Taxability of composite supply and mixed supply

Composite supply (Section 2(30) of the CGST Act, 2017)

1) What is composite supply?

Composite supply is defined under 2(30) of CGST Act, which 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.

Analysis

Supply is treated as composite supply only if following conditions are satisfied:

i. Supply must be made by a taxable person

  • Taxable person means a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act
  • Person includes individuals, HUF, company, firm, LLP, an AOP/BOI, any corporation or government company, body corporate incorporated under laws of foreign country, co-operative society, local authority, government, trust, artificial judicial person.
  • Person who is registered means those who were already registered in previous tax regimes before GST (VAT, Service tax, excise) and automatically got registered in GST regime.
  • Person required to be registered means who require to obtain registration under section 22 or section 24 of CGST Act.

ii. Supply must comprise of two or more taxable supplies

  • Taxable supply means any supply of goods or services or both which is leviable to tax under the Act.
  • Taxable supply includes exempt supply by virtue of definition of taxable supply u/s 2(108).

iii. Supply of goods or services or both must be naturally bundled

  • Two supplies cannot be considered as naturally bundled only because those supplies occurring simultaneously.
  • How to identify whether any supply is naturally bundled in the ordinary course of business or not??

Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below-

a) Perception of the consumer or the service receiver

b) Majority of service providers in the in a particular area of business provide similar bundle of services

c) The nature of various services

d) Advertised as a single package

e) Single Price

f) Different elements are not available separately

g) Different elements are integral to one overall supply

  • Supply is naturally bundled or not needs to be examined on case to case basis.

iv. Supply of goods or services or both must be supplied in conjunction with each other in the ordinary course of business.

v. One of the supplies involved must qualify as principal supply

  • Principal supply is defined under section 2(90).
  • Principal supply means a supply having predominant element of composite supply to which all other supplies forming part of that composite supply is ancillary.
  • The ancillary supply becomes necessary only because of the acceptance of the predominant supply.

2) How to determine following in case of composite supply??

i. Time of supply

ii. Place of supply

iii. Invoicing

iv. Value of supply

As composite supply is deemed as supply of principal supply and all other supplies are incidental and ancillary to principal supply, so all the matters as specified above shall be determined in respect of principal supply.

3) Tax treatment of Composite supply:

Composite supply shall be treated as a supply of   principal supply and the rate of GST shall be the rate applicable to such principal supply.

Circulars on Composite supply

i. Circular No. 11/11/2017 on treatment of printing contracts:

  • In the case of printing of books, pamphlets, brochures, annual reports, and the like, where only content is supplied by the publisher or the person who owns the usage rights to the intangible inputs while the physical inputs including paper used for printing belong to the printer, supply of printing [of the content supplied by the recipient of supply] is the principal supply.

In simple terms we can say purchase of any book is for content so published and not for quality of paper or printing. We should identify purpose/use of any supply and in this case the content is principal supply and printing is ancillary supply.

  • In case of supply of printed envelopes, letter cards, printed boxes, tissues, napkins, wall paper etc. falling under Chapter 48 or 49, printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, predominant supply is that of goods and the supply of printing of the content [supplied by the recipient of supply] is ancillary to the principal supply of goods and therefore such supplies would constitute supply of goods.

In simple terms we can say use of tissues, napkins are used for cleaning of hands and logo or any design on such tissue, napkins are not principal activity for such supply therefore here principal supply is of goods.

ii. Circular No. 34/8/2018 on retreading of tyres:

In retreading of tyres, which is a composite supply, the pre-dominant element is the process of retreading which is a supply of service. Rubber used for retreading is an ancillary supply.

In simple terms we can say retreading is a re-manufacturing process for tyres that replace the tread on worn tyres. Rubber used in retreading is not principal supply and ancillary to the process and actually process of retreading on tyres is supply of service and not supply of goods and is principal supply.

iii. Circular No. 32/06/2018 on food supplies to patients as advised by doctors:

Food supplied to the in-patients as advised by doctors/ Nutritionists is a part of composite supply of health care and not separately taxable. As health care services are exempt so food supply will also be covered under this health care service.

Further it is clarified that supplies of food to patients (not admitted) or their attendants or visitors by hospital are taxable.

4) Some illustrations of composite supply:

i. Renting of immovable property would be the main supply and provision of other utilities such as electricity, and water supply, fuel etc. would be in the nature of ancillary supply.

ii. Services provided along with transportation services such as insurance, packaging, loading, unloading, handling, are supplied in conjunction to principal supply under single contract or single price. Thus they would be covered under composite supply.

iii. Works contract as defined in section 2(119) of CGST Act, Works contract is an example of composite supply and treated as supply of service as per Schedule II.

iv. Restaurant and outdoor catering where food/drink is supplied for consideration, this transaction will be treated as supply of service as this transaction is naturally bundled where not only food is supplied but other amenities like good ambiance, cutlery, sitting area and other facilities are also provided (Schedule II).

v. Supply of repair services on computer along with requisite parts- Comprehensive AMC

vi. Supply of equipment and installation of the same will be covered under composite supply.

vii. A hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundle of services in  the ordinary course of business where service of hotel accommodation is the principal supply and breakfast is ancillary supply therefore, be treated as supply of providing hotel accommodation.

Mixed supply (Section 2(74) of the CGST Act, 2017)

1) What is mixed supply?

Mixed supply is defined u/s 2(74) of CGST Act. Mixed supply means supply of more than one goods/or services which are not naturally bundled together but sold for a single price.

Analysis

Supply is treated as mixed supply only if following conditions are satisfied:

i. Supply must be made by a taxable person

  • Taxable person means a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act
  • Person includes individuals, HUF, company, firm, LLP, an AOP/BOI, any corporation or government company, body corporate incorporated under laws of foreign country, co-operative society, local authority, government, trust, artificial judicial person.
  • Person who is registered means those who were already registered in previous tax regimes before GST (VAT, Service tax, excise) and automatically got registered in GST regime.
  • Person required to be registered means who are required to obtain registration under section 22 or section 24 of CGST Act.

ii. Involves two or more individuals supplies

  • Term used in mixed supply is individual supplies as against taxable supplies.
  • Mixed supply can include taxable and non taxable supplies.

iii. Supply is made for a single price

When supply of two or more goods or services made for different prices, the supplies cannot be regarded as mixed supply.

iv. It can be said that mixed supply is one which is not composite supply.

2) How to determine following in case of mixed supply??

i. Time of supply

ii. Place of supply

iii. Invoicing

iv. Value of supply

As mixed supply is deemed as supply of that supply which attracts highest rate of tax, so all the matters as specified above shall be determined in respect of that supply which attracts highest rate of tax.

3) Tax treatment of a mixed supply

It shall be treated as supply of that particular supply which attracts highest rate of tax.

4) Some illustrations of mixed supply:

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

ii. A house is given on rent one floor of which is to be used as residence (Exempt) and the other floor to be used for commercial purpose (Taxable). Such renting for two different purposes is not naturally bundled in the ordinary course of business. If a single rent deed is executed where only residential use of house is specified, it will be treated as a mixed supply as it is not naturally bundled and the renting of house for commercial use is a taxable supply. Thus said supply shall be considered as service comprising entirely of such service which attracts highest rate of tax.

iii. Tooth paste (say chargeable @ 12%) is bundled along with tooth brush (say chargeable @18%) and sold as a single unit for a single price. It would be treated as mixed supply and liable to GST at 18% as highest rate of tax.

iv. A shopkeeper sells water bottles along with refrigerator. In this case, both items are not naturally bundled as bottles and the refrigerator can be priced and sold separately. Hence, it is a mixed supply and rate which attract highest rate will be applied.

Advance ruling on Composite supply/Mixed supply

  • AAR Haryana vs. Paras Motor Industries

Whether activity of fabrication and fitting and mounting of bus bodies on chassis supplied by other party is a composite supply of service with supply of goods?

Clarifications given by AAR:

i. The applicant is engaged in the business of fabrication & fitting out bus bodies on the chassis supplied by its customers.

ii. The fabrication & fitting & mounting of bus body in the chassis supplied by the other party is a work contract which is treated as supply of service as per Schedule II of Section 7 of CGST Act, 2017 & not sale of bus body.

iii. Major part of this process is supply of bus bodies and fabrication/fitting of bus bodies is an associated work along with this supply.

iv. Activity is a works contract and treated as supply of service as service is principal supply.

v. This activity is covered under HSN Code -8707

vi. This activity is an example of composite supply.

  • AAR Kolkata vs. Switching Avo Electro Power Ltd. :

Whether a combination of goods that does not amount to a composite supply to be treated as mixed supply?

Clarifications given by AAR:

i Where UPS and battery are supplied as separate goods, but at a single price and as a single contract are to be treated as mixed supply.

ii. Supply of battery and UPS are to be treated as mixed supply as per Section 2(74), as supplied under a single contract at a combined single price.

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Location: Jodhpur, Rajasthan, IN
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