CLASSIFICATION OF SERVICES UNDER GST LAW – A PROBLEMATIC LACK OF OBJECTIVITY

By Srujan Nirkhee,
srujan.nirkhee@mnlumumbai.edu.in,
2nd Year Student at National Law University, Mumbai.

Abstract
GST Taxes both Goods and Services, but whether services given are subject to GST or not is
determined by classification of that service. In light of the Calcutta High Court decision in Ramesh
Kumar Patodia v. Citi Bank, this paper examines the provisions of the GST laws that determine
the classification of services. It enquires whether in every transaction of supply of services, an
examination of facts is needed to determine the taxability of services or is there any independent
and objective test that can determine it. And how far has the test proven its efficacy.
GST Law replaced the Service tax law as provided by Finance act, 1994 which contained specific
principles for classification of services. It also explores disputes resolved through “most specific
description” and the “essential character” test. Even then, no objectivity was there in
classification tests which carry forwarded in GST Law except multiple supply rules and tie-breaker
provisions.
The paper explores how the lack of objectivity in classification rules has created more disputes
with several cases analyses that highlight irrational decisions due to technical constructs of
competing classification headings and failures of specific description test. The test that is
commonly used focuses on most specific description is not exhaustive enough to help proper
classification. Notably, there are many cases that reflect subjective appreciation of categories of
services and non-uniformity in Judgments.

Keywords – Classification, Services, Objectivity, Most-Precise, Character

Research Objective- This Paper aims to appreciate the inadequacies of a proper objective test
for classification of services which caused disputable decision-making and confusions while
taking its note from its origin through a few real-life cases. It ends up with the Author’s personal
note.

1
Introduction
Before introduction of GST the Indian indirect taxation regime suffered tax-on-tax. So, the GST
Law was enacted to encompass many Central and State taxes in its ambit. The GST has formed a
continuous chain of set-off from producer/Service provider to Retailer which negated pyramiding
effect of indirect taxation regime. The production costs are cut down since only the final
consumer of goods/services is taxed.
Introduction of GST required a constitutional change since neither the Central Government nor
State Governments had specific authority under the Constitution to impose a tax on the "delivery
of goods and services." The States had the authority to tax sale of goods and the Center had
power to tax goods/services up to production stage. A constitutional change was required since
the GST regime mandates that both the Central and State Governments tax goods and services
at the same time. The Lok Sabha passed the Constitution (122nd Amendment) Bill, 2014 on May
6, 2015, while the Rajya Sabha cleared the Bill with 9 modifications on August 3, 2016. On 8th
August, 2016 Lok Sabha passed the amended Bill and the president gave the assent. According
to the current legislation, in order to be obligated to pay Goods and Services Tax (GST), one must
ascertain that the activity they do is a supply that is subject to GST. This depends on whether the
requirements to figure out a supply's "classification” under the GST regulations are satisfied. The
legal rules controlling the imposition of service tax legislation are noteworthy, which has been
replaced by GST. This is due to the fact that the Finance Act of 1994, which allowed for the
imposition of service tax, incorporated defined standards for the categorization of services. The
statute had two distinct clauses; 65-A1 (in effect till June 2012) and 66-F2 (in effect till June 2017).
Both of these clauses emphasized that categorization be based on the "most precise description"
and the "essential character" test. These resolved some disputes yet it lacked objectivity. The
definitions and scope of taxable services overlap significantly due to the ongoing increase in
taxable services subject to service tax and the ongoing lack of completion of the law. Because of
specific exemptions offered to a class or classes of services and the government's selective
approach to the imposition of the service tax, disagreements can emerge apropos the proper
classification of services. As a result, taxable services must be classified correctly and wisely.

1
“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.”

2
“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.”

2
Legal Position on Characterization of Supply
GST Laws lay out some classification standards which superseded the erstwhile Service Tax
principles. GST regulations include categorization criteria for multiple supplies, which are
referred to as "composite supply3" and "mixed supply4" under GST law along with several tie-
breaker measures. Categorization disputes between "goods" and "services" are also addressed.
However, there is no explicit provision in the GST regulations that governs service categorization.
As per Section 9(1)5 of CGST Act 2017, central government has power to specify rate of GST for
services. Further the Section 9 (3)6 reads as follows: “The Government may, on the
recommendations of the Council, by notification, specify categories of supply of goods or services
or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or
services or both and all the provisions of this Act shall apply to such recipient as if he is the person
liable for paying the tax in relation to the supply of such goods or services or both.”
Section 2(102)7 of GST Act is crucial to understand as it defines services those comprising actions
involving money in any form or currency being converted to another form or getting exchanged
for a service with a certain additional consideration.
Sec. 2(102):-
1) For the purposes of this chapter, classification of taxable services shall be determined according
to the terms of the sub-clauses of Section 65 (105)8.
2) If services can be classified under multiple sub-clauses of Section 65 (105)9, Most specific
description shall be preferred to a more general one. In case of composite services, whether
services are naturally bundled or not is checked and their essential character must be considered.
Sub-clauses that provide a more specific description shall take precedence over those that provide
a general explanation. Insofar as this criterion is relevant, composite services, which are made up
of a combination of many services and cannot be categorized in the way described in subsection
(a), shall be classified as if they are services, which gives them their basic/essential character.
When a service cannot be classified according to clauses (a) or (b), it must be classified under the
sub-clause that appears first among the sub-clauses that equally merit attention.

3
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”
4
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”
5
Central Goods and Services Tax Act, 2017, § 9(1).
6
Central Goods and Services Tax Act, 2017, § 9(3).
7
Central Goods and Services Tax Act, 2017, § 2(102).
8
Central Goods and Services Tax Act, 2017, § 65(105)
9
Supra.

3
Naturally Bundled services generally include a resort offering a swimming pool with range of
drinks, lunch indoor and dinner as well for tourists staying for more than a day. This bundle the
essential character and would, therefore, be treated as service of providing hotel
accommodation. Whereas, it will not be deemed naturally bundled if patrons visit only for the
dinner and use the pool, bar and sports facilities since many of them are chargeable to a variety
of rates. Where exactly services fall is determined by perception of consumers and general
business practices within that market. There is no objective rule to differentiate natural bundling
so facts analysis is relied upon wholly. However some judgments shed light on the
characterization as in Aktiebolaget NN v. Skatteverket 10 it was held that supply of cable is a
contract of sale and installation is naturally bundled service, hence not taxable separately. Volker
Ludwig11 and Leez Priory12, both stressed upon the need for presuming every service to be
normally distinguishable and independent unless some constituents of it are not primary services
that consumers want.
To ensure that it is taxed from an earlier era, unlike the principles in central excise or customs,
the classification in service tax would be done based on the earliest entry rather than the latest
entry. Where the taxable services themselves exclude Section 65A's application, Section 65A
would not be applicable. The case of RamKrishna13 gives a basic idea of incidental and primary
activity, in that, the Tribunal held that since mining was the appellant's primary activity,
excavation and overburden removal were incidental to that activity, the service would not be
taxable under the site formation service provision because mining was its primary activity.
Section 66F14 would deal with the classification of services, including bundled services.
The guiding principle flowing from the above is that incidental services are not taxable. In natural
bundling, multiple services are considered single as per essential character concept. If not
naturally bundled, then specific description is preferred to levy highest tax liability.

Disputes to lack of objectivity in characterization tests

Most Specific description carries subjectivity and more specific tests are needed to avoid the
disputes. In Ramesh Patodia v. Citi Bank15, the petitioner had a credit card with CITI Bank that
provided an immediate loan in excess of the credit limit. The bank issued him a loan that was
repayable in EMIs. The interest component of the EMI was taxed by the bank. The imposition of
GST on this interest component has been challenged in the High Court. Petitioners argued that
GST statute exempted "services by means of extending deposits, loans, or advances inasmuch as
the consideration is expressed by way of interest or discount (other than interest included in
credit card services)," and so the collection of GST was illegal. While, respondents defended that

10
[2012] 22 taxmann.com 175 (ECJ)
11
Volker Ludwig v. Finanzamt Luckenwalde [2013] 31 taxmann.com 287 (ECJ)
12
Leez Priory v. Commissioners of Customs & Excise [2013] 40 taxmann.com 512
(UKV - DUTIES TRIBUNALS)
13
2009 (13) STR 661
14
Central Goods and Services Tax Act, 2017, Bundled Services § 66 (f).
15
2022 SCC OnLine Cal 1786.

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the exemption cannot be available since the loan was intrinsically connected to the credit card
services which is a taxable service. Finally, The High Court agreed that the transaction was taxable
and stated that offer was only for citi bank card holders and the manner in which EMI is reflected
in credit card statements points toward services of credit card. The court did an intensive analysis
of factual matrix but did not lay down objective test to differentiate taxable services from non-
taxable ones.
In M/S Yulu Bikes Private Limited Case16, The Company rented bicycles through an electronic
platform and users were charged as per their time of drive. The issue was whether this activity
would be classified under SAC 9966 (Services and Accounting code) as rental services of transport
vehicles or under SAC 9973 as leasing or rental services without operator. The company argued
that bicycles were movable goods/property supplied on rent as properly classifiable under SAC
9973. The appellate authority disagreed with the company's rationale but approved the
suggested category. Initially, SAC 9966 included both operator- and operator-free rentals of
transportation vehicles. However, with revision SAC 9966 only covered rental services for
transport vehicles with an operator. SAC 9966's scope had to be disregarded even if it was the
most accurate description. Heading 9966 for the appellant's activity classification wouldn't be
accurate, particularly when company rented out without an operator which would entail a more
detailed and specific heading. Hence, it was decided that the appellant's service of renting
bicycles and e-bikes without an operator falls under Heading 9973. The authority observed that
even though "leasing of transport vehicles" was the most specific classification, it must be
rejected due to its technical construct which constrained its applicability, and that the service
should be classified under a general classification that covered all classes of leasing activity qua
all goods. The constraints of the most specific description test are indeed demonstrated by this
issue.

The case of Complete Solutions Service Apartment (P) Ltd17 illustrates a modern business
strategy known as "furnished tenancy" in common parlance. The applicant leased residential
dwelling units, combined them, and then subleased these units to different people or businesses
for residential use. These sublease agreements included amenities like room cleaning, cleaning
of utensils, changing of linen, cable/DTH connection, gas pipeline or cylinder, broadband
connection with dedicated telephones, electricity supply, water supply, pest control, AC
servicing, security guard, etc. The applicant had two agreements with sub-leases; a residential
one and one for the amenities. He charged GST on amenities but not on residential rent. The
authority agreed with the applicant's point of view and stated that the first agreement on
subletting was legitimately exempt from GST and that the second agreement regarding amenities
was properly subject to the tax. But it extended its judgment to say that original lease agreement
needed to be reclassified because it can only be described as property management services
between the owner and the applicant since the original lease agreement by itself did not result
into the residential lease. Hence, taxable.

16
(2021) 48 GSTL 187 (AAAR-GST-Kar).
17
(2021) 47 GSTL 402 (AAR-Har).

5
Because it held original lease to be taxable, it may affect the wording and implication of
exemption. The authority has confused “for use as residence” to misinterpret that “services by
way of renting of residential dwelling for actual use as residence”. The re-characterization 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.
The end use test cannot determine a product’s classification was held in Carrier Aircon Ltd. CCE.
18

Conclusion
It is clear from a review of the statutory provisions that there are no guiding principles or
established rules for classifying services under the GST regulations. The "most specific
description" requirement doesn't seem to be adequate or exhaustive to cover all of the many
economic transactions involving the supply of services. Thus, it should come as no surprise that
the classification of services is largely determined by the subjective evaluation of actions or
transactions. Therefore, the Calcutta High Court's ruling is neither the first nor would it be the
final example of how the judiciary has been pressured to develop justifications (and hopefully
principles) to resolve service categorization disputes. Strong actions from Legislature are
required to being in set of objective rules.

18
CCE v. Carrier Aircon Ltd. (2006) 147 STC 421 (SC)