2020 (1) TMI 338 - HC - GST

Court quashes AAR orders on medical instruments supply

The court quashed the orders of the Authority for Advance Ruling (AAR) and the Appellate Authority, remitting the matter back to the AAR for a fresh ... Composite supply - principal supply - naturally bundled and supplied in conjunction with each other in the ordinary course of business - supplies by different taxable persons - distinction between nature of supply and valuation of supply - jurisdiction of Authority for Advance Ruling (AAR) - scope of referenceComposite supply - principal supply - naturally bundled and supplied in conjunction with each other in the ordinary course of business - supplies by different taxable persons - distinction between nature of supply and valuation of supply - The AAR's finding that the transactions constituted a composite supply with the instrument as the principal supply was beyond its remit and legally untenable. - HELD THAT: - The AAR, having been asked to decide whether placement of instruments without consideration constituted a 'supply' or 'movement of goods otherwise than by way of supply', proceeded to recharacterise the arrangement as a composite supply and to treat reagents and consumables as taxed at the rate of the instrument. The Court held that the concept of enhancement of utility and the valuation consequences cannot be imported into the question whether two independent supplies constitute a composite supply. For a composite supply to exist it must satisfy the statutory definition at the time of supply - namely that multiple taxable supplies are 'naturally bundled' and supplied in conjunction with each other and one of them is a principal supply. Where supplies are made by different taxable persons, they are not to be treated as a single composite supply; economic reality or commercial linkage does not permit recharacterising separate legal supplies into a composite supply. On the facts, there was no material to show that the supplies were naturally bundled in the ordinary course of business, and the supplies were effected by different taxable persons; accordingly the AAR's conclusion on composite supply was beyond the terms of reference and legally unsustainable. [Paras 8, 9, 10]The AAR's finding that the transaction was a composite supply with the instrument as the principal supply was without jurisdiction and legally untenable and is quashed.Jurisdiction of Authority for Advance Ruling (AAR) - scope of reference - remand for fresh consideration - The appropriate remedy was to remit the matter to the AAR for fresh decision on the specific query originally referred to it. - HELD THAT: - Although the AAR could have inquired, on the basis of the contract, whether the ostensibly free placement of instruments amounted to a supply for valid consideration, its excursion into declaring a composite supply went beyond the question posed. The Court therefore quashed the AAR and Appellate Authority orders and remitted the matter to the AAR to decide afresh the query framed under Section 99 of the GST Act, having regard to the observations in this judgment and after hearing the petitioner. [Paras 7]Exts.P1 and P2 are quashed and the matter is remitted to the AAR for fresh consideration of the query; the AAR shall pass fresh orders within six weeks after receipt of this judgment.Final Conclusion: Writ petition allowed; the orders of the AAR and the Appellate Authority are quashed and the matter is remitted to the AAR for fresh decision on the original query, in accordance with the observations of the Court, to be completed within six weeks. Issues Involved:1. Jurisdiction of the Authority for Advance Ruling (AAR) and Appellate Authority.2. Determination of 'composite supply' under the CGST/SGST Act, 2017.3. Taxability and valuation of supplies under the agreement.Detailed Analysis:1. Jurisdiction of the Authority for Advance Ruling (AAR) and Appellate Authority:The petitioner contended that the AAR and the Appellate Authority acted without jurisdiction by rendering findings on the issue of composite supply, which was not raised before them for clarification. The court observed that the AAR went beyond the terms of reference by embarking on an enquiry as to whether the supplies under the agreement constituted a composite supply. This was deemed beyond their jurisdiction, as the primary query was whether the provision of medical instruments without consideration constituted a 'supply' or 'movement of goods otherwise than by way of supply.'2. Determination of 'Composite Supply' under the CGST/SGST Act, 2017:The AAR held that the placement of medical instruments for use without consideration, in conjunction with an agreement containing minimum purchase obligations, constituted a 'composite supply.' The principal supply was identified as the transfer of the right to use the instruments, taxable under Notification No.11/2017 Central Tax (Rate). Consequently, the reagents, calibrators, and disposables were taxed at the higher rate applicable to the instruments. The court, however, found this determination legally untenable. It emphasized that for a supply to be considered composite, it must meet the definition under Section 2(30) of the CGST Act, which requires the supplies to be naturally bundled and supplied together in the ordinary course of business by the same taxable person. The court noted that the supplies were made by different taxable persons (the petitioner and its distributor), and there was no evidence that they were naturally bundled in the ordinary course of business.3. Taxability and Valuation of Supplies under the Agreement:The AAR's findings suggested that the supply of instruments was for deferred consideration, as the minimum purchase obligation ensured the overall price included the rent for the instruments. The court disagreed, stating that the concept of enhancing the utility of the instrument through the supply of reagents/calibrators/disposables is relevant for valuation but not for determining the nature of the supply as composite. The court highlighted that supplies by different taxable persons cannot be clubbed to alter their nature and must be assessed individually based on their factual existence at the time of supply.Conclusion:The court quashed the orders of the AAR and the Appellate Authority, remitting the matter back to the AAR for a fresh decision on the original query regarding the nature of the supply of medical instruments without consideration. The AAR was directed to pass fresh orders within six weeks, considering the observations made in this judgment. The writ petition was disposed of accordingly.