2022 (3) TMI 1204 - AAAR - GST

Medical instruments placed at hospitals under reagent supply agreements constitute supply of services under Section 7 CGST Act

The AAAR Kerala held that placement of medical instruments by appellant at hospitals/labs under reagent supply and instrument use agreements constitutes ... Placement of goods as supply - transfer of right to use as supply of services under Schedule II - consideration including monetary value of any act or forbearance - nexus between minimum purchase obligation and consideration - value of supply where consideration not wholly in money - binding nature of advance rulingPlacement of goods as supply - transfer of right to use as supply of services under Schedule II - consideration including monetary value of any act or forbearance - nexus between minimum purchase obligation and consideration - Placement of specified medical instruments at customers' premises under the Reagent Supply and Instrument Use Agreement constitutes a 'supply' under Section 7 of the CGST Act, 2017 and is taxable as supply of services. - HELD THAT: - The authority found that the activity involves transfer of the right to use instruments without transfer of title and therefore prima facie falls within Sl. No. 1(b) of Schedule II, treating it as supply of services. The transaction is commercially linked to the appellant's sale of reagents under a common agreement and thus occurs in the course or furtherance of business. The definition of 'consideration' in Section 2(31) expressly includes the 'monetary value of any act or forbearance' made in respect of, in response to, or for the inducement of a supply. The contractual covenants-exclusive purchase obligation and monthly minimum purchase obligation with a contractual right to recover the deficit-constitute an act/forbearance having monetary value and are linked to the placement of instruments. Consequently, the obligation to purchase reagents (and the attendant forbearance) supplies the requisite consideration for the placement of instruments. The authority also observed that valuation and timing issues arising from non-monetary consideration are addressable under Section 15 and Rules 27-32. Given these conclusions, the placement satisfies all essential ingredients of 'supply' under Section 7 read with Section 2(31). [Paras 6]The placement of specified medical instruments at hospitals/labs is a supply of services attractable to GST.Movement of goods otherwise than by way of supply - binding nature of advance ruling - The movement of instruments in pursuance of the agreement does not constitute 'movement of goods otherwise than by way of supply' within the meaning of the Act; the placement is a taxable supply. - HELD THAT: - Having concluded that the placement of instruments is a supply for consideration (by reason of the linked minimum purchase and related covenants), the authority held that the movement of the instruments to customers under the agreement cannot be treated as movement otherwise than by way of supply. The authority also noted that advance rulings of other States are not binding on this authority and proceeded to apply the statutory definitions and the agreement's terms to reach its conclusion. [Paras 6]The movement of the instruments is not 'otherwise than by way of supply'; it forms part of the taxable supply concluded above.Final Conclusion: The Appellate Authority upholds the Advance Ruling (with modifications): placement of the appellant's instruments at unrelated hospitals/labs under the agreement constitutes a taxable supply of services under the CGST Act, 2017; the movement is not 'otherwise than by way of supply'. The appeal is rejected and the Advance Ruling stands affirmed as modified. Issues Involved:1. Whether the placement of specified medical instruments to unrelated customers like hospitals, labs, etc., for their use without any consideration for a specific period constitutes a 'supply' under Section 7 of the CGST Act, 2017.2. Whether such movement of goods constitutes otherwise than by way of supply under GST.Issue-wise Detailed Analysis:1. Whether the placement of specified medical instruments to unrelated customers like hospitals, labs, etc., for their use without any consideration for a specific period constitutes a 'supply' under Section 7 of the CGST Act, 2017:The appellant argued that the placement of specified medical instruments at the premises of unrelated hospitals is without any consideration and hence cannot be categorized as taxable supply under GST Act. The definition of 'supply' under Section 7 of the CGST Act, 2017, includes all forms of supply of goods or services such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. The appellant's activity involves placing medical instruments at hospitals/labs for their use under a Reagent Supply and Instrument Use Agreement. The ownership of the instruments remains with the appellant, and the hospitals/labs only possess a non-transferable right to use the instruments during the tenure of the agreement.The agreement also obligates the hospitals/labs to purchase reagents, calibrators, and disposables exclusively from the appellant at specified prices, with a minimum purchase obligation. If the hospitals/labs fail to meet the minimum purchase obligation, the appellant is entitled to raise a debit note equal to the deficit amount. This arrangement constitutes a valid consideration under Section 2(31) of the CGST Act, 2017, as it includes the monetary value of any act or forbearance in respect of, in response to, or for the inducement of the supply of goods or services.The Appellate Authority concluded that the placement of specified medical instruments to unrelated customers like hospitals, labs, etc., constitutes a supply of services under the CGST Act, 2017, as it satisfies all the essential ingredients of 'supply' as defined under Section 7 of the CGST Act, 2017.2. Whether such movement of goods constitutes otherwise than by way of supply under GST:The appellant contended that the movement of instruments to hospitals/labs under the agreement does not constitute a supply for consideration and should be treated as a movement of goods otherwise than by way of supply. However, the Appellate Authority noted that the agreement's terms and conditions clearly link the placement of instruments with the obligation to purchase reagents exclusively from the appellant. The minimum purchase obligation and the forbearance from using any other reagents serve as consideration for the placement of the instruments.The definition of 'consideration' under Section 2(31) of the CGST Act, 2017, includes the monetary value of any act or forbearance in respect of, in response to, or for the inducement of the supply of goods or services. Therefore, the movement of instruments under the agreement constitutes a supply for consideration and cannot be treated as a movement of goods otherwise than by way of supply.Conclusion:The Appellate Authority upheld the Advance Ruling Order No. KER/97/2021 dated 07/05/2021, concluding that the placement of specified medical instruments to unrelated customers like hospitals, labs, etc., for their use without any consideration for a specific period constitutes a supply under Section 7 of the CGST Act, 2017. The appeal filed by the appellant was rejected.