QUERY 1 : Redevelopment of Cooperative Housing Societies and implications

QUERIST: ABC Soc represented by CA Nikunj Parmar, Mumbai

QUERY

1. Querist is a co-operative society governed by the Maharashtra Co-operative Societies Act, 1960. Querist is going for redevelopment of its society.

2. No development agreement has been signed as of now. However, Querist wishes to get an opinion on the potential GST implications in the proposed redevelopment activity.

REPLY

Development rights given by Querist to the developer

3. There is currently a raging controversy as to whether “development rights” are even covered by the GST Act, being interest in land. The controversy revolves around whether Parliament and the State Legislatures have the legislative competence under Article 246A to levy tax on land or interest in land. Another aspect is whether the exclusion of “sale of land” from GST (per Schedule III of the Act) would include a transaction which is a barter and not a sale of interest in land.

4. We are of the view that no GST is payable on the grant of development rights by the Querist to the Developer even if one does not go into the above controversy. Section 7 of the GST Act reads:

“7. Scope of supply

(1) For the purposes of this Act, the expression “supply” includes–

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.

… [Emphasis supplied]

5. Thus, every supply is not subject to GST. It is only a supply which is “in the course or furtherance of business” which is made amenable to the tax.

6. Now it is our view that a co-operative housing society is not in the “business” of granting development rights. The term “business” is defined in Section 2(17) of the Act. Relevant clauses of the definition are set out herein-below:

“2(17). “business” includes–

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

…

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;”

7. Profit motive is an essential requirement of the definition of “business”. In State of Andhra Pradesh vs. H. Abdul Bakshi [(1964) 15 STC 644], the Supreme Court has held:

“The expression “business” though extensively used is a word of indefinite import, in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.”

8. Sub-clause (a) of Section 2(17) ends with the words “whether or not it is for a pecuniary benefit”. These words have been undoubtedly introduced to get over the observations in H. Abdul Bakshi (supra) relating to profit motive. However, for an activity to fall in sub-clause (a), an activity must be a “trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity”.

9. A co-operative housing society is formed by a group of persons with a view of domestic house-keeping of the units in which they reside. A residence is the most personal and cherished of all possessions of man. Due to shortage of land, the concept of co-operative housing was developed wherein a building is constructed by a group of persons and each is given a unit to reside in the said building. This group of persons pool their resources to manage the affairs of the building, like maintenance, repairs, cleaning etc. But these functions are ultimately domestic in nature. Any person who purchases a residence will have to carry out maintenance, repairs and cleaning of that residence. This does not mean that he is engaged in any “trade” or “commerce” as such. If this is true, the mere fact that instead of a single person constructing house for himself and maintaining it, a group of persons have come together and perform the same domestic house-keeping services between themselves will not bring the activity within the formulation of “business”.

10. The Bombay High Court has had the occasion of determining whether redevelopment of a society is a “business” of the society in Mohinder Kaur Kochar vs. Mayfair Housing (P) Ltd [(2013) 1 MahLJ 389. The question arose in context of the word “business” used in the Maharashtra Co-operative Societies Act, 1961, which is in fact left undefined in that Act. The Court said:

“It is thus clear that respondent No. 4, by the very nature of its object, had purchased land and got the flats constructed in accordance with the provisions of the Ownership Flats Act and the Rules made thereunder. The object of the society was not to engage in the business of real estate and demolition of buildings, as it was in Marconi’s case (supra). When the Society was formed in or about year 1965, it had purchased land and got the flats constructed and allotted the same to its members. After more than 40 years, when respondent No. 4-Society has undertaken the project of re-development of its property, it cannot be said that respondent No. 4-Society has engaged in the business of redevelopment, i.e., as has specifically been held by this Court in the decision dated 7 March, 2011 in Vardhaman Developers Limited vs. Thailambal Cooperative Housing Society Ltd., wherein the learned Single Judge observed as under:—

“Section 91 (of the Act) brings within its purview disputes touching inter alia the constitution, management or business of a society. Now in the present case, the process of redevelopment of the Society by the Developer does not constitute the business of the society within the meaning of section 91. The demolition of the existing building and the reconstruction of the building of the society is not the business of the society. Section 91 is therefore not attracted.” “

11. In State of Punjab vs. Guno Majra Coop. Agriculture Service Society [(2000) 9 SCC 210], it was held:

“It is not disputed that the respondent Society is the Agriculture Service Society and it has got its own bye-laws. The members of the Society are agriculturists, who require manure, fertilisers and implements for cultivation. The object for which the respondent Society was formed is to render service to its members for carrying out agricultural activities. One of the objects of the Society, as indicated in the bye-law, is to make arrangement for supply of agricultural requirements for its members as well as to supply manure, fertilisers, improved seeds, insecticides and other production requisites with a view to promote increased agricultural production. Another object of the Society is to give loans and also to give manure, fertilisers and improved seeds to its members on credit on “no-profit-no-loss” basis. Under the bye-laws, it is not permissible for the respondent Society to sell fertilisers in open market or to anybody else other than its members. From the aforesaid functions of the Society it is apparent that there is no commercial or business activity involved when the Society distributes and supplies fertilisers to its members. The purpose for which the Society has been formed is to help its members in the matter of cultivation. In fact, fertilisers purchased by the Society are for supply and distribution to its members and not for any commercial or business activity. In the absence of any business activity, the respondent Society could not be said to be a “dealer” within the meaning of clause 2(f) of the Order and, therefore, they were not required to take licence under clause 7 of the Order. We are in agreement with the views taken by the High Court.”

… [Emphasis supplied]

12. Though the Court has made observation about profit motive, the other factors which have been taken into consideration are the object of the society to serve the members and that this is not a commercial or business activity. The fact that sub-clause (a) of definition of “business” has made profit motive irrelevant does not matter. Commercial nature is still required. Where the assessee was formed with a view of spreading the message of Shirdi Sai Baba, the activity of sale of books carried out by the assessee was held not be a “business”. It is pertinent to note that the sales tax statute considered by the Supreme Court in that case specifically made profit motive irrelevant. However, the Supreme Court held that commercial nature is still required for an activity to be called “trade” or “business” even if profit motive is irrelevant [CST vs. Sai Publication Fund (2002) 4 SCC 57]. Therefore, sub-clause (a) is not applicable to Querist because of lack of commercial nature in Querist’s objects and activities.

13. There is one more reason why sub-clause (a) is not applicable. If one observes carefully, a separate clause has been specifically enacted for clubs, associations and societies. This is sub-clause (e). A provision of goods and services by a society to its members for consideration is treated as a “business”. Since sub-clause (e) specifically deals with societies and associations, the specific clause will apply and not a general clause like sub-clause (a). Thus, co-operative societies, if at all covered by the definition of “business”, can only fall within sub-clause (e) and not in any other sub-clause.

14. In our considered opinion, even though sub-clause (e) was brought to cover societies, the transfer of development rights by Querist to the Developer will still not be caught within sub-clause (e). Firstly, sub-clause (e) only declares the provision of goods and services to members as a “business”. There is no reference to third persons. In this case the transfer of development rights is to a third party, who is the Developer, who is not a member of the society. As such, the transfer of development rights to a third person is not a “business” of society even under sub-clause (e).

15. Secondly, profit motive has not been made irrelevant in sub-clause (e). The definition very specifically restricts the irrelevance of profit motive only to sub-clause (a) and does not mention anything about profit motive in sub-clause (e). Thus, the intention of the Legislature is very clear: the judgment of H. Abdul Bakshi (supra) requiring profit motive continues to be applicable to cases covered by sub-clause (e) though they may not be relevant for cases covered under sub-clause (a).

16. Thirdly, the judgment of the Supreme Court in Sai Publication Fund (supra) applies as much to sub-clause (e) as it applies to sub-clause (a). Unless there is commercial nature in the activity carried out by the society, there is no question of it being said to be in “business”. Pure domestic housekeeping not being a commercial activity, the Querist is not engaged in any “business”.

17. The UK High Court has also taken a similar view in Yarburgh’s Children’s Trust vs. CCE [(2002) STC 207]. In that case, a playgroup was formed for young children of working women, including from disadvantaged backgrounds, with a non-profit making object, run as a co-operative venture between trained staff and parents and supervised by a committee in which parents pre-dominate. It was held to be lacking the commercial nature which is implicit in the definition of “business”. It is pertinent to note that the UK VAT Act definition of business also contains a clause which is almost identical to sub-clause (e). It was held that since the word “business” indicates some underlying commercial nature, a “provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages to its members” must also be on commercial basis before it can be said to be a “business”. Where the activities of an association, even in its dealings with members, are not inherently commercial in nature, there can be no “business” notwithstanding the deeming provisions in the definition of “business” in the UK VAT Act. The UK High Court did make a distinction between profit-motive and commercial nature and held that even if profit-motive is considered irrelevant, the activities of the playgroup are simply not commercial in nature.

18. Fourthly, the ordinary meaning of “business” requires a systematic and organised activity. A one-off isolated transaction is not considered to be a “business” [State of Gujarat vs. Raipur Manufacturing Co. Ltd. (AIR 1967 SC 1066)]. To overcome the said decision, the Legislature has inserted sub-clause (c) which makes volume, frequency, continuity or regularity irrelevant. However, it is pertinent to note that sub-clause (c) is linked only to sub-clause (a) and applies only to cases which would have otherwise have fallen in sub-clause (a) if there was presence of volume, frequency, continuity or regularity in that activity. That is why sub-clause (c) specifically talks about “activity or transaction in nature of sub-clause (a)”. As discussed above, the activities of a co-operative housing society are not in the nature of those described in sub-clause (a) and hence sub-clause (c) does not apply.

19. When we come to sub-clause (e), one must note that the Legislature has not made volume, continuity, frequency and regularity irrelevant. Thus, the law declared by the Supreme Court in the case of Raipur Manufacturing (supra) continues to be applicable to cases which fall within sub-clause (e). The transfer of development rights in this case is a one-off event. It cannot be said to be “business” of the Querist.

20. The transfer of development rights thus cannot be said to be in “course” or “furtherance” of “business” of Querist, there being no “business” to start with. Therefore, no tax is payable by the Querist on any transfer of development rights. There is no liability on the Developer also to pay any tax on development rights, since there is no reverse charge liability.

Flats constructed by the Developer for society members

21. The construction service provided by the Developer for members is taxable since the Developer is in “business” of construction and he is providing services to society members. The valuation of this service will be done under Rule 27 of the CGST Rules because the Querist is not giving any consideration to the Developer for the construction services in money. The consideration is in form of development rights which is non-monetary consideration.

22. Rule 27 of the CGST Rules reads:

“27. Value of supply of goods or services where the consideration is not wholly in money.-

Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-

(a) be the open market value of such supply;

(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;

(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;

(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.”

23. Valuation exercise under Rule 27 starts with the determination of the “open market value” of the supply. The term “open market value” is defined in the Explanation appended to Chapter IV of the CGST Rules:

“open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

24. It is apparent from this definition of “open market value” that it cannot be applied to construction services. Every construction contract is peculiar and the valuation of one contract cannot be adopted for the valuation for some other contract.

25. At this stage, one must note that the agreement value of the construction contracts entered into with outside purchasers who will be giving full money consideration, cannot be used as open market value for the construction services provided to society members. The definition of “open market value” uses the words “such supply at the same time as the supply being valued is made”. “Such supply” means that the supply which is being valued and the supply which is contemporaneous and whose value is sought to be adopted as open market value must be identical. The supply which is made to the society members is not identical to the supply being made to outside purchasers. The supply which is made to society members is a supply of goods and labour which is used in the construction. However, the supply which is made to outside purchasers is a supply of goods, labour as well as interest in land. No interest in land is involved in the construction services provided to society members, since the society members are themselves owners of the land. In other words, the Developer is a developer for outside purchasers, but he is only a contractor qua the society members.

26. If “open market value” is not available, Rule 27(b) directs us to see if the money equivalent of the consideration is available and adopt it as value of supply if it is available. Now the consideration for construction services provided to Querist is the “permission” given by the Querist to the Developer to enter its land without being prosecuted for trespass, permission to build flats, permission to sell these to its own customers, ending with the covenant to transfer interest in land to the ultimate purchaser. This complex bundle of licences and rights is known by the simplistic term “development rights”. There is no mechanism to value this complex bundle. Since, these development rights cannot be monetarily valued, no monetary equivalent as contemplated by Rule 27(b) is available.

27. When Rules 27(a) and (b) are not applicable, we have to go to Rule 27(c). Accordingly, we must determine whether “value of supply of goods or services of like kind and quality” is available. The term “supply of goods or services of like kind and quality” is defined in the Explanation to Chapter IV:

“ “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.”

28. In our considered view, Rule 27(c) cannot also be applied to construction services. The pricing of the construction services provided by each builder or developer contains various variables like location, demand, quality of construction, distance from schools etc. It is impossible to apply this “supply of goods or services of like kind or quality” formula to construction services generally. Two complexes built side-by-side will have significant pricing and quality differences.

29. Therefore, Rules 27(a), (b) as well as (c) are inappropriate for valuation of services provided by the Developer to Querist. We have to then go to Rule 27(d) which directs us to apply the valuation principles contained in Rule 30. Rule 30 of the CGST Rules reads as under:

“30. Value of supply of goods or services or both based on cost.-

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.”

30. It is our firm view that Rule 30 is most appropriate and convenient for valuation of services provided by the Developer to Querist. According to this rule, valuation is to be carried out by taking the cost of provision of services and adding 10% markup. Thus, value of supply is cost-plus-10% or 110% of the total cost of provision of the supply.

31. The Developer should therefore calculate total cost for provision of construction services, including the material which goes into the provision of services and then add 10% of this cost to arrive at the value of supply. GST should be paid on the value of supply at 18% (that is, 9% Central Goods and Services Tax and 9% Maharashtra Goods and Services Tax) on such value.

32. The Developer should not take any land deduction with respect to construction services provided to Querist. Land deduction of 1/3rd of agreement value as per the Tariff Notification No. 11/2017-Central Tax (Rate) dated 28-6-2017 is available only if transfer of property in land or undivided share in land takes place while providing construction services. Since Querist itself owns the land, there is no question of any transfer of property in land or undivided 
interest in land from Developer to the Querist.

Flats constructed for outside purchasers

33. With respect to flats which are purchased for outside purchasers, GST is payable on the agreement value. However, land deduction of 1/3rd of the agreement value is available under Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.

Input tax credit to Developer

34. Schedule II Para 5(b) of the GST Act states that the following will be treated as a supply of services:

“construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”.

35. The usage of the words “entire consideration” in para 5(b) makes it amply clear that where even part of the consideration is not received before the completion certificate or the first occupation, whichever is earlier, no GST can be levied.

36. However, Para 5(b) Schedule II does not require a Flat Purchase Agreement to be made before the completion certificate or first occupation, whichever is earlier. Where a flat is sold to an investor on the basis of an allotment letter and some consideration is received before the completion certificate or first occupation, whichever is earlier, then GST will still be applicable even if the flat purchase agreement is not entered into till after the completion certificate or first occupation, whichever is earlier.

37. As aforesaid, if no consideration is taken before first occupation or completion certificate (whichever is earlier), then no GST will be leviable. However, the flip side of this position is that the Developer will not be entitled to any input tax credit under Section 17(2) read with Section 17(3) in respect of those flats on which no GST has been paid. This credit disqualification will have to be computed proportionately.

38. We must clarify here that with respect to flats which are constructed for society members, the taxable event will arise as soon as the agreement is entered into. As discussed earlier, the consideration for construction services is the grant of development rights by the Querist to the Developer. This grant is effected by contract. Since development rights are in the nature of immovable property, the transfer will be effected as soon as the Development Agreement is entered into. The consideration in form of development rights having been received before first occupation or completion certificate, the construction services provided to the society members will be taxable in hands of the Developer. This also means that credit will be available with respect to the goods and services which go into the construction of the flats for society members as well as proportionate common area and facilities.

Hardship allowance, Alternate accommodation allowance, Transport allowance

39. These allowances are in nature of supply of money which is considered to be neither goods nor services under the GST Act [See Sections 2(52) and 2(102) of the GST Act]. These allowances are consideration ultimately for the grant of development rights, but the consideration flows from the Developer to the Querist in the form of supply of money. No tax is leviable in the hands of the Developer or the Querist with respect to such allowances.

QUERY 2 : Classification of quilts and validity of circulars on classification

QUERIST: XYZ represented by Adv. Saurav Singh, Mumbai

QUERY

FACTS

1. Querist is engaged in the manufacturing as well as trading of various textile products. The product in issue in this opinion is the “polyester quilt”.

2. The Polyester quilt is a quilt made up of polyester yarn filling. The quilting process is done by needling the quilt in specific patterns to keep the filling in place.

3. Quilts are used as a type of thick blanket to protect from lower temperatures in the nights of winter as well as where the room temperatures may drop during the night due to air-conditioning.

4. Querist is classifying these products under Entry 224 of Schedule II of the GST Tariff and paying 12% rate of tax currently.

5. Acting on certain inputs, the Chief Commissioner, Haryana had conducted investigations at the premises of one Oyester Knit Pvt. Ltd. (“Oyester”). An order has been passed against the said Oyester demanding 28% rate of tax under Entry 213 of Schedule III of the GST Tariff from 1-7-2017 to 13-11-2017 and 18% rate of tax under Entry 438 of Schedule III for the period thereafter. This order has been published into a “Modus Operandi Circular No. 3/2018-19” with directions to all officers within the jurisdiction of the Haryana Commissionerate to retrieve data of all sales involving polyester/synthetic quilts and “take action” against dealers charging lesser amount of tax.

QUERY

6. Querist seeks our opinion on whether the Circular has classified the goods correctly and the legal options for contesting the Circular as such.

REPLY

7. Quilts are dealt with by the following entries in the GST Tariff:

Entry No. and Schedule	Customs Tariff Heading (“CTH”) and Tariff description	Rate of tax
1-7-2017 to 21-9-2017
224 Schedule II1	9404 Products wholly made of quilted textile materials.	12%
438 Schedule III2	9404 Coir mattresses, cotton pillows, mattress and quilts.	18%
213 Schedule IV3	9404 Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.	28%
22-9-2017 to 13-11-2017
257A Schedule I4	9404 Cotton quilts of sale value not exceeding ₹  1000 per piece.	5%
224A Schedule II5	9404 Cotton quilts of sale value exceeding ₹  1000 per piece.	12%
224 Schedule II6	9404 Products wholly made of quilted textile materials.	12%
438 Schedule III7	9404 Coir mattresses, cotton pillows, mattress and quilts.	18%
213 Schedule IV8	9404 Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.	28%
14-11-2017 till date
213 Schedule IV	[Omitted vide Notification No. 41/2017 – CT(R) dated 14-11-2017] 9404 Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.	28%
438 Schedule III	[Substituted vide Notification No. 41/2017 – CT(R) dated 14-11-2017] 9404 Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered [other than coir products (except coir mattresses), products wholly made of quilted textile materials and cotton quilts].	18%

8. We are of the view the product in issue will be covered by Entry No. 224 of Schedule II (“Products wholly made of quilted textile materials”) which falls in CTH 9404. Technical literature on the subject clarifies that “quilted textile material” means any textile material which undergo the process of quilting. As to difference between “quilted textile materials” and “quilts”, it seems that a quilted textile material is a sub-category of quilts. “Quilts” is a genus of which “quilted textile material” is a species. Quilts which undergo the further and special process of quilting (i.e., needling of the quilt at specific intervals in a pattern to hold together the cover and the filling) are known as “quilted textile material”. Not every quilt is in fact quilted. In other words, not every quilt undergoes this particular process of quilting and there are many quilts available in market which are simply needled at the borders and not quilted in the manner indicated above. Polyester being a textile material and the product in question being wholly composed of quilted textile materials, the product exactly fits into this entry.

9. It is well settled that taxing entries are to be understood as contemplated by the trade. This product will therefore be classified under Entry No. 224 of schedule II and will attract 12% from 1-7-2017 to date.

10. The entry relating to cotton quilts cannot apply to this product since there is no cotton involved. That leaves us with Entry No. 213 of Schedule IV which was omitted on 14.11.2017 and Entry No. 438 of Schedule III which was substituted with effect from 14-11-2017. The Entry No. 213 of Schedule IV reads as follows:

“Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.”

Entry No. 438 of Schedule III which was substituted from 14-11-2017 reads as:

“Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered [other than coir products (except coir mattresses), products wholly made of quilted textile materials and cotton quilts].”

11. Entry No. 213 of Schedule IV and Entry No. 438 of Schedule III, extracted above, are almost similar expect for the exclusion of “products wholly made of quilted textile materials” in the latter entry. These words were not present in the Entry No. 213 of Schedule IV before the omission of that entry with effect from 14-11-2017. Before 14-11-2017, there was some ambiguity as to whether a polyester filled quilt will be classified as a “product made of quilted textile material” classifiable under Entry 224 of Schedule II or as a “articles of bedding and similar furnishing (for example,….. quilts,…) …..stuffed or internally fitted with any material” in Entry No. 213 of Schedule IV. This ambiguity has been taken away after 14-11-2017 by specifically excluding products wholly made of quilted textile material from Entry 438 of Schedule III. However, this change is merely clarificatory in nature. Even before 14-11-2017, the product in issue will be classified as a product wholly made up of “quilted textile material” in Entry No. 224 of Schedule II being specific description as against Entry No. 213 of Schedule IV which is only a general description.

12. In the view that we have taken, Entry No. 213 of Schedule IV (before omission on 14-11-2017) or Entry No. 438 of Schedule III will not become redundant. There are certain types of quilts which cannot come in any other entry. For example, the quilts covered by CTH 9404 90 11 are quilts which are filled with feathers. Such quilts cannot come in entries relating to cotton quilts. They are also not covered by the entry relating to “quilted textile material”, feather not being a textile material, but an animal/bird product.

13. As far as the circular is concerned, we find that there is no discussion at all on Entry No. 224 of Schedule II “products made wholly of quilted textile material”. Furthermore, though the Chief Commissioner, Haryana has noticed that the “products made wholly of quilted textile material” have been excluded from Entry No. 438 of Schedule III, after 14-11-2017, but the main body of the circular only discusses the Entry No. 213 of Schedule IV which was in effect before 14-11-2017. As we have already stated, the Entry No. 213 of Schedule IV also does not cover this before 14-11-2017. However, the Chief Commissioner, has not paid any attention to the meaning of “products made wholly of quilted textile materials” and has not applied his mind to the issue of specific entry versus general entry issue.

14. Furthermore, the circular itself is a species not known to law. The circular reveals that certain investigations were conducted at the premises of Oyester and the Chief Commissioner, Haryana has gratuitously volunteered his views on the classification on the basis of the information received during that investigation. A bare reading of the circular shows that the circular is in fact an order which has been issued in the specific case of Oyester and the Chief Commissioner, Haryana for reasons unprecedented and best known to himself has chosen to publish an order passed against a single entity as a circular. This conduct is completely unlawful and amounts to a gross abuse of power.

15. From the circular it is not clear as to whether any notice was issued to Oyester calling upon Oyester to explain the issue of classification involved in the circular. There is no recording in the circular as to whether Oyester has put forth any factual and legal arguments relating to the issue. It is merely the Chief Commissioner’s own views which is recorded in extenso without any reference to any evidence which may have been led by Oyester itself on the issue of classification. We must point out that a taxpayer has much higher rights in law than what the Chief Commissioner, Haryana has sought to accord to Oyester in this case. In a classification dispute, it is the burden of Revenue to prove that the classification adopted by the taxpayer is wrong. It is also settled law that as long as the classification adopted by the taxpayer is reasonable, that classification is not to be disturbed by Revenue. Furthermore, liberal interpretation must be given to taxing entries if specific entry with a lower rate of tax is in conflict with a general entry with a higher rate of tax. Evidence in the form of certificates from experts and trade parlance must be adduced in a classification dispute. It is ultimately the trade understanding of the product which is adopted as a legal understanding.

16. In this case, the Chief Commissioner, Haryana has not taken any evidence from experts and has not gone into the trade parlance at all. Indeed, such evidence cannot be led and considered in administrative functions like issuance of circulars. Classification is a quasi-judicial dispute, which must take place in a quasi-judicial forum. Such quasi-judicial dispute cannot be adjudicated upon through circulars, since there is no provision nor occasion to consider expert evidence relating to trade understanding etc.

17. It is also well-settled that circulars are binding upon Assessing Officers. Therefore, when such circulars are issued, the Assessing Officer has no option but to follow it. Thus, taxpayers, including the Querist, will not get any opportunity of leading evidence and proving trade understanding of the product even at the assessment stage because the issue has been foreclosed by the Chief Commissioner, Haryana through this circular.

18. It is true that an appeal may be preferred against the assessment orders; however, the burden of proof will be reversed in appeal and pre-deposit requirement will be imposed for entertaining the appeal. In such a case, it is only under the writ jurisdiction of the High Court that such circulars can be challenged.

19. We are also of the view that the Chief Commissioner, Haryana had no authority at all to issue such circular. Section 168 allows only the Central Board of Indirect Taxes and Customs to issue orders, instructions and directions which are considered binding under the Act. There are no powers vested in any Chief Commissioner to issue any circular.

20. Furthermore, unlike Section 37B of the Central Excise Act, even the Board does not have power to issue instructions on classification of goods and services under the GST Act. The power to issue instructions under Section 168 is restricted to “implementing the Act”. It is well settled that these words only give power to regulate procedural and administrative details of implementation. Section 37B of the Central Excise Act specifically granted the power to issue circulars with respect to classification, but that power has been consciously omitted by the Legislature in the GST Act. It cannot be said that the Chief Commissioner, Haryana has any better power than the Board itself.

21. We are therefore of the view that the product in question is liable to be taxed under Entry 224 of Schedule II and will attract tax at 12%. The only option before Querist and other traders dealing with this product is to challenge this circular under Article 226 before the Punjab and Haryana High Court. An appeal against any assessment order following this circular will not be an adequate alternate remedy.