The advent of GST has brought about a paradigm shift in the indirect tax regime in India. However, the Legislature have retained the concept of ‘bundled services’ under the erstwhile Service Tax regime as ‘composite supply’ and broadened its scope to include supply of goods as well under the GST regime.
Composite supply as per GST law:
The term ‘composite supply’ has been defined under Section 2(30) of the Central Goods and Services Tax Act, 2017 (“CGST Act”).
“Composite supply” means a supply comprising two or more taxable 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.
As per the definition, the following are the essential characteristics of a composite supply made by a taxable person to a recipient:
- Consists of two or more taxable supplies of goods or services or both, or any combination thereof;
- Such supplies are naturally bundled and supplied in conjunction with each other in the ordinary course of business;
- One of the supplies is a ‘principal supply’
They cannot be separated.
As for the tax treatment of a composite supply, Section 8(a) of the CGST Act provides that 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. As a result, if one applies the concept of the composite supply, the ancillary supply in the composite supply would enjoy the tax treatment extended to the principal supply.
Section 2(108) of the CGST Act, 2017 defines the expression ‘taxable supply’ to mean ‘supply of goods or services or both which is leviable to tax under this Act’. Since the definition of ‘composite supply’ uses the expression ‘two taxable supplies’, one of the pre-requisites for the application of the composite supply would be the presence of two supplies leviable to tax under the GST law.
Section 2(90) of the CGST Act defines ‘principal supply’ as the supply which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
In case of a composite supply, GST is payable at the rate of tax applicable on the principal supply. The statute provides the following illustration of a composite 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.”
The above illustration is a bit disconcerting, as such single supply of goods along with freight and insurance may not always be naturally bundled i.e. supplied in conjunction with each other in the ordinary course of business as the same would depend on the contractual obligations agreed between the supplier and recipient. Further, the phrases “naturally bundled” and “predominant element” has not been defined under the GST Acts.
Unbundling the concept of bundling
The concept of ‘composite supply’ under GST is similar to that of ‘bundled services’ under Section 66F of the Finance Act, 1994. As per sub-section (3) of Section 66F, if various elements of a bundled service were naturally bundled in the ordinary course of business, it was to be treated as provision of the single service which gave such bundle its essential character. The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’. In this regard, the CBEC Education Guide provided the example of air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.
Therefore, we may infer that apart from being naturally bundled in the ordinary course of business, for two or more supplies to be construed as a ‘composite supply’, the principal or predominant supply must give the composite supply its essential character. In other words, such bundling of supplies into a single composite supply must not alter the essential character of the principal supply. In the aforesaid illustration provided under Section 2(30) of the CGST Act, though the supply of goods along with freight and insurance may not always be naturally bundled, however, if such supplies are bundled together into a single composite supply, it will not alter the essential character of the principal supply, which is the supply of goods. As a natural necessity in the ordinary course of business, the supply of goods may be bundled with the supply of freight and insurance. The principal supply overshadows the other supplies in a composite supply.
Other illustrative indicators, not determinative but indicative of bundling of services in the ordinary course of business are:
– There is a single price or the customer pays the same amount, no matter how much package they actually receive or use
– The elements are normally advertised as a package
– The different elements are not available separately
– The different elements are integral to one overall supply. If one or more is removed, the nature of the supply would be affected.
Some illustrations to understand this concept better,
For qualifying as composite supply, activities should be naturally-bundled. While selling a car, it is natural for the car dealer to supply standard accessories such as extra set of tyres, tools necessary to replace the tyres, first aid box etc. All these supplies are naturally bundled. Car dealers generally do not engage in imparting driving training. If a dealer agrees to arrange training also and charges for it, the activity of training will not fit into the concept of composite supply as it is neither ‘naturally bundled’ nor ‘in the ordinary course of business’.
For qualifying as composite supply, composition should be in the ordinary course of business. A readymade garment is put into transparent polyethylene bag and that bag is put into a bright print card board box. This is in ordinary course of business. A FMCG company approaches the garments supplier for buying garments to be packed in a set of five pieces in an attractive, durable suit case for gifting to delegates in its upcoming sales conference. Here supply of suitcase is not in the ordinary course of business.
Few AAR (GST) rulings in case of composite services are enumerated as hereunder:
1. M/s. SARJ EDUCATIONAL CENTRE (GST AAAR WEST BANGAL):
In the instant case, the Applicant is engaged in supplying food, laundry service, housekeeping service, etc. which are not naturally bundled with the lodging service. All these components are independent of each other and can be supplied separately. It is also evident from the submission of the Appellant that they also provide lodging service without providing food and Day Boarders do not avail laundry services. Therefore, none of the Services are bundled together in a natural way and there appears to be no principal Service.
2. M/s. Kerala Forest Development Corporation Ltd. (GST AAR Kerala):
In case where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.
Tax liability under GST for the tour packages, which are providing to guests by way of separate services like accommodation, serving food and beverages, service of authorized guides, trekking accessories etc. against separate invoices.
3. M/s. Abbott Health Care. (GST AAR Kerala- Kerala HC):
In the relevant case (AAR) ruled that the supply of both – equipment and products – are composite.
The high court said there are two suppliers and one supplier is not making both the supplies. Besides, it was not even concluded that the supply of equipment without consideration is a taxable supply. Also, it said in case of two supplies it is a question of valuation. In this case it was to be figured out whether value of equipment is included in the value of reagent to classify it as a composite supply.
AAR had also said that supply of medical products is incidental to that of equipment. High court asked as to how AAR can say that one supply is incidental to the other. It said one has to look at historic pattern of the company, how it is doing the transaction and then only one can come to the conclusion that one transaction is incidental to the other.
4. Bharat Sanchar Nigam Ltd. v. Union of India [2006]:
Calling for a dominant nature test. In Bharat Sanchar Nigam Ltd. v. Union of India [2006] wherein the Hon’ble Supreme Court observed: “The test for composite contracts remains to be – did the parties have in mind or intend separate rights arising out of the sale of goods. The test for deciding whether a contract falls into one category or the other is as to what is “the substance of the contract”.
Few offshore rulings in this regard,
European Court of Justice (“ECJ”) has delivered several judgments on the aspects of composite supplies under European Union Value Added Tax laws (“EU-VAT”). Under the EU-VAT law, Title IX of Council Directive 2006/112/EC, dated 28th November, 2006, provides for exemptions for certain activities in public interest, wherein the supply of goods and services incidental thereto are also exempt. In the case of Card Protection Plan (CPP) [see end note 1], the ECJ held that a service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied. In Levob [see end note ii], the ECJ held that where two or more elements or acts supplied by a taxable person to a customer are so closely linked that they form objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constitute a single supply for the purposes of application of VAT.
Recently, in the case of Brockenhurst College [see end note iii], the issue before the ECJ was whether VAT was applicable on the restaurant and entertainment services provided by the college. The college contended that such services were exempt on the basis that they were ‘closely related’ to the provision of education, which was exempt under Council Directive 2006/112/EC. The ECJ held that such activities could be regarded as supplies ‘closely related’ to the principal supply of education, provided that those services were essential to the students’ education and that their basic purpose was not to obtain additional income for that establishment by carrying out transactions which were in direct competition with those of commercial enterprises liable for VAT. The Court noted that services offered in the present case, as part of the courses taught to its students, to a limited number of third parties, were substantially different from those habitually offered by a commercial theatre or restaurant and were aimed at a different public and the intention was not to generate additional income. Therefore, the ECJ held that the principal supply was that of education and the restaurant and entertainment services provided by the college were ancillary to this principal supply.
[i] Card Protection Plan v. Customs and Excise Commissioners, [1998] EUECJ C-349/96.
[ii] Levob Verzekeringen BV, OV Bank NV v. Staatssecretaris van Financiën, [2005] EUECJ C-41/04.
[iii] Brockenhurst College v Revenue and Customs Commissioners, [2017] EUECJ C-699/15.
The definition of composite supply need not apply when services are provided separately & individually. Guests have the complete right to modify the plan to suit their needs. It is only for the guests’ convenience that services are advertised together for sake of benefit of selection. It is imperative to note here that there is no straight jacket formula that can be laid down to determine whether a service is naturally bundled in the ordinary course of business or not.
Since all the services are independent of each other and available separately and priced individually, this defeats the basic condition for being treated as composite supply.
Guests can only be billed for the services selected and availed. Essence of the same can be inferred that guest is opting for different services which suffer different tax rate and the same has been charged by the Hotel. GST registration certificate also may be inferred wherein the various applicable services are selected and invoiced for them accordingly in the invoices. For the sake of accounting convenience, all the services availed have been billed in the same invoice with breakup of the different services and tax rate.
Substance over form:
The principle of substance over legal form is central to the faithful representation and reliability of information contained in any document. The responsibility on the reviewers, here the department is to actively consider the economic reality of transactions and events to be reflected in the financial statements and documents. And more importantly, account for them in a manner that does fairly reflect the substance of the transaction (and situation). Hence, the department has to be vigilant and evaluate the transaction in totality. It must exercise commercial prudence and empathy in individual assessee case as applicable.
The term “naturally bundled” does not seem to be interpreted by various judicial fora, and much clarity as regards the ambit of the term “naturally bundled” is awaited in the days to come. If one were to rely on the parameters laid down by the CBEC Education Guide (endorsed by the CBEC in a recent press release dated 20th July on Composite and Mixed Supplies under the GST law), it would be very difficult to substantiate the required parameters with requisite documentary evidence and the entire exercise can be subjective.
All said and done, the concept of composite supply is likely to spawn considerable debate and litigation for long before the debates surrounding its application meet their logical conclusion.
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