AAR does not have jurisdiction to go beyond issues referred
IN THE HIGH COURT OF KERALA AT ERNAKULAM
7. On a consideration of the facts and circumstances of the case and the reasonings of the AAR and the Appellate Authority, it is my view that while it may have been open to the AAR to enquire, based on the terms of the agreement, whether the supply of the medical instruments to the customer, although styled as a free supply, was in fact one for valid consideration, its findings as regards a composite supply are wholly without jurisdiction. It is apparent that the AAR went beyond the terms of reference in embarking upon an enquiry as to whether the supplies effected under the agreement between the petitioner and the customer hospitals/laboratories, constituted a composite supply. As a consequence, the AAR did not go into the real issue of whether the supply of instruments per se constituted a taxable supply under the CGST Act. While these facts would have sufficed for this Court to remit the matter to the AAR for a fresh consideration of the issue, the learned senior counsel would urge me to give a definite view on the correctness of the finding of the AAR regarding the transaction being a composite supply. It is therefore that I deem it appropriate to offer my view on the said finding of the AAR, while relegating the matter back to the AAR for a fresh consideration of the query referred to it, for its clarification.
8. When I examine the order of the AAR, in the backdrop of the query that was raised before it for its clarification, I find that there was no occasion for the AAR to go into the issue of whether the supply effected was a composite supply or not. I also find that its findings on the said issue are at any rate legally untenable. The concept of enhancement of utility of the instrument through the supply of reagents/calibrators/disposables, while relevant for the purposes of valuation of the supply of instruments, cannot be imported into the concept of composite supply under the GST Act. A distinction has to be drawn between the nature of a supply and the valuation thereof. While clubbing of two independent supplies may be resorted to for the purposes of valuation of each of those supplies, there is no scope of clubbing of two independent supplies so as to notionally alter the very nature of each of those supplies as they existed in fact, at the relevant point in time. For a supply to be seen as a composite supply, it must answer to the definition of the term “composite supply” at the time of its supply. As per Section 2(30) of the CGST Act, “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 in conjunction with each other in the ordinary course of business, one of which is a principal supply.”
9. Many aspects of the transactions envisaged under the agreement entered into between the petitioner and its customer hospitals/laboratories militate against viewing them as a composite supply as defined above. Firstly, the supplies are made by two different taxable persons; the supply of instrument being by the petitioner and the supply of the reagents, calibrators and disposables being by his distributor, who purchases it from him on principal to principal basis. Although it could be argued that there is a relationship between the said persons that influences the valuation of the supply, the same does not take away from the fact that the supplies are, in reality, made by two different taxable persons. A reference can usefully be made to the decision in Nell Gwynn House Maintenance Fund Trustees v. Customs and Excise Commissioners [(1999) Simon’s Tax Cases 79 (HL)] as also to the decision in Telewest Communications PLC v. Customs and Excise Commissioners [(2005) Simon’s Tax Cases 481 (CA)]. In the last mentioned case, while reiterating that the concept of a composite supply would not be attracted in cases where there was more than one supplier, the Court of Appeal observed as follows:
“ (3) There were limits to the extent to which transactions could be recharacterised in VAT law and taxable persons denied the exemptions on which they sought to rely. Moreover, there was no authority for the proposition that the concept of principal and ancillary contracts could apply where there was more than one supplier, nor that where one supply could be said to be ancillary to another, even though they were made by separate suppliers, both suppliers had to share the same tax treatment. Indeed, supplies by two separate suppliers could not be treated as principal and ancillary supplies. Furthermore, there was an objection in principle to and strong policy reasons against taxing transactions according to their economic reality. The economic reality of a transaction was antithetical to legal certainty. The mere fact that the court sought to find the commercial reality of the situation did not mean that it would seek to apply VAT to the economic reality of the transaction. The economic reality of the transaction might have nothing to do with either the essential features of what the parties had agreed or the legal structure of their transaction. Moreover, economic reality had to be distinguished from economic neutrality which was a principle of VAT law. That principle precluded, inter alia, taxable persons who carried on the same activities from being treated differently for VAT purposes. That was one of a variety of doctrines which had been established in VAT law to prevent the distortion of competition. However, the authorities did not support the proposition that the doctrine of neutrality required two separate supplies to be treated as a single supply because the suppliers were related parties and their supplies were linked.”
10. Secondly, the two supplies do not answer to the description of being “naturally bundled and supplied in conjunction with each other in the ordinary course of business”. While they were not bundled together as a matter of fact, in the instant case, there is also no material to suggest that they are so bundled and supplied in conjunction with each other in “the ordinary course of business”. In fact, the business model followed by the petitioner appears to have held the field for a considerable period of time and would show that in the ordinary course of business, the supplies are not bundled.
In my view, a finding as regards composite supply must take into account supplies as effected at a given point in time on “as is where is” basis. In particular instances where the same taxable person effects a continuous supply of services coupled with periodic supplies of goods/services to be used in conjunction therewith, one could possibly view the periodic supply of goods/services as composite supplies along with the service that is continuously supplied over a period of time. These, however, are matters that will have to be decided based on the facts in a given case and not in the abstract as was done by the AAR. I therefore allow the writ petition, by quashing Exts.P1 and P2 orders, and remit the matter back to the AAR for a fresh decision on the query raised before it by the petitioner company.
The AAR shall pass fresh orders in the matter, based on the observations in this judgment, and after hearing the petitioner, within a period of six weeks from the date of receipt of a copy of this judgment.
The writ petition is disposed as above.
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