2022 (7) TMI 504 - AAR - GST

APMSIDC's drug procurement and distribution for state government ruled taxable supply under GST despite no profit motive

The AAR, Andhra Pradesh ruled that APMSIDC's procurement and distribution of drugs, medicines, and surgical equipment on behalf of the state government ... Scope of supply - consideration - business (inclusive definition) - pure services - composite supply involving goods and services - exemption under Notification No.12/2017 (Entry 3 and 3A)Scope of supply - consideration - business (inclusive definition) - Procurement and distribution of drugs, medicines and surgical equipment by APMSIDC on behalf of the State Government amounts to 'supply' under Section 7 of the CGST/SGST Acts. - HELD THAT: - The Authority examined whether the procurement and distribution activity by APMSIDC constitutes a supply under the inclusive definition in the Act. The Act requires (i) supply of goods or services, (ii) for a consideration, and (iii) in the course or furtherance of business. The applicant itself procures goods through tenders and invoices are required to be raised in the name of MD, APMSIDC, showing that goods are purchased and billed under GST rules. The features relied on by the applicant - no profit/no loss, absence of commercial interest, reimbursement by Government, and lack of intent to carry on business - do not exclude an activity from 'business' because the statutory definition of business is inclusive and covers activities even if not for pecuniary benefit. The concept of consideration as defined in the Act includes payments made by any person in respect of supply; accordingly the receipts linked to procurement and handling qualify as consideration. Applying these parameters to the material facts, the procurement and distribution undertaken by APMSIDC satisfy the requirements of supply under Section 7 and thus fall within the scope of the Act.Procurement and distribution by APMSIDC is a 'supply' under Section 7.Pure services - composite supply involving goods and services - exemption under Notification No.12/2017 (Entry 3 and 3A) - Establishment charges received by APMSIDC from the State Government are not exempt under Entry 3 or 3A of Notification No.12/2017-Central Tax (Rate). - HELD THAT: - The Authority analysed whether the establishment charges constitute 'pure services' eligible for exemption under Entry 3/3A. The applicant argued that charges are for services (handling/monitoring) and no profit on goods is earned. The Authority found, however, that the principal activity is procurement and supply of goods and the handling/monitoring is ancillary; therefore the transaction involves both goods and services and cannot be characterised as pure services. Further, Notification No.16/2021 amending the exemption notification (effective 01.01.2022) excludes supplies to governmental authority/entity from the exemption, but the Authority's determinative finding is that the transaction is not a pure service because of clear involvement of goods. Consequently the establishment charges do not qualify for exemption under Entry 3 or 3A.Establishment charges are not eligible for exemption under Entry 3 or 3A of Notification No.12/2017.Final Conclusion: The Authority ruled that APMSIDC's procurement and distribution activities constitute a 'supply' under Section 7 of the CGST/SGST Acts, and that the establishment charges received from the State Government are not exempt under Entry 3 or 3A of Notification No.12/2017-Central Tax (Rate). Issues Involved:1. Whether the procurement and distribution of drugs, medicines, and other surgical equipment by APMSIDC on behalf of the government amounts to 'Supply' under Section 7 of CGST/SGST Act.2. Whether the establishment charges received from the State Government by APMSIDC are eligible for exemption as per Entry 3 or 3A of Notification 12/2017-Central Tax (Rate).Issue-wise Detailed Analysis:Issue 1: Procurement and Distribution as 'Supply' under Section 7 of CGST/SGST ActThe judgment examines whether the activities of APMSIDC in procuring and distributing drugs, medicines, and surgical equipment on behalf of the Health, Medical, and Family Welfare Department, Government of Andhra Pradesh, qualify as 'Supply' under Section 7 of the CGST/SGST Act. According to Section 7, the scope of supply includes all forms of supply of goods or services or both 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 applicant contended that the procurement and distribution were done on a 'no profit/no loss' basis, with no commercial interest, and the government reimbursed the actual amounts incurred. However, the judgment clarified that these attributes do not exclude the transaction from being considered a 'supply.' The definition of 'business' under Section 2(17) includes any trade, commerce, manufacture, profession, vocation, adventure, wager, or any other similar activity, whether or not it is for pecuniary benefit. Therefore, the absence of profit motive does not shield the transaction from being included under 'business.'Furthermore, the transaction involved 'consideration,' as defined in the Act, which includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both. The procurement and distribution of drugs and surgical equipment by APMSIDC, involving invoices raised in the name of MD, APMSIDC, Mangalagiri, Andhra Pradesh, clearly fall under the definition of 'supply.'Issue 2: Exemption of Establishment Charges under Entry 3 or 3A of Notification 12/2017-Central Tax (Rate)The second issue addressed whether the establishment charges received from the State Government by APMSIDC are eligible for exemption under Entry 3 or 3A of Notification 12/2017-Central Tax (Rate). The notification exempts pure services provided to the Central Government, State Government, or local authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution.The applicant argued that the services provided by APMSIDC are pure services and fall under the functions entrusted to a Panchayat under Article 243G. However, the judgment noted that the principal activity of APMSIDC involves the procurement of goods (drugs, surgical equipment, etc.), and the ancillary activity is the service component of handling and monitoring the supply. The establishment charges received are for handling and monitoring the activity, but the principal activity involves both goods and services. Therefore, the transaction is not considered a pure service and does not qualify for the exemption under Entry 3 or 3A of Notification 12/2017-Central Tax (Rate).Ruling:1. The procurement and distribution of drugs, medicines, and other surgical equipment by APMSIDC on behalf of the government amounts to 'Supply' under Section 7 of CGST/SGST Act.2. The establishment charges received from the State Government by APMSIDC are not eligible for exemption as per Entry 3 or 3A of Notification 12/2017-Central Tax (Rate).