COMPOSITE SUPPLY VIS-À-VIS MIXED SUPPLY

[Mr. M. GOVINDARAJAN]

Composite supply

Section 2(30) of Central Goods and Services Tax Act, 2017 defines the expression ‘composite supply’ as 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.

One illustration is given in the Act to the definition of composite supply.  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.

Mixed supply

Section 2(74) defines the expression ‘mixed supply’ as  two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

One illustration is given in the Act to the definition of mixed supply.  A supply or package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply.  Each of these items can be supplied separately and is not dependent on any other.  It shall not be a mixed supply if these items re supplied separately.

Importance

Why the two supplies are considered as important?   GST council has defined specific rates for goods and services.  Sometimes supply of a good and service may be connected or may be done together even though not connect. Say for example, an AC is supplied and AC installation services are also supplied along with it. The GST Act defines how such supply must be rated.   Therefore, the concept of composite supply and mixed supply becomes important. It helps to determine the correct GST rate and provides uniform tax treatment under GST for such supplies.

Tax rate

The rates for both supplies are to be determined as follows-

• In respect of composite supply the principal item is to be taken for the purpose of tax.The tax rate applicable in respect of composite supply the tax rate of principal item is to be taken;
• In respect of mixed supply the item with highest rate is to taken for the purpose of tax.The tax rate applicable in respect of mixed supply is the highest rate of all the items is to be taken.

Advance Ruling

In Re ‘Switching Avo Electro Power Limited’ – 2018 (4) TMI 810 - AUTHORITY FOR ADVANCE RULING , WEST BENGAL the applicant is a supplier of power solutions including UPS, servo stabilizer, batteries etc., The applicant wants a ruling on the classification of the supply when it supplies UPS along with the battery.  The applicant wanted a more specific ruling whether such supplies could be treated as composite supply.

The Authority observed that the batteries are classified under tariff heads 8506 and 8506 of First Schedule of the Tariff Act.  The heading 8506 contains primary cells and primary batters.  The heading 8507 contains electric accumulators including separators whether rectangular (including square). 

The basic difference between the two tariff heads is the ability of accumulators to be recharged, whereas primary cell batteries cannot be recharged.  An accumulator is an energy storage device which accepts energy, stores it and releases it when needed.  Rechargeble batteries, flywheel energy storage, capacitors are examples of accumulators.   In common usage in electrical context, an accumulator usually refers to a lead acid batter.    UPS is an electrical apparatus that provides emergency power to a load when the input power source or main power fails.  A UPS differs from an auxiliary or emergency power system or standby generator in that it provides immediate protection from input power interruptions by supplying energy stored in batteries, super capacitors or fly wheels.  The on-battery runtime of most UPS is relatively short but sufficient to start a standby power source or properly shut down the protected equipment.  A UPS is typically used to protect hardware or other electrical equipment where an unexpected power disruption could cause injuries of data loss.

The Authority further observed that the UPS serves no purpose if the battery is not supplied or removed   It cannot function as a UPS unless the battery is attached.  It is needed to be considered whether or not these two items are ‘naturally bundled’.  The illustration to section 2(30) of the Act refers to a supply where the ancillary supplies are inseparable from the principal supply and form an integral part of the composite supply.  Note 3 to Section XVI of the Tariff Act refers to a composite machine as the one consisting of two or more machines fitted together to form a whole.  When a UPS is supplied with built in batteries so that supply of the battery is inseparable from supply of the UPS it should be treated as a composite supply.

The Authority observed that the standalone UPS and a battery can be separately supplied in retail set up.  A person can purchase a standalone UPS and a battery from different vendors.  The applicant himself supplied the battery and UPS as a separate machine as well as UPS with battery.  It is, therefore, obvious that the UPS and the battery have separate commercial values as goods and should be taxed under the respective tariff heads when supplied separately.  The UPS and the battery being supplied as separate goods, no longer form an integral part of a composite machine, but it remains to be discussed whether or not under these circumstances they may be considered as naturally bundled.  The applicant contended that as the battery, being supplied as part of an integral contract remains naturally bundles with UPS, the principal supply.  The Authority did not accept the contentions of the applicant.  Goods are naturally bundled in a supply contract if the contract is indivisible.  The contract for the supply of a combination of UPS and battery, if not built as a composite machine, is not indivisible.  The goods supplied in terms of such contracts are, therefore, no longer naturally bundled and cannot be treated as a composite supply.

The Authority observed that if combination of goods that does not amount to a composite supply is offered at a single price, such supplies are to be treated as mixed supplies. The Authority ruled that the supply of UPS and battery is to be considered as mixed supply within the meaning of section 2(74) of the Act as they are supplied under a single contract at a combined single price.