A pencil sold with sharpener will attract higher GST than a pencil sold alone since the sale of a pencil and sharpener together is ‘mixed supply’, the Gujarat AAR (GAAR) has held.

Businesses either supply goods or services alone, or bundle goods and/ or services. Bundled supplies are categorised into two – mixed and composite supply. While mixed supply refers to supply of two or more goods and/ or supplies together at a single price and each of them can be supplied separately, composite supply refers to supply of two or more goods or services or both, 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 tax liability in case of mixed supply is fixed on the basis of goods or services that have the highest rate. In case of composite supply, one good or service is taken as a principal supply, the tax rate for which will apply to the entire supply.

Doms Industries, based in Umbergaon (Gujarat), submitted details of its three products. One, pencils along with sharpener and eraser; second, a colouring book, pencil, colour pencils, oil pastels, plastic crayons, wax crayons, eraser, scale and sharpener, and third pencils, erasers, scale and sharpener. In July last year, based on a GST Council recommendation, the Finance Ministry notified 18 per cent GST for sharpeners, and that changed the equation.

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Accordingly, the company moved AAR to seek advance rulings on three questions. First, whether the supply of pencil sharpeners along with pencils, being the principal supply, will be considered “Composite Supply” or “Mixed Supply”. Second, the HSN code to be used. And third, whether the supply of a sharpener along with the kit having a nominal value will have an impact on the rate of tax. If yes, what will the rate of tax be and the HSN code to be used.

GAAR said each of the items in the products cannot be naturally bundled or supplied in conjunction with each other in the ordinary course of business. Also, each one can be sold independently. This means that the supply of pencils sharpeners along with pencils is covered under the category of ‘Mixed Supply’. Also, the supply of sharpeners along with the kit having a nominal value will have an impact on rate of tax, GAAR said.

Harpreet Singh, Partner with KPMG, says classification of supply as composite or mixed continues to be an item of perennial dispute between authorities and the industry. This is because there is no one-size-fits-all logic/ principle that can be applied. Generally, pencils are sold along with sharpener, and hence the view that the same is a composite supply. Alternatively, can a pencil be sold without a sharpener or vice-versa, the answer is affirmative and hence the alternative view that both are not naturally bundled. “Determining the value of constituents, industry practice, intention of parties, invoicing methodology, would always involve subjectivity, leading to varied interpretations and resultant disputes,” he said.

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