SUPPLY OF UPS WITH BATTERY: A CASE OF MIXED SUPPLY

[Dr. Sanjiv Agarwal]

It is a general trade practice that a battery is also supplied when one buys an unit of Uninterrupted Power Supply (UPS). A question arose as to whether the supply of UPS along with a battery would amount to a composite contract of supply or it will be a case of mixed supply in terms of section 2(30), 2(74) and section 8 of the CGST Act, 2017. It may to noted that in case of a single supply, the rate of GST as applicable to principal supply is levied whereas in case of a mixed supply of two or more items, the higher of the rates applicable would be levied to the entire mixed bundled of supply as it is not a case of naturally bundled supply.

Advance Ruling

In Re Switching Avo Elector Power Ltd. (2018) 4 TMI 810 (AAR-West Bengal);  the applicant was a supplier of power solution including UPS, servo stabilizer, batteries etc and wanted a clarity on the classification of supply of UPS along with battery.

The applicant filed an application for Advance Ruling on whether the supply of UPS along with battery was to be considered as mixed supply as they are supplied under a single contract at a combined single price ? It was contended that UPS cannot function without battery because it is an integral part of UPS. Hence, it is naturally bundled and such supply should be treated as a composite supply and not as a mixed supply.

Under GST law, following classification exists for UPS and battery as per Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017 as amended by Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017 under WBGST Act, 2017.

Schedule	Serial No.	Tariff Head	Description	Remarks
IV	138	8506	Primary cells and primary batteries	Omitted w.e.f 15/11/17 vide Notification No. 41/2017-Central (Rate) dated 14/11/17
IV	139	8507	Electric accumulators, including separators, whether rectangular (including square)
III	375	8504	Transformers Industrial Electronics; Electric Transformers; Static Convertors (UPS)
III	376A	8506	Primary cells and primary batteries	Inserted w.e.f 15/11/17 vide Notification No. 41/2017-Central (Rate) dated 14/11/17

What is UPS and relevance of Battery

An UPS is an electrical apparatus that provides emergency power to a load when the input power source or mains 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 flywheels. 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 such as computers, data centres, telecommunication equipment or other electrical equipment where an unexpected power disruption could cause injuries or data loss. The UPS serves no purpose if the battery is not supplied or removed. It cannot function as a UPS unless the battery is attached.

In the instant matter, this was not the case. It was on record that the applicant also supplies UPS and battery separately. It is a fact that a 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 UPS and the battery have separate commercial values as goods and should be taxed under the respective tariff heads when supplied separately.

The issue to be addressed was what should be the tariff head when the UPS and the battery are supplied as separate goods, but a single price is charged for the combination of the goods supplied as a single contract. The UPS and the battery, being supplied as separate goods, no longer form an integral part of a composite machine and as such, whether these can be considered as naturally bundled ?

The Authority was of the that goods are naturally bundled in a supply contract if the contract is indivisible. For example, a works contract within the meaning of section 2 (119) of the GST Act is a composite supply. Steel, cement and other goods and services supplied are inseparable in a contract for civil construction. The recipient has not contracted for the supply of steel, cement or architectural service, but for the service of constructing the civil structure, where all these supplies are inseparable and, therefore, naturally bundled. The contract for the supply of a combination of UPS and battery, if not built as a composite machine, is not indivisible. The recipient can split it up into separate supply contracts if he chooses. The goods supplied in terms of such contracts are, therefore, no longer naturally bundled and cannot be treated as a composite supply.

Further, mixed supply is defined under section 2(74) of the GST Act as one where "two or more individual supplies of goods/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". The stated Illustration to Section 2(74) of the GST Act refers to a package of items which can be supplied separately and are not dependent on each other, but for the instant purpose are being packaged together. If a combination of goods that does not amount to a composite supply is being offered at a single price, such supplies are to be treated as mixed supplies.

In the instant case, though the two items were independent, the price was quoted as a single price and billed together.

In light of facts, AAR ruled that the supply of UPS and battery is to be considered as mixed supply because they are two different and independent items which are supplied under a single contract at a combined single price, i.e., not being naturally bundled.

Before Appellate Authority

As it was to be, being aggrieved, matter was taken to the Appellate Authority for Advance Ruling (AAAR) by the applicant u/s 100 of GST law who vide Order dated 25.07.2018 and reported in   IN RE: M/S. SWITCHING AVO ELECTRO POWER LIMITED  - 2018 (8) TMI 1071 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL confirmed the original advance ruling.

As implied, the core issue involved in the appeal was whether UPS supplied with external storage battery was naturally bundled and hence a composite supply under the GST Act, or a mixed supply, as held by the West Bengal Authority for Advance Ruling. It was again reiterated by the applicant that when UPS comprising of static converter and an external battery is supplied it falls under Tariff Head 8504 and is taxable @ 18% under item No. 375 of Schedule III of the GST Act. UPS cannot function without battery as such it is an integral part of UPS and hence it is naturally bundled and supplied in conjunction with each other and hence the supply of static converter along with external battery should be construed as a composite supply and not a mixed supply.

Before appellate AAR, the appellant relied upon relevant case laws on classification under Central Excise, viz,

1. T.I. Miller Ltd. Vs Union of India and Another [ 1983 (7) TMI 54 - MADRAS HIGH COURT ]
2. Kerala State Electronics Dev. Corp. Ltd. Vs Collector of Central Excise, Cochin [ 1994 (1) TMI 151 - CEGAT, NEW DELHI ]
3. Commissioner of Central Excise Vs Electronics and Controls [1998(27)RLT816(CEGAT)]
4. Mangalore Chemicals & Fertilisers Co. Ltd. Vs Collector of Customs, Bombay [ 1997 (3) TMI 195 - CEGAT, NEW DELHI ]
5. Luminous Electronics Pvt. Ltd. Vs Commissioner of Central Excise, new delhi [ 2001 (3) TMI 131 - CEGAT, NEW DELHI ]

AAAR did not found these relevant as these were in relation to Central Excise or Customs and did not dealt with composite or mixed supply. It may be noted that we do not have direct judicial precedents under GST law which is barely not even an year old law.

AAAR observed that an in-built battery of static converter (UPS) is part and parcel of the uninterrupted power supply system and is covered under Tariff Head 8504 and intra-State supply thereof attracts tax under GST Act as per rate applicable to goods enumerated under Schedule III of Tax-Rate Notification(s), vide serial No. 375, but the situation changes when storage battery or electric accumulator is supplied separately irrespective of whether under a single contract or a separate contract.

AAAR endorsed in full force the ruling AAR- West Bengal, viz,

"The UPS serves no purpose if the battery is not supplied or removed. It cannot function as a UPS unless the battery is attached. However, what needs to be considered is whether or not these two items are "naturally bundled". The stated Illustration to Section 2(30) of the GST 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 also 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 and as a composite machine in terms of Note 3. The UPS being the principal supply, the relevant tariff head for the composite supply will be 8504 under serial no. 375 of Schedule III in terms of Notification No. 01/2017-Central Tax (Rate) dated 28/06/2017 (1125-FT dated 28/06/2017 of the State tax)."

Finally, it affirmed that the storage battery has multiple uses and can be put to different uses and when supplied separately with static converter (UPS) it cannot be considered as a composite supply or a naturally bundled supply.

Way Forward

The advance ruling has since been affirmed by the Appellate AAR and is now binding upon applicant. So far as its binding nature on others is concerned, it has a persuasive value. Though the doors of high court could be knocked, this ruling may lead to many such activities under the dispute of mixed supply or composite supply when GST rates could vary from 5 to 10 percent upon such classification. We have four rates of GST in vogue, i.e. 5, 12, 18 and 28 percent. Few examples in sight include supply of air conditioner with stabilizer, certain accessories included in price of motor vehicles, furnished accommodation, various fully loaded packages and so on. Let’s keep our eyes and ears open and of course, fingers crossed.