Kerala High Court lays down principles for composite supply

One of the controversial issues in the Goods and Services Tax is the determination of tax liability on the supply of two or more goods or services or a combination of both. Composite supply and mixed supply are the determinate factors in respect of tax treatment for such supplies.

The term ‘composite supply’ means a supply consisting of two or more goods or services or both. These goods or services can be naturally bundled together and supplied in conjunction with each other, one of which would be a principal supply of goods or services. If two or more supplies fulfils the criteria of composite supply, then the tax rate of the primary supply will apply to the entire supply.

Recently, in the case of Abbott Healthcare Private Limited (2020-VIL-08-KER), the Kerala High Court has quashed the order of the Authority for Advance Ruling (‘AAR’) and the Appellate AAR. The order of the Authority for Advance Ruling (‘AAR’) and the Appellate AAR had held that placement of medical instrument and supply of reagent, calibrators, disposables and such goods is a composite supply, in which principal supply being supply of medical instrument. The High Court has remanded back the matter to the AAR for fresh consideration. 

In this case, Abbott Healthcare is engaged in the business of supply of medical instruments, diagnostic kits, pharmaceutical products, and related products. Abbott Healthcare had entered into reagent supply and instrumental agreement with various hospitals and laboratories. As per the said agreement, Abbott Healthcare is required to provide medical instruments for specified periods at the premises of such hospitals and laboratories without any consideration. Further, under the said agreement, the hospitals and laboratories have an obligation to purchase specified quantities of reagent, calibrators, disposables, and other related products at the prices specified in the agreement through the distributors of Abbott Healthcare.

Based on the facts above, Abbott Healthcare had approached the AAR for a ruling on the issue as to whether the medical instruments provided to hospitals and laboratories without any consideration would constitute supply or whether it represents the movement of goods.

The AAR held that Abbott Healthcare was making two supplies – one of medical instruments and the other of reagents, calibrators, disposables, and other related products to be used along with the medical instruments. Since the medical instruments supplied had no utility unless they are bought along with the reagent, calibrators, disposables, and related products, the two supplies are to be treated as naturally bundled to form a composite supply. Considering the supply of the medical instruments as principal supply, the AAR held that supply of reagent, calibrators, disposables and other related products will be required to be taxed at the rate applicable to supply of medical instrument.

The Appellate AAR subsequently confirmed the order to AAR. Abbott Healthcare, aggrieved by the said order, filed a writ before the Kerala High Court. The High Court has made the following observation in its order:

• The findings of the AAR (i.e. two supplies constituting as composite supply) are without jurisdiction. The AAR did not go into the real issue for which the application was filed by Abbott Healthcare i.e. whether the supply of medical instrument would constitute supply or whether it constitutes movement of goods otherwise than by way of supply.
  
• The supplies are made by two different taxpayers, i.e. medical instruments by Abbott Healthcare and supply of reagent, calibrators, disposables, and related products by their distributor (who purchases it from Abbott Healthcare on a principal-to-principal basis). 
• There is no material to suggest that the two supplies are bundled and supplied in conjunction with each other in the ordinary course of business. The business model for supply of reagent, calibrators, disposables, and related products through distributors has been followed by Abbott Healthcare since many years, and it shows that providing of medical instrument is not bundled with sale of reagent, calibrators, disposables, and related products in the ordinary course of business.

Based on the above observations, the High Court remitted the matter back to the AAR for fresh consideration. 

The High Court ruling in the Abbott Healthcare case is an important ruling, both on jurisdiction of AAR and also on interpretation of the term ‘composite supply’. The Court has provided guiding principles for the term ‘composite supply’. This ruling shall be providing relief to the other business houses which are dealing in medical instrument and other products, because these are taxed at higher rate than the reagent, calibrators, disposables, and related products.

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