Tax Research Unit has no power to issue Circular u/s 168 of CGST Act

The Delhi High Court in the matter of ASSOCIATION OF TECHNICAL TEXTILES MANUFACTURERS AND PROCESSORS Vs UNION OF INDIA has held that the Tax Research Unit (TRU) has no power to issue Circular us 168 of the CGST Act.

Facts about the case:

The first petitioner, which is an association of technical textiles manufacturers and the second petitioner which is a member of the said association, are principally aggrieved by the Circular dated 31 December 2018 issued by the Tax Research Unit constituted under the first respondent, and to the extent that it purports to clarify that polypropylene woven and non-woven bags including those laminated with Biaxially Oriented Polypropylene are liable to be classified as falling under Chapter 39 and more particularly Tariff Heading 3923 forming part of the First Schedule to the Customs Tariff Act, 1975. The dispute essentially related to a question of classification of polypropylene woven and non-woven bags under the Harmonized System of Nomenclature.

The TRU has, on due consideration of the aforesaid issue, clarified that those articles would be classifiable as ‘plastic bags’ under Tariff Heading 3923. The petitioners are aggrieved by the aforesaid Circular, since it contends that polypropylene woven or nonwoven bags are made out of textiles and thus cannot be equated with plastics, which form the subject matter of Chapter 39 of the First Schedule to the 1975 Act.

It is also their case that polypropylene non-woven fabric is a textile, which is classifiable under Tariff Heading 5603 comprised in Chapter 56 titled as ‘Wadding, Felt and Nonwovens; Special Yarns; Twine, Cordage, Ropes and Cables and Articles Thereof’. Quite apart from the controversy with respect to classification, and which we shall consider in the subsequent parts of this decision, a challenge is also raised to the authority and jurisdiction of the TRU to issue such a clarification in the first place.

We note that both the petitioners as well as the respondents have referred to various decisions handed down by the AAR as well as the AAAR of different States. As noticed hereinabove, consequent to a failure on the part of respective counsels to place those decisions for our consideration, we are unable to form any opinion on the views that may have been expressed therein.

Notwithstanding the above, we are constrained to observe that divergent or contrary views that may be taken by the appropriate AARs or AAARs cannot be rendered a quietus by the issuance of a directive or clarification of the nature which was impugned before us. We, in this regard take note of the following pertinent observations as were rendered by the Supreme Court in Union of India vs. Bharat Forge Ltd:

“50. In this regard, we must not overlook the consequences of reading the word may in the letter dated 05.09.2017 as casting a mandatory duty. This would bring us to frontally face the question of how the purchaser would go about implementing such a direction. Sections 96 to 103 of the Central Act, as also of the State GST Act do provide for the mechanism of advance ruling. If the purchaser is to include the HSN Code, there must be a mechanism to give effect to what is directed by the High Court, viz., “to clarify the issue with the GST Authorities relating to the applicability of the correct HSN Code of the product and thereafter mention in the NIT”. To describe this as impractical and the direction given being without bearing in mind the conspectus of the statutory provisions of the GST Acts, cannot but be correct. Under the provisions relating to advance ruling, while it is true that the question which can become the subject matter of advance ruling includes questions relating to classification of goods and services, there is a detailed procedure provided in the matter. The matter does not rest with the decision of the original Authority. A right of appeal is provided. The matter may travel to the Supreme Court. The provisions contemplate powers of a civil court in the matter of discovery, adducing of evidence etc. In other words, it is long drawn and elaborate procedure and the direction to „clarify‟ with the GST Authorities, as directed by the High Court, can hardly square with the cumbersome and elaborate process detailed in the Chapter relating to the advance ruling. The advance ruling, we notice, is binding on the applicant ordinarily. No doubt, it has a wider impact in circumstances detailed in Section 103(1A). We are at a loss to further understand how in the name of producing a level playing field, the State, when it decides to award a contract, would be obliged to undertake the ordeal of finding out the correct HSN Code and the tax applicable for the product, which they wish to procure. This is, particularly so when the State is not burdened with the liability to pay the tax. The liability to pay tax, in the case before us, is squarely on the supplier. There are adequate safeguards and Authorities under the GST Regime must best secure the interests of the Revenue.

51. Shri Amar Dave, learned Counsel for the writ petitioner would contend that the Section 168 of the Central Act can be understood as the fountainhead of statutory power, using which, the appellants can comply with the impugned direction. The power is vested with the Board, it is pointed out. The appellants have floated a global tender. It means that the bidders can be located at any place. The Officers, who would be the Jurisdictional Officers of the bidders, may not even be known to the appellant.

52. It is difficult to accept the case of the writ petitioner that appellants must seek the „clarification‟ contemplated in the impugned Judgment by resorting to Section 168 of the Central Act or the State Act. Section 168 does not expressly provide for right to any person to seek a direction as contemplated therein. Further, we may notice that there is an express power provided in the provisions relating to advance ruling. There is an elaborate procedure to be followed and even right of appeal. At any rate, power under Section 168 is essentially meant for officers to seek orders, instructions or directions besides the Board itself on its own passing orders, in the interest of maintaining uniformity in the implementation of the Act.

53. We cannot ignore the case of the appellant that the Circular cannot bind the supplier and the Circular can be challenged in an appropriate proceeding. Appellants contend that it does not represent a final view, and does not bind the court and a circular which is in the teeth of the statute can have no existence in law. In this regard our attention is drawn to the judgment of this Court in (2008) 13 SCC 1. It is further contended that the circular cannot bind the appellants who are only purchasers of the product. There is no duty cast on the Board under the Central Act or on the Commissioner under the State Act to issue any clarification, as directed in the impugned Judgment. There is no duty cast on the appellants to seek such direction. Therefore, the appellants are right in contending that there is no statutory duty, which could have been enforced in the manner done in the impugned Judgment. There is no public duty which is enforceable.”

All that needs to be observed in this regard is that the conflict of opinion that may exist would have to be resolved by parties taking appropriate steps as contemplated under the CGST Act.

We further note that the impugned circular while purporting to convey a position with respect to the classification of non-woven polypropylene bags has rested its conclusions solely on the basis of the provisions contained in Chapter 39. It has neither alluded to Section XI of the First Schedule to the 1975 Act nor has it referred to Chapter 56 thereof. The contention of the petitioners that non-woven polypropylene is an article which would fall within Tariff Heading 5603 was neither questioned nor contested before us by the respondents. In any case, a reading of the impugned circular would establish that it fails to examine the issue on the anvil of the distinction which the 1975 Act appears to construct when it places plastics under Chapter 39 and textiles and articles thereof separately in Section XI, and more particularly, as was contended by the petitioners in Chapters 56 and 63 of the said enactment. The impugned circular also fails to advert to the Notes placed in Chapter 39, and which in unambiguous terms, exclude textiles from the ambit thereof. For the aforenoted additional reasons, we find ourselves unable to uphold the impugned circular.

While we were invited by Mr. Lakshmikumaran to render a final verdict on the issue of classification itself, we find that respective sides have, in this respect, failed to place adequate material on the record. The failure of parties to address the question comprehensively constrains us to desist from rendering a definitive opinion in that respect bearing in mind the industry wide ramifications that may ensue. Courts should avoid expressing an opinion on questions of classification unless they are directly raised and adequate and cogent material placed on the record. Bearing in mind the impact that such a ruling may have, findings in that respect, in any case, should not be founded on material which is tenuous and inadequate.

Order:

We are further of the view that since the writ petition itself stood restricted to the validity of the circular, it would be imprudent for us to hand down a verdict imbued with attributes of finality. We are thus of the considered opinion that the issue of classification should be left open for the consideration of the competent authority in appropriate proceedings.

The writ petition shall consequently stand allowed. The impugned circular dated 31 December 2018 is hereby quashed. We leave it open to the petitioners to adopt such measures, insofar as the issue of classification is concerned, as may be permissible in law.

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