Library / Goods and Services Tax: The Professional's Master Guide

6. Composite and Mixed Supply (Section 8)

Businesses rarely supply one thing at a time. A hotel room comes with breakfast, a machine comes with installation, a courier comes with insurance, a festive hamper holds several products. When the items in a bundle carry different rates, the law must decide which rate applies. Section 8 of the CGST Act does this through two concepts: composite supply and mixed supply.

6.1 Composite supply

A composite supply (section 2(30)) is a supply by a taxable person to a recipient of two or more taxable supplies of goods or services, or any combination, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. The Act's own example: goods packed and transported with insurance. The goods, packing, transport and insurance together form a composite supply, and the supply of goods is the principal supply.

The principal supply (section 2(90)) is the predominant element of a composite supply, to which the other elements are ancillary. Under section 8(a), a composite supply is treated as a supply of the principal supply. The whole value takes the rate, place of supply and time of supply of the principal supply.

Testing natural bundling

The Act does not define "naturally bundled". Practice and CBIC's early guidance point to the following indicators:

the customer sees the bundle as one supply and would not normally buy the elements separately from this supplier;
most suppliers in the trade offer the elements together;
the elements are advertised or priced as one package;
one element is the reason for the purchase and the others only help the customer to enjoy it better;
removing an element would change the nature of what is supplied.

A single price is a common feature but not essential. Separate line items on the same invoice do not by themselves break a composite supply if the elements are naturally bundled. Equally, an artificial bundle does not become composite just because one price is charged.

6.2 Mixed supply

A mixed supply (section 2(74)) is two or more individual supplies of goods or services, or any combination, made together by a taxable person for a single price, where the supply is not a composite supply. The Act's example is a package of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices sold for one price. Each item could be sold separately; they are not naturally bundled. Under section 8(b), a mixed supply is treated as a supply of the item that attracts the highest rate of tax. This works as a deterrent: bundling unrelated items for one price usually costs more tax.

Key point

First ask whether the bundle is naturally bundled. If yes, it is composite and the principal supply's rate applies (which may be lower or higher than other elements). Only if the answer is no, and a single price is charged, is it a mixed supply at the highest rate. If each item is priced separately and can be bought separately, there are separate supplies, each at its own rate.

6.3 Common examples

Illustration 32: Hotel room with breakfast

Hotel Sagar, Udaipur, sells a room at Rs. 6,000 per night including breakfast. Its sister hotel charges Rs. 9,000 per night including breakfast.

Step 1: Breakfast included in the room tariff is naturally bundled with accommodation. Accommodation is the principal supply.

Step 2: Hotel Sagar: accommodation up to Rs. 7,500 is taxed at 5% without ITC. GST = 5% of Rs. 6,000 = Rs. 300.

Step 3: Sister hotel: accommodation above Rs. 7,500 is taxed at 18%. GST = 18% of Rs. 9,000 = Rs. 1,620. The breakfast element is not taxed separately at the restaurant rate in either case.

Illustration 33: Tractor sold with toolkit and free first service

Kisan Motors sells a tractor for Rs. 6,00,000. The price includes a standard toolkit and the first free service.

Step 1: The toolkit and first service are supplied with every tractor in the ordinary course of business and are ancillary to it. The tractor is the principal supply.

Step 2: Tractors are taxed at 5% after GST 2.0. GST = 5% of Rs. 6,00,000 = Rs. 30,000 (CGST Rs. 15,000 + SGST Rs. 15,000).

Result: The toolkit (which on its own might carry 18%) and the service element both take the tractor's rate.

Illustration 34: Festive hamper

Mithai Ghar sells a Diwali hamper for a single price of Rs. 2,000.

Case A: The hamper contains sweets and dry fruits (5%) and a bottle of perfume (18%). It is a mixed supply. The highest rate, 18%, applies to Rs. 2,000: GST = Rs. 360.

Case B: A can of aerated sugary drink (40%) is added, price still Rs. 2,000. The highest rate is now 40%: GST = Rs. 800.

Case C: The items are priced separately on the bill (sweets and dry fruits Rs. 1,500 at 5% = Rs. 75; perfume Rs. 500 at 18% = Rs. 90). These are separate supplies. GST = Rs. 165.

Result: The way the hamper is priced changes the tax from Rs. 165 to Rs. 800 on the same goods.

Illustration 35: Coaching fee including books

Pragati Classes charges Rs. 50,000 for a CA Foundation coaching course, including printed study books.

Step 1: The books are supplied only to enrolled students as part of the course. Coaching is the principal supply.

Step 2: Private coaching is not an exempt education service, because the coaching institute does not itself award a qualification recognised by law. GST at 18% on Rs. 50,000 = Rs. 9,000.

Result: Although printed books are exempt when sold on their own, they take the coaching rate as part of a composite supply.

Other common cases: courier service with transit insurance is a composite supply of courier service; food supplied to in-patients as advised by a doctor is part of the composite supply of health care and exempt, as CBIC clarified in 2018; a comprehensive annual maintenance contract that covers spare parts is a composite supply of maintenance service, while a non-comprehensive contract with parts billed separately is two supplies; and freight charged by a seller for delivering goods to the buyer's door forms part of the value of the goods under section 15(2)(c).

6.4 Works contracts: composite supply by law

A works contract (section 2(119)) is a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property, where transfer of property in goods is involved in its execution. Schedule II para 6(a) treats it as a supply of services. The goods and labour are not split, and the whole value is taxed as a service (most works contracts at 18% after GST 2.0). A contract for repair of movable property with parts (for example, car repair) is not a works contract under GST and must be tested under section 8. Similarly, Schedule II para 6(b) treats supply of food or drink as part of a service, such as a restaurant, as a service.

Judicial view: Composite contracts before GST

Bharat Sanchar Nigam Ltd. v. Union of India (Supreme Court, 2006): The Court held that, for composite contracts other than those covered by the deeming fictions in Article 366(29A) (works contracts, catering and the like), the test is the dominant nature of the transaction: what the parties really intended to buy and sell. A transaction could not be split into a sale and a service merely by using the aspect theory.

Larsen and Toubro Ltd. v. State of Karnataka (Supreme Court, 2013) and Kone Elevator India (P) Ltd. v. State of Tamil Nadu (Supreme Court, 2014, Constitution Bench): A works contract is an indivisible contract that the Constitution allows to be split so that the goods element can be taxed. The dominant intention test does not apply to works contracts. Construction of flats under agreements made before completion, and supply and installation of lifts, were held to be works contracts.

Practical relevance under GST: The splitting problem has gone, since section 8 and Schedule II treat these bundles as one supply. But the old reasoning about what the customer really buys is still the best guide in identifying the principal supply, and the older rulings help in deciding whether a contract relates to immovable property.

6.5 Commonly disputed bundles

The table summarises the usual treatment. Facts can change the answer, so the contract and invoice must be read in each case.

Bundle	Usual treatment	Rate follows
Hotel room with breakfast in tariff	Composite	Accommodation
Goods with freight and insurance to buyer's door	Composite	Goods
Machine with installation and commissioning	Composite (works contract if it becomes immovable)	Machine, or works contract rate
Laptop sold with carry bag	Composite	Laptop
Gift hamper of unrelated items, single price	Mixed	Highest rate item
Coaching with study material	Composite	Coaching
Comprehensive AMC including parts	Composite	Maintenance service
Health care with food and medicines to in-patients	Composite	Health care (exempt)
Tour package with hotel, transport and sightseeing	Composite	Tour operator service
Construction with materials (immovable property)	Works contract by law	Works contract service

Practice note

When advising on a bundle, record in the working paper why the elements are or are not naturally bundled: trade practice, how competitors sell, what the customer is buying, and whether elements are available separately. A reasoned note carries weight in audit and in reply to a notice. Where the rate difference is large, consider an advance ruling.

Chapter summary

• A composite supply is naturally bundled in the ordinary course of business and is taxed as its principal supply.

• A mixed supply is a single-price bundle of items that are not naturally bundled; it is taxed at the highest rate among them.

• Separately priced items that can be bought separately are separate supplies, each at its own rate.

• Works contracts for immovable property and food served as part of a service are composite supplies of services by law.

• Pre-GST rulings (BSNL, L&T, Kone) still help in identifying what the customer is really buying.

• Pricing and contract structure can change the tax on the same goods, so document the reasoning.