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UNDERSTANDING COMPOSITE SUPPLIES UNDER GST

Goods and Services Tax - GST - By: - Srikantha RaoT - Dated:- 2-11-2018 - Composite contracts have traditionally posed problems in terms of taxation under service tax and VAT over the years. Very often the matter had to be referred to Courts for resolution of issues. The complications were due to the fact that the two levies referred to above were falling under different tax jurisdictions i.e. one with Union and the other with the States respectively. Resolving this issue was therefore one of th .....

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this regard. The question of splitting up a contract into one of supply of goods and one for service has come up quite often in recent past in all these cases. One of the trends noticed has been the high number of cases that have been referred to Advance Ruling authorities across States by assessees owing to the fear of possible substantial litigation costs at a later date in the event of wrong classification of contracts and objection by Revenue Authorities thereon. It would be interesting to .....

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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. An illustration has also been provided to explain the concept and this goes as follows - 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. One of the reasons why a proper determination of the na .....

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mixed supply which if found to hold true, would involve taxing of the supply under the contract at the highest applicable tax rate of all tax rates found to apply to various components of the mixed supply going by Section 8(b) of the Act. The term mixed supply has been defined under the Act u/s 2(74) to mean 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 consti .....

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enarios could be far more complex and there could be genuine difficulties in identifying the true nature of certain supplies. This is also compounded by the fact that the concept of natural bundling referred in the definition above has not been elaborated further. One would have to look at circumstances of each case in order to see whether or not various elements of a supply can be seen to be bundled so as to satisfy definition of composite supply. If one were to refer P. Ramanatha Aiyar s Advan .....

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with a computer or life assurance with a loan). Looking at both these terms together one can possibly conclude that where goods or services are to be clubbed or provided together considering their nature as well as inherent properties apart from usual trade practice followed, there can arise a composite supply. Schedule II to Central Goods & Services Tax Act 2017 read with Section 7(1A) of the Act provides list of some supplies which are deemed to be services even if there is some element o .....

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onsumption), where such supply or service is for cash, deferred payment or other valuable consideration. While the schedule specifically talks about the second and fourth entries above as composite supplies, in reality there could be other cases of such supplies where combination of goods or of services or both are involved. What is also relevant is the fact that the concept of works contract u/s 2(119) of CGST Act 2017 has undergone a change in GST as compared to the old law/s as it is now rest .....

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continue to hold good even today. We have had couple of circulars post 1st July 2017 seeking to clarify the concept of composite supply in certain specific instances. In Circular 11/11/2017 GST dated 20th October 2017, in the context of printing contracts with respect to books, pamphlets, brochures, letter cards etc. the following has been clarified - In the case of printing of books, pamphlets, brochures, annual reports, and the like, where only content is supplied by the publisher or the pers .....

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8 or 49, printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, predominant supply is that of goods and the supply of printing of the content [supplied by the recipient of supply] is ancillary to the principal supply of goods and therefore such supplies would constitute supply of goods falling under respective headings of under Chapter 48 or 49 of the Customs Tariff. This nevertheless would require readers to ana .....

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upplied to in-patients while providing healthcare services by a clinical establishment, the following has been clarified - Food supplied to the in-patients as advised by the doctor/nutritionists is a part of composite supply of healthcare and not separately taxable. Other supplies of food by a hospital to patients (not admitted) or their attendants or visitors are taxable. It would now be worthwhile to look at some of the decisions in the context of composite supply which could be used to unders .....

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mposite supply. Here, if the customer failed to meet its exclusive purchase obligation or its minimum purchase obligation, the applicant had the right to recover the deficit amount from the customer. This was a Ruling based on analysis of the real intention of the supplier on review of contractual terms. After sales services provided in India to end customers In Toshniwal Brothers (SR) Private Limited, (2018 (10) TMI 597 Authority For Advance Rulings Karnataka), the Authority held that pre-sales .....

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rice negotiations on his behalf. Blasting work carried on at customer site In M/s Khedut Hat (2018 (10) TMI 302 Authority for Advance Ruling (Gujarat)), use of explosives for carrying out the service of blasting activity was held to result in composite supply owing to deemed transfer of consumables/explosives used in the service. This was despite explosives never being handed over to client. This however will have to withstand judicial scrutiny if one were to consider dominant nature test. Body .....

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ed on the basis of facts and circumstances of each case. However Circular 52/26/2018 GST dated 9th August 2018 seeks to take a definitive stance on the bus body building activity undertaken by fabricator for principal who sends the chassis, by classifying it as a service and taxing it as such. Similarly, we have two advance rulings which contradict each other. In Re: M/s Paras Motor Industries (2018 (7) TMI 1422 Authority For Advance Rulings Haryana), the Authority held bus body building activit .....

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of the Applicant that body building activity is a service. The Authority was of the view that the statute nowhere provided for predominant intention . The classification in case of a composite supply had to be arrived at on the basis of predominant element of a composite supply, which in turn would be the Principal Supply. It held that the predominant component of the composite supply involved in the activity of Body Building would determine the rate of tax applicable on such composite supply. .....

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wed the view that body building on chassis supplied by principal under FOC challan would be service and taxed at 18% while body building on own chassis would tantamount to supply of bus and taxed at 28% Supply of battery with UPS Where an Uninterrupted Power Supply is supplied along with battery there could be a case for regarding the same as a composite supply as UPS cannot function without a battery. However, In Re: M/s Switching Avo Electro Power Limited (2018 (8) TMI 1071 Appellate Authority .....

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supply is in itself a question which will have to be taken up before the Judiciary as we are not dealing with classification of one item as such but a combination of items each of which may be separately classifiable individually but presented together as a bundled supply. This point would assume significance if we were to look at accessories to certain goods which are presented along with the principal item/goods. For example, cell phone and battery charger where the latter was regarded as acce .....

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andey Katju Published by Thomson Reuters), double meaning cannot be attached to a word or sentence occurring at one and same place to bear both literal and metaphorical senses at the same time. This could mean composite supply not being capable of being equated with composite goods. Supply in the course of works contract execution While the test for determining whether or not a contract could be construed as works contract has been laid down by the Supreme Court in M/s Kone Elevator India Pvt. L .....

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n on turnkey basis was held to be works contract and all supplies thereunder held to be one of composite supply of works contract which was classifiable as a service. In re: Dinesh Kumar Agrawal (2018 (6) TMI 466 Authority For Advance Rulings Andhra Pradesh), supply of solar power plant under turnkey EPC contract involving civil works, procurement of goods and erection and commissioning was held not to amount to supply of solar power generating system for any possible exemption. Where supply of .....

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d one for service as the implementation schedule also included erection, testing and commissioning of plant. The fact that resulting property was immovable in nature and until date of final acceptance all risk of loss was with supplier and not customer, was also relied upon to arrive at the conclusion. In re: M/s R.B Construction Company (2018 (6) TMI 559 Authority For Advance Rulings Gujarat) contract for supply, laying and testing and commissioning of pipeline was held to be works contract as .....

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for supply of goods and the other one for erection, installation and commissioning, the two could be treated as one composite supply in the nature of works contract if cross fall breach clause is found to exist. In this case, while the first contract was for supply of materials (ex-works) required for commissioning of transmission lines, the second contract was for completion of all other activities for complete execution of the tower package including transporting materials to site for executi .....

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(2018 (6) TMI 111 Authority For Advance Ruling Karnataka), three agreements covering Supply of Materials, Erection & Civil Works respectively awarded to the applicant in response to a single tender notification with the general terms and conditions being commonly applicable to all the three agreements was held to be indivisible and works contract as the applicant was supplying the material and providing the erection of towers service and also civil works service. Consultancy services and rei .....

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ls did not make the contract a composite supply contract. Exam support services and training services In Re: M/s BC Examinations & English Services India Pvt. Ltd (2018 (7) TMI 1495 Authority For Advance Ruling Haryana) services of conducting exams covering sourcing and managing test centres, supplying test materials, collecting papers post-test and managing security, managing logistics, office support for financial controls and accounting processes, printing results, recruiting, training an .....

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of equipment and provision of computer education services for 5 years in Govt, and Govt. aided high schools of Odisha in the state of Odisha was held to be composite supply of goods and services not naturally but artificially bundled and not contract for training programme for any possible exemption. Renting of immovable property and additional services In the European Union where the lease agreement for letting out immovable property also provided for services of water, heating, security, clea .....

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