INTRODUCTION
In the previous blog, the importance of classification of goods and services for the purpose of indirect taxation has been discussed along with the classification disputes with respect to Goods under the Goods and Services Tax (hereinafter referred to as “GST”).
This blog would cover classification disputes regarding Services under the GST. Classification of goods and services in indirect Taxation is not a novel concept; its origin can be traced back to Custom Laws. However, after the enactment of the Central Goods and Services Act, 2017 (hereinafter referred to as the “CGST Act”), the State Goods and Services Tax Act, 2017 (hereinafter referred to as the “SGST Act”) and the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the “IGST Act”), for ascertaining the tax rates, it is essential to classify and categorise the goods and services.
This blog also intends to discuss certain tests and classification principles developed by the Courts from time to time with respect to classification disputes of goods and services.
WHAT ARE SERVICES?
Section 2(102) of the CGST Act defines services as anything that is not covered under movable property, money and securities and includes any activity that relates to use of money or any other form which involves a consideration.
“2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
[Explanation.–– For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities;]”
It may appear from the above mentioned definition of services that it encompasses all the services, however, many services are kept out of the purview of GST and/or are exempted by various notifications and explanatory notes.
CLASSIFICATION OF SERVICES
Under the GST regime, the principles for classification of services are different than classification of goods. The Central Board of Indirect Taxes & Customs (hereinafter referred to as “CBIC”) vide Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, provides for the classification of services with an annexure determining the rate of taxation. The classification of services and tax rates is based on the Harmonised System of Nomenclature (hereinafter referred to as “HSN”) Classification.
The CBIC vide Explanatory Notes on the Scheme of Classification of Services dated 12.06.2018, clarified that the classification scheme was based on the United Nation Central Product Classification and the same shall be used for further guidance.
MEANING OF CENTRAL PRODUCT CLASSIFICATION
The Central Product Classification covers all the goods and services and that intend to harmonise tabulation of all kinds of goods and services, from product details to international trade in services, among others used in national accounts.
Moreover, it provides a framework for international comparison and promotes harmonised use of various types of statics. The Central Product Classification was first published in 1998, and is periodically updated to keep up with development in the global economy.
It is necessary to note that Central Product Classification covers all types of services in its categorisation and is exhaustive and mutually exclusive. In other words, if one service does not fit in one category, it must fit in another category under the Central Product Classification and the goods and services are classified based on the physical properties, the intrinsic nature of the product and the principle of industrial origin.
RULES OF INTERPRETATION
Chapter III of Central Product Classification provides for the Rules of Interpretation and, based on service categorisation and its equivalent in the HSN classification, based on the following principles:
I. When a service is prima facie classifiable under two or more categories, the Classification shall be based on comparison of categories on the same level.
a. The category that provides a more precise description will be preferred over the category that provide a general description;
b. In the case of composite services whose Classification is not possible under (a), they shall be classified based on the service which gives them their essential character, in so far as this criterion is applicable; and
c. If a service does not fall under (a) & (b), it shall be classified under the category that occurs last in numerical order amongst those with equal standing.
II. Services that cannot be classified under A above shall be classified under the category appropriate to the services they are most akin to.
EXPLANATORY NOTES
The explanatory notes provide the description of products included in each sub- class and examples of the similar products that are excluded for reference purposes. In some cases, explanatory notes are also available for categories of higher aggregated levels of the Central Product Classification structure.
The exclusions are sorted by cross-reference under the Central Product Classification code in numerical order. The title description defines the boundary of the sub- class and the explanatory notes clarify the border and content of the sub-class.
In addition to the Explanatory Notes provided in Central Product Classification, the explanatory notes provided in HSN can be used. If the sub- class is partially provided under Explanatory Notes of HSN, their operation is covered under Part IV of Central Product Classification. Though the explanatory notes are not intended to provide exhaustive list of services, they are only intended to provide general guidelines concerning subclass content.
CLASSIFICATION PRINCIPLES EVOLVED BY COURTS
The Courts and Tribunals in India have evolved different parameters and tests to resolve the classification disputes based on the dispute under consideration. The Supreme Court in OK Play (India) Ltd v C.C.E. [(2005) 180 ELT 300] has laid down that there is no universal test or static parameter for the correct Classification of goods or services. Moreover, the HSN Code, including the explanatory notes, provides guidance for the Classification of an entry along with general rules of interpretation under the Customs Tariff Act, 1975 (hereinafter referred to as the “CT Act”). In case of ambiguity, necessary assistance can be taken from a functional utility, design, shape and predominant usage, including name used in common parlance.
Common Parlance Approach
The Common Parlance approach means that the ‘word’ shall be construed in the same way, which is used by the common public who uses it. Whether a particular service will fall within a particular category of tariff rate has to be decided based on the tangible material or evidence to determine legislative intent while enacting it.
In Gulati & Co. v. C.S.T., [(2014) 14 SCC 286] the issue raised was whether ‘food essence and food colour’ used in manufacturing of food & foodstuff would fall within Entry 56 of the Notification No. ST-2-7218/10/6(43)/77. The Supreme Court held that ‘foodstuff’ shall be given its natural meaning according to day-to-day affairs i.e., anything with nutritive value consumed for sustaining one’s life. Furthermore, ‘food essence’ is added only for ornamental value. They have no nutritive value and hence cannot be considered as Foodstuff in Entry 56.
The Bombay High Court in Nirlon Synthetic Fibres v. U.O.I. [(1999) 110 ELT 445] observed that the common parlance test can only be used by the Courts when tariff rates & explanatory notes are ambiguous and not in any other case.
In C.C.E. v. Wood Polymers Ltd. [(1998)97 ELT 193], the Supreme Court held that the classification under the CT Act is primarily based upon parameters laid down in the Act itself, followed by description attached to Section Notes, Chapter Notes read with Explanatory & Exemption.
Functional Utility Test
Function Utility test, otherwise known as the End-use test, is relevant when the classification is based upon the function of the relevant goods and services. In such cases, the Courts have considered end-use to determine the classification.
In C.C.E. v. E.P.C. Irrigation [(2002) 146 E.L.T. A88], the issue before the Supreme Court was regarding the classification of plastic pipes and plastic fittings that are manufactured for the purpose to be used in irrigation systems under ‘part of irrigation system’ or as ‘plastic pipes’. The Supreme Court applied the functional utility test and classified it as a part of irrigation system.
In Kwality Sales Corporation v. C.C.E. [(1986) 23 ELT 137], it was held by the Customs, Excise and Gold Tribunal that the functional utility tests also have certain limitations; for example, in the case of generic goods like ‘axle studs’, they will be classified as screws even if they are used in motor vehicles as they are generic, there is no pre-manufacturing intention or post-manufacturing market limitation.
Dictionary Meaning
In case any goods or services are not defined in relevant Fiscal Statute & Entry, or their meaning cannot be ascertained by pre-determined case laws or other fiscal statutes, in such cases, Courts have, in many instances, relied upon dictionary meaning.
In Star Paper Mills v. C.C.E. [(1989) 43 ELT 178 (S.C.)], while interpreting instrument meaning in Tariff Item, “other instruments, appliances and apparatus” used for a medical purpose”, the Supreme Court relied upon the instrument meaning as defined under Merriam Webster’s dictionary.
Further, in Central Excise, Kanpur v. Krishna Carbon Paper Co. [(1989) 72 STC 280], the Supreme Court held that normally, dictionary meaning shall not be relied upon by the Courts in interpreting Fiscal Statutes because the dictionary meaning is somewhat elusive; a case gives different shades of meaning which is not appreciated in taxation statutes.
Expert Opinion
The Courts have generally favoured evidentiary value of Expert Report/Opinion in ascertaining the nature of goods in classification disputes. It only ascertains the nature of goods and services and cannot be equated to function as deciding factor for the Classification of goods and services.
Beneficial Construction
The Supreme Court in Garware Nylons Ltd. v. U.O.I. [(1980) 6 ELT 249] held that when goods or services are classifiable under two different entries, or leave a reasonable doubt about its meaning, the construction of meaning, beneficial to assessee will be done. The position is the exact opposite when it comes to ambiguity in the Exemption Notification. In that case, the benefit of the doubt is given to Revenue Authorities.
AMLEGALS REMARKS
This blog extensively covers the classification of services for the purpose of indirect tax regime, especially GST wherein the classification of goods and services is pivotal in order to determine the taxability.
The CBIC has adopted the international standards like HSN and Central Product Classification structure while classifying the goods and services. Moreover, the Schedule III of the CGST Act is extensive for the classification, but the Rules of Interpretation developed by Courts provide guidance for classification in case of ambiguity.
The tariff rates and explanatory notes remove ambiguity, but the Courts follow a distinct rule of interpretation, whenever there is ambiguity or confusion regarding the classification of goods or service.
– Team AMLEGALS assisted by Mr. Mridul Pateriya (Intern)
For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or aditi.tiwari@amlegals.com.
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