Lower authorities order quashed on improper ruling on classification of goods and applicable rate

An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAAR is as follows:

• Whether rental of e-bike warrants for classification under HSN 9973 and the applicable GST rate is 5% as per notification issued in this regard.

Facts of the appeal made to AAAR, by M/S. Yulu Bikes Pvt. Ltd.,(appellant)’, dated 11-Nov-2020:

The appellant, M/S Yulu Bikes Pvt. Ltd had applied to the Karnataka AAR requesting for confirmation on the classification of their rental service under HSN 9973 which reads as ‘leasing or renting services without operator’ and the GST rate would be 18% as per Serial No. (viia) of Notification No. 11/2017-Central Tax(Rate) dated 28.Jun.2017 as amended. The lower authority outright denied the aforementioned clarification sought by the appellant vide order no. KAR ADRG No. 49/2020 dated 13.Oct.2020.

Aggrieved by the order, the appellant represented the case with the appellate authority through application dated 11.Nov.2020 and reiterated that their service would fall under HSN 9973 which reads as ‘leasing or renting services without operator’ and the GST rate would be 18% as per Serial No. (viia) of Notification No. 11/2017-Central Tax(Rate) dated 28.Jun.2017 as amended. The appellant stated that prior to 1^st October 2019, the classification of their service was made by them under HSN 9966 – Rental services of transport vehicles with or without operators and paying 18% tax as per notification No. No. 11/2017-Central Tax(Rate) dated 28.Jun.2017, serial no. 10(iii). But the aforementioned notification was amended vide notification no. 20/2019-CT(R ) dated 30.Sep.2019 and pursuant to this amendment reclassified their services under HSN 9973 as per notification No. 11/2017-Central Tax(Rate) dated 28.Jun.2017 as amended. Further they contended that for the rate of goods, the GST for their Miracle (e-bikes) will be 5% as per rate given in Notification No. 01/2017 CT(R ) dated 28.Jun.2017, Serial No. 242A, Chapter 87, Serial No. 17(viia), as amended vide notification no. 12/2019 CT(R ) dated 31.Jul.2019.

Observations and final ruling by AAAR vide Order No. KAR/AAAR/02/2021 dated 02.Feb.2021:

In the personal hearing conducted on 07.Jan.2021, the authorized representative of the appellant reiterated the above facts and contended that the services of renting e-bike without operator will be classified under HSN 9973 vide notification No. 11/2017-Central Tax(Rate) dated 28.Jun.2017 as amended and the rate of GST applicable will be 5% as per Notification No. 01/2017 CT(R ) dated 28.Jun.2017, Serial No. 242A, Chapter 87, Serial No. 17(viia), as amended vide notification no. 12/2019 CT(R ) dated 31.Jul.2019. Basis the agreement entered into by the appellant, the appellant contended that there is transfer of right of the rented e-bikes and substantiated their case quoting case laws on similar services provide, such as in Supreme Court ruling in BSNL case and Great Eastern Shipping. Therefore, the appellant requested for setting aside the impugned order passed by the lower authority.

The AAAR acknowledged the facts presented by the appellant’s representative and agreed to the appellant’s contention that their services will be classified under Heading 9973 vide notification No. 11/2017-Central Tax(Rate) dated 28.Jun.2017 as amended. As for the GST rate, the AAAR stated that the appellant has first represented that the GST rate will be applicable as per Serial No.(iii) of notification no. 12/2019 CT(R ) dated 31.Jul.2019 and if the aforementioned serial number is not applicable for them, then they will be covered under Serial No. 17(viia) of the same notification.

On further review of the user agreement of the appellant, the AAAR opined that there is no transfer of right of goods used by the customer of the appellant and the possession of goods is held by the appellant. Since transfer of right of goods is an essential condition to be satisfied if the classification for the rate has to be under Serial No. (iii) of notification no. 12/2019 CT(R ) dated 31.Jul.2019 which reads as ‘transfer of right to use any goods for any purpose for cash, deferred payment or other valuable consideration’, the rate applicable under this heading cannot be adopted. Hence the AAAR concluded that the rate applicable for the service provided by appellant will be 5% as per Serial No. 17(viia) of notification no. 12/2019 CT(R ) dated 31.Jul.2019 i.e leasing or renting of goods.

The AAAR therefore set-aside the order passed by the lower authority and agreed with the appellant’s contention on the classification and rate of GST.