The Karnataka Appellate Authority of Advance Ruling (AAAR) ruled that the number of tasks entrusted through a single contract would not constitute ‘composite supply’.
The coram of The coram of D.P.Nagendra Kumar and Shikha C noted that there are multiple supplies of both goods and services being undertaken as part of this contract. While the supply from Cost Centre C is a supply of goods i.e. the Standard Gauge Intermediate Cars, the supply by Cost Centre D is primarily a service of commissioning and installation of the Cars supplied by Cost Centre C. Similarly, the supply from Cost Centre E is a service of joint inspection and completion of defects/deficiencies observed during integration test and joint inspection. The supply of spares from Cost Centre G is purely a supply of goods.
The bone of contention is whether the supplies by Cost Centres C, D, E and G are to be termed as a composite supply or not.
For a supply to be considered a composite supply, its constituent supplies should be so integrated with each other that one cannot be supplied in the ordinary course of business without or independent of the other. In other words, they are naturally bundled. The term “naturally bundled has not been defined in the GST Act. The concept of the “Naturally Bundled”, as used in Section 2(30) of the CGST Act, 2017, lays emphasis on the fact that the different elements in a composite supply are integral to the overall supply and if one of the elements is removed the nature of supply will be affected. We fail to see this concept in this contract.
The AAAR added that although there is only one contract, the different activities done by the Cost Centers C, D, E and G as part of the contract, are clearly specified and identifiable. The scope of works undertaken by each Cost Centre C, D, E and G are entirely independent and specific to that cost center and is not associated with any other Cost Centre. The work taken by the Cost Cemre D commences only on completion of all the milestone activities of Cost Centre C. Similarly, the work undertaken by Cost Centre E and G commence only on completion of all the milestone activities of Cost Centers D and E respectively. Therefore, it is evident that each Cost Centre is independent and every milestone supply made from the Cost Centre is an independent transaction.
Therefore, each supply by the Cost Centers C, D, E and G is clearly identifiable at the time of raising the invoice as to whether it is a supply of goods or a supply of service and the cost attributable to each supply is predetermined and laid down in the Pricing document which is part of the Contract. As such the Appellate Authority while setting aside AAR’s ruling, agreed with the Appellant’s contention that each transaction by the individual Cost Centers are to be assessed independently according to the nature of supply.
The lower authority ruled that the supplies made by the Respondent Company under Cost Centers form a composite supply and since the supply of goods i.e intermediate cars is the principal supply, the rate of tax as applicable to the supply of intermediate cars will be applicable to the composite supply in terms of Section 8 of the CGST Act, 2077. The Authority also held that Section 12 of the CGST Act, 2017 is applicable to the issues related to the time of supply.
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