India’s GST law is effective in full force. It is path-breaking, or atleast touted to be, in the sense that it helps businesses to do away with the need of paying different taxes on different ‘taxable’ under different indirect tax laws and allows them to pay Goods and Services Tax (‘GST’) on the taxable event called ‘supply’.
Under the GST law, the term ‘supply’ is defined to include all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business. It is important to pay attention to each and every transaction to determine if the same triggers the taxable event of ‘supply’ under the law as the term ‘supply’ is widely worded to include multiple events. Equally important is paying attention to issues of interpretation (which are galore as is the case with any newly introduced law) and new concepts introduced under the GST law. Considering the nascent stage in which the GST law is, it would not be long before that the issues surrounding interpretation of the provisions under the GST law and the concepts introduced thereunder would attain clarity. Amongst others, what is likely to spawn considerable litigation is the concept of ‘composite supply’, which held the attention of the industry and the department right from the introduction of the GST law.
In this blog post, I shall confine myself to the concept of ‘composite supply’, and attempt to briefly explain this concept and dwell upon the interesting issues surrounding its application.
Section 2(30) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) defines the term ‘composite supply’ as follows:-
“‘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”.
Conditions for A Composite Supply
In terms of the above definition, for a supply to qualify as a composite supply, there ought to be-
Supply of two or more taxable supplies of goods or services or both,
The two or more taxable supplies are naturally bundled,
The two taxable supplies are supplied in conjunction with each other in the ordinary course of business, and
One of the two taxable supplies is a principal supply.
The illustration to Section 2(30) of the CGST Act seeks to shed light on the concept of composite supply by way of an example, which reads as below:-
“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;”
Besides the above illustration to understand the concept of composite supply, neither the CGST Act nor the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) provide any guidance on what constitutes a composite supply.
As for the tax treatment of a composite supply, Section 8(a) of the CGST Act provides that a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply. As a result, if one applies the concept of the composite supply, the ancillary supply in the composite supply would enjoy the tax treatment extended to the principal supply.
Further, while the definition of the expressions ‘taxable supply’ (Section 2(108)) and ‘principal supply’ (Section 2(90)) have been provided for under the Act, and could prove to be useful in the application of the composite supply going forward under the GST regime, the expressions ‘naturally bundled’ and ‘supplied in conjunction with each other’ are neither defined nor explained under the CGST Act. Understanding these expressions is imperative for a thorough understanding of the concept of the composite supply.
Section 2(108) of the CGST Act, 2017 defines the expression ‘taxable supply’ to mean ‘supply of goods or services or both which is leviable to tax under this Act’. Since the definition of ‘composite supply’ uses the expression ‘two taxable supplies’, one of the pre-requisites for the application of the composite supply would be the presence of two supplies leviable to tax under the GST law. Now, what does the expression ‘leviable to tax under the Act’ imply? If there is a levy of tax, but the same is exempt by virtue of an exemption, can the supply be called a supply leviable to tax under the Act? Or, where the product in question is outside the ambit of GST, can its supply be called a supply not leviable to tax under the Act?
For instance, where there is supply of petrol (which is outside the ambit of GST) along with a taxable supply (let’s call it supply of transportation), there shall be no levy of GST on the supply of petrol, but the supply of transportation services shall be taxable under GST. Here, since petrol is not leviable to tax, one cannot apply the concept of composite supply, and it would be incorrect to come to a conclusion that there shall be no levy of GST on the transportation services as there is no tax on the main supply (which is petrol).
However, the situation is not as clear as it appears to be, when one applies the concept of composite supply in case of an exempt supply, that is to say, a supply on which GST is leviable but not levied by virtue of an exemption under the GST law. Take, for instance, the supply of transportation services by a non-Goods Transport Agency (GTA) as an ancillary supply along with supply of goods as the principal supply. Here, there are two supplies and one is exempt by virtue of an exemption under the law. In such cases, if one reaches a conclusion that supply of transportation services by a non-GTA does not cease to be a supply leviable to tax under the Act merely because there is an exemption in respect of the same, one could very well apply the concept of composite supply and extend the tax treatment extended to the principal supply to ancillary supply of transportation services by a non-GTA. But, will a supply ‘be leviable to tax under the Act’ even if the same is exempt by virtue of an exemption under Act? This is a question that is likely to generate considerable litigation.
The Possibility of Bypassing Composite Supply
As businesses and businessman would want to take benefits of the lower rate of GST, they may seek to devise ways to avail the benefit of lower rate of tax/or not tax at all. Accordingly, the following questions would further fall for our consideration:-
Can one bypass/avoid the application of the concept of ‘composite supply’ if they enter into two separate contracts for the two supplies they intend to make?
Should the concept of composite supply be understood qua two taxable supplies or qua two persons?
The answers to the above questions assume significance as if one were to understand composite supply qua two taxable supplies and not two persons, it is likely that, businesses may claim benefits of the lower rate of tax/tax exemption by entering into two separate contracts for two taxable supplies. However, this position will have little relevance if one interprets the concept of composite supply to work qua two persons making supplies and not qua two taxable supplies.
The other important expressions that merit our consideration are the expressions “naturally bundled” and “supplied in conjunction with each other in the ordinary course of business”.
The concept of composite supply under the GST law is identical to the concept of naturally bundled services that prevailed under the service tax regime, and the same has been explained in the Education Guide (June 20, 2012, Service Tax) issued by the Central Board of Excise and Customs (‘CBEC’) with examples.
Explaining the relevant parameters in determining if services are bundled in the ordinary course of business, the CBEC Guide provides that whether the services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which the services relate. The CBEC Guide provides that the normal and frequent practices adopted in a business can be ascertained from several indicators. Reference to all of such factors may be unnecessary, but it suffices note that the factors mentioned by the CBEC guide do not provide a conclusive answer to our question.
In the case of M/s. GoDaddy India Web Services Pvt. Ltd.,[i]the Authority for Advance Ruling (‘AAR’), having noted the guidelines laid down in the Education Guide, ruled that various support services proposed to be provided by the Applicant to GoDaddy US are “bundle of services” being naturally bundled in the ordinary course of business, and accordingly is a single service, being business support service, in terms of Section 66F of the Finance Act”without offering any reasoning to support its conclusion.
Further, in Xilinx India Technology Services (P.t) Ltd. v. Commissioner,[ii]while examining the services in question, although the Tribunal reaches a conclusion that the services are naturally bundled in the ordinary course of business, the Tribunal offers absolutely no reasoning for having reached such a conclusion.
Besides the above two cases, the term “naturally bundled” does not seem to interpreted by various judicial fora, and much clarity as regards the ambit of the term “naturally bundled” is awaited in the days to come. If one were to rely on the parameters laid down by the CBEC Education Guide (endorsed by the CBEC in a recent press release dated 20th July on Composite and Mixed Supplies under the GST law), it would be very difficult to substantiate the required parameters with requisite documentary evidence and the entire exercise can be subjective.
All said and done, the concept of composite supply is likely to spawn considerable debate and litigation and is likely to keep lawyers and courts busy for long before the debates surrounding its application meet their logical conclusion.
[i]M/s. GoDaddy India Web Services Pvt. Ltd. v. Commissioner of Service Tax, Delhi-IV, Ruling No. AAR/ST/08 /2016.
[ii]Xilinx India Technology Services (P.t) Ltd. v. Commissioner, 2016 S.T.R 129.
By Krishna Thej, Associate, PwC, and Prerit Goyal, Advocate, Rajasthan High Court