1. In the erstwhile Service Tax Regime, Section 65B(54) of the Finance Act,1994 defined “Works Contracts” as meaning a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as “sale of goods”. The definition also specifically included jobs like “repair, maintenance, erection, installation etc as works contract.
2. Section 66E of this Act [declared services] also specifically included, in Clause (h) “service portion in the execution of a works contract” as a “declared service.
3. Accordingly, companies used to raise their invoice for work like repairs, maintenance, erection, installation etc [as “composite works contract” [indivisible, without a separate bargain for goods and services] and used to charge service tax on the percentage of the value of the invoice under Clause (c) of Rule 2A of the Service Tax (Determination of Value) Rules, 2006, which prescribed the same rate charged by the concerned State VAT Act for transfer of property involved in the execution of works contract, on the total value as the sale value of goods involved in the execution of the WC.
4. When the GST Acts came into force w.e.f.01.07.2017, the CGST Act, 2017, in Section 2(119) included only work in relation to IMMOVABLE PROPERTY as “Works Contract”, leaving out repairs or maintenance.
5. So, w.e.f. from 01.07.2017, several companies started quoting separate prices for goods and services in respect of the “work” done by them and also started raising SEPARATE Tax Invoices, charging the applicable rate of CGST/IGST.
5.1. The customers accepted the separate Tax Invoices and kept paying them off.
6. NOW COMES THE COMPOSITE SUPPLY CONUNDRUM FROM 01.07.2017
Section 2(30) of the CGST Act,2017, defines a “Composite Supply” as given below:–
“COMPOSITE SUPPLY MEANS,–
6.1.A supply made by a taxable person to a recipient
6.2.Consisting of two or more taxable supplies
6.3.Of goods or services or both, or
6.4.Any combination thereof,
6.4.1.WHICH ARE NATURALLY BUNDLED AND SUPPLIED IN CONJUNCTION WITH EACH OTHER IN THE ORDINARY COURSE OF BUSINESS
6.4.2.ONE OF WHICH IS A “PRINCIPAL SUPPLY”
6.2. The illustration given under this Section, of transportation of goods with packing materials and insurance charges, deeming it as a “composite supply of goods” is not at all representative of business like repair, maintenance, erection, commissioning, installation etc.
6.3. Also, Section 2(90) of the CGST Act defines the term “principal supply” as MEANING ” 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”.
7. Now, QUERY NO.1.”Will the jurisdictional GST Authority, or the Audit or the Enforcement INTERPRET transactions involving use of goods as “Composite Supply of Service”, citing their views as follows:–
“7.1. The normal practise in the in the market place and in particular adopted by the companies is–
(i) to float an enquiry for work like “repair, maintenance, erection, installation etc of an equipment or machinery of his and ask for quote for doing the job, including the goods to be used in such work;
(ii) receive quotations with one price FOR DOING THE WORK including the cost of goods to be used;
(iii) place the WORK ORDER on the approved supplier to do the job, and
(iv) pay his invoice after the job is completed
7.1.1. Thus, the supply of goods is only ancillary to the supply of the services mentioned above and hence these two supplies get” NATURALLY BUNDLED IN THE ORDINARY COURSE OF BUSINESS”.
7.1.2. Since the supply of such service cannot be done without the supply of goods required for such service, these two supplies will have to be made “IN CONJUNCTION WITH EACH OTHER”.
7.1.3. Thus, 7.1.1. and 7.1.2. together fulfill the necessary conditions for a combination of supply of goods and services to be legally treated as a COMPOSITE SUPPLY, leaving NO CHOICE to the supplier to de-bundle the supply of goods and the supply of service and treat them as two INDEPENDENT supplies.
7.1.4. Also, the supply of service naturally becomes the “PRINCIPAL SUPPLY” in this transaction under Section 2(90) of the CGST Act, 2017.”
7.1.5.Now,what are stated in Para No.7 and its sub paras up to 7.1.4. together fulfil all the conditions stipulated in Section 2(30) and HENCE, the transactions of the nature mentioned above ARE “COMPOSITE SUPPLY” under Section 2(30)
8. Even such an interpretation should not matter in a case where the rates of taxes for supply of goods and supply of services [SAC9987] happen to be the same, say, 18% [CGST+SGST] or IGST.
9. But then, in the kind of transaction, involving use of goods explained below, the Supplier can get into problem because of the totally contrary provisions on the “place of supply” in Section 10(1)(a) and Section 12(2)(a) of the IGST Act,2017.
10. I WILL NOW ILLUSTRATE THIS ANOMALY through a typical example we face every day:–
10.1. The recipient shipping company [the customer] is located and registered under GST in Mumbai in Maharashtra;
10.2. He gives an order to a Supplier company to repair some equipments of his ship when it calls at Chennai Port in Tamil Nadu.
10.3. The supplier is located and is registered under GST at Chennai in Tamil Nadu.
10.4. He does the work and raises TWO SEPARATE TAX INVOICES,-
(i) One for the supply of goods to be used in the repair work and charge CGST and SGST under Section 10(1)(a) of the IGST Act, since the movement of the goods from our workshop terminate at the ship in Chennai Port for delivery to the recipient; and
(ii) Another invoice for the supply of service and charge IGST under Section 12(2)(a) of the IGST Act , which stipulates the place of supply of service as the location of the principal place of business of the recipient, which, in this case is Mumbai in Maharashtra.
10.5. Now if this transaction is treated as a Composite Contract of SERVICE, the Supplier will be raising one single Tax Invoice for the entire value and will be charging IGST, again under Section 12(2)(a) of the IGST Act,2017.
10.6. The State of Tamil Nadu will not get any revenue by way of SGST on supply of goods, which they are earning now when the Supplier raises a separate invoice for supply of goods.
8. QUERY NO.2.
8.1.“Will such transactions of involving use of goods, be deemed as a COMPOSITE SUPPLY AUTOMATICALLY BY OPERATION OF THE DEFINITION given in Section 2(30)or,
8.2. Is the supplier, entitled to determine such a transaction as two separate supplies of goods and services by the INTENTION of the parties [the supplier and receiver], AS EVIDENCED by the DOCUMENTS in respect of the transaction evidencing the following facts:
8.2.1.The quotation sent in response to the recipient’s [customer’s] ENQUIRY, oral or written,
(i) Mentions the details of the goods to be used in the transaction, including the technical specifications and quantity and GIVE A SEPARATE PRICE FOR THE GOODS TO BE SUPPLIED, item wise or, in total.
(ii) Mentions the details of the service to be supplied to carry out the transaction and GIVE A SEPARATE PRICE FOR THE SERVICE TO BE SUPPLIED, item wise, or, in total.
(iii) The recipient [customer] has the right to inspect and verify the documents like test certificates given to him and reject the goods received, or part of these, if he is not satisfied about the conformity of the goods, or part thereof with the specifications mentioned in our quotation.
(iv) The Supplier raises SEPARATE TAX INVOICES in respect of the goods supplied and service supplied , the customer ACCEPTS the separate invoices raised and pay them off.
9. Who will clear [and when] the fog of uncertainty caused by bad drafting of the Law and till it is not cleared, what about the huge loss such industries are sure to incur when they are asked to pay a different tax plus interest for “delayed payment” [for example, the IGST, when they have already paid CGST & SGST on the same transaction] if the GST Authorities interpret the Law as it suits them ?
(Author is Director of Chidambaram Shipcare Pvt.Ltd., Chennai)