MARCH 13, 2018

By Tushar Aggarwal & Hitesh Arora

THE taxable event in GST is supply of goods or services or both. In modern complex economies, it is not unusual for an economic operator to supply a consumer in the market with a bundle consisting of more than one good or service. Different components may attract different GST liabilities when supplied separately and when supplied as a single component. This issue of multiple tax rates can lead to disputes about whether the supplier is making a single supply attracting single GST rate or multiple supplies attracting different GST rates. If one of the components suppliedis zero rated/lower rated and the other componentis taxed at a higher/standard rate, it may be commercially advantageousfor the supplier to treat the zero-rated/lower rated component as the major element of the supply. 

For instance, food products provided together with promotional non-food items such as coffee mug withcoffee bean or a food chain providing a complimentary toy with its mealor a free bucket with detergent would retain a single dominant purpose of supply of coffee or food chain services or detergentwith an ancillary gift, or the free gifts itself is a separate supply which should be separately leviable to GST is still an open issue to discussion.

Sale of residential flat along with complimentary car/foreign trips, repair of car invoicing supply of services as well as spare parts, supply of voucher along with credit card services are some of the illustrations where industry is finding difficulty in determining the rate of tax as each component is taxed at different rate of tax.

It is for this reason under the CGST Act 2017, the distinction between composite, mixed, and separate supplies have been created for the purpose of affixing singular or differential taxation rates to goods, services, or both.

A composite supply would mean 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:

A 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.

There is nothing in GST law that gives definitive guidance. It would therefore be relevant to examine the position in international jurisprudence. The various judgments under the European Court of Justice gives acomprehensive and consistent discipline and testson the definition and treatment of composite supply.

The first test for registered person is to identify the true and substantial nature of what is being supplied to the recipient from the perspective of recipient ¹. This has to be determined objectively from the recipient's perspective. It is the actual supply made to the recipient that must be considered and not how the supply is invoiced or charged to the recipient. Even the proportion of cost of each element is not a determinative factor ². However, the difficulty lies in ascertaining the question of where, in the eyes of the consumer, the value and benefit lies. What is in the mind of the customer when they make their purchase is highly subjective.

In the second test, two or more distinct elements have been held to constitute a single supply where one element is the principal element and the other is ancillary whose role is only to enhance the enjoyment of the principal service by its customer. Since the ancillary element is not regarded as an aim by itself, but is only functional to the principal one, it will share the treatment of the principal service ³. To illustrate, where an airline supplied zero rated flights for a single price including the provision of in-flight catering, the Court of Appeal decided that catering was provided for the comfort and convenience of passengers and is ancillary to the main supply of the flight and therefore the court found a single composite supply.

However, there are situations where none of the elements can be considered either as principal element and ancillary element but still there can be a single supply if various elements are so closely linked that they constitute a "single and indissociable economic supply" which will be artificial to split. This is the third test.Example of the application of the same test is given in the case of Levob ⁴ where there was a supply to an insurance company of a pre-existing software program, coupled with the supply of considerable services in tailoring the software specifically to meet the customer's requirements. It was held that there is single supply of customized software as neither component can be said to be encompassed in the other.

Further, the availability of similar services from separate sources and option to procure the supply from a different source has also been one of the major deciding factor in few of the landmark decisions ⁵.

The above tests and indicators have emerged from the analysis of various jurisprudence on composite supply. They are not exhaustive or conclusive test to determine nature of supply as a single or mixed supply. It has the potential to mount enough disputes and litigation. We shall have to wait for the Indian judiciary to lay down the applicability of the above test to the facts of the above discussed transactions.

(Mr. TusharAggarwal is Joint Partner, L&S & the co-author Mr. Hitesh Arora is an Associate, L&S. The views expressed are strictly personal.)

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¹. Metropolitan International Schools v The Commissioners for Her Majesty's Revenue and Customs [2015] UKFTT 0517 (TC)

². Travel Incentives Meetings Exhibitions Ltd v The Commissioners for Her Majesty's Revenue & Customs [2016] UKFTT 024 (TC)

³. Card Protection Plan Ltd v Commissioners of Customs and Excise [1999] 2 C.M.L.R. 743

⁴ . LevobVerzekeringen BV and another v. Staatssecretaris van Financien[2006] STC 766

⁵. BGZ Leasing sp. Zoo. V. DyrektorIzbySakrbowej w Warszawie [2013] STC 2162

Honourable Society of the Middle Temple v HMRC [2013] UKUT 250 (TCC)