TMI Blog2023 (1) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... x in the mix supply. We hold that the applicant is required to use the HSN code of the particular supply which attracts higher rate of tax among all the taxable supplies containing in a pack/box. The applicant in their addition submission has referred the General Interpretation of Rules of Custom Tariff Act, 1975 and argued that as per the GIR the classification of the pack/box containing multiple of goods will be decided by the essential characteristics of the goods containing in the packet - We find that the argument of the applicant does not hold much water as the present application is filed by the applicant for deciding the nature of supply and not for deciding the classification of all the taxable supplies containing in the box/pack. The applicant all the supplies are covered under the category of Mixed supply hence as per the provision of mixed supply, the supply which attracts higher rate of tax shall the applicable rate for the supply. The applicant all the supplies i.e. kit if containing Sharpener and if tax rate of that particular sharpener is highest among all the product containing in that particular supply i.e. kit, in such case the applicant is liable to pay th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pener and eraser do not have any utility by itself. The applicant submits that it has always been trade practice in the Indian Stationery industry to sell a pack of pencil containing one sharpener and one eraser together. (2) Doms Smart Kit : This product is a gift pack containing combination of nine different products that is, a colouring book, two pack of pencils, one pack of colour pencils, one pack of oil pastels, one pack of plastic crayons, one pack of wax crayons, one eraser, one scale and one sharpener. It is submitted by the applicant that purpose of selling a kit bundled with products complimentary to drawing was to allow purchasing convenience to the consumer. The kit allows young kids to get a drawing book and other drawing / colouring product in a single pack. This kit is sold for a single price of all products bundled together. The applicant has submitted that they used to sell the said kit under HSN code of the Item with the highest value inside the kit, as it also had the maximum GST Rate. However, with the change in GST rate of pencil sharpener to 18%, sharpener now has the highest tax rate amongst all the products bundled together. (3) DOMS My f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kes, 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; 6. The applicant submits that for a combination of supplies to qualify as a 'mixed supply', it is important that such a combination should be supplied for a single price and the supplies are not naturally bundles. It is further submits that where goods are sold in combination with other goods and the same are naturally bundled in the ordinary course of business as per guidance stipulated under the Education guide, such supplies shall be construed as composite supply. 7. Section 8 of CGST Act, 2017 defines taxability of Composite and Mixed Supplies and read as follows:- The tax liability on a composite or a mixed supply shall be determined in the following manner, namely .- (a) 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 (b) a mixed supply comprising two or more supplies shall be treated as a supply of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, the drawing book and colouring tools provide the essential character to the entire package. This also evident considering the role of drawing book and colours in the entire set and even its value of compared to other constituent materials. 3. Doms My First Pencil Kit 1 Pencil, 1 eraser, 1 scale And 1 sharpener Similar to the product specified in Sr. No. 1 above, this kit facilities use of pencil by providing an eraser, sharpener and a scale along in the set. Hence, the set is sold to perform a specific activity of writing / drawing. As the object of the box is to enable writing/drawing, the pencil provide all the components of the box the essential character. 10. The applicant has submitted that four critical conditions are required to be satisfied for categorization of supply of multiple goods under composite supply. If these conditions are not satisfied, the said supply shall be considered as mixed supply. Accordingly, submitted as under: Sr.No. Conditions for Composite Supply Analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance Ruling is sought and is as follows : 1. Whether the supply of Pencils Sharpener along with Pencils being the Principal supply will be considered as the Composite Supply or Mixed Supply . Section 8 of CGST Act, 2017 has defined the tax liability on a composite and mixed supply in the following manner : (a) a composite supply comprising two or more supplies, sone of which is a principal supply, shall be treated as a supply of such principal supply; and (b) 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. 1. In the case of Doms Al Pencils, the applicant has submitted that in India, traditionally, a pack of 10 pieces of Pencils is sold along with the sharpener and eraser in the Pack as Accessories. 1.1 First of all, the items which is to be included in the application have specific classification in the Tariff and so far as the Accessories is concern-an extra item that is added to something and is useful or attractive but not of great importance. Thus, the packing as referred in the application cannot establish the sharpe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se supplies of goods and services are naturally bundled. Rather, the present case is similar to illustration mentioned in Section 2(74) (definition of Mixed Supply) which mentions supply of package consisting of canned foods, sweets, chocolates etc. which are sold for single price. These items can be supplied separately, independent of each other and are not naturally bundled. Therefore, when sold together for a single price, these products appear to be correctly categorized as Mixed Supply and not Composite Supply. What will be HSN code to be used by us for the supply of pencils in above case? In case of mixed supply as per section 8 of the CGST Act, 2017 which specify that 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 the HSN code under mixed supply may be HSN of the goods having highest rate of tax. Whether supply of sharpener having a nominal value along with the kit will have an impact on rate of tax of the kits? If yes, what will be rate of tax and HSN code to be used by us? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frequent practices adopted in a business can be ascertained from several indicators some of which are listed below:- a) 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 could be treated as naturally bundled in the ordinary course of business. b) 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. c) Nature of the services offered is such that one is the main service and the other services combined with such a service are ancillary. d) Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are - There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use. The elements are normally advertised as a package. The different elements are integral to one overall supply - if one or more is removed, the nature of the supply would be affec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spects of a principal supply is that any other supply forming part of the composite supply should be ancillary to such principal supply. Here, it is relevant to note, that the term 'ancillary' is not defined under the CGST Act. Accordingly, reference could be made to the definition of such a term in general parlance. 4. As per Stroud's Judicial Dictionary and the Supreme Court in its decision in the case of the Commissioner of Customs Vs. Spice Telecom, Bangalore [2006 (203) ELT 538 (SC)], the term ancillary is defined as 'A Work is said to be ancillary or incidental to a thing, trade or business when it is not necessary thereof or a primary part thereof. 5. Further, the Hon'ble Supreme Court in the case of Vareed Jacob vs Sosamma Geevarghese [AIR 1984 SC 744] has accepted the meaning assigned to the word ancillary as stated in the Law Lexicon. 'The expression 'ancillary' means aiding, auxiliary subordinate; attendant upon; that which aids or promotes a proceeding as a principal. 6. Therefore, given the aforementioned definition specified in Stroud's Legal Dictionary, a supply could be regarded as ancillary if it is not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such unless the same is sharpened. Thus, a sharpener is also provided in the box. Further, the eraser enables mistaken marks to be eliminated. Hence, these components are sold in combination to perform a specific activity i.e. writing or drawing. As the object of the product is to enable writing/ drawing, the pencil provides all the components of the product the essential character as the packaging suggests. This is also evident considering the role of pencil in the entire set. Further the value of ancillary product namely sharpener is Rs.3/- which is minimal (25%) as compared to MRP of overall product. This further highlights that the objective is to sell a kit with pencil as the principal product to the end consumer and not ancillary products. 3. Doms Smart Kit (MRP-Rs.500/) 1 colouring book, 2 packs of pencils, 1 pack of colour pencils, 1 pack of oil pastels, 1 pack of plastic crayons, 1 pack of wax crayon, 1 eraser, 1 sharpener an 1 scale The kit contain a paper activity book (to color, draw, design and decorate) The other constituents i.e. penci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuate/ understand the principles of classification under Customs Act to determine taxability under GST law. Under Customs Law, the following rules/notes is prescribed for interpretation and classification of rate tariff:- a) The General Rules for Interpretation of Import Tariff ('GIR') b) The General Explanatory Notes to Import Tariff ('GIN') c) Section Notes and Chapter Notes (before start of each section/chapter containing items/ products) 4. GIR lays down the principles for classification of goods under import tariff to ensure uniform and consistent legal interpretation. The key principles laid under GIR is given below:- As per Rule 1 of GIR, firstly the classification of an article shall be determined in terms of the headings and relative section and chapter notes. As per Rule 3(a) of GIR. if an article is classifiable under two or more headings, the heading which provides the most specific description shall be preferred to headings providing a more general description. As per Rule 3(b) of GIR. composite goods consisting of different materials/ made up of different components and goods put up in sets for retail sale which can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the term 'goods put up in sets for retail sale'. 10. Further, another critical element for application of Rule 3(b) is existence of the material/ component which provides the essential character to the entire set of products. For identifying the same the explanatory notes provides below guidance:- 'The factor which determines essential character will vary as between different kinds of goods. It may, for example, be determined by the nature of the material or component, its bulk, quantity, weight or value, or by the role of a constituent material in relation to the use of the goods.' 11. Hence, the component providing essential character to the complete set needs to determined basis a reasonable parameter such as the nature of the component, its role, quantity and value as compared with constituent components etc. Hence once the above two conditions i.e. qualification of set as 'goods put up in sets for retail sale' and determination of 'component providing essential character' are fulfilled, classification of such set needs to be done as per Rule 3(b) of GIR. 12. In case above criteria is not met, Rule 3(c) of GIR shall be applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held as goods put up in sets for retail sale , with the essential character imparted by the activity book. NYK87721 15. Considering the discussion stated above, the company believes that the classification of these multiproduct would fall under Heading 9609 i.e. 'Pencils (including propelling or sliding pencils), crayons, pastels, drawing charcoals and tailor's chalk' and hence will fall under Entry no. 233 of Schedule III of GST rate notification and hence liable to GST of 12%. 16. It is further relevant to note that even if the multiproduct packs do not fulfil the requirements under Rule 3(b) of GIR, classification needs to be done under Rule 3(c) i.e. basis the constituent falling under the heading which occurs last in numerical order. Considering this, even if the classification is done under Rule 3(c) of GIR, these multiproduct packs shall be classifiable under Heading 9609 and hence such packs shall continue to be taxable at 12%. 17. Further, as all the products being essential for the learning purpose, accordingly major consumers of this products are school going children's and due to the increase in rate of tax for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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; 19.1 To qualify any supply as a composite supply , the following conditions must be satisfied:- There must be two or more taxable supplies of goods or services or any combination thereof; Such supplies of goods or services must be naturally bundled; Such supplies of goods or services are made in conjunction with each other in an ordinary course of business; and One of such combination of supplies of goods or services is principal/ predominant supply to others which are ancillary to such principal element. 19.2 In light of the above provision of composite supply, we examine the each supply of the applicant one by one:- (I) Doms Al Pencil : (i) The applicant supplies Doms Al Pencil in a box which consists of 10 Pieces of Pencils, 1 eraser and 1 Sharpener in a single box. All these three goods are classified under separate HSN of Custom Tariff and taxable under GST in different HSN in terms of Notification No. 1/2017-CT (Rate) dated 28-6-2017. This pack consists of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, we hold that three goods i.e. pencil, pencil sharpener and eraser are not naturally bundled and cannot say supplied in conjunction with each other in an ordinary course of business. Hence third condition is not satisfied. (iv) It is necessary to decide the principal supply among all the products to qualify as composite supply but as already discussed all the three products can supply independently and are not naturally bundled. Also all the three product have their individual identity, therefore among all the three goods no goods can be considered as principal supply and other ancillary. Hence fourth condition is not satisfied. (II) Doms Smart Kit: (i) The applicant supplies Doms Smart Kit in a box which consists of a colouring book, two pack of pencils, one pack of colour pencils, one pack of oil pastels, one pack of plastic crayons, one pack of wax crayons, one eraser, one scale and one sharpener. All these goods are classified under separate HSN of Custom Tariff and taxable under GST in different HSN in terms of Notification No. 1/2017-CT (Rate) dated 28-6-2017. This pack consists of more than two taxable supplies of goods. Hence first condition is satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods. Hence first condition is satisfied. (ii) The applicant own his own has submitted that products eraser and pencil sharpener are supplied complementary to the Pencil. This means that eraser and sharpener are not integral and essential part required for supply of pencil. Also, the applicant has admitted that the purpose of selling this as a kit bundled with products complimentary to pencil is to allow purchasing convenience to the consumer. The main objective behind to sell a single pack with three different products is to advertise and convince the customer that this pack is cost effective as such having three items so that he may easily purchase the kit. Also, all three goods are not supplied in conjunction with each other in ordinary course of business as such pencil, sharpener and eraser do not have interlink with each other and usually supplied separately and independently. To supply all such three products together is not an activity which is followed in ordinary course of business. The applicant has own admitted in his submission that some of the products are complimentary to pencil. Thus the products which are supplied in a pack as complimentary cannot be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) such supply does not constitute a composite supply (i) This pack consists of supplies of more than two products in combination and all three products are taxable under GST. Hence First Condition is satisfied (ii) All the three supplies of goods are packed in a single box and supply in combination for a single price. Hence second condition is satisfied. (iii) As already discussed in Para 19.3 such supplies does not constitute under composite supply. Hence third condition is also satisfied. 2. Doms Smart Kit 1 colouring books, 2 packs of pencils, 1 Pack of colour pencil, 1 Pack of oil pastels, 1 Pack of wax crayons, 1 eraser, 1 scale and 1 sharpener (i) This pack consists of supplies of more than two products in combination and all three products are taxable under GST. Hence First Condition is satisfied (ii) All the three supplies of goods are packed in a single box and supply in combination for a single price. Hence second condition is satisfied. (iii) As already discussed in Para 19.3 such supplies does not constitute under composite suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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