The advent of GST has brought about a paradigm shift in various concepts in indirect tax regime in India, one of the major being the incidence of tax i.e. 'supply'.
Section 7 of the Central Goods & Services Tax Act, 2017 (CGST Act) defines supply as to include (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; and (c) the activities specified in Schedule I, made or agreed to be made without a consideration.
COMPOSITE SUPPLY AS PER GST LAW
In terms of definition of the term 'composite supply' the following are the essential ingredients of a composite supply made by a taxable person to a recipient:
- Consists of two or more taxable supplies of goods or services or both, or any combination thereof;
- Such supplies are naturally bundled and supplied in conjunction with each other in the ordinary course of business;
- One of the supplies is a 'principal supply'. Section 2(90) of the CGST Act defines 'principal supply' as the supply which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
In case of a composite supply, GST is payable at the rate of tax applicable on the principal supply. The statute provides the following illustration of a composite supply:
The above illustration is a bit disconcerting, as such single supply of goods along with freight and insurance may not always be naturally bundled i.e. supplied in conjunction with each other in the ordinary course of business as the same would depend on the contractual obligations agreed between the supplier and recipient. Further, the phrases "naturally bundled" and "predominant element" have not been defined under the GST Act.
UNBUNDLING THE CONCEPT OF BUNDLING
The concept of 'composite supply' under GST is similar to that of 'bundled services' under service tax regime. As per Section 66F(3) of Chapter V of the Finance Act, 1994, if various elements of a service were naturally bundled in the ordinary course of business, it was to be treated as provision of the single service which gave such bundle its essential character. The CBEC (now known as CBIC) in its Education Guide at the time of introduction of Negative List provided an example for composite supply wherein in case of air transport services provided by airlines, an element of transportation of passenger by air is combined with an element of provision of catering service on board.
Therefore, we may infer that apart from being naturally bundled in the ordinary course of business, for two or more supplies to be construed as a 'composite supply', the principal supply must give the composite supply its essential character. In other words, such bundling of supplies into a single composite supply must not alter the essential character of the principal supply. In the aforesaid illustration, though the supply of goods along with freight and insurance may not always be naturally bundled, however, if such supplies are bundled together into a single composite supply, it will not alter the essential character of the principal supply, which is the supply of goods. As a natural necessity in the ordinary course of business, the supply of goods may be bundled with the supply of freight and insurance. The principal supply overshadows the other supplies in a composite supply.
On the other hand, if two or more supplies, when bundled together into a single supply, alters the essential character of the principal supply, thereby making the identification of principal supply an improbable task, such supplies are termed as "mixed supply" under the GST laws. Section 2(74) of the CGST Act defines 'mixed supply' as two or more individual supplies of goods or services, made in conjunction with each other for a single price where such supply does not constitute a composite supply. In a mixed supply, supply of any good or service does not necessitate the supply of another good or service. For example, a toiletry kit containing a shaving razor, shaving cream, toothbrush, toothpaste and face cream sold for a single price, may be considered as a mixed supply. It is also important to note that in case of a mixed supply, it is treated as supply of that particular supply which attracts the highest rate of tax.
DISTINCTION BETWEEN COMPOSITE AND MIXED SUPPLY
To understand the distinction between composite supply and mixed supply, let us take the example of an airline operator supplying the services of transportation by air along with the service of catering on board for a single price to its customer. This bundling of supplies constitutes a 'composite supply' as the principal supply is the service of transportation by air. The supply of service of catering onboard is ancillary to the said principal supply. However, if the airline operator also provides accommodation in a hotel along with the service of transportation by air to its customer for a single price, such bundling of supplies will be construed as a 'mixed supply'. Each of such supplies can be supplied separately since supply of each is not dependent on one another and identification of the principal supply which gives the essential character to such bundle is not possible.
In the absence of Indian jurisprudence on the concept of composite supply, guidance may be derived from the judgments of European Court of Justice (the ECJ) wherein various judgments have been delivered on the aspects of composite supplies under European Union Value Added Tax laws (EU-VAT). Under the EUVAT law, Title IX of Council Directive 2006/112/EC, dated November 28, 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), 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 the case of Brockenhurst College, the issue before the ECJ was whether VAT was applicable on restaurant and entertainment services provided by the college. 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.
Despite clarifications arising from such judgments, many uncertainties still remain under the EU-VAT law as to whether the supplies must be treated separately or whether they must be considered to constitute a single supply. In the Indian context, there are many transactions which by their nature are classifiable as either Composite or Mixed Supply. However, given the fact that GST has been introduced recently and industry has not matured with the new law, industry would face headwinds with interpretation issues. It would take some time for the courts in India to adjudicate on similar issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.