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TMI Blog2019 (11) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? (3) What is the rate of tax for the service of machine under RRC/PRC models? (4) What is the value on which GST has to be paid in case of RRC / PRC model and what is the time of supply? (5) Whether the applicant is eligible for the input tax credit on the purchase of machinery for use in RRC / PRC contracts? The applicant has also asked seven more questions relating to proposed new models of business which he is thinking of introducing. But since these questions are not related to the activities undertaken, they are withdrawn at the time of hearing. 3. The applicant furnishes some facts relevant to the stated activity: a. The applicant states that he is in the business of trading of medical diagnostic reagents and diagnostic equipment. He also provides services / spares relating to such equipment. The applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eagents 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 of the fixed assets in the balance sheet of the applicant on which depreciation is being claimed under the Income Tax Act, 1961. e. The equipment given by the applicant is classifiable as services under GST Law as the title to the goods remain with the applicant. The SAC code of the service provided by the company fall under 997319 - Leasing or rental services concerning other machinery and equipments with or without operator. The applicable GST rate as per the Central Tax rate notification number 11/2017-CGST (rate) dated 28th June, 2017 is "same rate of central tax as on the supply of like goods involving transfer of title in goods". The machines provided by the applicant falls under the HSN Code 90278090. The relevant entry as per the tariff is as under: "INSTRUMENTS AND APPARATUS FOR PHYSICAL OR CHEMICAL ANALYSIS (FOR EXAMPLE, POLARIMETERS, R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany 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 are similarly worded - additionally, a non-refundable deposit is obtained from the customer upfront. A typical contract in this case would state as "2. In conjunction with the supply of the System, the Customer agrees to pay upfront, the Company, a sum of Rs.xxx. as non-refundable payment, forming a part of the contract while the Company agrees to sell Reagents, Calibrators, Controls and Wash Solutions (collectively referred to as Reagents) at prices specified. . . ". Since both RRC and PRC contracts are materially similar to each other, the tax implications stated below are considered together for both RRC and PRC contracts. (b) The applicant has quoted the provisions of section 9, section 7 and section 2(31) and has stated in his case, he is supplying machine rentals, reagents and services under the RRC/ PRC agreement for a consideration, which shall undoubtedly be taxable under GST Laws. 5. Regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctices 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 service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business. * Majority of service providers in a particular area of business provide similar bundle of services, for example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines. * The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example: service of stay in a hotel is often combined with a service of laundering of 3-4 items of clothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be charged for at agreed prices, whereas machine rental and services will be provided in conjunction with the sale of reagents. The machine cannot be used without the reagents and reagents without the reagents and reagents without the machine. The nature of elements in the bundle also demonstrate that they are naturally bundled together. 4 Other illustrative indicators: * There is a single price; * The elements are normally advertised as a package * The different elements are not available separately * * The different elements are integral to one overall supply * There is a single price for machine rental, reagents and services which are all combined into the price for the reagents * The RRC/ PRC contracts are advertised with end customers as a package * The different elements are available separately upon request by customers - however, RRC/PRC contracts are the more popular choice amongst end customers, so much so that the sales of the Company shall be significantly reduced of the RRC/PRC options are not provided to the end-customers. * * The machine, reagents and services are integral to one overall supply, which is to enable the end customer to provide dia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d some of these concepts are yet to be examined and elucidated by the Indian Courts, reference is drawn from international law. The applicant wishes to rely on judgement by the European Court of Justice in the case of Case Protection Plan Limited which is a landmark judgement under the EU VAT laws. Under the EU VAT laws the concepts of composite and mixed supplies are fairly similar to that under the GST Laws.. In the said judgement the Hon'ble European Court had held that "A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied." In case of RRC / PRC contracts, the placement of machines will not achieve any aim for the customer since the machine by themselves cannot perform any diagnostic activities without the steady supply of reagents supplied by the applicant. It may be noted that the machines supplied under RRC / PRC contracts are closed systems in which reagents supplied by the applicant alone can be used and not reagents of any other entities. On the other hand, the customer has other alternatives in relation to placement of machines - such as outrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4.3 The applicant also submits that in the RRC / PRC contracts, the transaction values are agreed therein, and the contract clearly mentions that the reagents shall be sold through distributors. In view of the above, value of supply shall be the transaction value, i.e. the amount of consideration charged by the applicant for the reagents upon sale to distributors who in turn sell the reagents to customers. The applicant submits that no other value shall be assigned separately for placement of machines or services provided. 5.4.4 Similarly, the time of supply shall also be determined based on the principal supply - hence the tax shall be payable upon sale of reagent to the distributors who in turn sell them to end-customers. The time of supply shall not be at the time of placement of machine at customer's premises. 5.4.5 In addition to the above, in case of PRC contracts, a non-refundable deposit is received from customers. In case of non-refundable deposit, the deposit shall be applied as consideration for said supply. Accordingly, the same is to be taxed upon receipt from end-customers. However, the principal supply remains sale of reagents and hence the rate of tax on the non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the contract between the applicant and distributor. But the applicant states very clearly that he is selling the goods to the distributor and the distributor is also selling the goods to the end-customer. Hence, it is clear that the supply of reagents to the end-customer is from the distributor and the applicant is merely facilitating such supply by binding himself to provide the reagents as the equipment would not work without the reagents. 7.2 As far as equipments are concerned, the equipments are imported from outside the country or sometimes procured within the country and taxes gets paid on such transaction of inward supply. The equipments are not transferred to the end-customer though the equipments are given to them for use. The applicant also capitalizes the cost of such equipments and also claims depreciation on such equipment so given for use. If any consideration is received for this transaction, this would amount to giving the equipments on rentals and the same would be liable to be taxed under the Acts. But in this model of business, there is no rental charged and the value of the asset is charged to the profit arrived on the supply of reagents. The applicant would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply; In this the first clause specifies only the payments which are made or to be made in respect of supply of goods or services and since no payment of any amount is made to the applicant in respect of the supply of services for the use of equipments, the same cannot be covered under this clause. Whatever the consideration paid by the end-customer to the distributor, is related to the supply of reagents and hence is not related to the supply of equipments. But there is an act of supply of equipment and in the second clause of the definition of "consideration", it is seen that the monetary value of any act or forbearance, 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. There is a clear inducement of supply of goods from the distributor and hence the monetary value of the act of supply of goods in the form of equipments would be the consideration for the supply of equipments. Since the monetary value of this transaction is Rs.NIL, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of whether these contracts form a single composite contract is examined and found that these are independent contracts for the following reasons: 7.5.1 The first contract of provision of equipments is a supply by the applicant to the recipient, i.e. end-customer. This would not be treated as a supply but utilizing the capital goods for the purposes of business. 7.5.2 The second contract is a supply of reagents and is either supplied by the applicant himself or by the authorised distributor, out of their own stocks and is an independent sale-purchase transaction and the time of this supply is the date as per sub-section (2) of section 12 of the CGST / SGST Act. 7.5.3 The third supply is the supply of service by the applicant to the end-customer and the time of supply of such supply is the date determined as per sub-section (2) of section 13 of the CGST / SGST Act. The clause (30) of section 2 of the CGST Act / SGST Act defines the "composite supply" as under "composite supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iderations for each of the supplies, the supplies cannot be treated as "composite supply" as per the provisions of the CGST Act/ KGST Act. The values are also separated and the value of supply of equipment would be the amount charged as non-refundable payment. 8.4 As far as the tax rates are involved, the following rates are applicable: 8.4.1. Where the delivery of equipments constitutes a supply of equipments on rental basis, i.e. as in PRC Contracts, the tax rate applicable is determined as under: Entry No. 17 (iii) of the Notification No. 11/2017 -Central Tax (Rate) dated 28.06.2017 specifies as under: Sl.No. Chapter, Section or Heading Description of Service Rate (per cent.) Condition 17 Heading 9973 (Leasing or rental services, with or without operator) (iii) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Same rate of central tax as on supply of like goods involving transfer of title in goods - (vi) Leasing or rental services, with or without operator, other than (i), (ii), {iii), (iv) and (v) above. Same rate of central tax as applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 28th June 2017 and hence liable to a CGST at the rate of 9% (b) Entry No. 35 of the Table to the Notification No. (11/2017) No. FD 48 CSL 2017 dated 29th June 2017 and hence liable to a KGST at the rate of 9%. 9. The other question raised in in relation to the eligibility for the input tax credit on the purchase of machinery for use in the RRC / PRC Contracts. The matter is examined and found as under: 9.1 In case of both the contracts, the equipments are purchased by the applicant and tax is paid on the same.. Clause (19) of section 2 of the CGST / KGST Act defines "capital goods" as under: - (19) "capital goods" means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business; Since the equipments are capitalized in the books of account, and are used in the course or furtherance of business, they form the "capital goods" of the applicant. The act of claiming depreciation on the value of these assets under the Income Tax Act, 1961 also points to the fact that they are capitalized in the books of accounts of the applicant. 9.2 Clause (62 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the customers under the RRC model. 2. The supply of reagents along with the machine rental services in both RRC and PRC contract is a separate supply independent of machine rental services supplied, if any 3. The rate of tax for the supply of rental service of equipments is 9% CGST and 9% KGST. 4. The value on which GST has to be paid and the time of supply are a. in case of RRC Model i. for the supply of reagents - at the time of supply of reagents on the transaction value ii. for 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 - at the time of supply of such services on the transaction value b. In case of PRC Model i. For the supply of rental services in equipments - at the time of supply of the equipments on the amount of non-refundable payment received or invoiced ii. for the supply of reagents - at the time of supply of reagents on the transaction value iii. for 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 a ..... 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