Procurement and distribution activity of medicines or surgical equipment on behalf of the government amounts to supply

The AAR, Andhra Pradesh in M/s Andhra Pradesh Medical Services and Infrastructure Development Corporation [TS-668-AAR(AP)-2022-GST dated December 22, 2022] held that the procurement and distribution of drugs, medicines and other surgical equipment by the assessee on behalf of the Government without any value addition, and without any profit or loss, without even the intent to do business, will amount to Supply as per Section 7 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") and exemption as per Entry 3 or 3A of Notification 12/2017 Central Tax (Rate) dated June 28, 2017 ("the Services Exemption Notification") will not be applicable on it.

Facts

M/s Andhra Pradesh Medical Services and Infrastructure Development Corporation ("the Applicant") is a society established in pursuance to a Government Order ("G.O.") Ms.No.309, HM&FW (F1) dated May 22, 1987 under the administrative control of Health Medical and Family Welfare Department.

The Government vide G.O. Rt. No. 672, HM & FW (M1) Dept., dated May 20, 1998 has notified the Appellant as a nodal agency for procurement of medicines and subsequently vide G.O. Ms. No. 78, HM & FW (M2) Dept. dated February 2, 2001 has entrusted the job of procurement of equipment to the Applicant. The total management of the Applicant is overseen by the Board of Directors who are all nominated by the Government of Andhra Pradesh.

The Applicant submitted that since total management is overseen by the Board of Directors nominated by the Government of Andhra Pradesh, they qualify as "Government Entity/Government Authority" as provided in the Services Exemption Notification. The Applicant further submitted that the establishment charges are received from the State Government of Andhra Pradesh out of the budgetary grants provided in the State Budget which are only for the services rendered by them but are not in relation to any goods. Also, the Applicant does not incur any profit or loss on any of the commodities. Thus, the remuneration earned by the Applicant is for the pure services alone. The Applicant then stated that as per the Entry no. 3 of the Services Exemption Notification, pure services provided to the Government or a Government authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat is exempt from the levy of Goods and Services Tax ("GST"). Thus, the establishment charges received by the Applicant  are eligible for exemption.

Issues

1. Whether the procurement and distribution of drugs, medicines and other surgical equipment by the Applicant on behalf of Government amounts to Supply under Section 7 of the CGST Act?
2. Whether the establishment charges received from the State Government by the Applicant is eligible for exemption?

Held

The AAR, Andhra Pradesh in TS-668-AAR(AP)-2022-GST held as under:

• Observed that,the Applicant procures drugs through tender system and distributes the same to the hospitals and PHCs. Moreover, for a transaction to be qualified under the definition of ‘business’
• Stated that, the absence of profit motive will not shield any transaction from being included under ‘business’. Also, the transaction involved ‘consideration’ as per Section 2(31) of the CGST Act.
• Noted that, the procurement and distribution of drugs, medicines and other surgical equipment by the Applicant is essentially a ‘supply’ as per Section 7 of the CGST Act.
• Noted that, the Applicant submitted that they do not incur any profit or loss on any of the commodities and hence, the remuneration earned by them is for the pure services alone but the Applicant undertakes the procurement of drugs, surgical equipment etc. and raises an invoice in the name of Managing director of the Applicant and establishment charges for handling and monitoring the activities is also received by the State Government.
• Opined that, the principal activity is the procurement of goods and the ancillary activity is the service component of handling and monitoring of the supply thus, there is a clear cut involvement of both goods and services in the instant transaction and it is not in any way, a pure service.
• Held that, the Applicant is not eligible for exemption as per Entry 3 or 3A of the Services Exemption Notification.

Relevant Provisions

Section 7 of the CGST Act

"Scope of supply-

(1) For the purposes of this Act, the expression "supply" includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation––For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

(b) import of services for a consideration whether or not in the course or furtherance of business and;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;

(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1) ––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,

shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1), (1A) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods."

Entry no. 3 and 3A of the Services Exemption Notification