2021 (8) TMI 360 - AAR - GST

Classification of supply - composite supply or not - rate of tax of the principal supply could be adopted for the whole of supplies or not - sale of LPG, Collection of Take or Pay Charges for not lifting minimum assured quantity and rental charges for supplier gas system installed at the customer premises to store the LPG which is a condition precedent for supply of LPG - supply/sale of LPG be treated as principal supply or not. HELD THAT - The applicant is in the business of sale of LPG to industrial customers. They have installed Supplier Gas System (SGS) consisting of 30 Nos of LPG cylinders, Regulators, Primary pressure regulating systems, Vaporizers etc. As seen from the agreement a minimum quantity of LPG has to be necessarily purchased by the buyer. And if such minimum amount is not purchased they shall pay by way of commitment charges i.e., Take or Pay Charges at the rate of ₹ 2900/MT of such shortfall in quantity. This amount Shall be paid once in a quarter. Composite supply is defined in the GST Act in Section 2(30) 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. Take or pay contract - HELD THAT - Take or Pay contract is a contact which requires the buyer to either purchase and receive a minimum amount of product at a set or pay for this minimum without taking immediate Take or Pay clauses in a contract ensure compensation for the seller in the event buyer does not purchase a specified quantity of goods or services in the course of a continuous supply. The Hon ble Courts of India in a catena of cases held that Take or Pay charges are meant to compensate for breach of a contract. In the case of applicant Take or Pay Charges are evidently compensation for breach of contract and a penalty stipulated to be paid to the applicant by his buyer for not purchasing the minimum quantity specified in the agreement. Thus these charges come into existence only when there is no supply of LPG. That means supply of LPG and Take or Pay Charges are mutually exclusive and can never exist together. The forbearance comes into existence only upon breach and hence the requirements of a composite contract mentioned above are not fulfilled. Thus, sale of LPG, Collection of Take or Pay Charges for not lifting minimum assured quantity and rental charges for supplier gas system installed at the customer premises do not form a composite supply - the question of supply/Sale of LPG be treated as Principal Supply do not arise at all.

Issues Involved:
1. Whether the impugned supply can be regarded as 'composite supply' and whether the rate of tax of the principal supply could be adopted for the whole of supplies.
2. Whether sale of LPG, collection of 'Take or Pay Charges' for not lifting minimum assured quantity, and rental charges for the supplier gas system installed at the customer premises to store the LPG, which is a condition precedent for supply of LPG, be treated as composite supply under section 2(30) of the GST Act, 2017.
3. Whether the supply/sale of LPG be treated as the principal supply for the above-mentioned transaction.

Issue-wise Detailed Analysis:

1. Composite Supply and Principal Supply:
The applicant, M/s. SHV Energy Private Limited, supplies LPG to industrial users and installs a Supplier Gas System (SGS) at the customer's premises. The SGS includes LPG cylinders, regulators, primary piping, and pressure regulator systems. The applicant owns the SGS, and the customer pays a rental charge for it. Additionally, customers are obligated to purchase a minimum quantity of LPG; failing which, they must pay 'Take or Pay Charges.'

The applicant sought clarification on whether these supplies (sale of LPG, rental charges for SGS, and 'Take or Pay Charges') constitute a composite supply under section 2(30) of the GST Act, 2017, and if so, whether LPG can be treated as the principal supply.

2. Definition and Attributes of Composite Supply:
Composite supply is defined under section 2(30) of the GST Act as a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services, or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, with one of them being the principal supply. The illustration provided in the Act clarifies that if goods are packed and transported with insurance, the supply of goods, packing materials, transport, and insurance is a composite supply, with the supply of goods being the principal supply.

3. Analysis of 'Take or Pay Charges':
'Take or Pay' contracts require the buyer to either purchase a minimum amount of product at a set price or pay for this minimum without taking immediate delivery. These charges ensure compensation for the seller if the buyer does not purchase the specified quantity of goods or services. The Hon'ble Courts of India have held that 'Take or Pay' charges are meant to compensate for breach of contract.

In this case, 'Take or Pay' charges are considered compensation for breach of contract and a penalty for not purchasing the minimum quantity specified. These charges come into existence only when there is no supply of LPG, meaning they are mutually exclusive and cannot exist together with the supply of LPG. Therefore, the requirements for a composite supply are not fulfilled, and 'Take or Pay' charges cannot form part of a composite supply with other components.

Advance Ruling:
1. The sale of LPG, collection of 'Take or Pay Charges' for not lifting the minimum assured quantity, and rental charges for the supplier gas system installed at the customer premises do not form a composite supply.
2. As a result, the question of treating the supply/sale of LPG as the principal supply does not arise.

This detailed analysis concludes that the supplies in question do not meet the criteria for composite supply as defined under the GST Act, and therefore, the rate of tax for the principal supply cannot be adopted for the whole of the supplies.

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