HC clears confusion over contentious issue of composite supply under GST

The Kerala high court has tried to clear the air over the contentious issue of composite supplies under the Goods and Services Tax (GST) which experts say may become guiding principles to decide cases in litigation.

If more than one good or service are supplied by a company, these could be considered composite or mixed under the GST system. If these are considered composite, then the GST rate on principal supply applies to the entire supplies, otherwise different rates as applicable to each transaction would be applicable.

Explaining the present case, Niraj Bagri, partner at Dhruva Advisors said, Abbott Health Care gives medical equipment to hospitals and labs to be used without consideration. For this Abbott has signd an agreement with these hospitals and labs.

These hospitals and labs, in turn, are bound to procure specified quantity of medical products such as reagents, calibrators, disposals etc through distributors of Abbott for consideration till the tenure of agreement.

Now, the issue was how much GST rate would be applicable to the goods supplied? Under GST, medical equipment draw 18 per cent rate, while products such as medicines and drugs attract five per cent rate.

The matter went into Kerala-based Authority of Advance Ruling (AAR) which ruled that the supply of both -- equipment and products-- are composite. It said equipment is the principal supply and products are just incidental and hence higher rate of 18 per cent would apply. Bagri said the tax department typically chooses the supply which attracts higher rate as a principal supply in the composite supply and apply that rate.

The appellate authority in the state upheld the ruling. 

The company went to the Kerala high court against the judgement. The high court wondered as to how AAR came to the conclusion that it was a composite supply.

The high court said said there are two suppliers and one supplier is not making both the supplies. Besides, it was not even concluded that the supply of equipment without consideration is a taxable supply.

Also, it said in case of two supplies it is a question of valuation. In this case it was to be figured out whether value of equipment is included in the value of reagent to classify it as a composite supply.

AAR had also said that supply of medical products is incidental to the that of equipment. High court asked as to how AAR can say that one supply is  incidental to the other. It said one has to look at historic pattern of the company, how it is doing the transaction and then only one can come to the conclusioin that one transaction is incidental to the other.

With these observations, the high court referred the case back to AAR. "The issue of composite supply is one of the biggest sources of litigation. The high court provided guiding principles of how composite supply could be defined," Bagri said. Companies can cite these principles while arguing similar cases in AAR, he said.