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:-
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.
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.