The high court in Kerala has tried to clear the matter about the controversial topic of composite supplies under the Goods and Services Tax (GST), which experts say may become guiding principles for determining legal cases.
If a company provides more than one good or service, these may be called composite or mixed under the GST scheme. If goods are considered to be composite, the GST rate on principal supply applies to all supplies bundled together, otherwise in mixed supply different rates will apply as applicable to each supply.
Explaining the present case, Niraj Bagri, partner at Dhruva Advisors said, Abbott Health Care provides hospitals and laboratories with medical equipment to be used without any consideration. Abbott has signed an agreement with these hospitals and laboratories for this.
Such hospitals and laboratories, in turn are bound to procure specified quantities of medical products such as reagents, calibrators, disposals, etc., for consideration by Abbott’s distributors until the term of the agreement
Now the question was how much of the GST rate will apply to the supplied goods? Medical equipment attracts a tax of 18 per cent under GST, while goods like medicines and medications attract a rate of 5 per cent.
The matter went into the Advance Ruling Authority (AAR), based in Kerala, which ruled that the supply of both— equipment and products— is composite. It said that equipment is the main supply and that goods are only incidental and would therefore apply a higher rate of 18%. Bagri said the tax department usually selects the supply that attracts higher rate in the composite supply as a principal supply and applies that rate.
The company went to the high court in Kerala against the judgement. The high court questioned how the AAR decided it was a composite supply.
The high court said there are two suppliers, and one supplier is not providing both the supplies. Moreover, it was not even concluded that supply of equipment without considered is a taxable supply.
Also, it said there is a question of valuation in case of two supplies. In this case, to classify it as a composite supply, it was to be determined whether the value of the equipment is included in the value of the reagent.
AAR also said suppliers of medical products are incidental to equipment supplies. High court asked how AAR could conclude that one supply is incidental to the other. It said that one has to look at the company’s historical pattern, how it does the transaction, and then only one can conclude that one transaction is incidental to the other.
The high court referred the case back to AAR, with these findings. “The question of composite supply is one of the biggest sources of litigation, and the high court provided guidance on how to define composite supply,” Bagri said. Businesses should quote these concepts when arguing in AAR regarding similar cases, he said.