GST Rules on Split Contracts for Goods and Freight Delivery
Splitting goods and freight into separate linked contracts still attracts GST at the main product rate as a composite supply.
- Ruling
- 05/WBAAR/2018-19 dated 28/05/2018
- Dated
- 28 May 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- Manufacturer asked if separate transport contracts enjoy GST exemptions.
- Contracts were linked by a single-breach condition clause.
- AAR ruled goods and delivery form an indivisible composite supply.
- Freight and insurance must be taxed at the main goods rate.
In short
An electrical equipment manufacturer signed two separate agreements with a buyer for supplying hardware and handling inland transport. The contracts contained a clause stating that a breach in one agreement counts as a breach of both. The manufacturer asked whether the transport and insurance services under the second contract could be treated separately or exempt from Goods and Services Tax (GST).
What has changed
How it worked before
Businesses often assumed that signing two separate contracts allowed them to treat transport independently from the supply of goods. Many suppliers claimed GST exemptions on road freight or charged lower service tax rates on delivery charges.
What has changed
The West Bengal Authority for Advance Ruling (WBAAR) in order 05/WBAAR/2018-19 ruled that linked contracts form a composite supply. Because delivery was tied to the supply of goods, the principal supply is the goods itself. Consequently, freight and insurance charges must be taxed at the same GST rate as the main product.
Who this affects
Manufacturers, engineering contractors, and suppliers who sign separate product supply and delivery agreements containing linked performance clauses.
An example
XYZ Electricals wins an order to supply and deliver transformers. To manage tax, they split the project into a supply contract and a freight contract, but include a clause linking breach of one to the other. Based on order 05/WBAAR/2018-19, the tax officer treats both contracts as a single composite supply. XYZ Electricals must charge GST on the transport portion at the 18% rate applicable to transformers, rather than treating transport as exempt.
What you should do
Review your supply and transport agreements for cross-breach clauses or linked performance terms. Note that an advance ruling binds only the business that asked for it and its specific tax officer. Consult a tax professional to evaluate your contract structure before claiming freight exemptions.
If you do nothing
If you treat transport as exempt on linked contracts, tax authorities may reclassify the whole deal as a composite supply during an audit. You risk receiving a tax demand for unpaid GST at the higher product rate. You will also have to pay interest and potential penalties on the short-paid tax.
The terms explained
- composite supply
- A single transaction involving two or more goods or services naturally bundled and delivered together.
- principal supply
- The main element in a bundled transaction that determines the GST rate for the entire package.
- cross-fall breach clause
- A contract condition where failing to fulfill one agreement automatically breaches all related agreements.
The ruling in detail
Authority for Advance Ruling
IAC Electricals Pvt Ltd
05/WBAAR/2018-19 dated 28/05/2018 · West Bengal
Questions before the authority
- Whether the services of inland transportation, in-transit insurance, and loading/unloading supplied under a second contract for delivery of goods at the contractee's site are exempt or taxable under the GST Act.
Facts
The Applicant, a manufacturer of Overhead Power Transmission Line Hardware and Accessories, was awarded two separate contracts by M/s Power Grid Corporation of India under separate Notifications of Award. The First Contract covered ex-works supply of equipment/materials, while the Second Contract covered inland transportation, in-transit insurance, and loading/unloading for delivery at site. Both contracts contained cross-fall breach clauses stipulating that a breach in one contract constitutes a breach of the other, creating single-source responsibility.
Ruling
| Question | What the authority ruled |
|---|---|
| Taxability of inland transportation, in-transit insurance, and loading/unloading services supplied under a separate contract for delivery of goods | Taxable under Section 8(a) as a composite supply at the GST rate applicable to the principal supply of goods. Applicable where contracts are bound by a cross-fall breach clause establishing single-source responsibility. |
The Authority held that the supply of goods and their transportation/insurance/handling form an indivisible **composite supply** with supply of goods as the principal supply. Consequently, the ancillary services under the second contract are subject to GST under **Section 8(a)** of the GST Act at the rate applicable to the principal supply of goods.
Reasoning
The First Contract cannot be performed independently of the Second Contract because place of supply under Section 10(1) of the IGST Act, 2017 requires movement and delivery to the contractee's site. The presence of a **cross fall breach clause** makes the promises inseparable, creating a composite contract with single-source responsibility rather than two distinct contracts. Under Section 2(30) of the GST Act, supply of goods packed and transported with insurance is explicitly illustrated as a **composite supply** where supply of goods is the principal supply. Exemption under Serial No. 18 of Notification No. 12/2017-Central Tax (Rate) for road transport of goods does not apply because the Applicant is procuring these services as a recipient rather than acting as a GTA or direct transport service provider.
Provisions relied on
- Section 2(30) of the CGST/WBGST Act, 2017
- Section 8(a) of the CGST/WBGST Act, 2017
- Section 97(2)(a)&(e) of the CGST/WBGST Act, 2017
- Section 10(1)(a) of the IGST Act, 2017
- Section 10(1)(d) of the IGST Act, 2017
- Notification No. 12/2017-Central Tax (Rate) dated 28/06/2017 (Serial No. 18)
For the practitioner
This ruling establishes that splitting a turnkey supply-and-delivery project into separate supply and freight/insurance contracts will not avoid GST on freight if tied by a **cross-fall breach clause**. Tax practitioners can cite this order to demonstrate that turnkey contracts with single-source responsibility clauses constitute **composite supplies**, preventing independent tax treatment or exemptions for the freight component.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/wbaar05_2018-19dt28-05-18_iac.pdf
Legibility of the scan, as read: high.
Prepared 18-10-2026.
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