Determination of Goods or Services: GST Provisions

GST has been levied on goods or services or both. Thus the distinction is not very relevant for leviability of the tax. The supply may be either of goods or of services or of both, GST is payable.

Still, there are numerous provisions in the GST law which distinguish between goods and services. Rate of duty as prescribed in the tariff may be different based on the fact whether the supply is supply of goods or supply of services. Place of provision of supply distinguishes between goods and services. Definition of export or import differs based on the fact as to whether it is an export/import of goods or services. Procedural provisions like that of transportation, storage, record keeping etc. are prescribed largely for supplier of goods. In view of these, it becomes important to understand the concept of goods and services, and trying to develop a yardstick to distinguish between goods and services.

Constitution of India defines goods under Article 366(12) as "goods" includes all material, commodities and articles. A plain reading of the aforesaid definition, it appears that only tangibles movable things which can be traded or marketed are items which would fall within the definition of goods. The Constitution Bench of the Supreme Court in State of AP v. National Thermal Power Corporation Ltd. [AIR 2002 SC 1895] held that definition of goods in the constitution is very wide and it includes all kinds of movable property.

Services has been defined negatively in the Constitution as something which are not goods. Thus it is important to know what are goods. Whatever is not goods may be treated as services.

In the case of Union of India v. Delhi Cloth Mills [1977 (1) ELT (J 199),1963 SCR Supl. (1) 586] Hon'ble Supreme Court held,

"It is helpful to consider also in this connection the ordinary meaning of the word "goods". For, by the very words of the: Central Excises andSalt Act, 1944, excise duty is leviable on "'goods".The Act itself does not define "goods" but defines "excitable goods" as meaning "goods specified in 'the First Schedule as being, subject to a duty of excise and includes salt." On the meaning of the word "goods" an interesting passage is quoted in the Words and Phrases, Permanent Edition, Vol. 18, from a judgment of a New York Court thus:

"The first exposition I have found of the word 'goods' is in Bailey's Large Dictionary of 1732, which defines it simply 'Merchandise'-, and by Johnson, who followed as the next lexicographer, it is defined to be movables in a house; personal or immovable estates; warn,; freight; merchandise,,"

Webster defines the word "'goods" thus:- "Goods, noun' plural, (1) movables; household, furniture; (2) Personal or movable estate, as horses, cattle, utensils, etc., (3) Wares; merchandise; commodities bought and sold by merchants and traders."

These definitions make it clear that to become "goods". An article must be something which can ordinarily come to the market to be bought and Sold."

Thus, based on earlier laws, Supreme Court held that movability and marketability of an article are basic characteristics, to be classified as goods.

Goods has been defined in CGST Act. Services have been defined negatively in the Act, and hence the primary thing which is required to be determined as to what are goods. Section 2(52) of the CGST Act defines goods as,

"goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Basic ingredients of the definition:

(1) Goods mean every kind of movable property. That means immovable properties are not goods.

(2) Money and securities are not goods.

(3) Goods include actionable claim. The actionable claim has been defined in Section 2(1) of the CGST Act as it has been defined in the Transfer of Property Act. As per Section 3 of the Transfer of Property Act, "actionable claim" means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent;

(4) Growing crops, grass or things attached to or forming part of the land, which are agreed to be severed before supply or under a contract of supply are goods.

Immovable Property:

Movable property has not been defined under GST laws. Section 2(36) of the General Clauses Act defined movable property as, "Movable property shall mean property of every description except immovable property."

Immovable property has been defined in Section 2(26) of the General Clauses Act as,
"Immovable property" shall include land, benefits to arise out of land and things attached to earth oe permanently fastened to anything attached to earth.

"Things attached to earth" has been defined in Section 3 of the Transfer of Property Act as to mean things,

(a) rooted in the earth, as in the case of trees and shrubs;

(b) embedded in the earth, as in the case of walls or buildings; or

(c) attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached.

In the case of Quality Steel Tubes (P) Ltd. v. Collector [(1995) 75 ELT 17 SC], it was held that goods which are attached to earth and thus becomes immovable do not satisfy the test of being goods. In Triveni Engineering v. CCE [(2000) 120 ELT 273 SC], Hon'ble Supreme Court held,

"There can be no doubt that if an article is an immovable property, it cannot be termed as excisable goods for purposes of the Act. From a combined reading of the definition of immovable property in Section 3of the Transfer of Property Act,Section 3(25)of the General Clauses Act, it is evident that in an immovable property there is neither mobility nor marketability as understood in the Excise Law. Whether an article is permanently fastened to anything attached to the earth require determination of both the intention as well as the factum of fastening to anything attached to the earth. And this has to be ascertained from the facts and circumstances of each case. In Municipal Corporation of Greater Bombay & Ors. Vs. Indian Oil Corporation Ltd. (1991 Suppl. (2) SCC 18), one of the questions this Court considered was whether a petrol tank, resting on earth on its own weight without being fixed with nuts and bolts, had been erected permanently without being shifted from place to place. It was pointed out that the test was one of permanency; if the chattel was movable to another place of use in the same position or liable to be dismantled and re-erected at the later place, if the answer to the former is in the positive it must be a movable property but if the answer to the latter part is in the positive then it would be treated as permanently attached to the earth."

So the test is if the thing erected has to be dismantled and has to be erected somewhere else in order to move it, the thing is attached to earth and is an immovable property and not goods. It is called permanency test. In Municipal Corporation of Greater Bombay v. IOCL [AIR 1991 SC 686,1991 Supp (2) SCC 18 ], Hon'ble Supreme Court held,

"Permanency is the test. The chattel whether is movable to another place of use in the same position or liable to be dismantled and re-erected at the later place? If the answer is yes to the former it must be a moveable property and thereby it must be held that it is not attached to the earth. If the answer is yes to the latter it is attached to the earth."

In Craft Interiors Pvt. Ltd. v. CCE [ (2006) 203 ELT 529 SC], Hon'ble Supreme Court held,

"We hold that items which are ordinarily immovable or which ordinarily cannot be removed without cannibalizing e.g. storage units, running counters, over- head unit, rear and side unit, wall unit, pantry unit, kitchen unit and other items which are ordinarily immovable or cannot be removed without cannibalizing are not furniture."

From the definition of goods under the CGST Act, it is clear that immovable property are not goods.

Goods can be intangible:

Movability is a test of being goods. However, goods can be tangible or intangible. The Constitution Bench of the Supreme Court in case of State of AP v. National Thermal Power Corporation Ltd. [1963 SCR Supl. (1) 586, (2002) 127 STC 280] held that merely because electricity is not tangible, it does not cease to be goods. It held,

"The definition of goods as given inArticle 366 (12)of the Constitution was considered by this Court and it was held that the definition of terms is very wide according to which "goods" means all kinds of moveable property. The term "moveable property" when considered with reference to "goods" as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electrical energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and uses which if done dishonestly is punishable under Section 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of "goods".

In Tata Consultancy Services v. State of Andhra Pradesh [178 ELT 22 SC] it has been held that canned software (Computer software packages) sold off the shelf like oracle, lotus etc. are goods. In Bharat Sanchar Nigam Limited v. Union of India [(2006) 3 SCC 1], it was held that goods may be tangible property or intangible one. In Associated Cement Company v. CC[2001 (4) SCC 593] it was held that computer software are goods.

From these judicial pronouncements, following principles emerges;

(i) An intangible property can be goods.
(ii) Goods must have attributes of utility, marketability and transferability.

Money:

Money is specifically have been kept from the definition of goods. A transaction in money is not taxable under GST laws. Money has been defined in Section 2(75) of the CGST Act as "money" means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

Security:

Securities has been defined in Section 2(101) of the CGST Act as "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The aforesaid Act defines security as,

"Securities" include

(i)shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

(id) units or any other such instrument issued to the investors under any mutual fund scheme;] Explanation.—For the removal of doubts, it is hereby declared that "securities" shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938);]

(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;]

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;"

Services:

Services has been defined in the Constitution of India.. Section 2(102) of the CGST Act defines services as,

"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.

Definition of service is negative. It means anything other than goods, money or securities. Although money is outside ambit of definition of service, money changing activities for consideration is covered under the definition of service.

Problem of determination of goods or services:

A supplier needs to determine whether the supply is supply if goods or services. The determination is legally complicated in this era of extremely wide definitions. Section 7(3) of the CGST Act provides that the central government may specify by notification transactions which shall be treated as supply of goods and not supply of services and vice versa. Such notification may be issued on recommendation of the GST council. Further Schedule II of the CGST Act defines certain transactions as supply of goods or supply of services.

Schedule II:

The schedule provides following principles;

(i) Any transfer of the title in goods is a supply of goods.

(ii) Any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.

(iii)Any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.

(iv) Any lease, tenancy, easement, license to occupy land is a supply of services.

(v) Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

(vi) Any treatment or process which is applied to another person's goods (popularly known as job work) is a supply of services.

(vii) Transfer of business assets is supply of goods.

(viii)Temporary transfer of business assets is supply of services.

(ix) Renting of immovable property is supply of service.

(x) 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 is supply of service.

(xi) Temporary transfer or permitting the use or enjoyment of any intellectual property right is supply of service.

(xii) Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software is supply of service.

(xiii) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is supply of service.

(xiv) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration is supply of service.

(xv) Works contract as defined in clause (119) of section 2 of the CGST is supply of service.

(xvi) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration is supply of service.

(xvii) Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration is supply of goods.

Many of the contentious issues have been defined as supply of goods or supply of services in this schedule. Further, IGST Act defines certain activities as goods or services while defining place of supply under Chapter V of the IGST Act. The chapter treats telecommunication, data transfer, broadcasting, cable and direct to home television as services. Supplies which are being treated as services in some different part of the law may be treated as such also for the purpose of determination as to whether these are supply of goods or services.

The author is an Advocate and can also be reached at custom.excise@gmail.com