medical instruments at customers' premises free of visible consideration, coupled with an obligation to procure consumables, constitutes a composite supply whose principal supply is transfer of the right to use the instrument and is taxable accordingly. - HELD THAT: - The agreement between the applicant and hospitals/laboratories supplies two inter dependent components: the instrument (installed at the customer's premises) and consumables (reagents, calibrators, disposables) without which the instrument has no utility. The components are naturally bundled and indivisible for providing the diagnostic service. The business model artificially bifurcates the transaction by showing the instrument as supplied free and consumables as separately invoiced, but the contractual minimum purchase obligation and the clause permitting recovery of deficit demonstrate that the consideration for use of the instrument is subsumed into the price of consumables. Consequently the elements merge into a single composite supply. Applying the statutory principle that a composite supply is taxed at the rate of the principal supply, and having identified the essential nature of the composite as the transfer of the right to use the instrument, the transaction falls within the scope of transfer of the right to use any goods. Section 8 of the GST Acts supports treating the combined transaction as a single supply and the agreement's characterisation or the absence of an explicit rent does not alter the legal nature of the supply when consideration is merged by contractual obligation.The placement-for-use together with the minimum-purchase obligation constitutes a composite supply whose principal supply is the transfer of right to use the instrument, and the entire receipt is liable to GST accordingly.Final Conclusion: The Authority rules that placement of medical instruments free of visible consideration, where the agreement imposes a minimum purchase obligation for consumables, constitutes a composite supply; its principal supply is the transfer of the right to use the instrument and the whole transaction is taxable under the heading for transfer of the right to use goods in terms of the GST rate schedule. Issues Involved:1. Whether the placement of specified medical instruments to unrelated customers like hospitals, labs, etc., without consideration, for a specific period constitutes supplyRs.2. Whether the movement of goods constitutes otherwise than by way of supply under GSTRs.Analysis:Issue 1: Placement of Medical Instruments as Composite SupplyThe applicant places medical instruments at hospitals or labs without consideration, with the customer having the right to use the equipment during the contract period. The agreement binds the customer to procure specified products from the applicant. The agreement is for the supply of both the instrument and the products, making it an indivisible contract. The supply of the instrument and products is naturally bundled, constituting a composite supply. The applicable tax rate is determined by the principal supply, which is the instrument, taxed at 18% GST. The applicant's attempt to split the supply through independent transactions is considered a colorable business model to avoid higher tax rates applicable to composite supplies.Issue 2: Transfer of Right to Use GoodsThe agreement establishes that the supply of the instrument and products is interdependent, forming a composite supply. The consideration charged for the products is linked with the right to use the instrument. The transaction is deemed as the transfer of the right to use goods for consideration, falling under Heading 9973 of the GST Act. The entire transaction, including the supply of products, is liable to GST under this provision.Conclusion:The ruling states that the placement of medical instruments without consideration, along with a minimum purchase obligation for products, constitutes a composite supply. The principal supply is the transfer of the right to use goods, subject to GST under the relevant notification.