1. Background

The assesee is running a shop where it sale and serve sweetmeats, namkeens, cold drinks and other edible items and also restaurant. The dilemma here is related to classification of the supply, whether the supply by the assesse will fall in the supply of goods or supply of services. Additionally one needs to find out the applicable tax rate and admissibility of input tax credit to the assessee.

2. Legal Provisions

In order to identify classification of the supply narrated above, it is essential to understand the relevant provisions of law as per the CGST Act, 2017.

Section 2 deals with the definition of the term used in the said Act, the relevant definition are as under:-

(30) “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 principle supply;

(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

(74) “ 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

(90) “Principal supply” means the 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;

(102) “Service” means anything other than goods. Money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

3. Mixed supply and Composite Supply

The concept of mixed or composite supply has evolved from the concept of naturally bundled service which was explained in the Education Guide issued by the C.B.E. & C. in the year 2012 (the Education Guide) and the same is borrowed in explaining the meaning of naturally bundled service under GST law vide CBEC Flyer No.4 dated 01.01.2018. The relevant extract is reproduced as under for ease of reference:

“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’ would be air transport service provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.

The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’

Under GST law, supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified with distinct characteristics as : -

(i) Composite Supply

(ii) Mixed Supply

If we look at the definitions (supra), composite supply is one where two or more goods or services or both are supplied together, in a natural bundle and in a normal course of business, provided one of which is a principal supply. However, principal supply will be that supply which is predominant over other supplies. This means that the goods and services and bundled owing to natural necessities. The Composite supply is taxed at the rate applicable to the principal supply whereas a 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 of these items can be supplied separately and is not dependent on any other. In Mixed Supply, the combination of goods and /or services is not bundled due to natural necessities, and they can be supplied individually in the ordinary course of business.

In order to identify if the particular supply is a Mixed Supply, the first requisite is to rule out that the supply is a composite supply. A supply can be a mixed supply only if it is not a composite supply. As a corollary, it can be said that if the transaction consists of supplies not naturally bundled in the ordinary course of business, then it would be Mixed Supply. Once the amenability of the transaction as a composite supply is ruled out, it would be a mixed supply, classified in terms of a supply of goods or services attracting highest rate of tax.

4. Discussion and Findings

In view of advance ruling given in the case of sweet-shop-cum restaurant, the services from the restaurant is a principle supply which provides a bundled supply of preparation and sale of food and serving the same and therefore, it constitutes a composite supply. It further satisfied the following conditions of a composite supply;

(i)Supply of two or more goods or services or both together

(ii)Goods or services or both are usually provided together in the normal course of business.

In the instant case the nature of restaurant services is such that it may be treated as the main supply and the other supplies combined with such main supply are in the nature of incidental or ancillary services. Thus restaurant services get the character or predominant supply over other supplies. Therefore, in the present case the supply shall be treated as supply of service and the sweet shop shall be treated as extension of the restaurant in as much as the said activity covered under Schedule II of the said Act and the relevant portion of the same read as under:-

5.Composite Supply

The following composite supplies shall be treated as a supply of services, namely:-

(a) Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) where such supply or service is for cash deferred payment or other valuable consideration.

Further, as the activity is classified as “restaurant services,” the same falls under Heading 9963 of GST rates on services under Notification No.11/2017-Central Rate (Tax), dated 28.06.2017 (as amended time to time) and the relevant portion of the same is reproduced as under:-

Heading 9963 (Accommodation, food and beverage services) –

(i)Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or drink, where such supply or service is for cash deferred payment or other valuable consideration, provided by a restaurant, eating joint including mess, canteen whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or  other commercial places meant for residential or lodging purpose having declared tariff o any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent.

Explanation. – “declared tariff” includes charges for all amenities provided in the unit of accommodation (Given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.

Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.

6. Conclusion

Thus, in view of the above discussion, the classification of supply shall be of restaurant services and the rate of GST on aforesaid activity shall be 5% as on date and input tax credit shall not be admissible on the goods and services used in the said activity in terms of aforesaid notification.

7. Author’s View

The author of this article partly differs on the ground taken by the AAR in deciding the issue. It seems that the AAR has decided the issue by considering the overall supplies made by the sweet shop-cum-restaurant as bundled supply and has accordingly decided the issue. The inference has been withdrawn by AAR on the basis of mixed supply and composite supply. The author is of the view that the concept of mixed and composite supply. The author is of the view that the concept of mixed and composite supply steps in when there are more than one supply for a single price to a single person. This ruling needs further discussion and revision.

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Concluding Remarks

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1. Payment of commission or brokerage liable for TDS under section 194H

Section 194H provides for deduction of tax at source from any income by way of commission or brokerage to a resident. Accordingly any person, not being an individual or a Hindu undivided family, who is responsible for paying, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five percent.

2. What constitutes commission for the purpose of section 194H

Explanation (i) to section 194H, explains the meaning of the term commission or brokerage. Accordingly, “Commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.

3. Payment in nature of discount not liable to TDS under section 194H

The following case law may provide guideline as regards nature of transaction:-

(I)Discounts paid by a manufacturer to its distributors for supply of its products to the retailers cannot be categorized as ‘Commission’. Thus, there is no liability upon the assessee to deduct tax at source on such discount payment under section 194H- Vide Addl.CIT v. Pearl Bottling (P) Ltd.2012 TaxPub(DT) 1042 (Visakha-Trib) : (2011) 46 SOT 133 (Visakh-Trib).

(II) No TDS under section 194H was required to be deducted on discount given to dealers as it would not be treated as commission or brokerage as they are not commission agent – Vide Hero MotoCorp Ltd. v. Addl.CIT 2013 TaxPub (DT) 2242 (Del-Trib) : (2013) 60 SOT 25 (Del ‘C’-Trib) : (2013) 156TTJ (Deb ‘C’-Trib) 139.

(iii) Assessee was not required to deduct tax at source under section 194H on discount given to customers on booking of air tickets because the same was a reduction on the sale price and not a commission – Vide ITO v. Kesar Travels ltd. 2014 TaxPub (DT) 3646 (Mum-Trib) : (2014) 34ITR (Trib) 124 (Mum ‘J’-Trib)

(iv) Provisions of section 194H could not be attracted where retail customers or group customers as well as small agents to whom concession was given by assessee-Airlines agents would only be ‘discount’ and not ‘commission or brokerage  - Vide Asstt.CIT v.Al Hind Tours & Travels (P) Ltd. 2014 TaxPub (DT) 2662 (Coch-Trib) : (2014) 64 SOT 1 (Coch-Trib).

(v) The discount on MRP granted by the assessee to distributors at the time of sale of the drugs/medicines (i.e goods) does not fall within the ambit of section 194H. Therefore, no tax was required to be deducted at source thereon – Vide ITO v. Unichem Laboratories Ltd. 2016 TaxPub(DT) 2199 (Mum-Trib).

(Vi) Where assessee was paying annual and quarterly discounts to stockiest/dealers on their achieving sale-linked targets and stockists were also providing additional services for such increase in sales, such discount could not be termed as commission, therefore, section 194H could not be applied, based on the facts that sale was made to stockists on principal-to- principal basis and providing of such additional services would directly benefit to stockists themselves – Vide Bajaj Consumer Care ltd.v. Dy.CIT 2016 TaxPub(DT) 2561 (Hyd-Trib).

4. Meaning of ‘Discount’

Discount in general terms, is a deduction from MRP of an article and it is given to attract the customers. Sometimes, such deduction is made in order to provoke the customers to make payment in cash and sometimes it is given when bulk purchases is made.

Discount is generally claimed as deductible expenditure under Profit & Loss account of the assessee. Controversy often arises as regards interpretation and distinction between terms discount and commission because discount is not required deduction of tax at source whereas commission is liable for TDS under section 194H. Generally when transaction is in nature of direct sale transaction on principal to principal basis, TDS obligation does not arises as no commission is involved in such transaction.

5. Recent decision in EPCOS India (P) Ltd.’s case

In EPCIS India (P) Ltd.v.ITO IT Appeal No.2533, 2758 (Kol.) of 2013 & 688,1325,1718 & 1895 (Kol.) of 2014, (Kol ‘C’-Trib) dt 02.02.2018 (2018 TaxPub (DT) 859 (Kol ‘C’- Trib), the assessee claimed certain expenses under the head “trade discount and cash discount” as there was a contract between he assessee and its customers which was based on principal to principal basis. But the assessing officer disallowed the same by contending that amount of discount offered by the assessee was nothing but commission expenses which is liable for deduction of tax at source under section 194H of the Act.

The assessing officer during the assessment proceedings observed certain facts as detailed under:

(i)The amount of discount offered to the customers was subject to various terms and conditions therefore it partake the character of commission.

(ii) The amount of discount was settled by the assessee by issuing credit note to the customers. These credit notes were issued to the customers only on the happening of the particular event/activity such as receipt of payments made by the customers. Thus the discount offered by the assessee is in the nature of commission.

(III) The discount was also offered to the customers on account of prompt payment made by dealers to the assessee. This again reflects that the discount is related to providing some services like prompt payment.

(iv) The amount of commission offered by the assessee is directly linked/related to its liquidity which proves that these are not normal discount offered by the assessee but represents the amount of commission.

(v) The terms and condition between the assessee and its customers is of principal and agent.

On appeal before Commissioner (Appeals), it was submitted that the contract of sale between the assessee and its customers/dealers is based on principal-to- principal basis. Therefore, the transaction between the assessee and its customers represents the sale purchase activities. Thus the discount offered can not be termed as commission under section 194H of the Act. The Commissioner (Appeals) directed assessing officer to allow deduction as claimed by assessee by contending that the offering of discount for purchasing the quantity in bulk by the customers cannot be treated as payment of commission to the customers specially when the sale is happening on a principal to principal basis.

I further appeal before the Tribunal, it was held that the assessee has been supplying goods to its dealers on principal to principal basis as evident from the agreement. Therefore, there was no relationship between the assessee and its customers as of principal and agents. Therefore, the amount of discount offered by the assessee could not be termed as commission under section 194H. Moreover, the issue of discount offered by the assessee has been duly settled by the Hon’ble Supreme Court in the case CIT.v.Ahmedabad Stamp Vendors Association 2012 TaxPub(DT) 2662(SC) : (2012) 348 ITR 378 (SC) wherein it was held as under:

“We are satisfied that 0.50% to 4% discount given to the Stamp Vendors is for purchasing the stamps in bulk quantity and the said discount is in the nature of cash discount.

In the circumstances, we concur with the impugned judgment that the impugned transaction is a sale. Consequently, section 194H of the income Tax Act, 1961 has no application.”

There is no dispute that the discount was offered by the assessee to its dealers in relation to the sales made by it to them.Thus the provisions of section 194H does not apply to the impugned discount offered by the assessee. Thys, there is no reason to interfere in the order of learned Commissioner (appeals).

6. Conclusion

Whenever deduction is given to customers for purchasing goods in bulk quantity, it would form part of discount in transaction of sale. Hence, on such discount there would be no liability to deduct tax at source under section 194H.

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