Case BriefsSupreme Court

Supreme Court: In the case where the constitutionality of two Central Government notifications related to levy of Integrated Goods and Services Tax (IGST) was under scanner, the 3-judge bench of Dr. DY Chandrachud*, Surya Kant and Vikram Nath, JJ has held that since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

The Court observed that,

“If Indian shipping lines continue to be taxed and not their competitors, namely, the foreign shipping lines, the margins arising out of taxation from GST would not create a level playing field and drive the Indian shipping lines out of business.”

Issue

Whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax (IGST) on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis?

Discussion

It was argued before the Court that the transaction between the foreign exporter and the respondents is already subject to IGST under Sections 5 of the IGST Act read with Sections 3(7) and 3(8) of the Customs Tariff Act as “supply of goods”. An additional levy of IGST on imported goods, that is on the supply of transportation service, by designating the importer as the recipient would amount to double taxation.

The Court explained that any Ocean Freight transaction involves three parties- the foreign exporter, the Indian importer and the shipping line. The first leg of the transaction involves a CIF contract, wherein the foreign exporter sells the goods to the Indian importer and the cost of insurance and freight are the responsibility of the foreign exporter. In other words, the foreign exporter is liable to ensure that the goods reach their place of destination and the Indian importer pays the transaction value to the exporter. The second leg of the transaction involves an agreement between the foreign exporter and the shipping line (whether foreign or Indian) for providing services for transport of goods to the destination, i.e., in the territory of India.

On the first leg of the transaction, between the foreign exporter and the Indian importer, the latter is liable to pay IGST on the transaction value of goods under Section 5(1) of the IGST Act read with Section 3(7) and 3(8) of the Customs Tariff Act. Although this transaction involves the provision of services such as insurance and freight it falls under the ambit of ‘composite supply’.

The Union Government had, however, submitted that the impugned levy is on the second leg of the transaction, which is a standalone contract between the foreign exporter and the foreign shipping line. Thus, the contract between the foreign exporter and the foreign shipping line- of which the Indian importer is not a party- cannot be deemed to be a part of ‘composite supply’.  The Court, however, refused to agree with the submission and observed,

“The Union of India cannot be heard to urge arguments of convenience – treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply.”

This observation was made in reference to the fact that the Court had agreed to Union of India’s submission to hold that when the place of supply of services is deemed to be the destination of goods under Section 13(9) of the IGST Act, the supply of services would necessarily be “made” to the Indian importer, who would then be considered as a “recipient” under the definition of Section 2(93)(c) of the CGST Act. The supply can thus be construed as being “made” to the Indian importer who becomes the recipient under Section 2(93)(c) of the CGST Act.

Stating that the Court is bound by the confines of the IGST and CGST Act to determine if this is a composite supply, the Court said that it would not be permissible to ignore the text of Section 8 of the CGST Act and treat the two transactions as standalone agreements.

The Court explained that the supply of service of transportation by the foreign shipper forms a part of the bundle of supplies between the foreign exporter and the Indian importer, on which the IGST is payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act. Hence, to levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation.

It was, hence, held that while the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation.

Conclusion

(i) The recommendations of the GST Council are not binding on the Union and States for the following reasons:

(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;

(b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and

(c) The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations;

(ii) On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service;

(iii) The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge;

(iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation;

(v) The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

[Union of India v. Mohit Minerals Pvt. Ltd., 2022 SCC OnLine SC 657, decided on 19.05.2022]


*Judgment by: Justice Dr. DY Chandrachud


Counsels

For UOI: ASG N Venkataraman

For respondent: Senior Advocates V Sridharan, Harish Salve, Arvind Datar, Vikram Nankani and Advocate Uchit Sheth

For intervenors: Advocate Rajesh Kumar Gautam

Advance RulingsCase Briefs

Rajasthan Authority for Advance Ruling, GST: Bench of J.P. Meena (Member Central Tax) and M.S. Kavia (State Tax)  determined whether supplying of coaching services along with supply of goods/printed material/test papers, uniforms, bags and other goods to students shall be considered a supply of goods or supply of services.

Questions for consideration:

  • Applicant supplied services of coaching to students which also included along with coaching, supply of goods/printed material/test papers, uniform, bags and other goods to students. Such supplies were not charged separately but a consolidated amount was charged. The major component of which was imparting of coaching. In such circumstances, whether such supply shall be considered, a supply goods or a supply of services?
  • If the answer to the aforementioned first question is supply of service, whether such supply shall be considered as composite supply? If yes, what shall be the principal supply?
  • Applicant provides coaching service under a business model through Network Partners as per sample agreement attached, containing obligations of Applicant and Network partners. Accordingly, the network partner provides the services to the students on behalf of Applicant. In such a case, who shall be considered as supplier of service and recipient of service under the agreement?
  • Subject to the above question, what shall be the value of service provided by Applicant to students and by network partner to Applicant?
  • Whether both, Applicant and network partner can avail eligible ITC for their respective supplies?

Findings, Analysis & Conclusion

In the instant case, the applicant was providing coaching service to its enrolled students for consideration which will be a lump sum amount for both goods and services.

Therefore, transaction of supply of coaching service for consideration falls under the ambit of “Supply of Service”.

As the supply involves multiple services and goods, the issue has to be examined whether the said supply is s Composite Supply or a Mixed Supply.

In the present case there is a principal supply of goods or services which constitutes the predominant element of a composite supply. Classification of this composite supply as goods or service would depend on which Supply is the principal supply which is also to be determined on the basis of facts and circumstances of the present case.

Therefore, in the instant case, the applicant along with coaching services provided goods in the form of uniforms, bags, study material etc.

Supply of goods is a part of supply of service shall qualify as composite supply’. The principal supply being the supply of coaching service to the students, tax on such supply shall be levied accordingly.

Further, the AAR also observed that where services are provided by the applicant to the students. students shall be regarded as recipient as consideration is payable for the supply of goods or services or both by the students to the applicant. Similarly. Network partner will be regarded as a provider of service to the applicant

Bench also noted that, the values of goods are part of the value of services provided by the applicant and charged a consolidated amount to the students. Therefore, the consolidated value for which tax invoice is issued shall be the taxable value.

As per Section 16(1) of the CGST Act, Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, been titled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Hence, in the present matter, applicant was a registered person and could avail eligible ITC as per provisions of GST Act.

Ruling

Pointwise conclusion:

  • Supply by the applicant will be considered “Supply of Service”.
  • The ‘supply’ stated above shall be considered as Composite Supply, and Coaching Service shall be principal supply.
  • Applicant will be service provider to the students and Network partner will be service provider to the applicant.
  • Total consolidated amount charged for which Tax invoice generated by the applicant will be the value of service supply by the applicant.
  • Applicant can avail eligible ITC as per provisions of GST Act, 2017.

[Symmetric Infrastructure (P) Ltd., In re.; Raj/AAR/2021-22/09; decided on 2-09-2021]


Advocate before the AAR:

Present for the applicant: Sanjiv Agrawal

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

 

Goods and Services Tax (GST) was introduced in India from July 2017. It is a tax on “supply” of goods and services. In the practical mechanics of GST, identification of the supply (technically known as “classification”) is crucial because it determines the rate of tax, time of tax liability, procedural mechanism such as for invoicing, compliances, etc. The ascertainment of the correct classification is therefore the starting point for complying with the GST law. Business dynamics, however, are not straightforward and therefore it is not correct to expect complete segregation of goods and services being supplied in each transaction.

 

To illustrate, a book seller may also arrange for transportation of the goods up to the destination of the buyer. In this simple example, there is a supply of goods (i.e. books) and also services (i.e. transportation). However, depending upon the parties’ dynamics, there can be multiple shades of this transaction involving a host of other supplies. For illustration, where the book seller is based outside India, there is likely to be an element of other services, such as insurance (to insure the books during transit), clearing and forwarding (to arrange for customs clearance of imported books), international transportation service (through courier, shipping, etc. as the case may be), etc. In such transactions, delineation and segregation of the various supplies and ascertaining their classification becomes challenging, if not impossible.

 

In order to address such eventualities, world over it is recognised that there can be a “bundle” of supplies in a single transaction. This concept is adverted differently under distinct laws. For illustration, under the erstwhile service tax law of India, this concept was explained through the “bundled supply” concept. Under the GST laws, the concepts of “composite supply” and “mixed supply” have been evolved to address such instances of bundle of supplies. This article demystifies these two concepts in the GST context by adverting to their conceptual nuances, application, implication, etc.

 

  1. Differentiating “principal supply” and “ancillary supply”

Before we advert to the concepts and distinction between composite supply and mixed supply, it is important to appreciate the concepts of “principal supply” and “ancillary supply” as these form the bedrock on which the differences between composite supply and mixed supply are set out. Principal supply is defined in Section 2(90) of the Central Goods and Services Tax Act, 2017 (CGST Act). Ancillary supply is not defined in the GST laws. Thus one is to be guided by the meaning of principal supply in order to appreciate the scope and coverage of ancillary supply as well. In other words, the definition of principal supply is the key differentiator between composite supply and mixed supply.

 

Under the CGST Act, principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary. If one were to look at this definition in isolation, certain aspects stand out. First, principal supply is also a supply; there are no adverbial qualifications attended to a principal supply and any supply can be a principal supply. Thus, one is not required to look for any special features in order to characterise a supply as a principal supply. Second, there cannot be a standalone principal supply; instead there can be a principal supply only in a composite supply. Thus, the significance of principal supply is limited for the purpose of composite supply, and as we shall examine subsequently, also for the purpose of identifying a mixed supply. Third, there is no objective test prescribed in the statutory definition of principal supply; instead it is a subjective determination because one is required to ascertain as to what constitutes the “predominant element of a composite supply” in order to identify the principal supply. The implication is that a supply which may be a principal supply in a transaction may not be so in another. Thus, the determination of what is the principal supply will fluctuate depending upon the ingredients of the composite supply.

 

Let us take a few illustrations to examine how principal supply has been appreciated in practice. To this end, we fall back upon the judicial delineation of the concept. The decision of the Gujarat High Court in Torrent Power[1] appears to be the only High Court decision addressing the concept,[2] albeit briefly. In this case the High Court declared that power distribution companies were engaged in carrying out a composite supply because supply of electricity meters and services such as meter inspection, testing, etc. were not predominant and transmission and distribution of electricity was the principal supply.

 

Then we have a few decisions of the GST Appellate Authority for Advance Ruling (AAAR) which have examined the concept. The AAAR in Kundan[3] opined that “when the goods such sweets, namkeens, cold drinks and other edible items are supplied to customers in the restaurant or as takeaway from the restaurant counter and which are being billed under restaurant sales head should fall under ‘composite supply’ with restaurant service being the principal supply. Since supply of food in this case, is naturally bundled with the restaurant service”. This conclusion was differentiated by the AAAR to conclude that when the “goods which are supplied to customers through sweetshop counter [they] have no direct or indirect nexus with restaurant service. Anyone can come and purchase any item of any quantity from the counter without visiting the restaurant. The billings of such sales are also done separately. Thus such sales, by no stretch of imagination, can be clubbed with restaurant service. These sales do not satisfy the basic requirement of ‘composite supply’ i.e. ‘being naturally bundled and supplied in conjunction with each other’. These sales are completely independent of restaurant activity and will continue even when the restaurant is closed, either temporarily or permanently. Hence such sales will be treated as supply of goods with applicable GST rates on the items sold”.

 

In Doctors Academy[4] the AAAR was dealing with supply of coaching services where some students also opted for lodging and boarding in the furnished facility. On the premise that “no student can choose only lodging or boarding without coaching”, the AAAR concluded that the principal supply was the coaching service and all other supplies were ancillary.

 

In Vidyasagar Rao Constructions[5] the AAAR considered a “combination of services of excavation of sand including loading with machinery at reach, formation of ramps and maintenance of roads, transportation charges for the tractors/tippers of sand from reach to stockyard and loading cost at sand from stockyard to lorries” to opine that in that fact pattern the principal supply was “transportation of goods” and not “excavation of sand”. This is because, according to the AAAR, “the basic intent and purpose of the tender/contract agreement and the concomitant description of the scope of the work therein is to move/shift the mineral sand from one place to another, by means of transport by roads/ramps; for enabling the further dispatch” instead of the excavation of sand itself.

 

A review of these orders, which are only illustrative and in no sense exhaustive, reveals that the determination of what constitutes a principal supply is a fact-based determination which hinges upon a close examination of the factual attributes of a given transaction and ascertainment of what would be the predominant element in such bundle of supplies.

 

The fact that no statutory definition has been ascribed to “ancillary supply”, coupled with the judicial advertence to this concept while determining disputes relating to principal supply, reveals that the expression “ancillary supply” is more of an appendage in the statutory scheme relating to composite supply and principal supply; there is no independent or significant tenet underlying ancillary supply. In an overall perspective, one could arguably conclude that the concept of ancillary supply exists under the GST law as a residuary space which is an omnibus description of all those supplies which are not principal supply in a composite supply.

 

  1. Appreciating composite supply

Once the concept of principal supply is understood, the concept of composite supply unravels easily. The expression “composite supply” is defined in Section 2(30) of the CGST Act, along with a statutory illustration. The definition states as under:

 

(30) “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.

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

 

An appraisal of the definition reveals that certain conditions need to be satisfied before a composite supply can be considered to exist. These conditions are: (a) there must only be one supplier and one recipient;[6] (b) the supply must consist of two or more supplies; (c) such supplies should be “naturally bundled” and supplied in conjunction with each other in the ordinary course of business; and (d) there must be a principal supply in those naturally bundled supplies. All these conditions must be cumulatively satisfied.

 

The first condition is easy to test and can be objectively satisfied. The second condition also appears to be objectively ascertainable as it is fairly effortless to determine if there is a single supply or multiple supplies exist in a transaction. The third condition is relatively complex as one is required to ascertain if all the supplies in the transaction are: (a) “naturally bundled”; (b) whether they are “supplied in conjunction with each other”; and (c) whether such supply is “in the ordinary course of business”. This is a subjective inquiry as its response would vary depending upon the fact situation of the transaction concerned. The last condition is fairly easy to appreciate. If there is no principal supply then no further inquiry is warranted and no composite supply exists.

 

The illustration reveals a situation wherein both goods and services are being supplied and it is concluded that the supply of goods is the principal supply whereas services such as packing, transportation and insurance are ancillary supplies. Though it is not apparent, perhaps the legislature was guided by the premise that packing, transportation and insurance services are contingent upon the supply of goods and there would be no occasion to supply such services if there is no supply of goods. Having said that, it must be appreciated that packing, transportation and insurance, etc. are certain services which have an independent identity and therefore the specific contextual setting and how these services satisfy the three conditions [i.e. are (a) “naturally bundled”; (b) “supplied in conjunction with each other”; and (c) supplied “in the ordinary course of business”] is very crucial to determine whether the transaction would qualify as a composite supply. This is because failure to satisfy any of these conditions would translate into rendering the classification of the supply to change from composite to mixed supply. This is evident from the discussion in the subsequent section.

 

With this delineation, let us examine certain instances wherein the application of the concept of composite supply has been called for. The AAAR in Kalani[7] rejected the claim that a consolidated amount per month from students against provision of hostel accommodation for residence purposes which would also include ancillary supply of food with certain other facilities amounted to composite supply. According to the AAAR, the provision of hostel accommodation along with food facility, playroom, gym, housekeeping, room cleaning, washing/dry cleaning of bedsheets and linen of rooms, etc. amounted to an independent service and each of the other services could be supplied separately. The AAAR distinguished the illustration appended to definition of composite supply by highlighting that “it is obvious that the packing material or the insurance cannot be supplied separately if there is no transportation of goods” whereas it was equally “obvious that a person can live in the hostel without availing other services like food, TV, gym, etc.; but to make one’s stay more comfortable, the said ancillary services are availed by him”. For this reason the AAAR concluded that all activities were independent, not ancillary, and in case not were not naturally bundled. Similarly, in Vertiv[8] the AAAR opined that even though there was one contract between the service recipient and service provider; (a) bifurcation of work into supply of goods from supplier’s Maharashtra GST registered premises and supply of services from its New Delhi GST registered office; and (b) the nature of the supplies, revealed that both the supply of goods and the supply of services were equally important and indispensable, thereby concluding that they were not a composite supply.

 

Conversely, the AAAR in KSEDC[9] concluded that furnishing of street lighting services was a composite supply of goods and services while carrying out the following activities; Phase I – Preparatory work for installation of smart feeder panels and LED light fixtures; Phase II – Implementation of energy efficient lighting fixtures, brackets and junction box, underground cables and flexible cables; and Phase III – Operation and maintenance up to the end of the contract period. According to the AAAR, the principal supply in this case was a supply of service as it is the operation, management and maintenance of the street lighting system which is the essence of the contract between the parties. Similarly, in Nikhil Comforts[10] the AAAR concluded that execution of air conditioning works in new building for State Corporation involving supply, installation, testing and commissioning of variable refrigerant flow indoor and outdoor units, refrigerant piping with insulation, drain piping with insulation, MS stands, cabling, additional refrigerant and associated electrical works, etc. amounted to a composite supply wherein supply of air conditioning units was the principal supply.

 

Ascertaining whether a transaction constitute a composite supply is a complex process and requires a deep appreciation of the relevant factual variables has been accepted by the Tax Department at well. For illustration, the Central Board of Indirect Taxes and Customs, in context of classification of software development services, inter alia sought to explain the classification process in the following terms:[11]

 

“In contracts where service provider is involved in a composite supply of software development and design for integrated circuits electronically, testing of software on sample prototype hardware is often an ancillary supply, whereas, chip design/software development is the principal supply of the service provider. The service provider is not involved in software testing alone as a separate service. The testing of software/design is aimed at improving the quality of software/design and is an ancillary activity. The entire activity needs to be viewed as one supply and accordingly treated for the purposes of taxation. Artificial vivisection of the contract of a composite supply is not provided in law. These cases are fact based and each case should be examined for the nature of supply contracted.”

 

It is, therefore, evident that the appreciating composite supply is not a small task and requires a close look at the factual setting and the legal provisions, as the review of AAAR orders reveals. Legislatively, however, two exceptions have been carved out wherein the following have been specified as constituting composite supplies:[12] (a) works contract;[13] and (b) “supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration”.

 

  1. Appraising mixed supply

 

The expression “mixed supply” is defined in Section 2(74) of the CGST Act in the following terms:

(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.

 

In Sarj[14] the AAAR, adverting to this definition, explained that “supply of goods and/or services will be treated as mixed supply if it fulfills the following two criteria: (a) it is a combination of two or more goods or services supplied at a single price; and (b) each of these items can be supplied separately and is not dependent on any other”. On such premise, the AAAR concluded that supply of food, laundry service, housekeeping service, etc. which are not naturally bundled with the lodging service and are independent of each other such that they can be supplied separately, qualify as mixed supply as there is no principal supply in this transaction.

 

The aforesaid reveals the following attributes of mixed supply; the supply must be by one person; it must be for a single price; and it must not be a composite supply. In other words, the multiple ingredients in the transaction must not have a predominant supply which would qualify as a principal supply in order for the transaction to remain within the realm of mixed supply. The illustration appended to the statutory definition of mixed supply also seems to confirm this underlying tenet. It refers to “a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices” which are for a single price. Because each of these supplies are independent and can be made separately, there is no overwhelming element predominating the supply and hence the illustration does not represent a composite supply despite a single price being charged for the transaction and therefore it is an example of mixed supply.

 

In the aforesaid lines, the AAAR in Asahi[15] the AAAR concluded that a bouquet of services relating to corporate accounting, corporate finance, corporate personnel and labour relations, corporate research and development, quality assurance and corporate intellectual property, etc. provided by one entity to another for one consolidated price rendered them classifiable as mixed supply because they lack a predominating principal supply.

 

In Switching Avo[16] the AAAR confirmed that that supply of UPS and battery is to be considered as mixed supply. In this case the AAAR rejected the contention “that UPS cannot function without battery as such it is an integral part of UPS and hence it is naturally bundled and supplied in conjunction with each other and hence the supply of static converter along with external battery should be construed as a composite supply and not a mixed supply”. According to the AAAR, “storage battery has multiple uses and can be put to different uses and when supplied separately with static converter (UPS) it cannot be considered as a composite supply or a naturally bundled supply”, therefore, it is only “when a UPS is supplied with built-in batteries so that supply of the battery is inseparable from supply of the UPS, it should be treated as a composite supply” whereas in all other cases the transaction would constitute a mixed supply.

 

From the aforesaid, it is clear that even in case of mixed supply, one is required to satisfy both objective and subjective tests as in the case of composite supply. Furthermore, whether a principal supply exists in the transaction is a crucial test even for determining whether there is a mixed supply or not. However, the outcome of the classification is rather binary, one with an either/or determination as the transaction can only either be classified as composite supply or mixed supply or neither, but not both.

 

  1. Implications of classifying supplies as composite supply or mixed supply

Having examined the scope and coverage of composite and mixed supplies, one must also appreciate the reason for this distinction. The key rationale highlighting the accentuating importance of composite and mixed supplies is the distinction in the tax incidence. Section 8 of the CGST Act provides a different scheme for levy of tax in such cases. It provides as under:

  1. Tax liability on composite and mixed supplies.— The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

 

A perusal of the statutory provision reveals that both in case of composite and mixed supplies, GST is not charged on the supplies comprising the individual ingredients of such composite and mixed supplies. To illustrate, if there are four supplies in a transaction and the transaction does not qualify either as composite or mixed supply, then the GST rate applicable against each of the four supplies would be relevant in order to determine the GST liability. However, in case of both composite and mixed supplies, the levy of GST is only on the basis of one of individual ingredients of the four supplies constituting the transaction. The difference between composite and mixed supplies is that in the case of composite supply that individual ingredient is chosen which constitutes the principal supply whereas in the case of mixed supply that individual ingredient is chosen which attracts the highest rate of tax. Thus, classification of supplies and whether these are composite supplies or mixed supplies or none is crucial for the purpose of GST liability of the supplier.

 

  1. Conclusion

Given the tax incidence, it is evident that ordinarily no supplier would prefer for the supply to be categorised as mixed supply[17] because it implies that all components of the transaction suffer the tax rate earmarked for that particular supply which attracts the highest rate of tax. Such inclination may, however, not exist in case of composite supplies where the principal supply determines the classification as also the rate of GST of the entire transaction. Nonetheless, given that it is not anyone’s choice as to the rate of tax, each transaction needs to be closely reviewed to examine the classification of the supply and whether it attracts composite supply or mixed supply characterisation. Even though the determination involves both objective and subjective tests and thus makes the classification exercise onerous, nonetheless, in view of the statutory mandate, it is crucial for the suppliers to appreciate the nuanced concepts underlying composite and mixed supplies and undertake appropriate classification of the supplies.

 


† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.

[1] Torrent Power Ltd. v. Union of India, (2018 SCC OnLine Guj 4808.

[2] The decision of the Kerala High Court in Abbott Healthcare (P) Ltd. v. CST, 2020 SCC OnLine Ker 24 : (2020) 34     GSTL 579 is another decision wherein a High Court had an occasion to consider the concept of principal supply. However, the High Court did not return any finding on the nuances of this concept.

[3] Kundan Misthan Bhandar, In re, 2018 SCC OnLine Utt AAR-GST 16 : (2019) 24 GSTL 94.

[4] Doctors Academy of Educational Society, In re, (2020) 38 GSTL 186 (AAAR).

[5]  R. Vidyasagar Rao Constructions, In re, 2018 SCC OnLine TS AAAR-GST 2.

[6] This appears to be logical conclusion from the usage of the article “a” in the expression “a supply made by a taxable person to a recipient”. See also, Chennai Metro Ride, In re, 2021 SCC OnLine TN AAAR-GST 1 inter alia concluding that “a composite supply is one in which one or more supplies are bundled naturally and supplied in conjunction by the service provider to the recipient. In the case at hand, land is supplied by the land owner to the appellant and the access to the pathway is granted by the appellant to the land owner. The recipient and the supplier are not the same in these supplies and therefore the same is not a ‘composite supply’ “.

[7] Kalani Infrastructure (P) Ltd., In re, 2020 SCC OnLine Raj AAAR-GST 4 : (2021) 46 GSTL 285.

[8] Vertiv Energy (P) Ltd., In re, 2020 SCC OnLine Mah AAAR-GST 11.

[9] Karnataka State Electronics Development Corpn. Ltd., In re, 2020 SCC OnLine Kar AAAR-GST 13.

[10] Nikhil Comforts, In re, 2019 SCC OnLine Mah AAAR-GST 55.

[11] Circular No. 118/37/2019-GST, dated 11-10-2019 issued vide F. No. 354/136/2019-TRU.

[12] Sch. II(6), CGST Act.

[13] Defined in S. 2(119) of the CGST Act.

[14] Sarj Educational Centre, In re, 2019 SCC OnLine WB AAAR-GST 6 :  (2019) 27 GSTL 131.

[15] Commr., GST v. Asahi Kasei India (P) Ltd., 2019 SCC OnLine Mah AAAR-GST 10  : (2019) 28 GSTL 172.

[16] Switching Avo Electro Power Ltd., In re, 2018 SCC OnLine WB AAAR-GST 10 : (2018) 15 GSTL 636.

[17] Except in an unlikely case of inverted duty structure i.e. a situation wherein the inputs (consumed to make the supply) are taxed at a higher rate than the supply which results into excess input tax credit situation. In such a scenario the supplier may instead prefer a higher rate of tax on the supply in order to be able to absorb the input tax credit.

Legislation UpdatesNotifications

G.S.R. 681(E).- In exercise of the powers conferred by sub-section (3) of Section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, and on being satisfied that it is necessary so to do for the purpose of clarifying the scope and applicability of the notification of the Government of India, in the Ministry of Finance (Department of Revenue) No. 11/2017- Central Tax (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, sub-section (i), vide number G.S.R. 690(E), dated the 28th June, 2017, hereby inserts following Explanation in the said notification, in the Table, against serial number 3, in column (3), in item (vi), namely:

Explanation. – For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”.

2. This notification shall come into force with effect from 27th of July, 2018.

[F. No.354/13/2018-TRU]

Note: The Principal Notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017, was published in the Gazette of India, Extraordinary, vide number G.S.R. 690 (E), dated 28th June, 2017 and was last amended by notification No. 1/2018- Central Tax (Rate), dated 25th January, 2018 vide number G.S.R. 64(E), dated 25th January, 2018.

[Notification No. 17/2018-Central Tax (Rate)]

Ministry of Finance