Delhi High Court
Case BriefsHigh Courts

   

Delhi High Court: In a case filed by Amitabh Bachchan for protection of his publicity rights against the fake Kaun Banega Crorepati (KBC) lottery fraud, the Single Judge Bench of Navin Chawla, J. granted ad-interim ex-parte injunction in favour of Amitabh Bachchan and restrained the defendants from infringing his publicity or personality rights by misusing his name, voice, image, or any other attribute exclusive to him.

Plaintiff alleged violation of his ‘publicity rights as a celebrity’ as had been recognized by this Court in Titan Industries Ltd. v. Ramkumar Jewellers, 2012 SCC OnLine Del 2382. In the present case, plaintiff was aggrieved by defendant’s unauthorized use of his celebrity status to promote their own goods and services, without his permission or authorization.

Analysis, Law, and Decision

The Court opined that plaintiff had made out a prime facie case in its favour for the grant of an ad-interim ex-parte injunction and the balance of convenience was also in favour of the plaintiff and against the defendants. The Court noted that defendants were using plaintiff’s celebrity status for promoting their own activities, without plaintiff’s permission or authorization. Therefore, plaintiff would suffer irreparable harm and injury to defendant’s reputation.

Thus, the Court granted an ad-interim ex-parte injunction in favour of Amitabh Bachchan, thereby restraining defendants from infringing Amitabh Bachchan’s publicity or personality rights by misusing his name ‘Amitabh Bachchan/Bachchan/BigB/AB’, voice, image or any other attribute that was exclusively identifiable with him, for any commercial or personal gain.

[Amitabh Bachchan v. Rajat Nagi, 2022 SCC OnLine Del 4110, decided on 25-11-2022]


Advocates who appeared in this case :

For the Plaintiff: Senior Advocate Harish Salve;

Advocate Pravin Anand;

Advocate Ameet Naik;

Advocate Madhu Gadolia;

Advocate Dhruv Anand;

Advocate Udita Patro;

Advocate Sujoy Mukherjee;

Advocate Nimrat Singh;

Advocate Swati Jain;

Advocate Sampurnaa Sanyal;

Advocate Tarini;

Advocate Rashmin Khandekar;

Advocate Karishni Khanna.

Delhi High Court
Case BriefsHigh Courts

   

Delhi High Court: In a case filed by Loreal India Private Limited (petitioner) challenging the order dated 23-06-2022 passed by National Anti-Profiteering Authority (Respondent 2) and the notice dated 01-06-2022 seeking to examining whether there is any profiteering or not, also challenging Section 171 of Central Goods and Services Tax Act, 2017, (CGST Act), Chapter XV of the Central Goods and Services Tax Rules, 2017, (CGST Rules) more particularly, Rules 126, 127 & 133 of the CGST Rules as unconstitutional, ultra vires and violative of Articles 14, 19(1)(g), 265 & 300-A of the Constitution of India, a Division Bench of Manmohan and Dinesh Kumar Sharma, JJ., held that a supplier cannot claim that he has passed on more benefit to one customer therefore he could pass less or no benefit to another customer than the benefit which is actually due to that customer as under Section 171 CGST Act, any benefit of reduction in rate of taxes or benefit of input tax credit on any supply of goods or services can only be by way of commensurate reduction in prices.

Counsel for petitioner submitted that the National Anti-Profiteering Authority (NAA) has no suo moto powers and therefore, the application filed by the Secretary, NAA, to the Standing Committee seeking initiation of proceedings under Section 171 CGST Act, is not a valid initiation of proceedings against the petitioner for examining whether there is any profiteering or not.

The petitioner further submitted that even though in some products they have not been able to grant commensurate reduction in prices, yet they have tried to pass on the benefit by way of increase in grammage of the product.

NAA further submitted that the petitioner was only required to pass on the benefit of tax reduction by not increasing his base prices which he has not done and has instead increased them as well as also compelled them to pay additional GST on these excess base prices which they should not have paid.

The Court noted that Section 171 CGST Act is not a charging or a taxing provision, rather an incidental provision for the purpose of eliminating the cascading effect of taxation on the consumer and any benefit of rate reduction of taxes or input tax credit benefit being passed on to the recipient without the middleman taking advantage of the Governments forgoing their taxes for the end consumer, and thus, is in the nature of a consumer welfare provision and must be liberally construed directed towards furthering consumer and public interest.

Further, Rule 128 of CGST Rules, 2017 nowhere prescribes that the applicant who is making the written application/complaint must also be the recipient of the goods or services, on which commensurate reduction in prices have not taken place. Thus, the Secretary, NAA, would qualify to make an application under Rule 128 CGST Act, which permits ‘any other person’ to make such an application.

The Court also noted that Section 171 of CGST Act, 2017 casts an obligation of every supplier of goods and services/registered person to pass on the benefit of rate reduction of GST or the benefit of ITC on every supply and not on some supplies. Thus, a supplier cannot claim that he has passed on more benefit to one customer therefore he could pass less or no benefit to another customer than the benefit which is actually due to that customer.

The Court remarked that when a statute clearly provides for a manner in which something is to be done, and a duty is cast upon the supplier to extend the benefit of rate reduction by way of commensurate reduction in prices, the supplier cannot insist that instead of reducing prices, he will give extra grammage of the product.

The Court held that under Section 171 of CGST Act any benefit of reduction in rate of taxes or benefit of input tax credit on any supply of goods or services can only be by way of commensurate reduction in prices and thus, the post-sale discount does not qualify as commensurate reduction in prices.

The Court further directed the petitioner to deposit the principal profiteered amount after deducting the GST imposed on the net profiteered amount which has already been deposited by the petitioner with the Department in six equated installments commencing 10-10-2022.

[Loreal India Private Limited v. Union of India, 2022 SCC OnLine Del 3281, decided on 06-10-2022]


Advocates who appeared in this case:

Mr. Mukul Rohatgi, Sr. Advocate with Mr. V. Lakshmikumaran, Mr. Karan Sachdev and Mr. Agrim Arora, Advocates, for the Petitioner;

Ms. Uma Prasuna Bachu, Advocate, for the R-1;

Mr. Zoheb Hossain, Sr. Standing Counsel for the Revenue with Mr. Vivek Gurnani and Ms. Niharika Kuchhal, Advocates, for the R-2, 3 & 4/NAA and DGAP.


*Arunima Bose, Editorial Assistant has put this report together.

Akaant MittalExperts Corner

Recently, the Supreme Court in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd.[1] settled on a crucial issue of defining the contours of the terms “operational creditors” and “operational debt” and expanded the same to include even the acquirer of such services and goods within its ambit.

 

In this column post, we will discuss on whether an advance payment made by one party to acquire the service or goods of the other party, entitles the former to claim an operational debt when such service or good is not provided or supplied by the latter.

Introduction

Generally, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[2] For the purposes of the definition of the term “goods”, the Sale of Goods Act, 1930 can be referred to; whereas, the definition of the term “services” is still not concretely defined. A claim on operational debt may be on account of breach of an agreement or a decree of a court of law; still the same must relate to the supply of goods and services.

 

The problem in classifying advance payments made by one party to acquire the services or goods from the other party is that the inherent meaning of the term “operational creditor” and “operational debt”. The party which is giving the advance sum is generally the acquirer, not the provider of goods and services, hence such party cannot be the creditor who is providing any services or supplying any goods towards the operations of a company.

 

The same seems to be case when one peruses the Bankruptcy Law Reforms Committee Report that formed the basis of the Insolvency and Bankruptcy Code, 2016 (IB Code). The report illustratively suggested that the definitions of “operational creditor” and “operational debt” include wholesale vendors of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold, thus making them operational creditors. Similarly, the lessor who rents out space to an entity is an operational creditor to whom the entity owes monthly rent on a three-year lease.[3] Operational creditors, in other words, maybe employees, rental obligations, utilities payments and trade credit.[4]

 

Judicial Discourse on the Issue of Advance Payment

Section 5(21) of the IB Code defines an “operational debt” as:

 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

 

For the present article, it is the scope of the phrase “a claim in respect of the provision of goods or services” which decides and spins the interpretation on the subject-matter.

 

Earlier, the position of law seemed to be clear on the issue that if an entity has provided goods or services, then only such a person could raise an issue that it must be paid its debt since such debt could be paid in terms of money. However, on the other hand, if a person claims that it has paid in advance for securing the services or seeking supply of goods, then the question arose whether such a person could claim that the goods or services grant such payer the status of an “operational creditor” holding a claim of an “operational debt” against the corporate debtor. Even additionally, whether repayment or reimbursement of money paid in advance could be taken to show that an “operational debt” is due.

 

The NCLAT has consistently maintained that in such cases, such payers of advance money either for receiving a supply of goods[5] or for procuring the services[6] could not claim to be operational creditors and such payment is not an operational debt.[7] While such a person is no doubt a creditor, but the payer is not an operational creditor. Consequently, such a person neither can file an application under Section 9 against its corporate debtor nor could stake any rights under the IB Code that are given to an operational creditor.[8] Even if the advance money is to be refunded by the corporate debtor, still the refund does not constitute an operational debt.[9]

 

In B. Karthikeyan v. Nonstop Courier & Cargo (P) Ltd.[10], the NCLAT took note of the fact that the appellant neither supplied any goods nor provided any services and had merely deposited money for securing franchisee rights and resultantly, held that the debt could not be termed as an operational debt.

 

However, opposite conclusion was reached in Overseas Infrastructure Alliance (India) (P) Ltd. v. Kay Bouvet Engg. Ltd.[11], where the NCLAT reached the opposite conclusion. It was held that a claim for refund of advance is an “operational debt”. The creditor, who was the contractor, had advanced funds to the debtor, who was the sub-contractor, for the completion of the project. The creditor pursued recovery of the advance from the debtor after the project was terminated, but the debtor failed and/or refused to pay. While the NCLT did not decide on this issue, the NCLAT specifically held that “the appellant having advanced 10% of the contract value to respondent — sub-contractor as advance payment had a claim in respect of provision of goods or services bringing him within the definition of ‘operational creditor’, to whom an ‘operational debt’ was owed by the respondent – ‘corporate debtor’ “. (emphasis added)

 

The NCLAT here opted for an expansive interpretation of the phrase “a claim in respect of the provision of goods or services” in the definition of the term “operational debt” under Section 5(21) of the IB Code.

 

However, when the case went for appeal in the Supreme Court, it was observed that there was a genuine pre-existing dispute and the appeal was dismissed on that ground only. Therefore, the question whether non-repayment of advance payments amounted to an operational debt or not was left undecided.[12]

 

It was this phrase of an operational debt being “a claim in respect of the provision of goods or services” that became the subject matter of discussion in the decision of the Supreme Court in Consolidated Construction Consortium[13] where the Court held that a creditor seeking refund of the advanced money can stake the claim for being an operational creditor since such creditor had advanced money to the debtor in respect of provision of goods or services. In other words, it is not material as to who was the acquirer or provider of the goods or services; what was material is that the debt arose in respect of goods and services. Since an acquirer had paid advance money to the service or goods provider to procure and secure the goods and services from such provider, the same was sufficient to cloth the person who paid the advance money with the status of an “operational creditor”.

 

In Consolidated Construction Consortium[14], the appellant — Consolidated Construction Consortium Limited entered into a contract to supply light fittings to Chennai Metro Rail Limited (CMRL). The appellant had placed purchase orders for light fittings with Hitro Energy Solutions (proprietary concern) pursuant to the contract with CMRL. On behalf of the appellant, CMRL issued a cheque for INR 50 lakh to the proprietary concern, but afterwards cancelled its contract with the appellant when the project on which CMRL was working was terminated. While the appellant cleared the dues towards the CMRL by returning Rs 50 lakh, it itself was unable to recover the stated sum from the proprietary concern on account of some facts and circumstances. While the NCLT decided in favour of the appellant – advance payer, the NCLAT decided against it and dismissed the application filed under Section 9 of the IB Code.

 

When the creditor went into appeal before the Supreme Court, it first considered the relevant provisions, rules and regulations, the legislative history of the IB Code in order for a better understanding of the issue in hand.  Consequently, the Supreme Court observed that the term “operational debt” under Section 5(21) of the IB Code is defined as “claim in respect of the provision of goods and services”. Resultantly, it was opined that the definition does not restrict the claim to only those who supply goods and services, but it requires that “the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver”.

 

With respect to the observations from the report of the Bankruptcy Law Reform Committee (noted above in the column post), the Supreme Court stated that the report also “specifies that operational debt is in relation to operational requirements of an entity”.

 

It is submitted that the judgment may have overstepped the core idea behind the inclusion of operational creditors, especially when such creditors are allowed to initiate insolvency process against a corporate debtor. The idea is that the corporate debtor is ailing financially to such an extent that even its own suppliers and employees are not getting paid.

 

Conclusion

The ruling of the Supreme Court in Consolidated Construction Consortium[15] is significant because it has resolved the controversy over the legality of forward payment for goods and services, as well as the ambiguity caused by various judgments of NCLTs and the NCLAT. However, whether the interpretation opted for by the Supreme Court truly conforms to the idea behind the definition of an operational debt and an operational creditor is still unclear. Nonetheless, the ruling of the Supreme Court is another step toward narrowing conflicting positions of law in the IB Code.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the National Law University, Mumbai and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

[1] 2022 SCC OnLine SC 142.

[2] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1, available online at HERE .

[3] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch. 5.2.1.

[4] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch. 3.2.2.

[5] Andal Bonumalla v. Tomato Trading LLP, 2020 SCC OnLine NCLAT 624; N.S. Rangachari v. Consolidated Construction Consortium Ltd., 2019 SCC OnLine NCLAT 1424; Kavita Anil Taneja v. ISMT Ltd., 2019 SCC OnLine NCLAT 512; Roma Infrastructures India (P) Ltd. v. A.S. Iron & Steel (I) (P) Ltd., 2019 SCC OnLine NCLAT 822.

[6]  Bhadreshwar Vidyut (P) Ltd. v. Maheshwari Handling Agency (P) Ltd., 2020 SCC OnLine NCLT 1224; Hitachi India (P) Ltd. v. Prime Infrapark (P) Ltd., 2018 SCC OnLine NCLAT 1044; P.R. Earnarst v. Ajantha Flat Owners Assn., 2019 SCC OnLine NCLAT 247, para 4.

[7]  Co. Jegannathan v. Spring Field Shelters (P) Ltd., 2018 SCC OnLine NCLAT 107.

[8] See, Ss. 24(3)(c), 24(4) and 30(2)(b) for the rights that an operational creditor is granted under the IB Code.

[9] Andal Bonumalla v. Tomato Trading LLP, 2020 SCC OnLine NCLAT 624.

[10] 2019 SCC OnLine NCLAT 873.

[11] 2018 SCC OnLine NCLAT 873.

[12] Kay Bouvet Engg. Ltd. v. Overseas Infrastructure Alliance (India) (P) Ltd., (2021) 10 SCC 483.

[13] 2022 SCC OnLine SC 142.

[14] 2022 SCC OnLine SC 142.

[15] 2022 SCC OnLine SC 142.

Case BriefsSupreme Court

Supreme Court: The division bench of Dr. DY Chandrachud and MR Shah, JJ has upheld the validity of Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) which provides for refund of unutilised input tax credit (ITC) in certain cases.

Provisions in question

Section 54[1] of the CGST Act provides for a refund of tax. Under sub-Section (1) of Section 54, a person claiming a refund of “tax and interest, if any, paid on such tax or any other amount paid” has to make an application within two years of the relevant date.

Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund was provided for in Section 54(3) which embodies for refund of unutilised input tax credit (ITC) in cases involving:

(i) zero rated supplies made without payment of tax; and

(ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies”.

Further, the Central Goods and Service Tax Rules 2017 were formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “Net ITC”. In defining the expression “Net ITC”, Rule 89(5)[2] speaks of “input tax credit availed on inputs”.

Case Trajectory

The petitioners approached the Gujarat High Court and the Madras High Court and made the following submissions:

(i) Section 54(3) allows for a refund of ITC where the accumulation is due to an inverted duty structure;

(ii) ITC includes the credit of input tax charged on the supply of goods as well as services;

(iii) Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies;

(iv) While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and

(v) In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.

Gujarat High Court’s judgment

By its judgment dated 24 July 2020, the Division Bench of the Gujarat High Court, held that:

“Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.”

The High Court therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3).

Madras High Court’s judgment

The Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, and held;

 “63…

(1) Section 54(3)(ii) does not infringe Article 14.

(2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.”

The divergent views by both the High Courts led to the case before the Supreme Court.

Supreme Court’s verdict

Upholding the constitutional validity of Section 54(3), the Court held that

“A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund.”

The Court explained that Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii) i.e.

(i) zero rated supplies made without payment of tax; and

(ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies.

Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.

“When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive.”

Stating that courts are averse to entering the area of policy matters on fiscal issues, the Court said,

“Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection.”

The Court also found it impossible to accept the premise that the guiding principles which impart a measure of flexibility to the legislature in designing appropriate classifications for the purpose of a fiscal regime should be confined only to the revenue harvesting measures of a statute.

“The precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and unequals are treated as equals.”

Noticing that both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and they are distinct species, the Court said,

“Parliament engrafted a provision for refund Section 54(3). In enacting such a provision, Parliament is entitled to make policy choices and adopt appropriate classifications, given the latitude which our constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions, concessions and benefits on terms, as it considers appropriate.”

[Union of India v. VKC Footsteps, 2021 SCC OnLine SC 706, decided on 13.09.2021]


*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

For UOI: N Venkataraman and Balbir Singh, ASG

For Assessee: Senior Advocates V Sridharan and Arvind Datar; Advocates Sujit Ghosh and Uchit Sheth

For Respondents: Advocate Arvind Poddar


[1] “Section 54. Refund of tax

(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of Section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed.

[…] (3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods and services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

*********************************************

[2] “(4) […]

(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period;

[…]

(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period;

(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula: – Maximum Refund Amount= {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} − tax payable on such inverted rated supply of goods

Explanation:- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in sub-rule (4).”

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.