Concept of Composite Supply:
Concept of Composite Supply brought in law to easily identify and decide tax structure of supplies. There might be separate HSN Code, separate tax rate for goods/services included in a grouped supply. However, if such supplies fall under purview of Composite Supply, a common HSN code or SAC and a common rate of tax will be applied. In this way, it will be an easy task for supplier to fix price of supplies, to issue invoices, paying government taxes and filling of monthly and annual returns. In this case, tax rate applicable to principal supply will be applicable to all supplies.
As per clause (a) of Section 8 of CGST Act, 2017, where a composite supply comprising two or more supplies, one of which is a principal supply, it shall be treated as a supply of such principal supply.
e.g. Supplier will raise invoice only for Laptop including price of Windows software where such software is pre-installed.
Definition of Composite Supply:-
As per Section 2(30) of CGST Act, 2017, Composite supply means a supply in which:
- two or more TAXABLE Supplies of goods or services or both or any combination thereof are supplied altogether; and
- such Taxable supplies of goods or services or both should be naturally bundled and supplied in conjunction with each other in the ordinary course of business; and
- one supply of the bundle of Taxable supplies is a Principal Supply.
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
Composite Supply includes only Taxable Supplies. In case, one part of such supply is exempt from GST, it does not fall under the definition of Composite Supply.
Rationale behind concept of a Composite supply is nature of ‘Naturally Bundled’ and one supply out of all supplies is a Principal supply.
Meaning of Bundled Supply :- Bundled supply means a bundle of provision of various goods or services wherein an element of provision of one supply is combined with an element or elements of provision of any other supply or supplies.
An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging GST.
Meaning of Principal Supply :- As per Section 2(90) of CGST Act, 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.
If supplies are just packed in a box and being supplied, it will not automatically become a Composite Supply. For example, a businessman added some packs of Cookies with some packs of nuts in a box and is selling to customers at a combined price. This supply will not be considered as Composite supply. However, if he prepare a new item using these items and offer for sale as a new item, it will become a composite supply.
In case, where battery charger is packed with mobile and sold collectively. This supply will be considered as composite supply. Here, mobile is a principal item and to provide mobile battery charger is naturally attached to mobile for regular working of mobile.
Let’s take some more examples :-
HP supplies its Laptops with pre-installed software of Microsoft Windows. It will be considered as naturally bundled supply by HP, where Laptop will always be a principal supply.
A hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.
Illustrative indicators to define Natural Bundled Supply
Whether supplies are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below:-
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- The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business.
- The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business.
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- Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
- Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
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- The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example, service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
- 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.
- The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example, service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
Important points:
As per Schedule – II to CGST Act 2017, following supplies will always be considered as Composite Supply and will be considered as supply of service instead of supply of goods:
| 1) Works Contract
Works Contract means a Contract for:- – Building – Construction – Fabrication – Completion – Erection – Installation – Fitting out – Improvement – Modification – Repair – Maintenance – Renovation – Alteration – Commissioning of any Immovable property, wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such property |
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2) Supply, by way of or as part of any service or in any manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) and such supply is for cash, deferred payment or other valuable consideration |
Composite Supply in case of Printing Industry
The printing industry in India in particular faces a dilemma in determining whether the nature of supply provided is that of goods or services and whether in case certain contracts involve both supply of goods and services, whether the same would constitute a supply of goods or services or if it would be a composite supply and in case it is, then what would constitute the principal supply. It is to be noted that in case of composite supplies, taxability is determined by the principal supply. To address concerns of the printing industry, CBEC has come out with Circular no.11/2017-GST dated 20.10.2017, where in it has clarified the same.
It is clarified that supply of books, pamphlets, brochures, envelopes, annual reports, leaflets, cartons, boxes etc. printed with logo, design, name, address or other contents supplied by the recipient of such printed goods, are composite supplies and the question, whether such supplies constitute supply of goods or services would be determined on the basis of what constitutes the principal supply.
In the case of printing of books, pamphlets, brochures, annual reports, and the like, where only content is supplied by the publisher or the person who owns the usage rights to the intangible inputs while the physical inputs including paper used for printing belong to the printer, supply of printing [of the content supplied by the recipient of supply] is the principal supply and therefore such supplies would constitute supply of service falling under heading 9989 of the scheme of classification of services.
In case of supply of printed envelopes, letter cards, printed boxes, tissues, napkins, wall paper etc. falling under Chapter 48 or 49, printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, predominant supply is that of goods and the supply of printing of the content [supplied by the recipient of supply] is ancillary to the principal supply of goods and therefore such supplies would constitute supply of goods falling under respective headings of Chapter 48 or 49 of the Customs Tariff.
Various AAR Decisions on Composite Supply
AAR issued by Chhattisgarh Authority for Advance Ruling in the case of M/s Taranjeet Singh Tuteja & Brothers, wherein the applicant has been allotted the principal job work of Custom Milling of Paddy for manufacturing of rice, and, along with custom milling they will also get the payment towards the transportation of paddy & Rice, usage of gunny bags for packing of Rice and incentives as an additional charge for custom milling.
There being a single contract for all above supplies of goods & services and as the said contract comprises of two or more supplies (i.e. transportation, supply of packing material & incentives) and one of which is principal supply i.e- custom milling of paddy, it shall treated as composite supply as per section 2(30) of Chhattisgarh GST Act 2017 and as per the provision of section 8(a) of Chhattisgarh GST Act 2017.
Accordingly the tax liability on a composite supply shall be decided as a supply of such principal supply under Notification no 31/2017-CT(R) notification no. 11/2017-CT (Rate) dated 28-06-2017 Serial No. 26. (c), vide state notification no. F-10-82/2017/CT/V(146) dated 13.10.2017 i.e. 5%(2.5% CGST & 2.5%SGST).
Read complete ruling : Transportation of Paddy/Rice is part of Composite Supply of Milling Work-AAR
AAR issued by Rajasthan Authority for Advance Ruling in the case of M/s SANDVIK ASIA PVT LTD, wherein applicant entered into two agreements, one is ‘Comprehensive Maintenance Contract’ and another is Supply of Equipment parts and services agreement.
In its ruling, authority ruled that ‘Comprehensive Maintenance Contract’ is a Composite supply where supply of service is a predominant supply. Whereas supply of parts and services agreement is a Mixed Supply.
In a writ petition by “Torrent Power Limited” in the High Court of Gujarat at Ahmedabad, it is ruled that supply by way of “Transmission and Distribution of Electricity” is a principal supply and the other ancillary supplies like Application fee for releasing connection of electricity, Rental Charges against metering equipment, Testing fee for meters/transformers, capacitors etc., Labour charges from customers for shifting meters or shifting of service lines, charges for duplicate bill provided by DISCOMS to consumers are naturally bundled with the principal supply of distribution of electricity.
Read full judgement: Gujrat High Court- Electricity Supply-Composite Supply
