As per the charging Section of GST Act(s), CGST and SGST / UTGST or IGST is levied on intra-State or inter-State supplies of goods or services or both. The use of words ‘or both’ denotes that GST will also be levied in case a supply involves any combination of goods or services.
Such combination of goods and services or may be two or more goods or two or more services can either be composite supply or mixed supply.
We shall concentrate our efforts in this article on composite supply and will deliberate on cases where supply is made under separate contracts and try to find whether such supply can be regarded as composite supply.
This question is very relevant for determining applicability of GST , in light of fact that if supply is not regarded as composite supply, both the supplies will be taxed separately. However in case such supply is regarded as composite supply, the entire supply will be taxed at rate applicable to the principal supply as per Section 8 of CGST Act,2017.
Meaning of 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.
For understanding the definition, following illustration has also been given in the definition:
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.
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.
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, work contract and restaurant and outdoor catering service are treated as supply of services. Thus in such cases, we need not identify the principal supply, as such composite suply are deemed to be supply of services.
Whether supply made under seperate contracts be regarded as Composite Supply:
Now coming on to our key question, as to whether supply made under separate contracts be regarded as composite supply and taxed together. Before answering this question, we need to fall back onto the definition of composite supply and analyse whether there is any condition that there should be single price or a single contract in order to constitute a composite supply.
By going through the definition of composite supply, as stated supra, we find that there is no condition mandated in the definition that in order to qualify as composite supply there should be a single price for a supply or a single contract,under which supply is being undertaken. Thus we can state that even if there are separate contracts for any supply but where such contracts collectively are to make a supply which is naturally bundled in the ordinary course of business, it shall be treated as composite supply and will be taxed as supply of principal supply which gives such bundle its essential character.
The above view is further corroborated from a ruling of Maharashtra AAR in the case of Cable Corporation of India Ltd in regard to work contract which is briefly discussed below:
Facts of the Case:
Applicant is engaged in work of supply, laying and terminating of 220 KV U/G cables package to the recipient and the engagement comprises of two separate agreements with respect to supply of goods and services.
- A supply of goods contract regarding the engineering, manufacturing, supply and type testing of Cable Package – C.
- A Services Contract for Cable Package – C (which includes Detailed Route Survey, Planning, Transportation, Insurance, Delivery at site, Unloading, Handling, Store, laying, installation (including civil works), Jointing, Termination, testing, Demonstration for acceptance, Commissioning, Documentation required for complete execution of Cable Package-C).
The above two contracts are linked by a cross fall breach clause i.e. any breach in either of the contract shall be treated as a breach of other contract , and vice versa.
Issue on which Ruling was sought:
Whether the supply of transportation services, rendered by the Applicant, will be exempt from the levy of GST in terms of Sl. no. 18 of the Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017″.
Ruling of Maharshtra AAR:
- It was held that 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.
- Referring the judgement of Andhra Pradesh High Court in the matter of M/S Larsen and Toubro Ltd. vs State of Andhra Pradesh on dated 14.09.2015 can give useful insights into the issue of two separate agreements when can be considered as an indivisible and a single contract.
- The ‘Cross fall breach clause’ settles unambiguously that supply of goods, their transportation to the contractee’s site delivery & related services are not separate contracts, but only form parts of an indivisible composite works contract supply, as defined under Section 2(119) of the GST Act, with single source responsibility. This is supported by the judgement of Supreme Court in case of M/s Indure Ltd and Anr vs. Commercial Tax Officer & Ors.
In view of above deliberations the Maharashtra AAR ruled that 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.
Concluding remarks:
Supply made under seperate contracts can be regarded as composite supply, if such contracts are dependent on each other in many aspects, cannot be executed independently and where they contain Cross fall breach clause. Such contracts will be viewed as colourable devices to evade or reduce GST and thus will be treated as a single contract of composite supply and accordingly will be taxed at the rate applicable to the principal supply.
However in cases where seperate contracts are not connected in any manner, they will not be regarded as composite supply and will be taxed seperately.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
