1. Querist seeks our opinion on the rate of tax applicable to the following three devices which are meant to be supplied to the XXXXXX:
(i) Porcelain-clad Vacuum Circuit Breaker
(ii) Current Transformer
(iii) Control Relay Panel
2. We have been referred to the Tender Specification issued by XXXXX as well as a Purchase Order dated 30-6-2017 for the purposes of this opinion.
3. It is apparent from the Purchase Order that the three devices are to be supplied under a single lumpsum price. It is in this context that a particular query has been directed to us: Whether the supply of the three devices under the Purchase Order is a composite or a mixed supply. The question of rate of tax applicable to the supply is closely connected with this determination.
4. Porcelain-clad Vacuum Circuit Breakers are individually classifiable under Customs Tariff Heading 8535, Control Relay Panels under Customs Tariff Heading 8537 and Current Transformers under Customs Tariff Heading 8504. Under the Notification No.1/2017-Integrated Tax (Rate) dated 28-6-2017, the description of goods and the GST rates corresponding to these Customs Tariff Headings is set out herein below:
|Customs Tariff Heading
|Description of goods
|Rate of tax
|Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, fuses, lightning arresters, voltage limiters, surge suppressors, plugs and other connectors, junction boxes), for a voltage exceeding 1,000 volts
|Transformers Industrial Electronics; Electrical Transformers; Static Converters (UPS)
|Boards, panels, consoles, desks, cabinets and other bases, equipped with two or more apparatus of Heading 8535 or 8536, for electric control or the distribution of electricity, including those incorporating instruments or apparatus of chapter 90, and numerical control apparatus, other than switching apparatus of Heading 8517
5. It is to be noted that the description of goods in the Customs Tariff Heading and the Notification No.1/2017-Integrated Tax (Rate) dated 28-6-2017 are identical. The GST Notification also calls for use of the rules of interpretation used under the Customs Tariff to be applied for purposes of classification of goods under the GST Notification.
6. In Crompton Greaves Ltd. v. CCE Aurangabad [1996 (87) ELT 414] a Special Bench of the Central Excise and Gold Appellate Tribunal had taken the view that a Porcelain-clad Vacuum Circuit Breaker and EHV SF 6 Gas Circuit Breakers which are inter-connected through wiring to a Control Panel are classifiable under Heading 8537. The Tribunal held that even if the circuit breakers and the control panels are installed at different places, as long as they are inter-connected by wiring the system falls within the words used in Heading 8537: “panels…equipped with two or more apparatus of Heading 8535 or 8536”. In short, even if the circuit breaker and the control panel were not mounted on the same panel, the goods as such were held as classifiable under Heading 8537. This decision was affirmed subsequently by the Supreme Court through Order dated 18-10-2001 in Civil Appeal No.12553 of 1996.
7. It is our considered view that this judgment, given under the Central Excise law, is not relevant under the GST regime. In the case at hand, the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel are not inter-connected at the Querist’s end at the time of making of supply. They are sold as separate components without any wire connecting them. It is the customer which will do the wiring after the goods are delivered. When the customer or its agents or authorised contractors will carry out the inter-connection and wiring of the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel, the Querist will be out of the picture as the supply will have ended with the delivery of the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel without any inter-connection between them. As such, Heading 8537 will never come into play.
8. Even otherwise, the judgments under Central Excise and Customs should be applied carefully under the new GST regime. It is pertinent to note that these GST Tariff Notifications are delegated legislation and are subject to the rules relating to composite and mixed supplies in Section 8 of the Central Goods and Services Tax Act, 2017. The Central Goods and Services Tax Act is a Parliamentary statute which will prevail over all secondary legislation. Thus, if a product is classifiable under a particular heading due to the application of the classification rules contained in Section 8 of the Act, the Customs Tariff rules or the HSN rules or the Tariff Heading descriptions cannot be interpreted in such a way as to achieve a completely different result.
9. A “composite supply” is defined in Section 2(30) of the Central Goods and Services Tax Act, 2017 to mean:
(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 a principal supply.
Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.
10. The term “principal supply” is defined in Section 2(90) of the Central Goods and Services Act, 2017:
“(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.”
11. Thus, a composite supply envisages one principal supply and two or more ancillary supplies. The principal supply is the pre-dominant element of the composite supply. The principal supply and the ancillary supplies must be “naturally bundled” and must be supplied in conjunction with each other in the ordinary course of business.
12. The word “naturally bundled” means a bundle of supplies in which each element is connected naturally to each other. For example: Renting of furniture is naturally bundled with the renting of immovable property [Xilinx India Technology Services v. CCE 2016 (44) STR 129 (CESTAT-Hyderabad)]
13. A “mixed supply”, on the other hand, is defined in Section 2(74) of the Central Goods and Services Tax Act, 2017:
“(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.
Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.”
14. Unlike a composite supply, the constituent elements of a mixed supply are not “naturally bundled”. These constituents are also not supplied with each other in the ordinary course of business. The illustration to Section 2(74) brings this out clearly: Fruit juices and chocolates have nothing to do with each other. A supply of chocolate is never seen as ancillary to a supply of fruit juice and vice versa. When such goods are artificially bundled together, that is supplied under a single price, a mixed supply takes place.
15. In this case, we have been informed that a Vacuum Circuit Breaker is almost always used with a Current Transformer and a Control Relay Panel. On enquiring with the Querist as to whether a Vacuum Circuit Breaker is ever used without a Current Transformer and a Control Relay Panel, we were told the same happens in very rare circumstances. Most importantly, a Vacuum Circuit Breaker is never used without a Current Transformer and a Control Relay Panel in a power distribution system, which is where the customer ultimately intends to install these devices.
16. A Vacuum Circuit Breaker is used only for protection of electrical circuits and it is essential that the same be used with a Current Transformer and a Control Relay Panel for achieving that purpose. It is clear that the supplies of the Vacuum Circuit Breaker, the Control Relay Panel and the Current Transformer are naturally bundled with each other and these supplies together constitute a composite supply. The pre-dominant element of this composite supply is the Vacuum Circuit Breaker, since it is the Vacuum Circuit Breaker which actually performs the electrical circuit protection work. The Current Transformer and the Control Relay Panel merely assist the Vacuum Circuit Breaker in its work.
17. Now, Section 8 of the Central Goods and Services Tax Act, 2017 contains the rules for classification of composite supplies:
“8. Tax liability on composite and mixed supplies
The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”
18. Since the Vacuum Circuit Breaker constitutes the principal supply, the entire composite supply will be treated as a supply of the Vacuum Circuit Breaker. As aforesaid, a Vacuum Circuit Breaker is classifiable under Heading 8535 and attracts 18% rate of tax. The entire composite supply will thus attract 18% rate of tax.
19. Lastly, the same result is reached even if the rules for composite and mixed supply are not invoked. We have already discussed in Para 7 that Heading 8537 is not relevant at all in this case due to the lack of inter-connection between the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel before the time of completion of supply. The Querist informs me that the three devices sold in this case are nothing but components of a system which, after inter-connection and assembly, is known in the market as a commercially distinct product which goes by the name “switchgear”. These three components are used as switchgear in power distribution systems to protect electrical circuits. Customs Heading 8535 contains the following sub-heading:
8535 90 – Other
8535 90 30 – Other control and switchgears
20. Chapter Heading 8535 deals with “electrical apparatus” which is used for protecting electrical circuits. The word “apparatus” will include even devices sold separately in an unassembled and non-connected form, as long as they are capable of working together to form any of the “apparatus” or systems mentioned in the sub-headings. Note 4 to Section XVI of the Customs Tariff (containing Chapter 85) also brings out this principle:
“Where a machine (including a combination of machines) consists of individual components (whether separate or inter-connected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”
… (Emphasis Supplied)
21. The Tender Specifications also make a reference to these devices as “switchgear components”. The Porcelain-clad Vacuum Circuit Breaker, Control Relay Panel and the Current Transformer will therefore be classifiable under Heading 8535 as “switchgear” even if the rules for composite and mixed supply in Section 8 of the Central Goods and Services Tax Act, 2017 are completely ignored.
22. Therefore, we are of the firm view that the three devices – Porcelain-clad Vacuum Circuit Breaker, Current Transformer and Control Relay Panel – to be supplied to SPDCTL by Querist are classifiable under Heading 8535 and will attract 18% rate of GST.