Pencils and sharpeners sold in sets, classifiable as 'mixed supply' and not 'composite supply'

The Applicant is engaged in the business of manufacturing and supplying all kinds of stationery items. The Applicant sold ten pencils in sets with the sharpener and eraser in the pack as accessories.  Furthermore, the Applicant used to sell the pack under the HSN code of the item with the highest value inside the pack, which also had the highest GST rate, however with the change in the GST rate of the pencil sharpener to 18%, the sharpener now carries the highest tax rate among all products bundled. Hence, the Applicant sought an advance ruling to ascertain whether the supply of pencil sharpeners along with pencils, which, as per the Applicant, is the principal supply, will be considered as ‘composite supply’ or ‘mixed supply.’

The Applicant had argued that sale of such stationary items is naturally bundled, with pencils being the principal sully and therefore, classifiable as composite supply. It had been further argued that in terms of the Rule 3 of General Interpretation Rules for classification of goods, issued by the World Customs Organization, when goods are capable of being classified as under two or more headings, the classification of goods, which are put up in sets for retail sale is to be undertaken basis the product giving providing essential character to the complete set.

Basis the above contentions, the Applicant had argued that stationary sets supplied by them are classifiable as composite supply, with pencils being the principal supply, chargeable to 12% GST.

The AAR noted that, the pack supplied by Applicant satisfies all the conditions of ‘Mixed Supply’ u/s 2(74) of the CGST Act and as per the provision of mixed supply, the supply that attracts the higher rate of tax shall be the applicable rate for the supply. Accordingly, the AAR ruled that the supply of sharpeners along with pencils falls under the category of ‘mixed supply’ and therefore, the Applicant is required to use the HSN code of the product, which attracts a higher rate of tax among all the taxable supplies contained in a pack or box. 

Doms Industries Private Limited [Advance Ruling No. GUJ/GAAR/R/2022/52] 

GLS Comments:

Interestingly, in the instant case, the Applicant had placed reliance on the General Rule of the General Interpretation Rules of Customs to argue that in case of goods sold in sets, the product giving the essential character is to be used for classification. In this regard, it shall be noted that the purpose of classification of goods under the Customs law vis-à-vis the GST law is different. The Rules meant for classification for the purpose of Customs, although having persuasive value for GST classification, cannot be applied mutatis mutandis.

In RE: Texel Industries Limited [2022 (61) GSTL 217 (AAR-GST-Guj.], it had been held that GST Scheme of law shall be given precedence and compliance for Classification. Further, the explanatory notes issued by the WCO have a persuasive value for determining classification.

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