India: GST : Mixed Supply Or Composite Supply-Contradiction Continues

Last Updated: 5 December 2018
Article by Gagan Kumar and Rakesh Chhabra, CA

The Goods and Service Tax ("GST") was introduced on 01st July, 2017 and has completed one year in operation since its inception. The journey of first year has been exciting as various aspects and their interpretations have been cleared from time to time, yet, this being a new law, the same have proved to be insufficient. A mechanism has been provided in the form of Authority for Advance Ruling ("AAR") and the Taxpayers are approaching the AAR to get clarity on the specific issues faced by them. The AAR set up under the GST regime has given many important Rulings. One of the controversial issue in the GST is the tax liability on supply of two or more goods or services or combination of both. Composite Supply and Mixed supply are the determinate factor in respect of tax treatment for such supplies. Let's understand each term individually and the tax implication on the same.

Broadly speaking, Composite supply means a supply consisting of two or more goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of the business, one of which would be principal supply of goods or services. If two or more supplies fulfills the criteria of Composite Supply then the tax rate of the principal supply will apply on the entire supply. For example, where goods are packed and transported with insurance then the supply of goods, packing materials, transport and insurance would be regarded as Composite Supply of goods and service. Similarly, a Composite Supply in relation to immovable property would be works contract and it would be taxable as supply of service at a special rate prescribed for the same. 

Mixed Supply on the other hand, means a 'combination' of two or more supply of goods or services or any combination thereof, made together for a single price where such supply does not constitute a 'Composite Supply'. A mixed supply shall be taxable at the highest rate leviable on any of the item forming part of 'Mixed Supply'. For example, a shopkeeper selling laptop alongwith laptop bag. Although Laptop and Laptop bag can easily be priced and sold separately, both the items shall be taxed at the rate which would be subject to higher rate of tax amongst the laptop or laptop bag.

For determining whether a supply is composite or mixed, the following aspects need to be examined:

  1. The way the supplies are bundled. Mere conjoint supply of two or more goods or services do not constitute composite supply.
  2. The two (or more) supplies must appear to be naturally bundled and presented to the recipient.
  3. The ancillary supply becomes necessary only because of the acceptance of the predominant supply.
  4. The method of billing, assignment of separate prices etc. may not be relevant.

In the recent ruling of the AAR, West Bengal in the case of Switching Avo Electro Power Ltd. [2018] 69 GST 414 (AAR-West Bengal), the core issue involved in this application was whether UPS supplied with external storage battery is a composite supply or a mixed supply. The AAR held that the supply of UPS and Battery is to be regarded as Mixed Supply within the meaning of Section 2(74) of the GST Act as the strength of the battery, make of a battery or number of batteries is not unique to UPS but it varies as per power requirement of the customer and the storage battery has multiple uses and can be put to different uses. In other words, actual functionality rather than the contract was considered for deciding the issue. 

In another ruling of the AAR, Maharashtra in the case of Dinesh Kumar Agarwal [2018] 69 GST 133 (AAR-Maharashtra), the question canvassed before the AAR was whether the Engineering, Procurement and Construction contracts for installation of solar plant may be treated as works contract? In other words, whether the installation of Solar Plant tantamount to construction of an immovable property? The AAR held that the intent of the person at the time of erecting and operationalizing a Solar Plant is to be seen and if the intent is to establish an immovable property at the time of setting it up, then it is to be treated as an immovable property even if later on due to some exigency it is required to be dismantled or removed.

On a careful analysis of both the ruling, the common principle appears to be missing. While West Bengal Bench of AAR has suggested to examine functionality of the product supplied whereas the Maharashtra bench of AAR seen to have given emphasis on the dominant intention of the supply. Such divergent views from various benches on similar issues may discourage the taxpayers in approaching AAR and thus the purpose of attaining certainty in GST law may get delayed.

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.

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