Manish Sachdeva

Conveying the definition but not the intent, how do you do that government’s way? Very easy, introduce the concepts of Composite and Mixed Supply under Section 8 of Central Goods and Services Tax Act, 2017 (‘the Act’). The present piece provide a discussion over the application of these concepts in transactions which by their nature involves more than one element of supply.

1. The genesis of Composite and Mixed Supplies

In delving into the intent and purpose of Composite and Mixed, understanding of a relative concept of Single and Multiple Supplies under the European VAT would help. European Sixth Directive 2006 on VAT and UK VAT Act, 1994 (for reference) do not legislate over Single and Mixed Supplies, but the concepts have evolved over the years with the jurisprudence established by their National Courts and Court of Justice for European Union (CJEU). A landmark ruling in this regard comes from ECJ, in the case of Card Protection Plan Ltd vs Commissioners of Customs and Excise[1], on reference from House of Lords, which truly paved the way.

A. Revolutionary Ruling

The Appellant, CPP provided insurance services for the loss caused by fraudulent misuse of Credit Cards, such insurances were covered with other re-insurance providers. CPP claimed exemptions from VAT, as insurance services were exempt. The revenue on the contrary argued that CPP barely offers card handling services of which insurance was incidental element. The question before ECJ was to rule upon the nature of services carried out by CPP. The ECJ holding that the services were insurance services, provided following golden rules for determining the understanding of different elements in a supply as follows;

1. Every supply of services must normally be regarded as distinct and independent supply

2. The supply which comprises of a Single Economic Service from Economic Point of view should not be artificially split

3. Essential features of transaction must be ascertained to determine whether supplies constitutes several distinct Principal Services or a Single service.

4. The services is only Single when one (or more elements in combined) are Principal and one or more element are ancillary

5. And an ancillary service is not an aim in itself, but a means of better enjoying the Principal Service. [Commissioners of Customs and Excise v Madgett and Baldwin [2]]

B. The Certainty Principles

The CPP Ruling evolved and discovered the identification of the supply when it is either bundled or split for varied reasons. The Court luminously pointed out that every supply should be treated as distinct and independent, so that correct VAT treatment be applied to it. However, not every time, every supply is offered independently, therefore there should be certainty principles that correct treatment be accorded to such transactions. These certainty principles are;

1. Every transaction should be viewed, from the point of view of a typical consumer, to ascertain that if the supply is a Single Supply of involves Multiple Supplies. Illustratively, when a consumer uses Postpaid Mobile services and has been given the facilities of collecting payments from his home, does it mean that consumer is being provided only Telecom services (Single Supply) or he is being provided Telecom services as well as Payment Facilitation Services (Two Supplies). In effect, it can be said that a split or bundling should also be seen from point of view of consumer, Everything Everywhere Ltd vs HMRC [3].

2. The other important feature is that Economic Reality of the transaction should be seen. Economic Reality means gauging a transaction as a whole. A supplier can construct his contracts in such a way, to reduce the tax treatment of a transaction, which shouldn’t be there if the supplies are viewed economically than mere contract bound. For e.g., a medical practitioner could offer his advisory separate from the medicines, and gain a tax advantage on account of the latter one, while in effect the purpose of both combined was to cure the patient, rather than to feed him medicines.

3. The Court also explained the concept of a supply involving Principal element and other Ancillary elements. The Court commended that Principal activity is an Aim for a typical consumer, and other elements that may be found along with are merely there for better enjoyment of the very Aim. The test is known as “Aim vs Means”.

4. The Court further held that in a supply, if there is a Principal elements and there are one of more Ancillary elements, then supply should be treated as a Single supply of Principal Supply.

C. Propositions of Splitting and Bundling

The starting point for both bundling and splitting of a supply is identification of all known elements in a transaction. Again the point of view of a typical consumer is important while identifying the elements therein. In an Installation Contract of Solar Power Generation Plant, a supplier is supposed to supply goods as well as services, however the consumer only seeks Solar Power Generation Plant, while the services of erection and installation are not sought by the consumer. Accordingly applying the test above, it can reasonably be said that supply is a Single Supply that of Solar Power Plant only.

Splitting: Now that if the supplier attempts to supply goods at separate price and services at separate prices, it can be seen that the supply has been split. It’s another question that split is artificial or otherwise, but from an economic point of view the transaction is a split.

Bundling: Let’s take the transaction forward, after getting Solar Power Plant, the consumer asks the supplier to offer Operation and Maintenance services for 2 years after its installation. In such case, if the supplier combines the supply of Solar Power Installation and O&M at a single price, it would tantamount to bundling, be it artificial or natural.

It can therefore be seen that a splitting and bundling flows from the singularity, accordingly to optimize tax in a supply involving multiple elements, the discovery of the singularity is the prime task.

D. Determining the singularity/ multiplicity

As can be seen from above, between the bundling and splitting, there is either a Singularity or Multiplicity. To move in either direction, the prime identification is always necessary. The Indian Laws, including erstwhile Section 66F of Finance Act, 1994, the Service Tax Education Guide of 2012, the flyers issued by CBIC on Composite and Mixed Supplies offers guidance only on limited aspects thereof, therefore application of European Jurisprudence can help in streamlining the transactions which can have ramifications of Section 8 ibid.

Multiple Elements

 2. Inter-relationship between European Jurisprudence and Section 8

CPP Test was a revolutionary in laying the roadmap for identification of true character of the supplies. Over the years, more tangible tests were laid for situations where CPP Test wasn’t the cure. It is reiterated again, that European VAT Legislations do not codify the law for transactions having characteristics of Single and Multiple Supplies, on the other side, Indian GST defines terms like Composite and Mixed Supplies. Be that case maybe, nature and tax treatment of both the concepts are somewhat coterminous with each other respectively.

Composite Supply Single Supply is
Where two or more supplies are naturally bundled and are supplied in conjunction[4] with each other  (in ordinary course of business) and one of which is a Principal Supply[5] where one or more elements are to be regarded as constituting the principal services, while one or more elements are to be regarded as ancillary services [CPP]
where two or more elements are so closely linked that they form a single, indivisible economic supply [Levob Verzekeringen BV[6]]

There is observable difference between the two, that while Single Supply is established when either of two tests viz. (1) Principal/ Ancillary or (2) Closely Linked is satisfied, while for a supply to be composite supply, both of test are to be satisfied viz. (1) Natural bundling of Principal and other supplies and (2) The supplies should be in conjunction with each other. It can therefore be said that Section 2 (30) departs from the European Jurisprudence to that extent. Although the practical application in numerous situations would show that both Single Supply and Composite Supply are more or less towards the same cause viz. according a supply, tax treatment in terms of its economic reality.

Mixed Supply Multiple Supplies
Two or more supplies, made in conjunction with each other and for a single price where such supply doesn’t constitute Composite Supply Two or more elements if together does not constitute Single Supply are Multiple Supplies

 There appears to be little difference between Mixed and Multiple Supplies not in terms of its characterization, but in terms of the tax treatment that respective jurisdictions seeks to provide to them. In other words, by classifying supplies as Multiple Supplies, the European jurisdictions’ accord tax treatment to all the supplies, separately and independently while Section 8 (b), accords the highest tax treatment to all the supplies, as a punishment for the mischief (intentional or unintentional). That’s seems to be only explanation for the usage of words “in conjunction with” and “single price” in Section 2 (74) ibid.

If the words “single price” and “in conjunction with” are deleted, then although there will no discouragement for the taxable persons in frivolously offering their supplies under as Composite Supply, in as much as the only the correct tax treatment will be accorded to them, while Mixed Supply would act as discouragement in as much as it heightens the tax liability to the highest. For e.g. a Food vendor will offer Tea [5%] and Pan Masala [28% + Cess] may offer both at a single price and contend that both are composite supplies. Even if the, the revenue secures that both are separate supplies, in the absence of Mixed Supply, both will attract their respective tax rates. While with the concept of Mixed Supply, both Tea and Pan Masala would attract highest of the tax rates. Hence, Mixed Supply is nothing but a deterrent for ‘Mischievous Composite’ and a cure for Valuation hassles.

3. Only Complex transactions needs ascertainment

A cursory look at the definitions of Composite Supply and Mixed Supply it can be inferred that, to proceed any further, the existence of two or more supplies is per se required, however such supplies need not be probed into when there are merely two or more activities comprising in a single supply. A supply is what is defined under Section 7 of the Act, while an activity is a sub set of supply, supply is a subset of Composite and/ or Mixed Supply.

Illustratively, when a manufacturer contracts to manufacture and sell goods to his customer, in essence he promises to complete multiple tasks for him. Can it be said that the manufacturer supplied multiple services to the customer namely, handling the manufacturing operations, carrying out storage, preservations, engaging transporters for dispatch. In the normal course, the supply can be said to be only sale of goods, and manufacturing can only said to be an activity in undertaking the supply of sale of goods. The thrust therefore lies in identifying major supply. Reference is invited to Australian GST Ruling 2001/8[7].

38. This Ruling does not apply to supplies that simply involve one thing, for example, the supply of a car by a dealership to a customer. A car has many parts which are fitted together to make a single vehicle. Although some of those parts, such as the tyres, may also be purchased separately, it is readily apparent that only the car is supplied when it is sold.[8]

52. The Commissioner’s view is that a supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply…………

4. Determining Composite and Mixed Supplies

From singularity, there can either be a bundling or split, this section discovers the former aspect. After a precursory identification that there are more than one elements in a given transaction, there arise need to identify the nature of bundling. In simple words, a natural bundling is a Composite Supply and an artificial bundling is Mixed Supply. The exercise extends to identifying Principal Supply if the supply is ascertained as Composite one. To determine whether the bundling is natural or artificial, following guiding principles are applied;

A. View of a typical consumer

In determining, whether the supply constitute Single (Composite) or Multiple (Mixed), the view of a typical consumer is an important consideration, as the ECJ envisioned in CPP case. It is particularly important if there is only a single price paid for the whole transaction. When a consumer procures a supply, he does it to satisfy a particular aim. A consumer can have multiple aims while consuming a supply.

In a transaction involving multiple elements, where one element constitutes the aim of the consumer and other ancillary elements are merely the means of better enjoying the aim, then it can be inferred that the supply is naturally bundled and therefore is a Composite Supply. Further the aim element will constitute the Principal Supply under section 2 (90) of the Act.

However, where the transaction involve multiple aims sought by the consumer, then it is an indicator that multiple different independent supplies are bundled together, artificially. A Mixed Supply can be said to be exist in such cases.

B. Integral, Ancillary or Incidental (‘IAI’) Identification

Where a supply consists of more than one component, the supply is a Composite supply if there is clearly one overall supply being made to which the remaining components are IAI. This means that whilst the components may be either minor or significant in their own right and may be capable of being supplied separately, they are an integral part of the main supply. Having regard to all the circumstances, indicators that a part may be IAI, is where:

  • It can be reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself or
  • It represents a marginal proportion of the total value of the package compared to the dominant part; or
  • It is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or
  • It contributes to the proper performance of the contract to supply the dominant part.

Existence or Absence of IAI on the facts and degree can dictate whether a supply is mixed or composite.

C. Economic Reality

Economic reality refers to the nature of the transaction, determining the economic substance considering all the commercial circumstances. The Economic Reality inspection initiates with the scrutiny of the relevant contract(s). In case there are more than one elements identified in contracts, their inter-dependency is to be evaluated.

Cross Fall Breach clauses, it is to be considered whether the different elements are separately enforceable. This takes into account whether the different elements are supplied under their own terms and conditions, and also if one element is not paid for and so not delivered whether the other elements will still be provided. It is usual that CFB clauses in contracts may indicate the existence of one main Aim, however that should be objective and not taken granted for as in BGŻ Leasing sp. z o.o. vs Director of the Warsaw Tax Chamber[9] [Para 47]. Appraisal includes looking at factors such as the pricing structure, the optional nature of some elements and whether elements can be provided alone and have their own value.

Economic Reality fetches the intent/ purpose of the contracts, if the elements therein are so closely linked that economically they forms rom an economic point of view, a whole transaction, they shall be considered as Composite Supply (Levob case). Similarly Economic Reality may indicate that consumer, actually had different aims, which constituted different and independent supplies, in such case Mixed Supply concept will operate.

D. Intention/ Text of Legislature

The text of legislation is superlative in relation to any contractual or natural scope. Where, the legislation clearly speaks that a given set of transactions shall be classified as Singular, Composite or Mixed Supply, there can be no argument against the said unless the vires are under challenge. Section 7 (1) (d) of the Act read with Schedule II is a classic example of this principle. Schedule II enlists specific transactions which are to be treated in a specified manner.

Construction supplies are a type of supplies which on the sets of Section 8 can be classified as either Composite of Mixed Supply, however Entry 5 (b) accords the said supplies grouping of services, and accordingly provides a specified rate of tax under Notification No. 11/2017-CT (Rate). Notwithstanding the vires, therefore it cannot be argued

  • that construction be treated as Composite supply of goods, even if the facts indicates so based on above tests
  • that construction involves separate supplies of goods and services, so as to apply separate tax treatment to them

Entry 6 of the Schedule goes a step beyond, in as much as it first deems supplies of works contract and specified restaurant services as Composite Supply, but also determines its classification as specified services (Discussed further later).

E. Principal Supply

In circumstances where there is a Composite supply, there is also a need to ascertain what constitutes the principal component of the supply as this will affect the overall liability.

2. (90) “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;

Deciding Predominant can be fairly easy more often, but cumbersome at times. For deciding the pre-dominant consumer point of view and economic reality should be taken under the umbrella. What is an Aim for consumer should be pre-dominant supply provided it’s the only Aim. In a Restaurant Services, goods are immediately consumed, however restaurant transactions are characterized by a cluster of features and acts, of which the provision of food is only one component and in which services largely predominate. They must therefore be regarded as supplies of services – Faaborg-Gelting Linien A/S vs Finanzamt Flensburg[10].

In Commissioner for Excise and Customs vs FDR[11], the Court of Appeal held that sometimes in a transactions, more than one supply are integral to each other with none dominating the other, but they are none the more predominant over other ancillary supplies therein. This un-usual scenario is table-top model of Composite Supply and Principal supply must be identified with a further re-look at the supplies. The Court also urged that un-necessary complexities be avoided and Principal supply may be determined on the reference – on the numerical domination. The judgment forms usual savior when two or more supplies are founded as pre-dominant and revenue may take shelter to the strict language of Composite supply in as much it only permits the existence of only one Principal supply.

F. Other Factors

  • Judicial Pronouncements can act as necessary tools in certain transactions where facts appears to be similar to those in the relevant pronouncement
  • Pricing structure is considered as not being determinative, but it is often cited as an indicator

5. Splitting the split-able, leaving the others as it is

Tax optimization begins with identifying the nature of transaction, and continues with the eliminations of negatives. A split is the way out when the supply is identified as Mixed Supply, more so because unlike the European Jurisdictions, Section 8 (b) acts as a deterrent for un-natural bundling, so much so that even the sub-standard rated supplies gets fussed in higher tax bracket. A disputable Advance Ruling from West Bengal In Re, Switching Avo Electro Power Ltd., can show the gruesome nature of Mixed Supply. The Authority held that UPS and Battery at single price constitutes Mixed Supply, so as to attract the higher rate of tax of 28%. Ignoring the validity of the ruling, had the price of package was split between UPS and Batteries, least the UPS could fetch lower tax rate of 18%.

A. Splitting the Composite Supply: Intelligent Split

Composite supply by its very nature is a un-split-able object per se, although there can still be some scope for splitting. The best split is intelligent split viz. according rational valuation to each split component. CBIC (earlier CBEC), seems to fully apprehend such approach. Service Tax Education Guide 2012 at 9.2.1 and recent flyer on Composite and Mixed Supply[12] discusses the various services provided by Hotel and classify them as Composite Supply however, provides an exception to such classification as follows;

As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax. None of the individual constituents are able to provide the essential character of the service. However, if the service is described as convention service it is able to capture the entire essence of the package. Thus the service may be judged as convention service and chargeable to full rate. However it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate.

Courtesy is also invited to Circular No. 47/21/2018-GST dated 08 June 2018. Entry 2 of the inter alia Table elucidates a possible of a split in case servicing of cars which involves both supply of goods (spare parts) and services (labour), where the value of goods and services are shown separately. The Circular with a caution of factual circumstances answers the question in positive;

2.1 The taxability of supply would have to be determined on a case to case basis looking at the facts and circumstances of each case.

2.2 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.

Harmony between Circular and Section 8, For all intents and purposes, the Circular accepts that car servicing contracts are split-able per se, and not comes in a specie of completely indivisible supply. Based on such understanding only, the Circular is harmonious to the Act, otherwise Section 8 would lose its value. Composite Supply [Section 2 (30)] differs from Mixed Supply [Section 2 (74)] definition on a crucial aspect that former do not get qualifies by the words “for a single price”, in other words Composite Supply per se doesn’t assumes the pricing of elements as its constituent factor. Now, if the Circular is applied rigidly, then such feature of Composite Supply definition would fail, so much so that by every composite supply will be open to split.

Therefore split should be intelligent and only to the extent possible. A brilliant example follows from the judgment of Mahle IPL Ltd vs Commissioner of Central Excise and Service Tax[13]. The Tribunal accepted splitting of value of designing services from the value of Tools and Dies to the extent such value was clearly attributable to specified services.

B. Splitting the Mixed Supply: Reasonable Split

Splitting a Mixed Supply is fairly tranquil to the extent that supplies are dissimilar in nature and possess identifiable market prices. The Split anyways should be on reasonable basis when it comes to distributing values. The Valuation Rules under Section 15(4) of the Act are reasonable methods to bring out the value of split-able parts. Different valuation methods are suitable in different facts and circumstances. A split can be based on;

  • Open Market Value of the split elements
  • Proportionate Values of the split elements
  • Discount formulation

Illustrative Precedents

Splitting the promotion package – Promotional packages in convention are offered as (1) Buy ‘One’ get ‘One’ Free (2) Buy ‘Two’ at the price of ‘One’ (3) Buy ‘One’ at reduced value, if you buy alongside ‘the Two’. At the end of the day, there is nothing Free in such supplies, but the value of one or two is dig into the value of combined, such that one or two becomes cheaper in combined as compare to in individual. With discount in mind, it can be challenging sometimes to split.

Ascribing of Discounts – A peculiar example stemmed in Commissioner of Taxation v Luxottica Retail Australia Pty Ltd[14], wherein Luxottica ran various promotions the terms of which were that spectacle “Frames” were offered at a discount from the normal selling price (NSP) but on condition that the customers purchased a complete pair of “Spectacles”. To the customer the scheme worked as if frame was being sold at a discount [160 – 60 = 100], the lenses were sold without any discount [40], and the price of the complete pair of spectacles was the aggregate of these two amounts [140]. In the scheme of events, Frames had increasingly become fashion accessories and were not just the means of holding lenses in place. The High Court of Australia approved the decision of Administrative Tribunal and held that the discount of 60 is to be ascribed towards Lenses only in as much as Lenses NSP was kept at same prices even after the supplies, and the scheme was offered for clearing the stocks of Frames. Further the Revenue couldn’t bring out any evidence for ascribing any discount towards Lenses.

Promotional Items – split at zero value – In Food Supplier v Commissioner of Taxations[15], the taxpayer supplied Food items (lower tax) along with dissimilar Promotion items such as jugs, cricket bats (higher tax) etc. The taxpayer argued that, since promotional items are supplied as “Free” and out of value of package, ‘Nil’ value should be accorded it. The Administrative Tribunal on the contrary held that the words “Free” in the context could be misleading and the Package value pertains to the value of both items. The Free item attaches a condition that the other item has to be purchased, therefore it has some intrinsic contribution towards the total consideration.

Supplies marketed at single price but sold independently – At this juncture, a question can be asked, whether the way of marketing/ serving of products can influence the tax treatment over such products. Take for an example, a supplier supplies Mixed Supply of a Laptop and Mobile Phone at combined price of INR 35,000. Now given that the supplier understands that supply sensibly falls as Mixed Supply, is there any problem for him to raise his tax invoice like this;

Case A Case B
Laptop[16] 21,186 25,000
Mobile Phone[17] 8,929 10,000
GST 4,885 5,700
Offered Price to Customer 35,000 40,700

Right, then the consumer pays the asked price of INR 35,000 or 40,700, also the supply is a mixed supply before a tax invoice is produced, the question therefore is can by producing a tax invoice based on reasonable values, the devil of Mixed Supplies be avoided?

No direct authority exists for the resolution of such proposition, though judgments on the validity of marketed prices for the purpose of tax laws has been discussed in Kripal Drinks vs CCE[18], the Tribunal held that for the MRP Valuation under section 4A of the Central Excise Act, 1944, the value printed on newspaper advertisement is not relevant.

After hearing both sides, we find that there is no provision in Section 4A to consider the price advertised in the local newspaper as the actual MRP. Hence the assessable value in this case would be the MRP as printed on the package….

Further on a literal interpretation of Section 2 (74), it seems force in contending the Mixed Supply will come into play only when the supplies are made, merely putting advertisement cannot befall supply as Mixed. Even otherwise, if contrary interpretation is adopted, it will be chaos, the marketing strategies of FMCG business will unduly be disrupted, therefore makes no sense. The thing that should be kept in mind such arrangements, is that prices should appear to be building up rather than splitting down. Otherwise, it will be too difficult to rebut the revenue’s proposition of irrational split.

C. Split the Suppliers

There is creative arrangement that is not usually applied for splitting of the supplies viz. Split the supplies and split the suppliers. The inherent deficiency of this arrangement is, that it can be open to challenge of abuse and sham. The English Jurisdictions have accepted the validity of such split arrangements, given that the scheme is not purely an abuse but a commercial one.

In Telewest vs Commissioners of Customs & Excise (Court of Appeal)[19], the Appellant, ‘Telewest C’, a cable television services (taxable), set up a subsidiary company ‘Telewest P’ for distribution of complementary magazines (zero rated). The Telewest P would supply to consumer at zero rate and attributed a portion of total subscription from the customers towards the same. Telewest C would pay tax on the cable services after reducing the value of magazines from the subscription price. The Court of Appeal held that the concept of Composite and Mixed is not applicable when there are two contracts with different suppliers, in as much as one cannot be clubbed with the other for identifying the services. A similar ruling stems from the Upper Tribunal from the case of The Lower Mill Estate Limited vs HMRC[20].

To summarize the split part, it can be unarguably be said that split begins from the contract and ends with the scrutiny of the economic reality of the transaction(s) as a whole. The split of Composite Supplies should not be artificial and clearly spelt out with contract documentation, even an advance ruling should be taken for stability. The split of Mixed Supply circles around with the visionary foreseeing and effective valuation. Precedents acts as necessary tools for proving the intelligent splits and also acts as safeguard for protective litigation, hence all care should be take while applying their ratio.

6. Bundling the bundle-able, leaving the others as it is

As is the case with splitting, bundling also begins with the identification of the singular. Moreover, even Composite Supplies can be further bundled to the extent, they end up as natural bundling. Anyhow, bundling of Mixed, makes no sense. A bundling can be natural and artificial, while a natural bundling would result in the desired tax management, an artificial bundling can lead to anti abuse provisions. Therefore artificial bundling should not be done unless necessary to serve, a specific purpose.

A. Bundling the singular: Gathering the elements

The objective of the Bundling is remove the hassles of taking of multiple supplies that an organization offers. The objectives could also be achieving a tax arbitrage viz. to load a supply with another supply or with another natural bundle of supplies which attract lesser rate of tax.

Bundling of begins with the expansion of the scope of work. Illustration provided CBIC in the flyers supra can be extracted;

A 5 star hotel is booked for a conference of 100 delegates on a lump sum package with the following facilities:

◊ Accommodation for the delegates

◊ Breakfast for the delegates,

◊ Tea and coffee during conference

◊ Access to fitness room for the delegates

◊ Availability of conference room

◊ Business centre

As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax. None of the individual constituents are able to provide the essential character of the service. However, if the service is described as convention service it is able to capture the entire essence of the package.

Take for an example, In RLRE Tellmer Property sro vs Tax Directorate of Ústí nad Labem[21], the ECJ held that service of renting and other miscellaneous connected services such as parking space, cleaning are not per se indivisible supplies. The reasons being, (1) the emphatic separation of the services in the invoices (2) liberty of the recipient to receive the cleaning services from a third party and (3) no persuasion in renting services to mandatory avail cleaning services. However, in The Hon’ble Society of Middle Temple[22], the Upper Tribunal held that above ratio operates where it is practicable to discern cleaning services from the renting services. Where the cleaning services are no choice but to avail from the landlord, the services are to be treated as Composite Supply.

Accordingly, contracts can be structured in such a way that ancillary supplies are made mandatory part of the dominant supplies. For example,

(1) Bundling of Tools and Dies contract with the Components Contracts in case of Automobile Industry[23] in export cases, so as to avoid GST on Tools and Dies retained in the factory.

(2) Bundling Equipment sale and accessories wherever there is a tax arbitrage

(3) Bundling Hardware supplies with warranty contracts

It is common surveillance that an intelligent Bundling can take places only in certain sectors, and only in specific transactions. If anything is bundled without looking at the economic reality, it can take the gruesome shape of Mixed Supply and whole exercise becomes unproductive. It is though repeated that bundling should not be seen as tool for tax avoidance.

B. Bundling the expenditure: Section 15(2)

Section 15 (2) (c)[24] of the Act is a valuation provision, extracted below;

15. (2) The value of supply shall include –

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

There is an inextricable contrast between the concept of bundling and valuation. Clause (c) of Section 15(2) (c) provides for addition of value of a supply by the amount representing incidental expenses, including commission etc. Take for an example, a leasing company supplies equipment on lease. The company in terms of lease contract also provides that equipments must remain insured all the time, and accordingly procures insurances from insurance company. The leasing company recovers two amounts from the lessee, (1) Lease Rent (2) Insurance amount. In such case three apprehensions could be there;

(1) Leasing and Insurance services are separate supplies, that they should be taxed at respective tax rates and amount recovered for insurance should be added in the value of Leasing services as well OR

(2) Leasing and Insurance services are separate supplies, that they should be taxed at respective tax rates but amount recovered for insurance shouldn’t be added in the value of Leasing services OR

(3) Leasing and Insurance services are composite supply, that they should be taxed at tax rate as applicable to that of leasing services (being principal services) and amount recovered for insurance should be added in the value of Leasing services

The issue stands resolved by ECJ in BGŻ Leasing sp. z o.o. vs Director of the Warsaw Tax Chamber supra, the Court said that Section 15 (2) (c) ibid should be interpreted in harmony with Section 8 ibid, in as much as 2nd and 3rd of above apprehensions are correct. That clause (c) can operate only where the supplies are Principal and Ancillary, so as also to justify the words “Incidental” as appearing therein. If supplies are separate, then consideration for one cannot be added in the value of another, by taking recourse to such clause. Similar observations in Commissioner of Customs and Excise vs British Telecommunications Plc[25].

Therefore it can be said that Bundling of expenditure can be loaded only where the supplies qualifies as Singular or Composite. If incidental expenditure is substantial or is a separate aim for the consumer, the expenditure cannot be bundled with the supply of principal supply, even the recourse to Section 15 (2) (c) shall serve no cause.

7. Works Contract and specified Food serving services

There is something curious with Entry No. 6 of the Schedule II ibid.

6. Composite supply

The following composite supplies shall be treated as a supply of services, namely:—

(a) works contract………

(b) supply, by way of or as part of any service ……………

For the record, Schedule II draws powers from Section 7 (1) (d)[26] of the Act, while Section 8 confers the jurisdiction to determine if the supply is Composite or Mixed. In the mix of this, Entry 6 begins with the words “Composite Supply”, that’s a little out of the place. It wouldn’t be exaggeration to say that section 7 (1) (d) merely governs classification, the maximum that it could interfere with Section 8 (a) is that it may give classification of Principal supply, however it can never classify something as Composite when the same can only be done via Section 8.

Neither of Section 7 and 8 are non obstante, neither of them are less relevant compare to the other, therefore they should be applied in harmony. But seems to be no resolution to this, unless Section 8 is read in derogate to Section 7. Barring any judicial encroachment, it seems Works Contract and the other clause (b) services are deemed to be Composite Supplies. Works contract has its own devils as seen In re: Giriraj Renewables Private Limited (Maharashtra AAR)[27], where once the supply was established as works contract, the applicant was dissuaded from arguing that principal supply could be that of goods. Or In re: Fermi Solar Farms Private Ltd. (Maharashtra AAR)[28], where the applicant was denied the benefit of splitting the goods part and services part.

To conclude that, it seems the Legislation picked from the middle of the art, and defined Composite and Mixed strictly. Given that there is no beginning for Section 8, it seems gauging Composite and Mixed is easier task than to split or bundle. A split and bundling can even sounds tax schemes that tax concepts, but they are the tools to exploit, and taking guidance from Europe and Oceania, it can be said that split and bundle are possible and not completely out of the law. Way to go for government lads.

Apologies for the Grammar
Manish Sachdeva
[email protected]

[1] C-349/96

[2] C-308/96 and C-94/97

[3] C-276/09

[4] In Conjunction with:    in combination with : together with [Merriem-Webster]

If one thing is done in conjunction with another, the two things are done or used together [Collins Dictionary]

[5] Composite Supply is further qualified that (1) a taxable person can affect a composite supply and (2) supplies can be of any combination of goods or services

[6] C-41/04

[7] Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts

[8] Commissioner of Taxation v. Luxottica Retail Australia Pty Ltd [2011] FCAFC 20

[9] C-224,11

[10] C-231/94

[11] Case No: C/1999/0654


[13] 2014 (036) STR 1118 (Tri. – Chennai)

[14] [2011] FCAFC 20

[15]  [2007] AATA 1550

[16] Taxable @ 18%

[17] Taxable @ 12%

[18] 2004 (173) ELT 0096 (Tri. – Kolkata)

[19] [2005] EWCA Civ 102

[20] [2010] UKUT 463 (TCC)

[21] C-572/07

[22] [2013] UKUT 0250 (TCC)

[23] With due regard to the commercial consequence of bundling

[24] Pari materia with Article 78 (b) of Sixth Directive 2006

[25] House of Lords (1999 STC 758)

[26] Or Section 7 (1A), it might be known in possible future

[27] GST-ARA-01/2017/B-01

[28] GST-ARA-03/2017/B-03

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June 2021