Composite Supply – Naturally Bundled Supply

[RAMESH PRAJAPATI]

Section 8 of the CGST Act 2017 provides that the tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-

1. 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; and
2. a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

Therefore, it is necessary to understand the composite and principal supply as stated under Section 8. First of all, to know whether it is a new idea introduced in the GST era or it is something old adopted from the Central Excise / Service tax regime. The composite supply is defined under Section 2 (30) of CGST Act 2017 which reads as under:

“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.

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.

Under section 2 (90) of the CGST Act 2017, “principal supply” has been defined as 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.

When we see in the past, we find the naturally bundled services under section 66 F of the Finance Act 1994 is similar to the definition of composite supply under CGST Act. So in order to understand composite supply, we should recollect the concept of “naturally bundled services” under Section 66F of the Finance Act 1994.

Section 66F:- Principles of interpretation of specified descriptions of services or bundled services

(1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.

(2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

(3) Subject to the provisions of sub-section (2), the taxability of a bundled service shall be determined in the following manner, namely:––

(a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character;

(b) if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax.

Explanation.- For the purposes of sub-section (3), the expression "bundled service" means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.

An example of ‘bundled service’ is 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.

Whether the services are bundled in the ordinary course of business:

It depends 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 is ascertained from several indicators some of which are listed below:

• 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 is treated as naturally bundled in the ordinary course of business.
• 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.
• The nature of the various services in a bundle of services also helps 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.
• The different elements are integral to one overall supply. If one or more is removed, the nature of the supply would be affected.

Since wording of the definition of  “composite supply” under Section 2 (30) of the CGST Act 2017 is similar to the Section 66 F (3) (a) of the Finance Act 1994, it is easy to understand the meaning of composite supply in light of the theory of  naturally bundled services of  Service Tax. Further, one can notice a resemblance between the concept of “not naturally bundled Services” under Section 66 F (3) (b) of the Finance Act 1994 (discussed above) and the definition of “Mixed Supply” under Section 2 (74) of the CGST Act 2017 (given below):- 

“Mixed Supply” means 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.

Illustration - A supply of a 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 are supplied separately;

Conclusion:-

Composite Supply – Naturally Bundled Supply

Mixed Supply – Not Naturally Bundled Supply