Apsara Oil Pastels with free scraping tool classified as mixed supply under Section 2(74), taxed at highest rate of 18%

The AAR Gujarat ruled that Apsara Oil Pastels packaged with a free scraping tool constitutes a mixed supply under Section 2(74) of CGST Act, 2017, not a composite supply. The scraping tool represents an independent supply under Section 7, as removing it would not affect the nature of the oil pastels supply. Under Section 8(b), mixed supplies attract tax at the highest rate applicable to any component. The product is classified under HSN 3926 and liable to GST at 18%.

---

---

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the inclusion of a free 'Scraping Tool' in the pack of Apsara Oil Pastels constitutes an independent 'supply' of the scraping tool under Section 7 of the CGST Act, 2017.

2. What is the classification and rate of tax applicable to the supply of 'Apsara Oil Pastels with Free Scraping Tool' under the provisions of the CGST Act, 2017 and the GGST Act, 2017Rs.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Inclusion of Scraping Tool as Independent Supply

Relevant legal framework and precedents:

Section 7 of the CGST Act, 2017 defines the scope of supply, which includes all forms of supply of goods or services made for a consideration in the course of business. The applicant argued that the scraping tool, being free of cost, does not constitute a supply.

Court's interpretation and reasoning:

The Court found that the inclusion of the scraping tool in the kit with oil pastels is a supply. Despite being offered free of charge, the scraping tool is part of the overall supply of the kit, which is sold for a consideration. The Court referenced Circular No. 92/11/2019-GST, which clarifies that offers like 'Buy One, Get One Free' are not individual supplies of free goods but rather a combination of supplies offered for a single price.

Key evidence and findings:

The Court noted that the entire kit, including the scraping tool, is sold for a consideration. The argument that the scraping tool is not a supply because it is free was found untenable.

Application of law to facts:

The Court applied Section 7 of the CGST Act, determining that the scraping tool is indeed part of the supply of the kit, despite being offered without a separate charge.

Treatment of competing arguments:

The applicant's reliance on previous rulings in unrelated contexts was dismissed as irrelevant to the present case.

Conclusions:

The Court concluded that the inclusion of a scraping tool in the pack of Apsara Oil Pastels constitutes an independent supply under Section 7 of the CGST Act, 2017.

Issue 2: Classification and Tax Rate of the Combined Product

Relevant legal framework and precedents:

Section 2(30), 2(90), and Section 8 of the CGST Act, 2017 define composite and mixed supplies. The applicant argued that the supply should be classified as a composite supply, with oil pastels as the principal supply.

Court's interpretation and reasoning:

The Court disagreed with the applicant's classification as a composite supply. It found that the scraping tool and oil pastels are not naturally bundled or integral to each other, as required for a composite supply. Instead, it determined the supply to be a mixed supply under Section 2(74) of the CGST Act.

Key evidence and findings:

The Court considered the definitions and examples of composite and mixed supplies, noting that the scraping tool is not essential to the use of oil pastels and can be sold separately.

Application of law to facts:

The Court applied the criteria for mixed supply, concluding that the supply of oil pastels with a scraping tool meets these criteria, as the products are sold together for a single price but are not naturally bundled.

Treatment of competing arguments:

The applicant's arguments regarding the accessory nature of the scraping tool and its integration with oil pastels were rejected due to lack of supporting evidence.

Conclusions:

The Court concluded that the supply is a mixed supply and should be taxed at the higher rate applicable to the scraping tool, which is 18% under HSN 3926.

SIGNIFICANT HOLDINGS

The Court held that:

(i) The inclusion of a free 'Scraping Tool' in the pack of Apsara Oil Pastels amounts to an independent 'supply' of the scraping tool under Section 7 of the CGST Act, 2017.

(ii) The product 'Apsara Oil Pastels with Free Scraping Tool' is classifiable under HSN 3926 and is subject to GST at 18%, as it constitutes a mixed supply.

Core principles established:

The judgment clarifies that the inclusion of free items in a product package can still constitute a supply under GST if the overall package is sold for a consideration. Additionally, it establishes that supplies not naturally bundled or integral to each other should be classified as mixed supplies, subject to the highest applicable tax rate.

---