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May 26, 2020

Can activities performed under ‘Comprehensive Maintenance Agreement’ to be classified as Composite or Mixed Supply?

by Rubina Dsouza in GST, Legal Court Judgement

Can activities performed under ‘Comprehensive Maintenance Agreement’ to be classified as Composite or Mixed Supply?

Introduction

In order to understand about activities performed under ‘Comprehensive Maintenance Agreement’ to be classified as Composite or Mixed Supply it is important we know what is supply, and how composite and mixed supply are different from each other. We will also analyze the same with the help of a case M/s Sandvik Asia Private Limited- Authority of Advance Ruling- Rajasthan.

What is supply under GST?

Supply is defined to include all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. It also includes importation of services for a consideration whether or not in the course or furtherance of business.

But not all supplies will be simple and clearly identifiable. Some supplies are a combination of goods or a combination of services or a combination of both goods and services, where each individual component may attract different rates of tax. The rate of tax to be applicable for such supplies may be difficult to compute.

Hence, the GST law identifies composite supplies and mixed supplies which provide certainty in respect of tax treatment under GST.

What is Composite Supply?

Composite supply means a supply comprising of two or more goods/services, which are naturally bundled and supplied in with each other in the ordinary course of business, one of which is a principal supply.

It means that the items are generally sold as a combination and cannot be sold separately.

The tax rate of the principal supply will apply on the entire supply.

For instance, a hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

What is Mixed Supply?

Mixed supply under GSTmeans a combination of two or more goods or services made together for a single price. Each of these items can be supplied separately and is not dependent on any other.

A mixed supply will have the tax rate of the item which has the highest rate of tax.

Can activities performed under ‘Comprehensive Maintenance Agreement’ to be classified as Composite or Mixed Supply?

The above issue relates to M/s Sandvik Asia Private Limited

Facts of the Case

The applicant is engaged in manufacturing, distribution and sales agency activities of various industrial products.

Further, the applicant is also engaged in the business of after sales support for the mining equipment manufactured by its overseas group entities which are imported by the customers into India.

Issues raised

Applicant has sought ruling under section 97(2) (a) (e) of CGST Act 2017, on the following questions:-

a. Maintenance services rendered on customers’ equipment under Comprehensive Maintenance Services Agreement and Supply of parts and services Agreement which also includes supply and replacement of spare parts to be classified as ‘Composite Supply’ or ‘Mixed Supply’.

b. If the same is considered as composite supply, what is the principal supply and what tax rate is to be considered?

Advance Ruling Order

Under the said Advance Ruling Order, the Rajasthan Authority for Advance Ruling , GST, Jaipur ( hereinafter referred to as “AAR”) has held that the activities performed under Comprehensive Maintenance Services Agreement (Agreement 1) shall be classified as “Composite Supply”, where principal supply would be the supply of maintenance services. In respect of Supply of parts and services Agreement, (Agreement 2) the AAR has held that the services provided under the said Agreement are classifiable as “Mixed Supply”.

The Appellant not being satisfied with the classification of the activities performed underAgreement-2 as “Mixed Supply” had preferred the subject appeal under Section 100 of the CGST Act, 2017.

Contention of Appellate Authorities for Advance Ruling (AAAR)

a. The Appellant’s contention is that in both the situations the service is classifiable under Composite Service which is not tenable.

b. Regarding the Agreement made for maintenance services in respect of machinery supplied in 2017, the Appellant is well aware about the parts which would suffer wear and tear and need to be replaced by the Appellant. 

c. It is also evident that the Appellant can supply these parts individually.

d. Main intention of the Agreement is to ensure that the equipment is available for operation to the customer on a continuous basis. The Appellant is required to provide supervision and maintenance services on a continuous basis to ensure that the equipment is available to the customer at all times. While providing such maintenance services, the Appellant may be required to replace certain parts or consumables that may have worn out due to continuous operation of the equipment.

e. However, the Appellant or the customer would not be aware of the parts that are required to be replaced until the maintenance services are provided to the customer. Therefore, it is clear that the supply of parts is incidental till the main supply of maintenance services are not provided by the Appellant.

f. Entering into two separate agreements with their client(s) itself is an indication that the nature and quantum of supply of service(s) and/or spares/parts under these agreements is not similar.

g. Also, supply of services and supply of parts are not integral to each other. Therefore, it is not a case of two or more taxable supplies that are naturally bundled and supplied in conjunction with each other.

The AAAR thus upheld the Advance Ruling rendered by the Rajasthan Authority for Advance Ruling, Goods and Services Tax, Jaipur vide their Ruling No. RAJ/AAR/2018-19/21 dated 12.10.2018, in respect of activities performed by the Appellant under ‘Equipment Parts Supply and Services Agreement’ (Agreement-2), which has been held as “Mixed Supply”.

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