OCTOBER 07, 2020  

By R K Singh

IN this article it is argued, nay established, that the value of principal supply made as part of composite supply remains unaffected by section 8 of the CGST Act. This issue is not merely academic and assumes significance, for example, in the context of the exemption to garments of sale value below Rs .1000/- (say Rs.950/-) per piece (chargeable to GST@ 5% under notf. No. 1/2017-CT (Rate); the question being whether the same garment will be rendered ineligible for the said exemption if supplied as a composite supply with delivery service of value Rs.150/- (thereby taking the value of the composite supply (of which the supply of the said garment constitutes principal supply) to more than Rs.1000/-. (Incidentally, CBIC in FAQs has clarified that the sale value referred to in the said notification refers to the transaction value and not the retail sale price of such readymade garments.) Several knowledgeable(s) citing section 8 ibid assert that as the said composite supply will be treated as supply of the said principal supply (of garment), its (principal supply' s) value will become Rs. 1050/- rendering the said garment ineligible for the said exemption. This is an erroneous view for the following reasons.

2. The definitions of composite supply, principal supply, and sections 8 and 15 ibid are reproduced below for convenience.

S.2(30) "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;

Illustration. - Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

S.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;

S.8. The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

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15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

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3. As is evident from the definition of composite supply, it comprises two or more taxable supplies and, unlike mixed supply (s. 2(74)), composite supply need not be for a single price. Indeed each of the two ( or more) taxable supplies can have its individual value and still when naturally bundled and supplied in conjunct ion with each other/one another in the ordinary course of business, they will constitute composite supply and hence be leviable to the rate of tax equal to that applicable to the principal supply. There is no doubt (especially in view of the illustration appended to s. 2(30) ibid) that supply of the garment in conjunction with supply of delivery service as above constitutes composite supply of which garment supply is principal supply. By virtue of section 8, this composite supply will be treated as supply of principal supply, namely, supply of garment and hence the rate of tax leviable on both, the supply of garment and the supply of delivery service will be that applicable to the supply of the said garment. But, from this it does not follow that the value of the principal supply (supply of the said garment) will include the value of the delivery charges (and as a consequence become equal to the value of the said composite supply) and the reasons for that are given below.

4. It is trite to say that when it comes to the value of the composite supply vis-à-vis the value of its principal supply, it has to be remembered that both composite supply and its principal supply are legally defined taxable supplies and their values have to be and indeed can only be determined in terms section 15 ibid; section 8 ibid has no eyes to look at the valuation aspect at all. Section 8 ibid is value-blind. Therefore, it can not be asserted on the basis of section 8 ibid that the value of the said principal supply will become equal to the value of composite supply (of which the former is a part).

5. In the above example, apart from the composite supply, both, the said principal supply and the supply of delivery service, are taxable supplies in their own right and, therefore, their respective taxable values as per section 15 ibid will be their individual transaction values and those transaction values happen to be known in the above cited example. (But even if the transaction value of a taxable supply is not known, it can be nobody's case that section 15 read with the CGST Rules relating to valuation is incapable of arriving at the taxable value. Indeed, section 15 read with the CGST Rules relating to valuation is capable of arriving at the taxable value of any taxable supply.)

6. The sum total of the forgoing is that in the given example, the opinion of some knowledgeable (s) notwithstanding, the value of the principal supply (namely the supply of garment) can not become equal to the value of the composite supply and remains Rs. 950/- and the value of the supply of delivery service remains Rs.150/- (making the value of composite supply Rs.1050/-) and by virtue of s. 8 ibid read with not no. 1/2017-CT(Rate), the applicable rate of tax on both these supplies (namely, the supply of the said garment which is the principal supply and the supply of the delivery service) will be @ 5% ad val orem.

(The author is former Member CESTAT and Sr Partner, TLC Legal Advocates. The views expressed are strictly personal.)