Composite or mixed supply

[SUNIL NATH]

On one sales invoice, in different material both 5% and 18% are charged. We are also claiming transportation charge on the same invoice, what will the rate of transportation charge?

[Amit Agrawal]

When legal provisions are constitutional & clear (as the situation under discussion here), one cannot ignore it just because one does not like it.

Furthermore, I find that same is very reasonable & logical. And same is made - by applying deep thoughts - to avoid tax-evasion by any aggressive tax-paper by indulging into fancy commercial structuring of a supply involving two or more supplies.

And I also believe that the distinction between composite & mixed supply & its implications (as elaborated in my earlier posts) are testimony to reasonableness of these provisions.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

[Jayaram Hiregange]

Flyer issued by CBIC on composite supply and mixed supply gives some insight into the matter.It is relevant to note that flyer in the context of clarifying the mixed supply clarifies as below:

"However, it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate."

Another aspect is that the mixed supply excludes composite supply. Does it mean, composite supply also requires single price?

Hence, there is an element of ambiguity on the interpretation of composite supply. Also, if one raises a separate invoice/debit note for transportation, instead of reflecting on the invoice which reflects the supply of goods, what is the treatment one has to adopt. Another example is 2-3 different kinds of goods supplied along with transportation charges. In this case, which supply one has to tag the transportation?

[Jayaram Hiregange]

Please read "It is relevant to note that flyer in the context of clarifying the composite supply "

[Amit Agrawal]

@ Shri Jayaram Hiregange Ji,

W.r.t. GST Flyer quoted by you, please note the followings:

First, using flyers for interpretation of GST provisions is very risky, as they do not have any legal force what-so-ever.

Second, for many of its portions, said flyer actually is a preproduction from the Education Guide issued by CBIC in the year 2012 and does NOT deal with GST provisions per se.

As you must be aware, provisions under service tax regime (for bunded services etc. u/s 66 (2) & 66 (3) of the Finance Act, 1994 (32 of 1994)) cannot be equated with provisions of gst regime which deals with both goods & services as well as both composite supply & mixed supply with proper definitions given for both (which is different from erstwhile regime) and its differential tax-treatment is also specified u/s 8 of the CGST Act, 2017.

This line quoted by you is from a big Para of the flyer. If one reads that Para in its entirety, it is full of contradictions. Anyway, lets deal with what the flyer quoted by you actually says.

Relevant Para (which contains the lines preproduced by you) is as follows:

"A 5 star hotel is booked for a conference of 100 delegates on a lump sum package with the following facilities:

• Accommodation for the delegates

• Breakfast for the delegates,

• Tea and coffee during conference

• Access to fitness room for the delegates

• Availability of conference room

• Business centre

As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax. None of the individual constituents are able to provide the essential character of the service. However, if the service is described as convention service it is able to capture the entire essence of the package. Thus, the service may be judged as convention service and chargeable to full rate. However, it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate."

As can be seen from above, said clarificatory is contradictory at many levels.

A. First, it says that none of the individual constituents are able to provide the essential character of the service. This in-turn rules out subject supply falling under composite supply in GST.

B. Example deals with 'a lump sum package'.

C. Then, it says that if the service is described as convention service it is able to capture the entire essence of the package.

D. But, in both cases, it wants tax-payer to pay taxes at full rate in entire value.

E. Then, again, it also says that it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate'.

E1. Now, from GST point of view, if it is mixed supply (at single price), then, tax it on full rate on entire value. If there are separate price for each elements & there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate, then, it will not fall under mixed supply. And one cannot need pay taxes at full rate and total combined consideration under the category of mixed supply.

E2. Under GST, there cannot be mixed supply if same falls under composite supply. Said GST flyer mixes the two, without noting this distinction & its implication under GST.

Moreover, following portion from the Flyer also needs to be noted, in the context of ongoing discussion here:

"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."

First, said flyer specifically says that given illustrative indicators are NOT determinative but indicative of bundling of services in ordinary course of business where one of the factor listed is 'single Price'.

So, if one wants to rely of this flyer to interpret GST provisions, it specifically says that single price is NOT determinative but ONLY indicative factor for determining what constitutes composite supply.

Then, it also says that 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.

So, one applies definition of composite supply u/s 2 (30) with illustration given therein-under in GST and use above flyer to interpret it, then, it is clear that subject supply under discussion here falls under composite supply despite separate prices for goods and transportation services.

Lastly, as far as I am concerned, I will NEVER use any of these flyers for interpreting any provisions of GST.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

[Amit Agrawal]

@ Shri Jayaram Hiregange Ji,

Now, kindly allow me to address other two posers from your last post above:

Another aspect is that the mixed supply excludes composite supply. Does it mean, composite supply also requires single price?

My views: There is no such interpretation possible. As far as the facts of "specific requirement of having 'single price' for falling under 'mixed price' and having no such requirement for falling under 'composite supply'" clearly means that there can be either single price or multiple price for elements involved in composite supply.

Hence, there is an element of ambiguity on the interpretation of composite supply. Also, if one raises a separate invoice/debit note for transportation, instead of reflecting on the invoice which reflects the supply of goods, what is the treatment one has to adopt. Another example is 2-3 different kinds of goods supplied along with transportation charges. In this case, which supply one has to tag the transportation?

My views: I find no such ambiguity while interpreting composite supply for reasons explained in answer above as well as more elaborately, in my earlier posts. Furthermore, raising a separate invoice/debit note for transportation (instead of reflecting on the invoice which reflects the supply of goods) does NOT allow escape from taxability (or lower liability) against transportation services forming part of composite supply due to Section 8 (a) of the CGST Act, 2017. For entire consideration (including transport charges) for subject situation under discussion, tax-liability u/s 8 (a) is as a supply of such principal supply (i.e. goods) and hence, raising a separate invoice/debit note for transportation should be avoided.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

[Padmanathan KV]

Learned Amit Ji,

After going through your in-depth analysis, which is not only enlightening academically but also equally helpful practically, the following doubts cropped up in my mind.

Please consider this as only a pure academic discussion:

1. As per the facts, There are three supplies involved:

A. Supply of goods at 5%

B. Supply of goods at 18%

C. Supply of transportation

2. If this is a composite supply, which of the above will be principal supply? Supply of transportation is ruled out as it is the anciliary supply. But whether the Principal supply is supply of goods at 5% or supply at 18%?

3. This becomes all the more important as the definition reads:

(30) “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;

(90) “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;

3.1. On a combined reading of above definitions, can it be understood that in a composite supply, there can be only ONE principal supply?

4. If the answer to above is affirmative, will supply in the query under consideration fails to be a composite supply as ONE principal supply cannot be identified?

5. In that case, GST rate should apply as per the individual line items in the invoice (nobody's case that it is a mixed supply).

6. Lastly, kindly consider the decision of Court of Appeals of England and Whales in Commissioner for His Majesty's Revenue and Customs vs Gray Farrar International LLP [2023] EWCA Civ 121, wherein it was held as under:

I acknowledge, as did the UT, that this may not always be possible. There may be cases where there is no predominant element in a single composite supply viewed through the eyes of a typical consumer. College of Estate Management might be regarded as such a case: in the context of a single supply of education, the typical student purchased the courses in order to obtain the qualification offered by the College. Viewed by the student, the supply of books was part of that larger composite supply of education with a view to qualification, and could not be said to predominate for the purposes of the Mesto test, even if the provision of books was regarded as an important element of the single supply. A similar analysis applies to Byrom (t/a Salon 24), where the supply was of “massage parlour services” to those offering their services to clients. An important element of the single supply was the provision of a room. But viewed from the perspective of the masseuse the provision of the room could not be said to predominate in the larger supply provided, which included toilet, changing and shower facilities, a seating and other areas for clients, bed linen and towels. In such cases, the overarching supply test might remain relevant, either to help decide whether a particular element predominates in the eyes of the typical consumer and the qualitative importance attached to a particular element of the single supply; or as reflecting how the typical consumer views the transaction where there is no predominant element so that the predominant element test cannot be applied. Equally, I do not rule out the possibility, given the diversity of commercial transactions to which these provisions might apply, that there may be cases where the economic reality justifies the application of the overarching supply test as a separate test to be applied.

I do completely agree that provisions of EU VAT directive and Indian GST may be difference, EU VAt judgements are not binding on Indian Court etc., But only point I wish to convey is similar issues have been dealt in Foreign Jurisdictions though it may be new in Indian GST Law.

[Amit Agrawal]

@ Shri Padmanathan Kollengode Ji,

From the facts shared in the query (where tax-payer is charging different tax-rates for two different goods supplies) and question raised therein, here, it is clear that there is not a case raised by the Querist where there is a single composite supply involving three supplies (i.e. two type of goods & one services, as listed by you).

As understood from the facts shared read with legal provisions quoted in earlier posts, this is a case where there are two composite supplies where 'principal supplies' are two type of goods goods (having rate-rate @ 5% & 18% respectively) & transport service is incidental / ancillary supply for both of these 'principal supplies'.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Padmanathan KV]

Learned friend Amit Ji,

This was my initial understanding too. But since it was suggested to apply the higher, I was confused.

As per your explanation in previous reply, shouldn't the tranportation service attributable to 5% goods and 18% goods be apportioned based on some logical factor such as space taken up?

[Amit Agrawal]

@ Shri Padmanathan Kollengode Ji,

I have already explained difficulties of apportionment of transport charges in above post of mine at serial No. 5 & hence, practical suggestion to avoid disputes / litigation to the extent possible, relevant portion of which reads as follows:

"W.r.t. prorata the transportation charges, method of bifurcation - based on value of goods having different rate of GST - can be disputed by Dept. as transportation charges can vary depending upon weight / volume (space) of goods involved. One needs to check entire factual aspects related to business before choosing least-controversial method of bifurcation.

Hence, Ms. Shilpi Ji's practical suggestion of charging GST against transportation on higher rate of taxes - among the goods involved - is better choice to avoid disputes / litigation, specially when recipient is entitled to avail ITC there-against & supplier are getting GST extra."

For background for above views & more importantly, for the practical suggestion made therein, kindly note the factual aspect of the query raised where tax-payer is raising only one invoice for subject supplies under discussion here.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

AI Summary

Composite supply: transportation bundled with goods is taxed as the principal supply, apply highest applicable rate to avoid disputes.
Transportation charges bundled with the supply of goods are normally a composite supply and, being ancillary, are taxed as the principal supply of goods even if shown separately. If an invoice contains goods taxed at different rates plus transport, taxpayers may either apportion transport to each principal goods supply or, for conservative compliance and to reduce disputes where the recipient claims input tax credit, apply the highest rate among the goods to the transport charges. Separate invoicing does not alter this tax characterisation.