MAY 28, 2018

By Rohini Mukherjee

WITH increasing complexities in trade and business, it is commonplace to encounter supplies which are a combination of two or more categories of goods or services or both. In such cases, there may be instances wherein each individual component (goods/services) in a transaction attracts a different rate of GST. Depending on whether such a transaction is a composite supply or mixed supply or separate supplies, the tax liability, time of supply and place of supply is determined.

A ‘composite supply 'as defined under Section 2(30) of the Central Goods and Services Act, 2017 (CGST Act) is 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 which are naturally bundled and supplied in conjunction with each other in the ordinary course of business. One of the pre-requisites of composite supply is that one of the supplies should be a principal supply. This supply as defined under Section 2(90) of the CGST Act is the supply which constitutes the predominant element of a composite supply and any other supply forming part of that composite supply is ancillary to the principal supply.

A typical example of composite supply is the supply of air-conditioner with transportation to customer's premises and installation wherein the supply of air-conditioner is a principal supply. Further, as clarified by Circular No. 32/06/2018-GST dated 12.02.2018, food supplied to the in-patients as advised by the doctor/nutritionists is a part of composite supply of healthcare and not separately taxable.

On the other hand, a ‘mixed supply 'in view of the definition under 2(74) of the CGST Act is understood under GST law as two or more individual supplies of goods or services, or any combination which is made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. An example of such a supply is the supply of a cosmetic kit consisting of face cream, eye liner, nail paint and lipstick for a single price in one package is a mixed supply.

The tax treatment for composite and mixed supply varies. While a composite supply is taxed at the rate applicable to the principal supply, a mixed supply is taxed at the highest rate applicable to any of the supplies constituting the mixed supply.

With GST law in place for close to a year, there are multiple issues which have emerged where the question whether a transaction constitutes a composite supply or mixed supply or separate supplies has assumed importance.

One such key area is trade promotion schemes. It is a common practice in the consumer product market to run various types of promotional schemes. There are various categories of such schemes which are indicated below:

a) Buy one, get one free (with cross reference on both packets)

b) Connected item given free which is not packed together, for e.g. Toothbrush free with tooth paste

c) Unconnected items supplied together with cross reference on both packets, for e.g. Face wash free with shampoo

d) Unconnected items in a single pack, for e.g. Packet of chips with tattoo free inside

e) Connected items in a single pack, for e.g. Pack of bleach with gloves inside

This issue is particularly important in a case where the promotional item attracts a higher rate of GST as compared to the main item. If the transaction becomes a ‘mixed supply' then it is taxed at the highest rate which is the GST rate on the promotional item.

When there is a cross reference on the main item and promotional item, it is possible to argue that the consumer cannot purchase the free item without purchasing the item charged for. In such a case, it can be said that the item charged for is the principal supply and the item given free is incidental to such supply. This argument becomes stronger in a case when there are connected items such as toothbrush given free with tooth paste. In such cases, it is possible to argue that this is a composite supply.

When there are connected items in a single pack containing both the principal item and the promotional item, it can be argued that the two are connected and the two items are being sold for a single price. In which case, it is a mixed supply.

In case of trade promotions, the declarations on packages assume importance. For example: in a case where there is cross reference on the main item and the promotional item, it can be said that the two are sold together for a single price and therefore, this qualifies as a mixed supply. Similarly, the terms and conditions in promotional scheme circulars are also relevant to ascertain whether there is a principal supply. Further, an invoice can be said to be relevant to ascertain whether it is a mixed supply or composite supply. For instance: if there is a single line item mentioning say, Face wash free with Shampoo, the same can be said to be a mixed supply wherein two products are supplied for a single price. However, the declaration on invoice may not be conclusive.

Another area in which the question becomes relevant for analysis is in a case where the supply of goods, installation and commissioning are provided under separate contracts by the same supplier to the same recipient. In such a case, the question is whether there is a composite supply when supply, installation and commissioning are provided under separate contracts.

Further, in case of sale of an apartment where separate amounts are charged for sale of parking area and preferential area location, the moot point is whether this is a composite supply of apartment with incidental sale of parking area and preferential location service or a single supply of apartment. The argument for this being a composite supply is that the supplies of parking and preferential location can be said to be incidental to the principal supply of the apartment and are required for better enjoyment of the apartment.

Another instance is printer maintenance contracts where the scope of contract is running of the printer in good condition. There is supply of repair and maintenance service, toner cartridge, consumables and spare parts. In this case as well, the issue is to identify whether this is a composite supply with the supply of toner or maintenance supply being the principal supply or a mixed supply which might lead to a higher tax rate by being taxed at a higher GST rate of any of the supplies (for instance: GST rate applicable on spare parts).

Circular No. 11/11/2017-GST dated 20.10.2017 has issued certain clarifications on the taxability of printing contracts by examining which is the principal supply which is specific to the facts of the case.

A recent Circular No. 34/8/2018-GST dated 01.03.2018 in the context of following questions dealt with the issue as to how to determine which is the principal supply:

++ Whether activity of bus body building, is a supply of goods or services?

++ Whether retreading of tyres is a supply of goods or services?

The Circular has clarified that the above are composite supplies. Further, which part of a composite supply is the principal supply, must be determined keeping in view the nature of the supply involved. Value may be one of the guiding factors in this determination, but not the sole factor.

As seen above, the Circular has kept the determination of which is the principal supply open depending on the specific facts of individual cases.

As is evident from the above, there are numerous open areas where it becomes pertinent to examine whether a supply is a composite supply or mixed supply or separate supplies. There is no straight jacket formula to decide this. The key factors which are required to be examined to arrive at a conclusion are the contract terms, declarations on the packages in case of supply of consumer goods, intention between the supplier and recipient and trade practice. These act as aids to understand as to how closely connected the various supplies are in a situation.

Considering the complexities, this is an area which is ripe for future litigation under GST.

(The author is Principal Associate, Lakshmikumaran & Sridharan, New Delhi and the views expressed are strictly personal.)