Classification of Goods and Services under indirect tax regime forms the base of Tax Levy and Collection Mechanism. A definite classification of the subject matter into various classes helps in the identification of taxable and non-taxable items while determining the scope of tax liability through particular legislation.
With the introduction of Goods and Services Tax (hereinafter referred to as “GST”), the classification is more trivial for the applicable tax rates.
For the effective administration of GST collection, it is important to understand a few concepts such as the definition of goods and services, the schedule of activities of supply of goods or services, identification of composite and mixed supply, identification of Harmonised System of Nomenclature Code (hereinafter referred to as the “HSN Code”) from the rate notification, the principles of general interpretation under the Customs Tariff Act, 1975 (hereinafter referred to as the “Customs Tariff Act”) as applicable in GST regime now and Service Code (Tariff) with respect to the supply of services.
WHAT ARE GOODS?
Section 2 (52) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) defines goods which means every kind of movable property other than money and securities and further includes actionable claims, crops and things attached or forming a part of land which are agreed to be severed under a contract. However, it may appear from the definition of goods that it encompasses all the goods, but many goods are kept out of the purview of GST and/or are exempted by various notifications and explanatory notes.
The GST is levied not on goods and services but on the supply of goods and services, as per Section 7(1)(d) read with Schedule II of the CGST Act. There may be an instance where certain transactions or activities that are neither considered as goods nor services but are treated as a supply of goods and services due to the operation of Schedule II of the CGST Act.
There may be instances where the supply of goods is treated as supply of service. For example, a company leasing heavy machinery to another company is a transfer of right to goods without transfer of title is treated as supply of service. Moreover, activities that do not qualify to be goods or services, but are still treated as supply of service such as activities related to immovable property [immovable property is outside the purview of Classification] such as lease and tenancy to land.
There may be instances wherein certain activities are neither treated as supply of goods nor service due to deeming fiction as neither supply of goods nor service. For instance, service related to funeral, burial, actionable claims, service by an employee to the employer in employment to state few.
CLASSIFICATION OF GOODS
The Ministry of Finance, Government of India publishes the Rate of Tax (Schedule) for specified goods and services under the CGST/IGST Act vide Notification 01/2017-CT (Rate) dated 28.06.2017, which was amended periodically. It consists of six schedules and with different tax rates.
The Schedule II of the CGST Act specifically classifies the supply of goods and services, and the HSN Code further helps in removing the ambiguity relating to dispute of supply of goods along with applicable tax rates. The Supreme Court in the case of C.C.E. v. Wood Craft Products Ltd. [(1995) 77 E.L.T. 23] held that in case of any ambiguity regarding classification, necessary assistance can be taken from Harmonised System of Nomenclature Handbook published by the World Customs Organization, though it cannot dilute or override the fiscal statute scheme.
The Supreme Court in the case of C.C.E. v. Vicco Laboratories [(2005) 179 ELT 17] held that the burden of proof in classification dispute is on the Department, the Department has to classify goods under a specific tariff head, and the same should be appropriately constructed from the fiscal scheme.
Necessary steps for Classification of Goods
- Identify the supply of goods under the CGST Act.
- Identify a broad section followed by a chapter from the tariff schedule.
- Use the Rules of General Interpretation under Chapter II of the Customs Tariff Act to classify the product in terms of 8-digit Classification
- Find relevant sub-headings in the GST Rate Schedule grouped under 4/6-digit Classification.
- Find relevant description of heading in G.S.T. Rate Schedule with the corresponding Rate.
GENERAL RULES OF INTERPRETATION
In cases wherein the description read with the Sections is insufficient to classify the goods under GST correctly, rules laid down under the Customs Tariff Act will be followed.
1. Rule 1: Classification to be made as per Heading
The title and description attached to the section, chapter, and sub-chapter are provided for guidance only. The classification of goods shall be made based on the description of heading read with relevant section and chapter notes and provided such heading or note does not express other intent.
As the section notes and chapters are part of the fiscal statute itself, they do not require the Rule of Interpretation. However, Classification is based on the Entry under relevant heading under Tariff rate and hence, requires Rule of interpretation.
In the case of Monita Containers v. C.C.E. [(2007) 213 ELT 262], the Classification of aluminium foil, assessee intended to classify under Entry 76.16 [Other articles of aluminium] of the Customs Tariff Act whereas the Department classified the aluminium foil under Entry 48.23 [Other paper, paperboard, cellulose wadding and webs of cellulose fibres; other articles of paper pulp, paper, paperboard]. The Customs, Excise and Gold Tribunal held that aluminium can be classified under Entry 48.23 merely by reference to a title to the Chapter. Hence, it was classified under Entry 76.16.
The Supreme Court in C.C.E. s M/s Simplex Mills Co. Ltd. [(2005) 181 ELT 345] held that if Classification is possible under Rule 1, it will be followed; only if Classification is unsuccessful under Rule 1 following Rule will be applied.
2. Rule 2(a): Classification of Incomplete or Unassembled Goods
If the unfinished goods have characteristics of the final goods, then the tariff entry covering the said goods would be applicable to such unfinished goods, including goods presented in an unassembled state.
In the case of Camlin Ltd. v. C.C.E. [(2003) 155 ELT 138], the question was regarding the classification of ‘crayplas shapeless plastic crayon’ as goods. The assessee classified it under the heading CTH 9609.00 [pencils, crayons, pencil leads, pastels, drawing charcoals, writing or drawing chalks]. On the other hand, the Department tried to classify it under subheading 3204.19[pigments and preparation based thereon other than those in unformulated and unstandardised or unprepared form, not ready for use]. The Supreme Court in the case applied Rule 2(a) to classify good under entry 9609.00 as unfinished good only required to be given necessary shape to turn into the final product.
3. Rule 2(b): Classification of Composite Goods
Scope of Rule 2(b) is determined by the Customs, Excise and Gold Tribunal in the case of CC v National Carbon Co. [(1989) 41 ELT 433], wherein it held that
“Rule 2(b) consists of two parts. The first part relates to the mention of material or substance under any heading, and it has been set out that the reference to the material or substance shall be taken to include a reference to mixtures of those materials or substances. This part does not talk about finished goods made of material or substance. The second part of the Rule deals with the goods of a given material or substance mentioned under any heading of the tariff, and reference is to be taken to include a reference to goods consisting of such material or substance. This part does not deal with the composite goods made.”
If Rule 2(b) is not applicable, reference will be made to Rule 3.
4. Rule 3 (a): Primacy of specific Entry over generic Entry.
This Rule provides that in case when a part of the material contained in goods or even part of good is retail able under any specific entry, is preferred over generic. The Customs, Excise and Gold Tribunal in case of Jyoti Industries v. C.C.E. [(2000) 115 ELT 559], relevant goods ‘kitchens sink’ is classified under the subheading ‘sanitary ware’ that is CTH 7324 [Sanitary ware and parts thereof] over CTH 7323 [Household articles of iron and steel] which is a generic description.
5. Rule 3(b): Essential Character test for Mixture or Composition of Goods
If any goods is not classifiable under Rule 3(a), then Rule 3(b) will be followed herein. Classification will be made based on material and its essential character as finished goods. This Rule will not apply when any mixture of finished goods has a specific Entry, for example, a Shirt and its buttons. Then the composition of both cannot be classified as Shirt as buttons have separate Entry altogether.
In re Samsung India Electronics P. Ltd. [(2016) 340 ELT 430 (A.A.R.)], the Supreme Court classified Phones with zoom cameras as a phone instead of cameras. The dominant character of the phone with a zoom camera was still phone functions.
6. Rule 3(c): If both Mixtures are Specific – the latter is preferred
It simply means that one good can equally be classified under two entries. Then the latter Entry is preferred over the former.
In the case of Mahindra & Mahindra v. C.C.E., [(1999) 109 ELT 739], the Customs, Excise and Gold Tribunal the goods concerned were equally classifiable under Entry 87.03 and CTH 87.04, applying the Rule 3(c) later Entry that entry 87.04 was applied for Classification.
7. Rule 4: Classification as Akin Goods
Goods which cannot be classified following the above Rules shall be classified under the heading appropriate to the goods to which they are most akin.
8. Rule 5: Classification of Packing Containers and Packing Materials
As per Rule 5(a), the packing containers which are customarily sold along with the main good and does not have an essential character of its own like gun cases, necklace case etc. will be considered as article customarily sold in addition to the main good.
Rule 5(b) covers packing materials that do not provide essential character to goods and are not of repetitive use to be classified with goods under the duplicate Entry.
9. Rule 6: Goods are Comparable at the same level only for Classification
The Chapter will be compared with the Chapter; then the Heading will be compared with the Heading, followed by the sub- heading will be compared with the sub- heading. Sub- headings under the same heading are compared with each other and not sub- headings under another heading.
The scheme of Classification of supply of goods and supply of services has created detailed guidelines for the administration of GST and have intended to reduce discrepancy among indirect tax regime in the Courts.
This blog has extensively discussed the determination of disputes relating to the supply of goods and the rules of interpretation that would be applicable in case of ambiguity.
It is essential that the supply is classified as supply of goods or services or both in accordance to Schedule II of the CGST Act. But in case of ambiguity, it can be classified in accordance to rules of interpretation. The further classification disputes relating to the services will be covered in next blog.
– Team AMLEGALS assisted by Mr. Mridul Pateriya (Intern)
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