The Central Goods and Services Act 2017, was admittedly an Act which drew inspiration from the earlier laws, and also brought in concept to nullify issues brought up due to jurisprudence of past Acts. But, while trying to iron out the wrinkles of the past, could it have unintentionally brought in issues for the future?
One such new concept which was brought in was that of ‘Composite Supply’. It was not a completely new concept, since in erstwhile Service tax regime, explanation to Sec. 66F of the Finance Act, 1994, referred to the concept of Bundled Service. In GST, the scope was expanded to have goods as well as services bundled up.
In GST era too, the concept of Composite Supply has evolved. The Model GST Law, released in June 2016, stated the definition of Composite Supply as below:
“Composite supply” means a supply consisting of –
(a) two or more goods;
(b) two or more services; or
(c) a combination of goods and services
provided in the course or furtherance of business, whether or not the same can be segregated;
In the next iteration of the Model GST Law, released in November 2016, the definition underwent a change. This new definition, is exactly what was carried into the final CGST Act.
“Composite supply” means a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, 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;
One of the important changes in the definition, was the addition of the concept of “a principal supply”. The term “principal supply” was now defined as:
“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
Our discussion today will revolve around this addition, and the impact thereof.
As seen above, the definition of Composite supply very clearly states that in every composite supply, there must be “a” Principal supply i.e. just one supply which is predominant, or which is the main intention of the typical customer. What if there are more than one Principal Supplies? Or two equally important supplies?
A similar fact matric played out in the European Court of Justice, and in the landmark decision of ECJ, Case C-41/04, Levob Verzekeringen BV, OV Bank NV v. Staatssecretaris van Financiën [2005] ECR I-9433 ([hereinafter Levob]. The facts of the case were that a software was being supplied, along with customisation of the software. The ECJ held that:
in the present case, neither of the two main supplies (the supply of the standard software and the customization thereof) is subsidiary to the other in such a way that it clearly represents an ancillary supply. However, it cannot be concluded on this basis that the two supplies cannot be regarded as a single comprehensive supply for value added the situation of principal-ancillary services, as described in Card Protection Plan, is only one of the cases of single supplies tax purposes. The principal/ancillary supply arrangement is only one scenario already recognized in case-law
The ECJ said that splitting this transaction into two different supplies would be “entering the realms of the artificial”. The fact that separate prices were contractually agreed for the supply of the software, and for its customisation, was also considered not decisive. This new genus, was characterised by them as having elements which were economically integrated but with no dominance of one element over the other. Thus, this was held to be yet another species of composite supply, as against the earlier species as elaborated in Card Protection Paln which envisaged a Principal-Ancillary relation. This species has been re-affirmed in cases such as ECJ, Case C-44/11, Finanzamt Frankfurt am Main V-Höchst v Deutsche Bank AG [2012] ECLI:EU:C2012:276 and Customs and Excise Commissioners v FDR Ltd. [2000] BVC 311 (where such supplies were called “table top supplies”).
Coming back to the Indian context, the challenge for such supplies will be that will they fall out of the definition of “composite supply”, for not having just “a” Principal Supply?. Then what are they? Are they then a “mixed supply”?
It is interesting to note here though, that two very common examples of such “table top supplies” have been “deemed” to be composite supplies in the CGST Act itself, that of a works contract and that of food served, essentially at a restaurant.
Can anyone truly identify which element of a works contract is the principal supply? Is it the cement, the steel, the labour, the overall coordination?
Can anyone say what is the principal supply in a restaurant? The food, the ambience, the feeling of being “served”?
Yet, Schedule II clause 6 states as below:
6. Composite supply
The following composite supplies shall be treated as a supply of services, namely: —
(a) works contract as defined in clause (119) of section 2; 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.
Thus, Schedule II indirectly deems these supplies to be composite supplies. However, Schedule II stops short of naming which is the principal supply. It only says treat them as a supply of “service”. It may be noted that even in Notification No. 11/2017-Central Tax (Rate), which prescribes the rates for services, Works Contract has been referred to as “composite supply of works contract”, thereby presuming that a works contract is a composite supply.
The above entries in Schedule II also have a history. In the original version of the model draft GST law, these entries were to appear under clause 5 of Schedule II, in the following manner:
5. The following shall be treated as “supply of service”
………..
(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
…..
(h) 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
Explanation. – For removal of doubts, it is clarified that activities specified in clause (f) and (h) shall be treated as a composite supply and supply of service involved in such supply shall be deemed to be the principal supply.
The subtle difference in the original version and the final version which we see today, seems to be that, the final version does not deem the service element to be the principal supply, whereas the earlier version stated this. We are not privy to why phrase was in the original draft, but could it be because the lawmakers realised the absence of an obvious principal supply in both these transactions, hence they were obliged to specify the principal supply, just to enable these two transactions to fit into the “composite supply” paradigm? We can merely speculate on this.
Thus, while the lawmakers have seemingly deemed these two activities which do not have any principal supply, to be composite supplies, the law is silent on many other such similar “table top supplies”, which then dangerously flirt with the definition of “mixed supply”. An example could be of a Trans-oceanic cruise with accommodation facility. The transport element, the accommodation element as well as the entertainment element, all could be considered on equal footing.
There can also be a case, where in the context of one composite supply, different customers may have different perceptions of what the principal supply is. A New year’s event, for examples has various supplies bundled: Supply of food, mocktails, cocktails, live dance by customers, musical performances, other performances, and the overall “experience”. Various customers may have different preferences and hence may see the same event from a different lens. Thus, it could be a challenge to determine one singular principal supply from the “typical customer’s” view point.
Therefore, we can conclude that the definition of composite supply, while trying its best to cover in its ambit, many such supplies, does not encompass situations where there can be multiple principal supplies or no single identifiable principal supply, even though such activities may fulfil all other conditions and may conceptually be “composite” in nature. India awaits its “Levob” moment, either via courts or via amendments to the Act.
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