The, Kerala Authority for Advance Ruling (AAR) in its recent ruling in the case of Abbott Healthcare Pvt. Ltd has held that the placement of medical instruments to unrelated customers like hospitals, labs etc., for their use without transfer of ownership and consideration, against an agreement containing minimum purchase obligation to purchase other products like reagents, calibrators, disposals etc for specified period, constitutes a ‘supply of services’.
Facts of the Case:
- The applicant M/s. Abbott Healthcare Private Limited is engaged in sale of pharmaceutical products, diagnostic kits etc.
- As a part of its business activity, the Applicant places specified medical instruments to unrelated hospitals, labs etc. for their use for a specified period without any consideration.
- In order to execute the placements of instruments, the Applicant enters into reagent Supply and Instrument Use Agreement with various hospitals, labs etc.
- Abbott Healthcare had moved AAR with similar question in 2018 too. At that time, the AAR had held that the transaction constitutes composite supply, the principal supply being the transfer of right to use any good for any purpose liable to GST.
- Later, the Appellate Authority upheld the ruling. Then the matter reached High Court which quashed the ruling by AAR as well by AAAR and remitted back to AAR for fresh decision stating that the orders of AAR and AAAR as ‘wholly without jurisdiction’.
- Accordingly the matter before remanded back to AAR is whether the placement of medical instruments to unrelated hospitals, labs etc. under the Agreement without any consideration for a specified period constitutes supply of service.
Order of Kerela AAR: Deliberation and Ruling
- As per the agreement the hospitals or labs where the medical instruments are installed have the right to use the medical instruments during the period specified under the Agreement but the title and the ownership of the same continue to be with the Applicant and the same are to be returned after the specified period or termination of the Agreement.
- In order to fall under the definition of supply under Section 7(1) of the CGST Act, 2017 following conditions have to be fulfilled:
- The activity/ transaction involves goods or services- Fulfilled as medical instruments fall under the definition of goods (i.e., Section 2(52) of the CGST Act) and the right to use the same for the specified period under Agreement falls within the scope of transfer.
- The activity/ transaction is in the course or furtherance of business- AAR noted that the definition of business (i.e., Section 2(17) of the CGST Act) is wide enough to include the activity/ transaction in its scope.
- The activity/ transaction is made for a consideration: The AAR noted that as per the Agreement, the hospitals or labs purchase other products like reagents, calibrators, disposals etc exclusively from the Applicant for a minimum value every month with obligation to pay the deficit amount in case the purchase in a month falls short of the minimum agreed value constitutes a valid consideration under Section 2(31) of the CGST Act.
- The AAR Rejected the Applicant’s contention that consideration in the CGST Act, must be in monetary form as it is evident from Section 2(31) ibid, and held that as per clause (b) of Section 2(31) ibid, every act or abstinenence that is a motivation to induce a person is consideration and there is no requirement that it must be in monetary form.
In view of above deliberations, the AAR held that as the Applicant grants a non-transferable right to use the medical instruments for a specified period without transfer of ownership and further as the Applicant has all rights, titles and interest in the medical instruments other than the right to use the same, the placement of the medical instruments by the Applicant at the hospitals, labs etc. qualifies as supply of service as per Para 1(b) of the Schedule II of the CGST Act.
Relevant provisions of CGST Act,2017
Section 7(1) and (1A) of the CGST Act:
“7. Scope of supply.
(1) For the purposes of this Act, the expression “supply” includes–
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business and;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”
Schedule II of the CGST Act: “ACTIVITIES OR TRANSACTIONS TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES
Para 1(b)
1. Transfer
(a) any transfer of the title in goods is a supply of goods;
(b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;.”
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
