Pencil kits with sharpeners classified as mixed supplies under Section 2(74) requiring highest tax rate application

The AAR Gujarat ruled that the applicant's supplies of Doms Al Pencil, Doms Smart Kit, and Doms My First Pencil Kit constitute mixed supplies under Section 2(74) of CGST Act, 2017, not composite supplies. For mixed supplies containing multiple items, the HSN code and tax rate of the supply attracting the highest tax rate must be applied to the entire supply. Where kits contain sharpeners with the highest tax rate among all products in the kit, the applicant must pay tax at that highest rate and use the corresponding HSN code for the entire supply.

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Issues Involved:

1. Whether the supply of pencil sharpeners along with pencils is considered a "Composite Supply" or "Mixed Supply".
2. Determination of the HSN code to be used for such supplies.
3. Impact on the rate of tax and HSN code when a sharpener with a nominal value is supplied along with the kit.

Issue-wise Detailed Analysis:

1. Composite Supply vs. Mixed Supply:

The applicant, a manufacturer of stationery items, sought clarification on whether their bundled products, such as pencil sharpeners sold with pencils, qualify as "Composite Supply" or "Mixed Supply" under GST laws. The definitions provided under Section 2(30) and Section 2(74) of the CGST Act, 2017 were pivotal in this determination.

- Composite Supply: Defined as a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services that are naturally bundled and supplied in conjunction with each other in the ordinary course of business, with one being the principal supply.
- Mixed Supply: Defined as two or more individual supplies of goods or services made together for a single price where such supply does not constitute a composite supply.

The applicant argued that their products, such as the Doms A1 Pencil Kit, Doms Smart Kit, and Doms My First Pencil Kit, should be considered composite supplies because the items are naturally bundled and sold together in the ordinary course of business. They contended that the principal product in each case (pencil or drawing book) provides the essential character to the bundle.

Authority's Findings:

- The authority examined each product bundle separately and concluded that the items in the bundles (pencils, sharpeners, erasers, etc.) are not naturally bundled but are distinct products that can be supplied separately. The authority emphasized that these items are sold together as a marketing strategy rather than out of necessity.
- For instance, in the case of the Doms A1 Pencil Kit, the authority noted that sharpeners and erasers are accessories and not integral to the pencils. Similarly, for the Doms Smart Kit and Doms My First Pencil Kit, the authority found that the bundled items do not meet the criteria of being naturally bundled or supplied in conjunction with each other in the ordinary course of business.
- Consequently, the authority held that these supplies do not qualify as composite supplies but rather as mixed supplies.

2. Determination of HSN Code:

Given the conclusion that the supplies are mixed, the authority referred to Section 8(b) of the CGST Act, 2017, which states that a mixed supply shall be treated as a supply of that particular supply which attracts the highest rate of tax.

- The authority determined that the HSN code to be used should correspond to the item within the mixed supply that has the highest tax rate. For example, if the sharpener in the kit attracts the highest tax rate, the HSN code for the sharpener should be used.

3. Impact on Rate of Tax when Sharpener is Included:

The inclusion of a sharpener, even with a nominal value, impacts the rate of tax for the entire kit under the mixed supply provisions.

- The authority reiterated that the tax rate applicable to the mixed supply would be the highest rate among the items in the bundle. Therefore, if the sharpener has the highest tax rate, the entire kit will be taxed at that higher rate, and the HSN code for the sharpener will be used.

Ruling:

1. The supply of pencil sharpeners along with pencils is classified as a "Mixed Supply".
2. The HSN code to be used is that of the item with the highest tax rate among the bundled products.
3. The inclusion of a sharpener, even if nominal in value, affects the rate of tax for the entire kit, applying the highest tax rate among the items in the bundle.

This comprehensive analysis ensures that the legal terminology and significant phrases from the original text are preserved, providing a thorough understanding of the judgment.

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