“Get closer to your customers. So close, in fact, that you tell them what they need well before they realise it themselves”

Steve Jobs

With these lines from a renowned personality, it is a very well-known fact that there has been an evolution in doing businesses over a period of time wherein companies are making day-in-day-out efforts by providing more and more value addition to customers so as to increase customer loyalty and brand image. This ever-increasing appetite of customers has circumlocutorily made the companies to follow complex transactions involving combination of goods or services been supplied in the business. Since, there been a multiple set of goods or services been supplied in a single transaction, question of taxability on such transactions would come into picture for the lawmakers.

For decades, it has invariably been a matter of litigation under courts which involved, inter alia, categorization of the activity involving multiple goods or services. However, considering such long-term continuing disputes, lawmakers have brought in with the concept of composite and mixed supply under the GST Act itself. Further, sincere efforts by government have been made in plugging out activities and clearly clarifying as supply of services or goods. For example, works contract services has been clearly categorized as “supply of services” under Entry no. 6 of Schedule II of the CGST Act, 2017 even though the supply includes goods along with services. But still there are various aspects to be judged while understanding and classifying a particular bundle of elements or acts as a composite supply.

This article is therefore, an attempt to drill down with the concept of composite supply brought in under CGST Act, 2017.

Concept of Composite supply under GST:

The concept of somewhat was acknowledged via Section 66F of the Finance Act 1994 read with Service Tax Education Guide, 2012 issued by the Central Board of Excise and Customs [currently known a Central Board of Indirect Taxes and Customs (CBIC)] under the service regime, however, it was restricted only to that of provision of services and not for goods because of the tax structure of the country prior to GST. So, where the activities involved both goods and services or multiple goods under single transaction, as the case may be, interpretation with respect to elements or acts been composite was dependent on the court rulings and precedents.

Now, since GST Law is applicable on both goods and services, the concept of composite supply covers all the aspects related to supply of bundled goods or services or both under a transaction. So, the utmost determinant factor is the scope of the concept of composite supply under the GST regime.

Section 2(30) of the CGST Act, 2017 has defined the term Composite supply as a supply made by 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.

From the above definition, it can be interpreted that following highlights must be present in order to categorise any supply as composite supply:

a) There should exist two or more “Taxable supplies”:

Section 2(108) of the CGST Act, 2017 defines the term “taxable supply” as supply of goods or services or both that is leviable to tax under this Act. For an activity to qualify as a taxable supply, the pre-requisite is that the activity should be supply (as per section 7 of the CGST Act, 2017) and thereafter question of leviability to tax shall come into picture.

It can also be said that bundle of activities involving activity with is a non-taxable supply would not constitute composite supply. So, it is imperative to understand non-taxable supply as well. Section 2(78) of the CGST Act, 2017 simply defines “non-taxable supply” as any supply which is not leviable to tax under CGST Act or IGST Act. Therefore, it can be said that supplies on which GST is not levied or the provisions of GST Act are not application shall constitute non-taxable supplies.

In this regard, it may be noted that Schedule III of the CGST Act, 2017 specified activities that are neither supply of services nor supply of goods. Hence, any activity covered under Schedule III would not qualify as a taxable supply.

Further, Section 9 of the CGST Act, 2017 determines the taxability of supply of goods or services except alcoholic liquor for human consumption. Therefore, supply of alcoholic liquor for human consumption is out the purview of supply, or so to say non-taxable supply. So, to say, if a combination of goods or services in a particular supply consist of any non-taxable supply, then such supply would not fall under composite supply.

For example, services of restaurant wherein food is served along with alcoholic liquor would not constitute composite supply as it comprises both taxable and not taxable supply. Therefore, supplies should be segregated so as to levy respective taxes. Considering the same, Question 45 of the Tweet FAQ-3 issued by CBIC clarified that since, such services comprise both taxable and non-taxable supply then taxable person will charge VAT on the non-taxable supply (which is alcohol for human consumption) and GST on all other taxable supplies.

b) The supplies should be naturally bundled:

At this juncture, the term naturally bundled has not been explained under Indian GST Law nor the courts have not laid down any principles for identifying whether a particular set of elements or acts in a supply are naturally bundled or not.

It may be noted that India being a newcomer to GST can borrow the analogy from foreign jurisprudence wherein courts have already established rulings to identify single or multiple supplies under a particular transaction. So, to say, European VAT is one such example wherein concept of single or multiple supply exists and the authorities have laid down fundamentals to define whether the supply is single or multiple in case where there are elements of different tax rates are supplied. European Court of Justice (“ECJ”) under host of judgements have laid down mentioned whether a particular bundle of elements or acts would fall under composite supply of not.

A cornerstone of EU regulations for composite supply is the Card Protection plan Ltd. (CPP) case (Case C-349/96, Card Protection Plan Limited v. Commissioners of Customs and Excise [1999] STC 270 All ER (EC) 339) wherein fundamental issue was clarified as to whether the set of activities would qualify as separate supplies having separate VAT treatments or single supply undergoing single VAT treatment. Under the case, CPP was offering holders of credit cards, on payment of a certain sum, a plan intended to protect them against financial loss and inconvenience resulting from the loss or theft of their cards or of certain other items such as car keys, passports and insurance documents. The company would purchase a block insurance policy from an insurance company and list its customers as the assured under the same company. At the same time CPP provided assistance to its customers by notifying the credit card companies of the lost or stolen cards and providing their customers other minor services.

The UK Commission of Customs and Excise held that the company had provided its customer a basket comprised of ordinary taxable services, whilst no insurance exempted services has been supplied, since no direct contractual relationship between the company’s customers and the insurance company was found. On the other hand, CPP claimed that its services constituted an arrangement for insurance services and that there was a sufficient direct relationship between the customers and the insurance company to constitute exempt insurance services. Thus, each part argued that only a single supply had been provided, either of exempt insurance or taxable card registration services.

The court held that “taking into account that every supply of a service must normally be regarded as distinct and independent and a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. 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.”

Accordingly, the services of CPP were held to be insurance services and thus deemed to be single supply of exempt services.

Similar contention was taken by the court in the case of Madgett and Baldwin (ECJ, joined cases C-308/96 & C-94/97, Commissioners of Customs and Excise V T.P. Madgett, R.M. and the Howden Court Hotel [1998] ECR I-6229) wherein the court held that additional bought- in services by the hotelier from third parties and supplied to customers did not constituted for customers an aim in itself, but just a mean for better enjoying the principal service supplied by the hotelier.

Therefore, considering the aforesaid cases, distinction would be required between the “principal service” and the “ancillary service”, the latter having no other purpose than ensuring a better enjoyment of the former, so that the GST of the composite supply should follow the treatment of the principal service (so to say, principal-ancillary relationship).

Further, a very fact shall not be unturned that the activities shall be considered independent unless such activities constitute single supply from economic point of view which cannot be artificially spilt. Driving the same analogy, it can be said that for set of supplies to constitute a composite supply, it shall be so economically integrated (been value derived by the customer) that any segregation would distort the treatment under GST.

For example, Airlines provide services of transportation to passengers wherein they provide in-flight food at the time of transportation. Therefore, the single supply involves multiple element and acts (namely, supply of transportation of passengers by air on one hand and supply of food on the other). Accordingly, basis the aforesaid jurisprudence, it can be said that the from customers point of view, the principle activity is of transportation of air (as the customers have purchased the transportation service) and the activity of supply of food would constitute as it said supply of food is made for better enjoyment of principal supply (i.e. transportation of passengers by air). Accordingly, it can be said to be a composite single supply wherein principal supply is considered as supply of services by way of transportation of passengers by air.

The aforesaid case dealt with the situation of a principle-ancillary relationship between the supplies, however, ECJ in the case of Levob (Case C-41/04, Levob Verzekeringen BV, OV Bank NV v. Staatssecretaris van Financiën [2005] ECR I-9433) had laid down fundamental of single supply even if, activities does not constitute principle-ancillary relationship. Under the case, Levob, a Dutch insurance company, entered into a contract with US supplier to supply a computer software for a specified consideration. The contract enumerated that standard software will be imported by Levob and thereafter the US Supplier would provide customisation services along with training to purchaser’s staff for an additional consideration. The question under consideration was whether the said transaction would be treated as distinct supplies or a single supply of customised software.

In this regard, the court considering advocate general’s view stated that the absence of subordination of one supply to another did not preclude the existence of a single supply. So, to say that the activity of provision of standard software and its subsequent customisation are neither subsidiary to the other (unlike under CPP case wherein scenario of principle-ancillary supply was considered as single supply), nor the supplies can be classified as two distinct supplies. It was ultimately held that related provision of standard software and its subsequent customization had to be considered for VAT purposes as a single supply of services, where the customization service, based on elements such its extent, cost or duration, was “neither minor nor ancillary but, on the contrary, predominates” and also “of decisive importance in enabling the purchaser to use the customized software”.

Under the case, it is found that there was a close link between of supply and customisation forming a single economic consideration irrespective of the fact that contract stipulated separate prices for both the activities (similar to position stated in CPP). Thus, the fundamental drawn is that the bundle of activities shall constitute one from economic point of view whether or not the activities have a principal-ancillary relationship.

Therefore, the fundamental of “economic reason amongst the parties” derived by ECJ or the ultimate value been provided to customer under the bundle of elements or acts for determining composite supply would depend on case to case basis. However, this is not the only determinant factor as it may change based on the contracts executed to classify the supply composite. So, to say, following aspects/indicators needs to be examined in order to derive the aforesaid fundamental that would require to determine a composite supply:

a) All the circumstances involved in the particular transaction,

    • Whether single or separate prices have been agreed in contract?
    • Whether single or different contracts have been executed between parties?
    • Whether elements are normally advertised as a package?

b) The aim of the customer (i.e. customer’s point of view) in entering the particular transaction.

c) Principle Supply: 

The definition of the composite supply ends by stating that out of all taxable supplies been supplies together, at least one shall be the principle supply. Further, section 8(a) provides the tax liability in case of composite supply wherein it states that all the supplies under composite supply will be treated as principle supply. Therefore, it is imperative to ascertain the principle supply as it is the determinant factor based on which provisions related to time of supply, place of supply etc., shall be applicable.

Section 2(90) of the CGST Act, 2017 defines “principle supply” as 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. Therefore, from the said definition, it can be said there should be a principle – ancillary relationship between the supplies been made in a single composed supply.

Therefore, the prima facie interpretation of the aforesaid definition determine the very relation between the supplies as principal-ancillary which is very well covered under the CPP case (supra) as to what should be described as principal or ancillary, however, situations where the supplies are equally relevant having no dominance over one another (as given the levob case), is subject to the interpretation of the judiciary.


Activity is considered to be a composite supply where there exist two or more taxable supplies. The activities are bundled in such a way that they are from economic-point of view integrated and would cannot be artificially split, doing so would distort the treatment in GST. Further, amongst the activities would constitute as principle-ancillary relationship, wherein the ancillary is per se not an aim to the customer but is for better enjoyment of the principle supply.

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Qualification: CA in Practice
Company: Suraj Garg and Associates
Location: Delhi, Delhi, India
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April 2021