True tests for determining Composite & Mixed Supply under GST laws including analysis of position under foreign laws
To determine whether a particular supply is a composite supply or mixed supply, we have to analyze the definition of composite supply and mixed supply.
As per Section 2(30) of CGST Act, 2017, composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, 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.
Conditions for treating a supply as composite supply
The conditions for treating a supply as composite supply are as follows
1) Supply should consist of two or more taxable supplies of goods or services or both
2) Supplies should be naturally bundled and supplied in conjunction with each other in ordinary course of business
3) One of the supplies should be principal supply
4) Supply must be made by taxable person
All these conditions should be cumulatively satisfied so as to regard a supply as composite supply.
Condition No-1 – Supply should consist of two or more taxable supplies of goods or services or both
The law merely specifies that the supplies included within composite supply must contain two or more taxable supplies. A question may arise as to what would be the treatment in case of a supply that fulfills all the conditions, but involves an exempt supply – say, purchase of fresh vegetables from a store which offers home delivery for an added charge. Fresh vegetables are exempt from tax, whereas the service of home delivery would attract tax. No clarification has been issued in this regard. On a plain reading of the provision, it appears that this condition would not be satisfied where composite supply involves an exempt supply.
However, the issue under consideration is settled by High Court of Gujarat in the case of Torrent Power Ltd. v/s Union Of India 2020 (34) GSTL 385 (Guj). In this case, Torrent Power Ltd. was engaged in the supply by way of transmission and distribution of electricity. It provided other auxiliary services like
High Court held that charges such as application fee, meter rent, testing fee etc. collected by the petitioner are part of composite supply of which principal supply is transmission and distribution of electricity. Supply by way of transmission or distribution of electricity by an electricity transmission or distribution utility is exempt from GST under Notification No.12/2017-CT(R). Consequently, entire composite supply is exempt from GST. In other words, if the principal supply of transmission and distribution of electricity is exempt from levy of GST then the related services shall also be exempt from levy of GST. The apex court construed the word “taxable” appearing in the definition of composite supply as liability to taxation. The liability to taxation would also mean not being liable to any tax.
Therefore we can conclude that two or more supplies of goods or services or both consisting of exempt supply would also be treated as composite supply provided other conditions are fulfilled.
Condition No-2 – Supplies should be naturally bundled and supplied in conjunction with each other in ordinary course of business
The concept of natural bundling needs to be examined on a case to case basis. What is naturally bundled in one set-up may not be regarded as naturally bundled in another situation. Where certain supplies could be naturally bundled, it is essential that they are so supplied in the ordinary course of business of taxable person.
Whether services are 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 several indicators some of which are listed below –
No straight jacket formula 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 some of which are outlined above.
The above principles explained in the light of what constitutes a natu¬rally bundled service can be gainfully adopted to determine whether a particular supply constitutes a composite supply under GST and if so what constitutes the principal supply can be found out so as to determine the right classification and rate of tax of such composite supply.
Condition No-3 – One of the supplies should be principal supply
In every composite supply, there must be only one principal supply. Where a conflict between the various components of the supply, as to which of those qualify as the principal supply, cannot be resolved and results in multiple predominant supplies, the supply cannot be regarded as a composite supply.
A principal supply is defined u/s 2(90) of CGST Act, 2017 to mean the predominant element of a composite supply to which any other supply forming part of that composite supply is ancillary. Therefore, mere identification of the predominant element would not suffice, and it must be ascertained that all other supplies composed in the composite supply are ancillary to that predominant element of the supply. The ancillary or incidental supplies comprised in composite supply should help in better enjoyment of principal service.
Condition No-4 – Supply must be made by taxable person
This condition presumes that composite supplies can only be effected by a taxable person. As per Section 2(107) of CGST Act, 2017, taxable person means a person who is registered or liable to be registered under Section 22 or Section 24.
Where any of the aforesaid conditions are not satisfied, the transaction cannot be treated as a composite supply.
Tax liability on composite supply
As per Section 8(a) of CGST Act, 2017, a composite supply comprising of two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply. Once the supply is treated as composite supply, the tax rate applicable to principal supply shall be levied on other ancillary supplies comprised in composite supply. In other words the rate of GST fixed for principal supply shall levied on entire value of composite supply.
The matters such as time of supply, invoicing, place of supply, value of supply applicable to principal supply shall be adopted in respect of entire composite supply, since the entire supply shall be deemed to be a supply of the principal supply alone. For instance if the composite supply involves supply of services as principal supply, such composite supply would qualify as supply of services and accord¬ingly the provisions relating to time of supply of services would be applicable. Alternatively, if composite supply involves supply of goods as principal supply, such composite supply would qualify as supply of goods and accordingly, the provisions relating to time of supply of goods would be applicable.
As per Section 2(74) of CGST Act, 2017 mixed supplies 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.
Conditions for treating a supply as mixed supply
The conditions for treating a supply as mixed supply are as follows
1) Supply should consist of two or more individual supplies of goods or services, or any combination thereof
2) Such supplied should be made in conjunction with each other for a single price
3) Such supply does not constitute a composite supply
All these conditions should be cumulatively satisfied so as to regard a supply as mixed supply.
The above mentioned three conditions are discussed simultaneously as follows.
Most importantly, a supply should not qualify as a composite supply, for it to be treated as a mixed supply. The two or more individual supplies of goods or services or both should not be naturally bundled. Such supplies should not be supplied in conjunction with each other in ordinary course of business. In other words, two or more individual supplies which are independent of each other and all of them are predominant in nature and are artificially bundled and supplied in conjunction with each other for a single price, will fall within the ambit of mixed supply. If put in other way, where a supply consist of combination of two or more individual supplies and principal supply cannot be identified or more than one principal supply is identified then such supply will be treated as mixed supply provided single price is charged for such supply.
However, where prices are assigned to individual supplies which are artificially bundled and supplied conjointly then such supply will not be regarded as mixed supply. In other words, where a supply of two or more goods or services is made for different prices, the supplies cannot be regarded as mixed supplies. In such case GST rate applicable to each supply will be levied on value of respective supply. Further matters like time of supply, place of supply and value of supply applicable to each supply will be adopted for respective supply.
It may be noted that the term used in the case of mixed supply is “individual supplies” as against “taxable supplies”. Therefore, a mixed supply can include both taxable and non-taxable supplies. The condition of single price is not relevant for composite supply.
Tax liability on mixed supply
As per Section 8(b) of CGST Act, 2017, a mixed supply comprising of two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
The matters such as time of supply, invoicing, place of supply, value of supply etc. applicable to supply attracting highest rate of tax shall be adopted for other individual supplies comprised in mixed supply.
Position under foreign laws
European Court of Justice has delivered several judgment 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) v. Customs and Excise Commissioners, (1998) EUECJ C-349/96, 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 Verzekeringen BV,OV Bank NV v. Staatssecretaris van Financien, (2005) EUECJ C-41/04, 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.
In the case of Brockenhurst College v. Revenue and Customs Commissioners, (2017) EUECJ C-699/15, 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.
Therefore, “ancillary or incidental supply” under GST laws is akin to “closely related supplies” under EU Vat.
ECJ in the decision propounded three fundamental conditions/parameters to determine as to whether a supply is a “closely related supply”.
The three fundamental conditions/parameters are – a supply is incidental or auxiliary if
1) It “relates to” and is “closely linked” with the main supply
2) It is actually supplied as ancillary to the main supply and
3) It does not constitute an end in itself, but a means of better enjoying the main supply
Under the UK VAT laws, a multiple supply (also known as a combined or composite supply) involves the supply of a number of goods or services. The supplies may or may not be liable to the same VAT rate.
If a supply is seen as insignificant or incidental to the main supply, then for the purposes of VAT it is usually ignored – the liability is fixed by the VAT rate applicable to the main supply (or supplies).
In the case of Tumble tots (UK) Ltd. v. R & C Commrs (2007) BVC 179, members of a playground received a T-shirt (children’s clothing is potentially zero rated) and a magazine (potentially zero rated) as well as the right to attend classes which would be standard rated. The court decided that there was a single standard rated supply of the right to belong to the playground and the T-shirt and magazine were incidental to the main supply. No one who was not in the playground would have bought the T-shirt or magazine separately.