1. The taxable event under GST is supply of goods or services or both. The GST rates for goods and services are separately notified by GST Council. A supplier may engage in supplying combination of goods and services simultaneously.
Each individual component in a given supply may attract different rate of tax. The rate of tax to be levied on such supplies may pose a problem in respect of classification of such supplies.
It is imperative on the part of lawmaker to clarify the taxability in each such case.GST law coins them either as composite supply or as mixed supply or none and further relevant provisions to cater taxability are thus enacted. It is important to understand the implications of composite supply vs. mixed supply under GST Act.
2. Meaning of composite Supply :- ‘Composite supply’ means a supply made by a taxable person comprising of two or more taxable supplies of goods or/and services which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
2.1. 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 – section 2(30) of CGST Act.
3. Meaning of Mixed Supply : ‘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.
3.1 Illustration: A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drink 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 – section 2(74) of CGST Act.
4. Principal supply’ As per section 2(90) of CGST Act 2017, 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.
5. Naturally Bundled : The word ‘naturally bundled’ is not defined in GST Act. A nice explanation of the term ‘ natural bundled in CBI&C’s Education Guide published on 20-6-2012 is as follows :-
The determining factor for the services to be considered as naturally 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 various indicators such as nature of services, the perception of the recipients, practise followed by majority service providers in the area etc. Generally, the natural bundled supplies are advertised as a package and different elements in the supply are integral to one overall supply.
There is no straight formula which can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors and indicators. A ‘turnkey project’ is the most appropriate example of bundled service. Since, the term ‘natural bundled’ is not defined in GST, following references from circulars & case laws of PRE GST Era will help us to understand the meaning of natural bundled supply :-
5.1 Goods Transport Agency (GTA) services : The ancillary services like loading/unloading, packing/unpacking, transshipment, temporary storage during transit etc are naturally bundled and are form part of GTA service – MF(DR) circular No. 186/5/2015-ST dated 5-10-2015.
5.2 Freight Forwarder Services :- The service of freight forwarder starts with taking delivery of goods from place of seller, packing, loading, transporting, clearing at State borders or customs (as applicable), unloading at other side, transporting to destination and giving delivery to the customer at other end. It is a classic example of naturally bundled service (Para 5.9.5 of CBI&C’s ‘Taxation of Services : An Education Guide’ published on 20-6-2012.)
5.3 Customization of Software Supply of software, its customization and training under single contract constituted a single supply of service. Predominant element is customization as it would make software useful to consumer and its price was also higher. Hence whole contract ie supply of software, its customisation and training are closely linked ( naturally bundled) and they constitute a single indivisible economic transaction, LevobVerzekeringen BV and OV Bank NV v. Secretary of State for Finance, Netherlands (2012) 36 STT
5.4 Boarding schools : Boarding schools provide service of education coupled with other services like providing dwelling units for residence and food. Such services in the case of boarding schools are bundled in the ordinary course of business the entire bundle would be treated as educational service – Para 4.12.4 of CBI&C’s Taxation of Services : An Education Guide’ published on 20-6-2012.
6. Distinction between Composite Supply and Mixed Supply : A composite supply is ‘naturally bundled’ while ‘mixed supply’ is not naturally bundled in ordinary course of business.
A supply can be ‘mixed supply’ only if it is for a single price, while a supply can be ‘composite supply’ even if separate prices are charged.
7. Invoicing in case of Composite Supply and Mixed Supply : Normally, in case of composite supply, consolidated bill may be issued, while in case of mixed supply, bill is often split in various separate supplies.
8. Statutory Provision :- The tax liability on a composite or a mixed supply shall be determined in the following manner —
(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
(b) a mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax – Section 8 of CGST Act.
9. It is important for businesses to clearly understand composite supply vs. mixed supply, their tax implications and accordingly operate to fulfill the desired objective of bundling goods and services. A number of businesses approached Authorities of Advance Ruling (AAR) in order to get clarity whether a particular supply is a composite or mixed. An attempt has been made to compile all such decisions by AAR ( references ) with illustrations in the following Paragraph.
10.Illustrations of Composite Supply & Mixed Supply
|Sl||Description of Supply||Composite/ Mixed||Explanation & References|
|(a)||Supply of mobile with charger||Composite supply
|It is naturally bundled and principal supply is Mobile
Samsung (India) v. CCT (2018) 66 GST 1
|(b)||Supply of goods with transportation, loading/unloading
|Even if there are two separate contracts – one for supply of materials at ex-factory price and other for transportation, transit insurance, loading/unloading of goods. The contracts entered are not independent and it is a composite contracts
Supply of goods is a principal supply and naturally bundles with transportation, loading/unloading etc
|(c )||UPS (Uninterrupted Power Supply) with built in batteries||Composite supply||UPS is a principal Supply|
|(d)||Comprehensive Maintenance Agreement||Composite supply
|Maintenance Service is a principal supply|
|(e)||After sales service (including supply of spare parts, maintenance services) for a single price.||Composite supply||AAR-Maharashtra(2019) In re Cummins India Ltd|
|(f)||Supply of free medical instrument with obligation to purchase minimum quantity of||Composite supply||AAR-KERALA In re Abbott Healthcare (P.) Ltd.|
|(g)||Marine Consultancy Service and support service as intermediary service||Composite supply||Intermediary service is the principal supply.|
|(h)||Supply of medicines and food with healthcare services||Composite supply||These services are naturally bundled and are exempted under ‘health care service’
|(i)||Health Care Services along with providing medicines, in-plants etc||Composite supply||Naturally bundled and are exempted under ‘health care service’|
|(j)||Construction services of a dwelling unit in a residential complex, bundled with services relating to the preferential location of the unit and right to use car parking space and common areas and facilities,||Composite supply||AAR-West Bengal) 2019 In re Bengal Peerless Housing Development Co. Ltd.|
|(k)||Retreading of tyres||Composite supply||Supply of Services (Process of retreading ) is a principal supply
MF(DR) (TRU) circular No. 34/8/2018-GST dated 1-3-2018
|(l)||The activity of fabrication and fitting and mounting of bus bodies on the chassis supplied by the other party||Composite supply||It is a supply of goods and the principal supply is a bus body|
|(m)||Supplied of batteries separately with UPS (Uninterrupted Power Supply||Mixed Supply||AAAR-WEST BENGAL2018 In Switching Avo Electro Power Ltd|
|Supply of other goods or services – ancillary to comprehensive maintenance agreement||Mixed Supply||AAAR- Rajasthan In Sandvik Asia (P.) Ltd|
|(o)||Servicing of vehicles which covers both goods and services||None
(Two different supplies )
|If value of goods and services is shown separately, it will be treated as two different supplies and the goods and services shall be liable to tax at the rates applicable to such goods and services separately|
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Part 4 of the series will cover the topic “ Charging Section of GST under section 9 of the CGST Act.