5.             M/S ABBOTT HEALTHCARE PVT. LTD. vs. THE COMMISSIONER OF STATE TAX [2020 (1) TMI 338 (KERALA HIGH COURT)]

Placing of diagnostic instruments at hospital, labs etc.

Background:

• Abbott placed its own diagnostics instruments at the premises of unrelated hospitals, labs for their uses for a specified period without any consideration.

To execute the aforesaid placement of instruments, the appellant assessee inter-alia entered into Re-Agent Supply and Instrument use Agreement (“the Agreement”)  with various unrelated hospitals, labs etc. (“the Customers”). The ownership in the instruments continues to be with the assessee and all rights, title and interest in the instruments vested with the assessee at all times during the continuity of the agreement with no consideration charged from the customers. The customers had only a permission to use the instruments  provided to the hospitals for a specified period and the instruments  were returnable at the end of such specified period or at the earlier termination of the agreement.

• As per the terms of the agreement, the customers were required to purchase re-agents, calibrators, disposables. etc. (hereinafter referred to as the ‘products’) at the prices specified in the agreement. The products were supplied by the assessee to its distributors on payment of applicable GST. The distributors in turn supplied the same to the hospitals i.e., the customers. The distributors also duly discharged the applicable GST on the price charged for the supply of the said There was no direct sale/ supply of the products by the assessee to the hospitals/labs etc.
• The AAR, Kerala held that the placement of specified medical instruments to unrelated customers like hospitals, labs,   constituted a ‘composite supply’, where the principal supply was transfer of right to use the instruments for any purpose and was accordingly liable to GST under serial Entry No. 17(iii) – Heading 9973 of NN 11/2017-CT(R) dt. 28.06.20J7.

Significant Judicial and Advance Rulings in GST : A Compilation

• The assessee filed an appeal before the AAAR against the order of The AAAR dismissed the appeal. Aggrieved by the dismissal order, the assessee filed a writ petition before the Kerala High Court.

Point of Dispute:

• Whether the provision of specified medical instruments by Abbott (the assessee) to the customers namely unrelated parties like hospital/s Lab/s for use by them without any consideration, constitutes a ”supply” or whether it constitutes “movement of goods otherwise than by way of supply” as per the provisions of the GST law?”.

Decision of the Court:

• It was open for the AAR to decide whether the supply of instrument was a supply for consideration, but its findings regarding composite supply were wholly without
• The AAR could not have held that the placement of instrument and the supply of re-agents is a composite supply for the following reasons:
  1. The supply of instrument and the supply of re-agent was by two separate persons, i.e., by the assessee and the distributor of the Supply by two persons cannot be fused together to make it a composite supply.
  2. For two supplies to be composite supplies they have to be supplied on ‘as is where  is’ basis, i.e., at the same time. Thus, in the present case, continuous supply of service (right to use instrument) and periodic supply of goods/ products cannot be a composite
• The High Court quashed the order of AAAR and AAR, respectively and remanded the matter to AAR for fresh determination of the question posed by the

Remarks:

• After the remand by the High Court, the AAR held that the placement of instrument at the premises of the customers i.e., the hospitals/labs was a supply of service by the assessee as per entry no. 1(b) of schedule II of the Act which provides that any transfer of right in goods without transfer of title is a supply of service. The AAR further held that the obligation of the customers to purchase minimum value of re-agents at the specified price and to forfeit the deficit amount in case

Scope of Supply

of short purchase was the motivation for the assessee to enter into the contract with the customers and thus, such obligation constituted valid consideration for supply of  transfer  of  right  to use  the  instrument  by the assessee.  Subsequently,  assessee  filed  an  appeal  to  challenge the order of AAR before the AAAR.

• The AAAR held that on a plain reading of the terms and conditions of the agreement, it is revealed that the primary intention of the assessee was to enter into an agreement to place the instrument only at the premises of those customers who agreed to purchase the products of the agreement in accordance with the terms and conditions specified in the agreement. The minimum purchase obligation of the re-agent and forbearance of the customers from using any other re-agent than that was prescribed by the assessee served as a consideration for the placement of the instrument at the premises of the customers by the
• The AAAR concluded that the act of assurance from the part of the customers for exclusive usage of re-agents, calibrators and disposable in the instruments according to  the  approved  directions  of  the assessee and the obligation to purchase minimum assured quantity on the agreed price from the appellant assessee constituted a valid consideration for inducement  of the supply of these services against the activity of placement of the instruments by the assessee at the customers’