TaxTMI 
TaxTMI 
2019 (11) TMI 993
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....pplicant 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 But since these questions are not related to the activities undertaken, they are withdrawn at the time of hearing. 3.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 eq....
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....cant 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 en....
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....om 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 applic....
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....uly 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 - * The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business. * Majority of service providers in a particular area of business provide similar bundle of services, for example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines. * The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of ser....
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....odels in few other industries as well such as the high-end printing industry. Furthermore, it is relevant to note that the above practice of RRC/PRC models have been followed since many years in the past and is not a new phenomenon with the advent of GST regime. 3 The nature of the various elements in the bundle As per the agreement, it is clearly expressed that the reagents shall be charged for at agreed prices, whereas machine rental and services will be provided in conjunction with the sale of reagents. The machine cannot be used without the reagents and reagents without the reagents and reagents without the machine. The nature of elements in the bundle also demonstrate that they are naturally bundled together. 4 Other illustrative indicators: • There is a single price; • The elements are normally advertised as a package • The different elements are not available separately • * The different elements are integral to one overall supply • There is a single price for machine rental, reagents and services which are all combined into the price for the reagents • The RRC/ PRC contracts are ....
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.... the applicant wishes to submit that the predominant element and thereby the principal supply under RRC/PRC model is sale of reagents while rental of machines and services are incidental to the same. This is further strengthened by the fact that the consideration for the supplies is factored into the price of the reagents to be sold over the period of the contract. 5.2.6 Without prejudice to anything stated herein above, and considering that the GST Laws in India are fairly nascent and some of these concepts are yet to be examined and elucidated by the Indian Courts, reference is drawn from international law. The applicant wishes to rely on judgement by the European Court of Justice in the case of Case Protection Plan Limited which is a landmark judgement under the EU VAT laws. Under the EU VAT laws the concepts of composite and mixed supplies are fairly similar to that under the GST Laws.. In the said judgement the Hon'ble European Court had held that "A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied." In case of RRC / PRC contracts, the placemen....
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....the price actually paid or payable for the said supply of goods or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. 5.4.2 Furthermore, as per section 8, a composite supply comprising of two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply and hence the value as applicable to the supply of the principal supply shall apply for the overall composite supply. 5.4.3 The applicant also submits that in the RRC / PRC contracts, the transaction values are agreed therein, and the contract clearly mentions that the reagents shall be sold through distributors. In view of the above, value of supply shall be the transaction value, i.e. the amount of consideration charged by the applicant for the reagents upon sale to distributors who in turn sell the reagents to customers. The applicant submits that no other value shall be assigned separately for placement of machines or services provided. 5.4.4 Similarly, the time of supply shall also be determined based on the principal supply - hence the tax shall be payable upon sale of reagent to the distribut....
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....tributors and the distributors in turn sell it to the end-customers. It may be a fact that the goods may not be available in the open market except with the distributors and the contract between the applicant and end-customer may stipulate the purchase of reagents from the distributor, it does not say about the details of such distributor specifically. The moot point is whether the agreement signed between the applicant and the end-customer be binding on the distributor unless the condition to that effect is present in the contract between the applicant and distributor. But the applicant states very clearly that he is selling the goods to the distributor and the distributor is also selling the goods to the end-customer. Hence, it is clear that the supply of reagents to the end-customer is from the distributor and the applicant is merely facilitating such supply by binding himself to provide the reagents as the equipment would not work without the reagents. 7.2 As far as equipments are concerned, the equipments are imported from outside the country or sometimes procured within the country and taxes gets paid on such transaction of inward supply. The equipments are not transfer....
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....wise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) 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 or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply; In this the first clause specifies only the payments which are made or to be made in respect of supply of goods or services and since no payment of any amount is made to the applicant in respect of the supply of services for the use of equipments, the same cannot be covered under this clause. Whatever the consideration paid by the end-customer to the distributor, is related to the supply of reagents and hence is not related to the....
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.... in the transactions and they are (a) Provision of equipments free of charge - which is not a supply under the Act. (b) Supply of reagents either by the applicant or by the authorised distributor of the applicant out of their own stocks (c) 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. Though all the above three are covered in a single contract, the three limbs are independent contracts which are linked to each other. They have separate considerations. 7.5 The issue of whether these contracts form a single composite contract is examined and found that these are independent contracts for the following reasons: 7.5.1 The first contract of provision of equipments is a supply by the applicant to the recipient, i.e. end-customer. This would not be treated as a supply but utilizing the capital goods for the purposes of business. 7.5.2 The second contract is a supply of reagents and is either supplied by the applicant himself or by the authorised distributor, out of their own stocks and is an independent sale-....
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....Since this payment is related to the equipments and is not related to the supply of reagents, which may either be supplied by the applicant himself or by his authorised distributor, this payment can be considered as the "consideration" and hence amounts to supply of equipments on rental basis with the lumpsum rent collected. 8.2 As far as the other supplies are involved, i.e. supply of reagents and supply of services for tolerating the act of reduced purchase of reagents, the scheme of things as applicable to the RRC contracts are applicable here also. 8.3 Even here, since the supplies are not made in conjunction with each other and there are specific considerations for each of the supplies, the supplies cannot be treated as "composite supply" as per the provisions of the CGST Act/ KGST Act. The values are also separated and the value of supply of equipment would be the amount charged as non-refundable payment. 8.4 As far as the tax rates are involved, the following rates are applicable: 8.4.1. Where the delivery of equipments constitutes a supply of equipments on rental basis, i.e. as in PRC Contracts, the tax rate applicable is determined as under: Entry No. ....
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.... consideration is received, the same are covered under Entry No. 35 which reads as under: Sl. No. Chapter, Section or Heading Description of Service Rate (per cent.) Condition 35 Heading 9997 Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified). 9 - In view of the above, the tax rate applicable for the above services is determined as under: The services are covered under HSN code 9997 and the entry related to the " other miscellaneous services including services nowhere else classified" and the same are covered under Entry (a) Entry No. 35 of the Table to the Notification No. 11/2017- Central Tax (Rate) dated 28th June 2017 and hence liable to a CGST at the rate of 9% (b) Entry No. 35 of the Table to the Notification No. (11/2017) No. FD 48 CSL 2017 dated 29th June 2017 and hence liable to a KGST at the rate of 9%. 9. The other question raised in in relation to the eligibility for the input tax credit on the purchase of machinery for use in the RRC / PRC Contracts. The matter is examined and found as under: ....
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.... manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Since the applicant is using the goods in equipments, as capital goods, in the course or furtherance of his business, he is eligible to take the credit of input tax charged on any supply of such goods. But this is subject to the condition and limitation prescribed for capital goods in sub-section (3) of section 16 and also under section 17. 9. In view of the foregoing, we rule as follows RULING 1. 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. 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. The rate of tax for the supply of rental service of equipments is 9% CGST and 9% KGST. 4. The v....