TMI Blog2019 (11) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... uipments would be the consideration for the supply of equipments. Since the monetary value of this transaction is Rs.NIL, this cannot be considered as the consideration - Hence, the delivery of equipments by the applicant to the end-customer without any charge under this model would not amount to a supply under the Act. Whether the supply of reagents along with the machine rental and services in a RRC/PRC contract is a separate supply or a mixed supply or composite supply? - If considered as composite supply, what is principal supply? - HELD THAT:-It is very clear from the contract that the applicant has detached the supply of equipments from the supply of reagents, in that the supply of reagents can be made either by himself or by his authorised distributor, at the discretion of the applicant. Since the delivery of equipments is not treated as a supply as per the provisions of the Act, there cannot be a composite supply involving it. Further, since the supply of goods in reagents and the supply of services in tolerating an act are not supplied in conjunction, they also do not form the composite supply. Value of the supply of the supplies involved in the contract - HELD THAT: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suchindra, Chartered Accountant ORDER UNDER SUB-SECTION (4) OF SECTION 98 OF CENTRAL GOODS AND SERVICE TAX ACT, 2017 AND UNDER SUB-SECTION (4) OF SECTION 98 OF KARNATAKA GOODS AND SERVICES TAX ACT, 2017 1. M/s Randox Laboratories India Private Limited, (called as the Applicant hereinafter), KIADB Industrial Area, 191-195, Bommasandra Jigani Link Road, Bengaluru 560105, having GSTIN number 29AADCR0074K1Z7, has filed an application for Advance Ruling under Section 97 of CGST Act, 2017, KGST Act, 2017 read with Rule 104 of CGST Rules 2017 KGST Rules 2017, in form GST ARA-01 discharging the fee of ₹ 5,000-00 each under the CGST Act and the KGST Act. 2. The Applicant is a Private Limited Company and is registered under the Goods and Services Act, 2017. The applicant has sought advance ruling in respect of the following questions: (1) Whether the applicant is liable to pay GST on the machines given to the customers under RRC/PRC models? (2) Whether the supply of reagents along with the machine rental and services in a RRC/PRC contract is a separate supply or a mixed supply or composite supply? If considered as composite supply, what is principal supply? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are sold by the applicant to distributors in different states who shall in turn sell the goods to the end-customers. c. The other model is the Part Reagent Rental Placement Contract ( PRC ) wherein the contract is worded akin to the contract in the RRC model except for the fact that an additional upfront non-refundable deposit is obtained from the end-customer. d. The applicant s main objective is to sell the reagents which are profitable to the applicant. As the reagents can be used only with the help of the analyser equipment, the applicant provides these machines to the customer for a fixed period as per the agreement with a condition that the minimum reagents are procured from the applicant by the customers. The applicant states that it can be observed from the contract document that the main objective of the applicant is to sell the reagents for which the machine is placed in the customer s premises for the use of the reagents. Further, the title to the machine remains with the applicant unless it is specifically mentioned in the agreement that title gets transferred after the conditions have been fulfilled. As the title is with the applicant, they are forming part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments contains certain clauses which can be extracted as under: 4.1 Extracts of the agremeents: (a) RRC/PRC contracts are entered into with end-customers, who are generally laboratories providing diagnostic services. Few key extracts of the agreement are provided below: 2. In conjunction with the supply of the System, the Company agrees to sell Reagents, Calibrators, Controls and Wash Solutions (collectively referred to as Reagents) at prices at prices specified . . . 3. All the reagents specified to be used with the System will be supplied exclusively by the Company s authorised distributor during the period. 4. The Customer agrees to purchase Reagents from the Company at the prices mentioned in the agreement or at prices as revised from time to time as stated . . . 5. The Customer and the Company agree that subject to clause 11, the System will be returned promptly to the Company at the end of the period of 5 years unless the agreement is renewed on mutual terms. The system shall remain at all times and in all material respect the property of the Company. The above extracts are from a typical RRC contract. Under the PRC model, the contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitments from the customer, which is the primary product of the applicant. RRC contracts are necessitated out of business requirements owing to the nature of the customers, who would not prefer to be burdened with high upfront investment on the machine. The reagents can be used only with the diagnostic machinery and cannot be used independently by itself. This is an indication that the supply of reagents with the machine is naturally bundled in the course of business of the applicant. 5.2.1 Since the words naturally bundled is not defined under the GST laws, the applicant refers to the Education Guide to Service Tax released by the CBEC in July 2012, and a flier on composite supplies released by NACEN, the following can be extracted: 9.2.4 Manner of determining if the services are bundled in the ordinary course of business Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which the services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below - The perception of the consumer or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase separately, customers prefer these models since upfront cost for machine cannot be afforded by all the customers. Generally, the RRC/PRC based contracts account for 5-6 times the number of machines sold outright which indicates that the customer does not intend to purchase machines but wants a composite contract of machine rental plus reagents to be provided over the contract period. This is also evident from the extracts of sample agreement which have been provided elsewhere above. 2 Majority of service providers in a particular area of business provide similar bundle The RRC/PRC models are a standard practice in this industry. Furthermore, these kinds of cases are commonly used business models in few other industries as well such as the high-end printing industry. Furthermore, it is relevant to note that the above practice of RRC/PRC models have been followed since many years in the past and is not a new phenomenon with the advent of GST regime. 3 The nature of the various elements in the bundle As per the agreement, it is clearly expressed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e premise of its customers for a specified period, generally of upto 5 years. This placement of the analyser is to facilitate the sale of its reagents and also to ensure that in case the customer gets accustomed to use the machine that is sold by the applicant, which shall result in further increase in the sale of reagents. The conditions for placing this analyser machine is after taking a commitment from the customer that the reagents totaling certain minimum committed value is mandatorily to be purchased from the applicant (through authorised distributors). Under these circumstances, since the core activity of the applicant is only resale of reagents. 5.2.5 The act of providing the analysers is only a marketing strategy for reagents, A company can adopt different modes of marketing its products. As the main objective of the applicant is selling of reagents, the applicant wishes to submit that the predominant element and thereby the principal supply under RRC/PRC model is sale of reagents while rental of machines and services are incidental to the same. This is further strengthened by the fact that the consideration for the supplies is factored into the price of the reagents to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding the rental of machines and services, would be a composite supply under the CGST Act, 2017. 5.3 On the third question, relating to What is the rate of tax for the service of machine under RRC / PRC models? , the applicant submits that since the same is argued to be treated as a composite supply with sale of reagents being the principal supply the rate of GST applicable should be 12% as applicable on the sale of reagents and the applicable HSN should be 3822 0090. 5.4 On the fourth question, relating to What is the value on which GST has to be paid in case of RRC / PRC model and what is the time of supply? , the applicant submits that. 5.4.1 As per the sub-section (1) of section 9, the tax shall be levied on the value determined under section 15 and as per Section 15, the value of supply of goods or services shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. 5.4.2 Furthermore, as per section 8, a composite supply comprising of two or more supplies, one of which is a principal su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant submits that inward supplies of machine are being used in the furtherance of business and is eligible for input tax credit on the GST paid at the time of procurement of said machines. 6. FINDINGS DISCUSSION: The nature of contract is verified and found that there are two types of transactions and hence they need to be considered separately, one related to Reagent Rental Placement Contracts (RRC) and Part Reagent Rental Placement Contracts (PRC). 7. Reagent Rental Placement Contracts (RRC) 7.1 In this model, it is seen the applicant is selling the reagents to the distributors and the distributors are selling the reagents to the end-customers. There may not be any supply from the applicant to the end- customers in so far as reagents are concerned. In such cases, the applicant transfers the property in goods in the form for reagents to his distributors and the distributors in turn sell it to the end-customers. It may be a fact that the goods may not be available in the open market except with the distributors and the contract between the applicant and end-customer may stipulate the purchase of reagents from the distributor, it does not say about the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. As per clause (a) above, the rental of goods would amount to supply transaction, of it is made or agreed to be made for a consideration in the course or furtherance of business. There is no dispute that this transaction involves delivery of goods for use and is in the course or furtherance of business. The only issue is about the consideration. 7.2.2 Clause (31) of section 2 of the CGST / SGST Act defines the term consideration: as under: (31) consideration in relation to the supply of goods or services or both includes- (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied directly by himself or the order is fulfilled by the authorised distributor of the applicant, and an invoice is raised for each of such supply of reagents, either by the applicant himself or by the authorised distributor, as the case may be. In case the quantity of orders fall below a threshold, then the customer is invoiced for deficient orders and this would be charged for violation of the terms of the agreement which is a separate supply of an act agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act for which consideration is charged by the applicant and the amount is paid by the end-customer, and this is irrespective of the fact whether the supply of reagents is made by the applicant himself or by his authorised distributor. Hence there are three transactions involved in the transactions and they are (a) Provision of equipments free of charge - which is not a supply under the Act. (b) Supply of reagents either by the applicant or by the authorised distributor of the applicant out of their own stocks (c) Supply of services in the nature of an act agreeing to the obligation to refrain from an act, or to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues determined as per Section 15 of the CGST Act / SGST Act. This would be normally on the value for which invoice is raised, which would be the transaction value. But in case of the provision of equipments free of cost, the same does not amount to supply and is only a usage of a fixed asset for the purpose of business and would be a cost on the sale of reagents. 8. Part Reagent Rental Placement Contracts (PRC) 8.1 In this contract of Part Reagent Placement Contracts (PRC) all the ingredients of the RRC contract are present with only one variation. In this contract, an non-refundable payment is made upfront by the end-customer to the applicant and there is no transfer of property in goods. The effective control of the equipments lies with the end-customer though there is no change in the ownership of the equipments. Since this payment is related to the equipments and is not related to the supply of reagents, which may either be supplied by the applicant himself or by his authorised distributor, this payment can be considered as the consideration and hence amounts to supply of equipments on rental basis with the lumpsum rent collected. 8.2 As far as the other supplies are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 of Schedule III to the Notification No. (01/2017) No. FD 48 CSL 2017 dated 29th June 2017 Hence the rental services supplied in relation to the equipments without transfer of title in goods in case of PRC contract is liable to a tax of 9% under the CGST Act and 9% under the KGST Act. 8.4.2 The tax rate applicable on the supply of reagents, in case of supply made by the applicant, the same is determined as under: The reagents are covered under HSN code 3822 0090 and the entry related to the same are covered under Entry (a) Entry No. 80 of the Schedule II to the Notification No. 01/2017-Central Tax (Rate) dated 28th June 2017 and hence liable to a CGST at the rate of 6% (b) Entry No. 80 of the Schedule II to the Notification No. (01/2017) No.FD 48 CSL 2017 dated 29th June 2017 and hence liable to a KGST at the rate of 6% 8.4.3 The tax rate applicable on the supply of services in the nature of an act agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act for which a consideration is received, the same are covered under Entry No. 35 which reads as under: Sl. No. Chapte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act; (d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy; Clause (63) of section 2 of the CGST Act / KGST Act defines the input tax credit as under (63) input tax credit means the credit of input tax; The input tax paid on such equipments, since is a tax charged on any supply of goods or services or both made to him, the same would qualify as input tax, in relation to the applicant and hence the credit of such tax would qualify as input tax credit. Section 16 which deals with the Eligibility and conditions for taking input tax credit , reads as under: 16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner speci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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