Introduction
Under the incumbent regulations, obligation to pay Goods and Services Tax (GST) presupposes that the activity carried out by one is a supply liable to GST. The determination of this question rests upon satisfaction of the various conditions under the GST laws which inter alia involve determining the “classification” of supply. This in turn requires one to characterise the supply. In other words, characterisation of supply forms the bedrock of GST, or any transaction tax for that matter. A recent decision of the Calcutta High Court raises an interesting issue which forces one to revisit the principles governing characterisation of services and thus, in turn, the classification of supply of services.
Calcutta High Court decision
The decision of the Calcutta High Court in Ramesh Kumar Patodia v. Citi Bank NA2 is on relatively simple facts. In this case the petitioner held a credit card with a bank which offered instant loan above the credit limit. Upon his acceptance the bank issue a loan which was repayable in EMIs. The bank levied GST on the interest component of EMI. The levy of GST on this interest component was challenged before the High Court. It was pleaded by the petitioner that the GST law exempted “services by way of extending deposits, loans or advances insofar as the consideration is represented by way of interest or discount (other than interest involved in credit card services)” and accordingly the levy of GST was unlawful.
For the petitioner, it was contended before the High Court that the transaction was one of “loan” and thus GST was exempt. Per contra, the levy of GST was defended by the respondents contending that the exemption was not available as the loan in this case was intrinsically connected to the credit card services which were carved out from the exemption. In a short fact based conclusion the High Court agreed that the transaction was taxable inter alia observing as under:
26. It is evident from the offer of loan that the same was not an offer to all intending borrowers but was restricted to a particular category of persons holding the Citi Bank credit card. The criteria for processing the loan, the manner in which the EMI of loan is reflected in the credit card statements and the charging of interest in case there is a shortfall in the payment of the amount due as well as the mode of payment all goes to prove that the service rendered by the bank in extending the loan in question is nothing but a service pertaining to the said credit card.
27. Petitioner has accepted the offer made by the bank contained in the aforesaid communications dated 21-2-2019 and 28-2-2019. Thus, the terms and conditions mentioned in the said communications are also accepted by the petitioner. In view thereof this Court is unable to accept the contention of the learned advocate of the petitioner that the services by way of extending loans by the bank in the instant case does not amount to credit card services.
The decision of the High Court may well have concluded the controversy in this case, but as it is evident from the aforesaid reasoning, it is difficult to gauge the legal principle flowing therefrom. The rationale for this state of affairs is the conspicuous absence of objective and principle-driven rules for classification of services under the GST laws. This also prompts a larger question, whether every transaction require similar fact-intensive dissection in order to ascertain the intrinsic characterisation of supply or are there any objective rules to this end in the GST law? Thus one is compelled to review the legal position.
Rules governing classification under erstwhile services tax law
Before adverting the classification principles under the GST law, it is expedient to take note of the statutory provisions governing the levy of service tax law which has been replaced by GST. This is because specific principles for classification of services were engrafted in the Finance Act, 1994 which provided for levy of service tax. There were two different provisions in the law. Section 65-A3 applied for the period up to June 2012 and Section 66-F4 governed the law from July 2012 until June 2017 when service tax was subsumed in GST.
Both these provisions emphasised on the dominant nature of the service insofar as it was provided that the classification shall be inter alia determined basis “most specific description” and the “essential character” test. These tests were akin to a widely accepted principle of statutory interpretation that a special provision prevails over a general one. Accordingly, a large number of classification disputes in the service tax context stood resolved through this principle.5 Nonetheless, the fact remained that there was no objective principles for classification of services in the service tax law.
Scheme governing classification of services under GST laws
With the advent of GST, the provisions governing levy of service tax were replaced by the GST laws. However, the GST laws did not improve upon the position prevailing in the service tax law vis-à-vis the principles governing classification of services. Indeed the GST laws provide for rules governing classification to address instances of simultaneous multiple supplies, referred to as “composite supply”6 and “mixed supply”7 under the GST law.8 In addition, there are also certain tie-breaker provisions in the GST laws whereby a classification conflict between “goods” versus “services” is resolved.9 However, there is no statutory provision in the GST laws which determine classification of services.
The void in the GST law is addressed by way of subordinate legislation. The Government is inter alia empowered under the GST law to notify the rate of GST on supply of services.10 Acting on such empowerment, the Government issues statutory notifications enumerating the rate of tax qua specific services.11 As a part of these notifications, the Government has issued a “scheme of classification of service” which houses all services under “Chapter 99” which is comprised of various “sections”, “headings”, “groups”, etc.12 In order to explain this “scheme”, the GST Council has issued “explanatory notes” which “indicate the scope and coverage of the heading, groups and service codes of the scheme of classification of services”. To ward-off doubts on the relevance and legality of these notes, it is clarified that “[t]hese may be used by the assessee and the tax administration as a guiding tool for classification of services”. The most crucial part in these notes it the clarification that “where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description”.
The aforesaid reveals that the “most specific description” test in the service tax law has been continued in the GST law for the purposes of classification except the technical change that the test which had statutory mandate under the service tax law instead finds place by way of an administrative instruction under the GST legal framework.
Illustration of service classification disputes under GST laws
It is unarguable that the “most specific description” test inherently carries a great deal of subjectivity. The lack of rule-based principles governing classification of services under the GST law has therefore, expectedly, resulted in disputes. A larger number of advance rulings have addressed such disputes, which serve as illustrations to the grim situation and exemplify the need for more pronounced principles governing the classification of services. To this end, it is expedient to note certain examples of the disputes pertaining to service classification under the GST laws.
(A) Yulu Bikes (P) Ltd., In re13
In this case an interesting issue came up regarding the classification of services. The company was engaged in renting of e-bikes/bicycles through a technology driven mobility platform. They would enter into an agreement with customer permitting of the e-bikes/bicycles and charge based on the time of usage. The issue was whether this activity would be classified under SAC14 9966 as rental services of transport vehicles or under SAC 9973 as leasing or rental services without operator. It was argued for the company that e-bikes/bicycles rented out by it to the customers were essentially “goods” which are movable property and are goods included in SAC 9973, therefore, supplying renting services in respect of e-bikes/bicycles without operators is appropriately classifiable under SAC 9973.
The appellate authority for advance ruling disagreed with the principle canvassed by the company and yet accepted the proposed classification. It pointed out that earlier the scope of SAC 9966 covered rental services of transport vehicles with our without operator. However, after its amendment SAC 9966 only covered rental services of transport vehicles with operator. Accordingly, the scope of SAC 9966 had been statutorily limited and thus despite it being the most specific description, it had to be ignored for classification purposes. The authority explained the consequential legal position in the following terms:
“Although Heading 9966 is specific to renting of transport vehicles, we cannot ignore the fact that the heading is specific only to renting of transport vehicles with an operator. Classifying the appellant’s activity under Heading 9966 especially when their vehicles are rented without an operator, would not be correct. The more specific heading would be renting of goods without operator. Therefore, we hold that the service of renting of e-bikes and bicycles by the appellant without an operator is classifiable under Heading 9973.”
Thus, on a technical construct of the competing classification headings, the authority opined that even though “renting of transport vehicles” was the most specific classification, this classification was to be rejected in view of its technical construct which limited its scope and the classification of service was to be under a general classification which covered all classes of leasing activity qua all goods. This case also highlights the limitation of the most specific description test and its ability to holistically address classification of services.
(B) Oswal Industries Ltd., In re15
In this case the company operated naturopathy centers which offered physical, psychological and spiritual health overhaul. It also offered for corporate clients wellness facilities for diverse types of diseases. It claimed, “that such wellness facilities are provided with the help of highly qualified professionals’ doctors in the field of naturopathy, researchers, and support staff”. The company claimed exemption from GST on the ground that “services by way of health care services by a clinical establishment, an authorised medical practitioner or paramedics” were notified as exempt and the expression “clinical establishment”16 was also widely defined which covered them. The authority, however, rejected this submission which was based on the intrinsic elements of the services provided by the company and thus was arguably based upon the “most specific description” principle itself.
Having a close look at the business model of the company, the authority opined that the company was providing a bundle of services wherein “the principal supply would be the accommodation services since the therapy can in no way be administered without accommodation. In fact, there is no option available for the customer to avail the wellness package without opting for the accommodation”. For this reason, the authority refused to extend the exemption to health care services and instead classified the activities as “accommodation services”.
The aforesaid reveals that, notwithstanding the core activity of the company as being health care, owing to the manner in which the services were rendered to the customers, the classification was not made under health care services under the GST law. Thus, the most specific description test and the extensive explanation as to the business model of the company (and the fact that its core activities were indeed health care services as contrasted from hotels and other accommodation services) were overridden by the structure of the transaction between the company and its customers. In other words, this case represents yet another failure of the most specific description test to classify services.
(C) Complete Solutions Service Apartment (P) Ltd., In re17
This case presents a contemporary business model which is colloquially referred as “furnished tenancy”. The applicant took on lease residential dwelling units on lease, aggregated them and thereafter sub-leased these units to various individual/corporates for residential purposes. The applicant also provided various amenities which were essentially in nature of housekeeping services. These comprised of room cleaning, cleaning of utensils, changing of linen, cable/DTH connection, gas pipeline or cylinder, broadband connection with dedicated telephones, electricity supply, water supplies, pest control, AC servicing, security guard, etc.
The applicant charged separately towards the sub-lease and the amenities. The applicant maintained that GST was leviable only on the amenities and not on the rent towards the sub-lease in view of the exemption from GST to “services by way of renting of residential dwelling for use as residence”. The authority agreed with the view of the applicant and opined that the first agreement towards sub-letting was indeed entitled for exemption and GST was rightly charged upon the second agreement qua amenities. Intriguingly however, the authority went beyond to declare that the original lease agreement required recharacterisation as the lease “between the owner and the applicant, at the most can be termed as property management services”. The authority did not extend any reason for such effect but perhaps it was guided by the fact that the original lease agreement by itself did not result into the residential lease. Nonetheless, the authority concluded that the original lease was subject to GST.
The view of the authority on the services provided by the applicant appears reasonable. However, the recharacterisation of the original lease implies rewording of the exemption to “services by way of renting of residential dwelling for use as residence”. The authority appears to have concluded that “for use as residence” in the exemption has a limited nuance and it instead means “services by way of renting of residential dwelling for actual use as residence”. This is because the fact remains that the property was indeed used as residence (in view of the affirmation of the exemption on the sub-lease by the applicant). In other words, the recharacterisation of the transaction between the owner and the applicant was based on the end-use test (i.e. whether the property was actually used for residence) irrespective of the most specific description test (i.e. whether the property was leased for use as residence) as a consequence of the transaction.
Conclusion
Upon an appraisal of the statutory provisions, the lack of objective principles or a rule-base regime for classification of services in the GST laws is evident. The “most specific description” test appears to be neither sufficient nor exhaustive to categorically address the myriad commercial transactions involving supply of services. It is thus not surprising to find that classification of services is largely dictated by subjective appreciation of activities/transactions. The decision of the Calcutta High Court, therefore, is neither the first nor would be the last illustration of judiciary being pressed upon to evolve reasons (and hopefully principles) to settled service classification controversies. One would hope that the legislature takes note and interjects to introduce objective rules which obviate disputes on classification of services under the GST law. Until then, classification of services in GST laws remains a vexed question.
† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.
3. “S. 65-A. Classification of taxable services … (2) When for any reason, a taxable service is, prima facie, classifiable under two or more sub-clauses of clause (105) of S. 65, classification shall be effected as follows: (a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description; (b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, insofar as this criterion is applicable; and (c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration.”
4. “S. 66-F. Principles of interpretation of specified descriptions of services or bundled services … (2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.”
5. For illustration, see Electronics Technology Parks v. Commr. of Customs, (2022) 56 GSTL 182 (Tribunal); Ess Gee Real Estate Developers (P) Ltd. v. CCE, (2020) 34 GSTL 486 (Tribunal); Airport Retail (P) Ltd. v. Union of India, 2014 SCC OnLine Del 3858 : (2014) 35 STR 659; Atwood Oceanics Pacific Ltd. v. CST, 2012 SCC OnLine CESTAT 2457 : (2013) 32 STR 756; United Enterprises v. CCE and Service Tax, 2012 SCC OnLine CESTAT 2654 : (2013) 29 STR 605; Hardy Exploration & Production (India) Inc., (2012) 28 STR 513, etc.
6. Central Goods and Services Tax Act, 2017, S. 2(30) states, “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”.
7. Central Goods and Services Tax Act, 2017, S. 2(73) states “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”.
8. Central Goods and Services Tax Act, 2017, S. 8 addresses “tax liability on composite and mixed supplies”.
9. For illustration, see, Central Goods and Services Tax Act, 2017, Sch. II which enlists “activities or transactions to be treated as supply of goods or supply of services”. See also, Central Goods and Services Tax Act, 2017, S. 7(3).
10. For illustration, see, Central Goods and Services Tax Act, 2017, S. 9(1).
11. For illustration, see Notification No. 11 of 2017-Central Tax (Rate), dated 28-6-2017.
12. See, Tarun Jain, “Appraising the Classification of Goods and Services under GST Laws”, <https://www.scconline.com/blog/post/2019/08/13/appraising-the-classification-of-goods-and-services-under-gst-laws/> for detailed explanation of the scheme.
13. (2021) 48 GSTL 187 (AAAR-GST-Kar).
14. SAC represents “Services Accounting Code”.
15. 2020 SCC OnLine Guj AAR-GST 1 : (2020) 41 GSTL 226.
16. Defined in Notification No. 12 of 2017-Central Tax (Rate) dated 28-6-2017 to state, “clinical establishment means a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases”.
17. (2021) 47 GSTL 402 (AAR-Har).