1. Introduction
As per the Charging Section of GST Act(s), GST is a tax on supply of goods or services or both. Thus an activity / transaction may comprise of supply of two or more goods or services, wherein an issue would arise regarding taxability viz supply should be considered of which good / service. Further there may be situation wherein a combination of good and service is supplied, here also it needs to be decided as whether such transaction be taxed as good or service.
It needs to be appreciated that above issue is very critical, considering that there are different provisions for determination of place of supply and time of supply for goods and services. Further different goods / services are also subject to varying rates of tax.
Under GST Law, such combination supplies have been bifurcated into two categories viz Composite Supply and Mixed Supply. Under GST Law specific provisions have been mandated in regard to taxability of such supplies, which has been discussed by the author CA. Mohammad Salim along with the Circulars and relevant case laws, in the succeeding paras.
2. Composite Supply
As per Section 2(30) of the CGST Act,2017 “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.
Accordingly, composite supply may comprise of two or more taxable supplies of goods or services or both, or any combination thereof, out of which one is a principal supply.
2.1 No need of a single price
It may be noted that as per definition there is no requirement that in order to be composite supply, a single price should be charged. Accordingly even if price break up is available of various components of composite supply, it would make no difference.
2.2 Meaning of principal supply
As per section 2(90) of the CGST Act,2017, “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.
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.
2.3 How to determine whether a supply is naturally bundled.
As the provisions under GST law is similar to that provided under service tax law. Accordingly we can take guidance from para no 9.2.4 of the Education Guide of CBEC which provides that the following factors may be considered in determining if the services are bundled in the ordinary course of business i.e. naturally bundled:-
- Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below –
- i)The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business.
- ii)Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
- iii)The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
- Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are :-
- There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
- The elements are normally advertised as a package.
- The different elements are not available separately.
- The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.
No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above.
2.4 Taxation of Composite Supply:
As per Section 8 of CGST Act, the tax liability on 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. Accordingly the tax rate applicable to the principal supply shall be applicable to such composite supply.
Composite supply are naturally bundled in the ordinary course of business, and same shall be treated and taxed as supply of principal supply which gives such bundle its essential character.
Illustration: A hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business and thus is a composite supply. The service of hotel accommodation gives the bundle the essential character and therefore the rate of tax applicable on providing hotel accommodation would be applicable on such entire supply even if separate price is charged for break-fast.
2.5 Composite supplies to be regarded as supply of services
As per Section 7(1A) of the CGST Act, 2017 read with para 6 of the Schedule II of said Act, two types of composite supplies are be treated as a supply of services. Thus in such cases we are not required to identify principal supply to identify which supply is made. Rather in such cases the legislature has itself treated such composite supplies as supply of services. The twin composite supplies treated as supply of services are as under:-
- Works contract as defined in section 2(119) of the CGST Act, 2017: As per said Section, “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;
The expression ‘works contract’ is limited to contracts to do with immoveable property. A contract will amount to a ‘works contract’ only where the resultant which is immovable property. Transactions resulting in movable property, however, would be treated as a ‘composite supply’ of goods or services depending on the principal supply as discussed supra.
- Supply, by way of as part of any service or any manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.
Under this clause both restaurant and outdoor catering services will get covered. It may however also be contended that the clause also covers other forms such as parcels, take-away, home-delivery, etc. As long as the circumstances where the goods supplied are ‘for the purpose of immediate consumption’, whether or not it is actually consumed, it would be treated as deemed supply of services. For eg. bottled-water supplied to Railways will be supply of goods but will be regarded as supply of services when supplied by Railways to its passengers along with food.
3. Mixed Supply
As per Section 2(74) of the CGST Act,2017 “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.
Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;
Thus mixed supply means where a combination of goods or services is supplied which is not composite supply i.e. not naturally bundled and there is no principal supply.
In order to identify if the particular supply is a Mixed Supply, the first requisite is to rule out that the supply is a composite supply. A supply can be a mixed supply only if it is not a composite supply. As a corollary it can be said that if the transaction consists of supplies not naturally bundled in the ordinary course of business then it would be a Mixed Supply.
3.1 Single price is required
It may be noted that there is requirement that a single price is being charged for a combination of goods / services, in order to qualify as mixed supply. Accordingly in case a combination of goods / services is being supplied, wherein price of each good / service is mentioned separately, it will not be regarded as mixed supply. Rather such a supply would be a normal supply and each good / service would be taxed as such i.e. on basis of rate applicable on each of them.
3.2 Taxation of Mixed Supply:
As per Section 8 of the CGST Act,2017, as a mixed supply comprising two or more supplies, is treated as supply of that particular supply which attracts the highest rate of tax, it shall be taxed accordingly.
Suppose in the illustration given above, the rate of tax for dry fruits is 12% and other items is 28%. Then the highest rate of tax i.e. 28% will be charged on the complete mixed supply (single price charged) including the dry fruits as per Section 8 of the CGST Act,2017.
Thus in such cases instead of a combined supply with single price such supplies should be made separately / separate price be charged for each good / service, to save application of highest rate of tax.
The following illustration given in the Education Guide of CBEC referred to above can be a pointer towards a mixed supply of services: –
“A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of service tax. In this case renting for use as residence is a negative list service while renting for non-residence use is chargeable to tax. Since the latter category attracts highest liability of service tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.”
4. Relevant Circulars on composite and mixed supply
Taxability in case of Buy one get one free offer (Circular No. 92/11/2019-GST, dated 7-3-2019). – As per section 7(1)(a) of the CGST Act, the goods or services which are supplied free of cost (without any consideration) shall not be treated as ‘supply’ under GST (except in case of activities mentioned in Schedule I of the said Act). It may appear at first glance that in case of offers like ‘Buy One, Get One Free’, one item is being ‘supplied free of cost’ without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one.
Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.
Composite and Mixed Supply insofar as Education is concerned (Press Release, dated 16-10-2017): Boarding schools provide service of education coupled with other services like providing dwelling units for residence and food. This may be a case of bundled services if the charges for education and lodging and boarding are inseparable. Their taxability will be determined in terms of the principles laid down in section 2(30) read with section 8 of the CGST Act, 2017. Such services in the case of boarding schools are naturally bundled and supplied in the ordinary course of business. Therefore, the bundle of services will be treated as consisting entirely of the principal supply, which means the service which forms the predominant element of such a bundle. In this case since the predominant nature is determined by the service of education, the other service of providing residential dwelling will not be considered for the purpose of determining the tax liability and in this case the entire consideration for the supply will be exempt.
Let’s take another example where a course in a college leads to dual qualification only one of which is recognized by law. Would service provided by the college by way of such education be covered by the exemption notification? Provision of dual qualifications is in the nature of two separate services as the curriculum and fees for each of such qualifications are prescribed separately. Service in respect of each qualification would, therefore, be assessed separately.
If an artificial bundle of service is created by clubbing two courses together, only one of which leads to a qualification recognized by law, then by application of the rule of determination of taxability of a supply which is not bundled in the ordinary course of business, it shall be treated as a mixed supply as per provisions contained in section 2(74) read with section 8 of the CGST Act, 2017. The taxability will be determined by the supply which attracts highest rate of GST.
However incidental auxiliary courses provided by way of hobby classes or extra-curricular activities in furtherance of overall well-being will be an example of naturally bundled course, and therefore treated as composite supply. One relevant consideration in such cases will be the amount of extra billing being done for the unrecognized component vis-a-vis the recognized course. If extra billing is being done, it may be a case of artificial bundling of two different supplies, not supplied together in the ordinary course of business, and therefore will be treated as a mixed supply, attracting the rate of the higher taxed component for the entire consideration.
The Education guide of 2012 for the purpose of service tax has given the following important clarifications in respect of educational services. The same can be gainfully referred to, for the purpose of clarity under the GST regime:
“The supply of placement services provided to educational institutions for securing job placements for the students shall be liable to service tax. Similarly, educational institutes such as IITs, IIMs charge a fee from prospective employers like corporate houses/MNCs, who come to the institutes for recruiting candidates through campus interviews in relation to campus recruitments. Such services shall also be liable to service tax.”.
Activity of bus body building, is a supply of goods or services (Circular No. 34/8/2018-GST, dated 1-3-2018) : In the case of bus body building there is supply of goods and services. Thus, classification of this composite supply, as goods or services would depend on which supply is the principal supply which may be determined on the basis of facts and circumstances of each case.
Retreading of tyres is a supply of goods or services (Circular No. 34/8/2018-GST, dated 1-3-2018): In retreading of tyres, which is a composite supply, the pre-dominant element is the process of retreading which is a supply of service. Rubber used for retreading is an ancillary supply. 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. The primary question that should be asked is what is the essential nature of the composite supply and which element of the supply imparts that essential nature to the composite supply. Supply of retreaded tyres, where the old tyres belong to the supplier of retreaded tyres, is a supply of goods.
Food supplied to the in-patients (Circular No. 32/06/2018-GST dated 12-02-2018): As advised by the doctor/nutritionists is a part of composite supply of healthcare and not separately taxable. Other supplies of food by a hospital to patients (not admitted) or their attendants or visitors are taxable.
Supply of books (Circular No. 27/01/2018-GST dated 04-01-2018) The supply of books shall be treated as supply of goods as long as the supplier owns the books and has the legal rights to sell those books on his own account.
Supply of books, pamphlets, brochures, envelopes, annual reports etc (Circular no.11/11/2017- GST dated 20-10-2017) : It is clarified that supply of books, pamphlets, brochures, envelopes, annual reports, leaflets, cartons, boxes etc. printed with logo, design, name, address or other contents supplied by the recipient of such printed goods, are composite supplies and the question, whether such supplies constitute supply of goods or services would be determined on the basis of what constitutes the principal supply. In the case of printing of books, pamphlets, brochures, annual reports, and the like, where only content is supplied by the publisher or the person who owns the usage rights to the intangible inputs while the physical inputs including paper used for printing belong to the printer, supply of printing [of the content supplied by the recipient of supply] is the principal supply and therefore such supplies would constitute supply of service.
In case of supply of printed envelopes, letter cards, printed boxes, tissues, napkins, wall paper etc. falling under Chapter 48 or 49, printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, predominant supply is that of goods and the supply of printing of the content [supplied by the recipient of supply] is ancillary to the principal supply of goods and therefore such supplies would constitute supply of goods falling under respective headings of Chapter 48 or 49 of the Customs Tariff.
5. Relevant Case laws on Composite and Mixed Supply:
i) Tax liability on portion of contract which is termed as a ‘composite supply’ will be determined in terms of section 8, wherein rate applicable to dominant nature of supply will prevail – Giriraj Renewables (P.) Ltd., In re [2018] 97 taxmann.com 510/70 GST 246 (AAAR – Karnataka)
ii) Circular No. 34/8/2018-GST, dated 1-3-2018 which proposed levy of GST by DISCOMS against recovery of charges from consumers under State Electricity Act towards activities related with transmission and distribution of electricity, such as application fee, testing fee, labour charges for shifting meters, etc. being ultra vires provisions of section 8 of CGST Act, 2017 as well as Notification No. 12/2017 – Central Tax (Rate) Sl. No. 25, was to be struck down. – Torrent Power Ltd. v. Union of India [2019] 101 taxmann.com 303 (Guj.)
iii) Services of transportation, in-transit insurance and loading/unloading, being ancillary to the principal supply of goods, shall be treated to taxation under Section 8 (a) of the GST Act, and the consideration receivable on that account be taxed accordingly. IAC Electricals (P.) Ltd., In re [2018] 93 taxmann.com 476/68 GST 392 (AAR – West Bengal)
iv) Activity of supply, design, installation, commissioning and testing of reverse osmosis
plant and O&M work by applicant for Government is a works contract of composite supply – Kailash Chandra, In re [2019] 102 taxmann.com 216/72 GST 470 (AAR – Rajasthan)
v) Even though two separate agreements have been executed, but since the two contracts are dependent on each other in many aspects and cannot be executed independently, therefore the contract would be an indivisible contract and cannot be treated separately for supply of goods and supply of services.
vi) Sale / supply of medical kit comprising of various machines / equipment all having individual functions independent of each other, apparently constitutes ‘mixed supply’. – B.G Shirke Construction Technology (P) Ltd, In re [2021] 132 taxmann.com 124/55 GSTL 174/88 GST 831 (AAR- Maharashtra).
The supply of transportation services, rendered by Applicant, will not be exempted from levy of GST and is in the nature of ‘Composite supply of Works Contract’ which is a service & would be taxable @ 18% in terms of Sr. No. 18 of Notification No. 11/2017 – Central Tax (Rate) dated 28.06.2017 and artificial bifurcation of contracts and scope of work as claimed by the applicant to go out of scope of correct tax liability is not legal and proper. Cable Corporation of India Ltd , Maharashtra AAR
6. Concluding remarks:
Taxability of supplies involving more than one goods / services or both depends upon as to whether such a supply is composite supply or mixed supply, which is determined on basis whether such supply is naturally bundled or not. Identification of composite (naturally bundled and has a principal supply) or mixed supply (artificially bundled with single price) is of utmost importance as not only taxability / rate of tax applicable hinges on it but the time of supply as well as place of supply will be determined accordingly as there are different rules in this regard for goods and services.
However in respect of work contract and restaurant, no drilling is required to be made, as these composite supplies are treated as supply of services as per Section 7(1A) read with para 6 of Schedule II of the CGST Act, 2017. Further clarifications issued / judicial pronouncements made, as discussed in article should be kept in mind by the tax payers while dealing with Composite or mixed supplies .
***
Don’t miss the next GST Update / Article / Judicial pronouncement
Subscribe to our newsletter from FREE to stay updated on GST Law
Resolve your GST queries from national level experts on GST free of cost.
CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.
