Category: Indirect Taxes

INTRODUCTION
The erstwhile CENVAT Credit Rules, 2004 permitted the claim of credit of tax paid on inputs, input services or capital goods. An inward supply was required to fall within the purview of the said terms, as defined u/r 2 thereof. The definition of inputs and input services provided therein specifically excluded the following goods/ services from being classified as inputs/ input services:

The above indicates that the legislature’s intention has always been to deny CENVAT credit in respect of such goods or services which have an element of being used primarily for personal use or consumption of any employee. This approach has been inherited under GST as well with two specific clauses – (b) and (g) u/s 17 (5) with clause (b) specifically restricting credit on specified inward supplies, subject to exceptions provided therein (nexus with outward supplies/ obligatory for an employer to provide the facilities) while clause (g) is more in the nature of a use-based restriction, as it restricts input tax credit on goods or services or both, used for personal consumption.

One important distinction in the provisions under the CENVAT regime and GST regime is that under the CENVAT regime, clauses (b) & (g) were under a single entry and therefore, the restrictions complemented each other, i.e., the specified goods/services were not eligible for CENVAT credit when used for personal consumption of an employee. However, under GST, the restriction is split into two different entries. Therefore, items covered under clause (b) shall not be eligible for input tax credit (subject to exceptions), irrespective of whether the same are used for personal consumption or not. However, when it comes to clause (g), there will be a need to identify and demonstrate ‘personal consumption’ first. Once the item is classified as meant for ‘personal consumption’, the input tax credit shall not be allowed, even if is covered within the exceptions under clause (b) or other sub-clauses.

Another distinction that needs to be noted is that under the CENVAT regime, the ineligibility to claim credit was attracted when the goods/ services were used for the personal consumption of the employees. However, under GST, the restriction applies only for personal consumption, which gives rise to the question as to whether it intends to refer to the personal consumption of the taxpayer/ the employees of the taxpayer. In this article, we have analysed both clauses.

CLAUSE (b) – SPECIFIC ITEMS COVERED U/S 17 (5)
Clause (b) is reproduced below for reference:

(5) Notwithstanding anything contained in sub-section (1)
of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;

AMENDMENT W.E.F 1st FEBRUARY, 2019
The above was amended w.e.f 1st February, 2019 by way of substitution as under:

(b) the following supply of goods or services or both—

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

The effect of the above amendment is tabulated below for ease of reference:

FOOD AND BEVERAGES
The first item under clause (b) on which input tax credit is blocked is ‘food and beverages’. In our view, the following points need analysis:

• Whether the restriction would apply on receipt of goods, being food and beverages or even services with an element of food and beverages would be covered?

• What shall be the scope of the terms – ‘food’ and ‘beverages’?

• Whether the ‘and’ need to be read as ‘or’ while interpreting the restriction?

Clause (b), as reproduced above, applies to the supply of goods or services or both, of food and beverages. The first question which needs analysis is whether this restriction has to be applied when the food and beverages are being supplied as standalone goods, or as part of service and therefore, deemed as service in view of entry 6(b) of Schedule II? This is relevant because if it is the former, when food and beverages would be supplied as part of a service, the same would be deemed to be a supply of service and therefore, unless such food or beverages are supplied as a part of a service and specifically mentioned under the restrictive clause, the same would not be an ineligible input tax credit. One reasoning to support this view is that after food and beverages, clause (b) refers to outdoor catering. If the supply of food and beverage as a part of service was supposed to be covered within the first item, i.e., food and beverage, there was perhaps no need to specifically cover outdoor catering under the restriction list.

Per contra, it may be contended that a restaurant also supplies food and beverages, with the only distinction being that the food and beverages are not sold as such but are supplied by way of service. One may rely on the decision in the case of Northern India Caterers’ case [1980 SCR (2) 650] wherein the Hon’ble SC has held as under:

The appellant prepared and served food both to residents in its hotel as well as to casual customers who came to eat in its restaurant, and throughout it maintained that having regard to the nature of the services rendered there was no real difference between the two kind of transactions. In both cases it remained a supply and service of food not amounting to a sale. … … (only relevant extracts).

In other words, even in the case of restaurant service, there is a supply of food and beverage, though the same may not be sold in the restaurant itself owing to it being consumed. Therefore, a strong view prevails that the restriction under food and beverages extends to restaurant services as well.

Food & Beverages – scope

This takes us to the second question, i.e., the scope of the terms – ‘food’ and ‘beverages’ for the purpose of this clause. The general meaning of both the terms is something which is consumed by a person. Generally, food refers to something which can either be in solid/ semi-solid/ liquid stage, while beverages refer to liquid items for consumption. What constitutes food has been dealt with by the Hon’ble SC in the case of Swastik Udyog vs. Commissioner [2006 (198) ELT 485 (SC)] wherein the Hon’ble SC held that food is a substance which is taken into the body to maintain life and growth. Similarly, in the context of beverages, in the case of Hamdard (Wakf) Laboratories [1999 (113) ELT 20 (SC)], the SC has held as under:

5. Beverages, broadly speaking are liquids for drinking, other than water, which may be consumed neat or after dilution.

This takes us to the first issue, i.e., whether preparatory items used to cook such food and beverages can be treated as food/ beverages per se or not? For instance, whether coffee beans/powder used to make coffee can be treated as an item classifiable as ‘food’ or ‘beverage’ and therefore, input tax credit on the same is blocked? For instance, while dealing with the question of whether Rasna powder, which is used for preparing a beverage, can itself be treated as a beverage or is it a mere preparatory material to make the beverage? In the case of P. Sukumaran [(1989) 74 STC 185], the Delhi HC held that Rasna is only a concentrate and not a liquid. Therefore, it would not come within the ambit of the expression ‘beverage’. However, while dealing with the classification of Rooh Afza, the Hon’ble SC in the case of Hamdard (Wakf) Laboratories held as under:

7. The Tribunal would also appear to have concluded that the said sharbat was not a beverage but a preparation for the same. The fact that three table spoonfuls of the said sharbat have to be added to a glass of water to make it drinkable does not, in our view, make the said sharbat not a beverage but a preparation for a beverage. Were that so, many beverages which are classified as such, as for example, tea, coffee, orange squash and lemon squash would not be beverages. (See, for example, paragraph 5 of this Court’s judgment in the case of Parle Exports P.Ltd. [1988 (38) E.L.T. 741 (S.C.) = 1989 (1) SCC 345] and paragraph 12 et seq of the Tribunal’s judgment in the case of Northland Industries [1988 (37) E.L.T. 229]. It seems to us that the phrase `preparations for lemonades or other beverages’ in clause (j) of Note 5 of Chapter 21 was intended to refer to the industrial concentrates from which aerated waters and similar drinks are mass produced and not to preparations for domestic use like the said sharbat.

Of course, both the products are different in nature. While Rasna powder cannot be consumed as such, Rooh Afza can be consumed, as held by the Hon’ble Court, without mixing with any other liquid. However, a prudent view would be to not only treat such items which can be consumed directly as ‘food’ or ‘beverage’, but also such items, which with minimal process would result in the ‘food’ or ‘beverage’ being prepared, for instance, ready to eat meals, such as Maggi, soups, etc., Infact, such items were also referred to under the Central Excise Tariff as ‘food preparations’. Not doing so may defeat the intention of the legislature, which is to deny input tax credit on items that are meant for personal consumption.

‘And’ vs. ‘Or’

This takes us to the next question as to whether while analysing the first item, i.e., ‘food and beverages’, the ‘and’ needs to be read ‘as is’ or as ‘or’. In this regard, one may refer to the decision in the case of Kamta Prasad Aggarwal vs. Executive Engineer, Ballabhgarh [1974 (4) SCC 440] wherein the Hon’ble SC held that depending upon the context, ‘or’ may be read as ‘and’ but the Court would not do it unless it is so obliged because ‘or’ does not generally mean ‘and’ and ‘and’ does not generally mean ‘or’. In other words, the context needs to be looked into while determining if ‘and’ can be read as ‘or’.

In this regard, let us look into the intention of the legislature to understand the context behind the entry. The purpose of this entry is to restrict credit, i.e., deny a benefit to the taxpayer. In such a scenario, reading ‘and’ as ‘and’ instead of ‘or’ would deny the purpose of the entry. This is because the ‘and’ would necessitate both ‘food’ and ‘beverages’ to be present in a supply. This would mean the existence of two different supplies, one of food and another of beverage. However, such a situation would be theoretically impossible since both the supplies would be taxed independently as GST is a transaction-based tax and therefore, there cannot be a scenario where food and beverage are being supplied under a single contract. On the other hand, if the ‘and’ is read as ‘or’, the scope of the restriction entry would drastically expand, as the likelihood of a person receiving only food or only beverages in a single supply is higher. One may also refer to the service tariff entry, which also refers to the tax rate on supply of food and beverage. If the ‘and’ is read as ‘and’, the rate notification itself would also fail.

Lastly, it is an industry practice to refer to any person dealing in the food or beverage industry as a part of Food & Beverage Industry.

OUTDOOR CATERING
This takes us to the next restriction for outdoor catering. The first question that comes into mind is the need for specifically referring to ‘outdoor catering’ under clause (b), especially when food & beverages are also restricted in the same clause. The only probable reason is that outdoor catering is a wider activity as compared to the mere supply of food and beverages. This aspect has been dealt with by the Hon’ble SC in the Tamil Nadu Kalyana Mandapam Associations vs. UOI [2006 (3) STR 260 (SC)] wherein the Hon’ble SC held as under:

55. … … …

Similarly the services rendered by out door caterers is clearly distinguishable from the service rendered in a restaurant or hotel inasmuch as, in the case of outdoor catering service the food/eatables/drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer’s choice of foods is limited to the menu card. Again in the case of outdoor catering, customer is at liberty to choose the time and place where the food is to be served. In the case of an outdoor caterer, the customer negotiates each element of the catering service, including the price to be paid to the caterer. Outdoor catering has an element of personalized service provided to the customer. Clearly the service element is more weighty, visible and predominant in the case of outdoor catering. It cannot be considered as a case of sale of food and drink as in restaurant. … …

BEAUTY TREATMENT, HEALTH SERVICES, COSMETIC AND PLASTIC SURGERY
This restriction is directly borrowed from the definition of input services u/r 2 (l) of CENVAT Credit Rules, 2004. While what is meant by the above terms has not been defined under GST, the same were defined under the Finance Act, 1994, and it would therefore be appropriate to refer to the definitions provided therein to understand what may and may not get covered within it:

• ‘beauty treatment’ includes hair cutting, hair dyeing, hair dressing, face and beauty treatment, cosmetic treatment, manicure, pedicure or counselling services on beauty, face care or make-up or such other similar services.

• ‘health and fitness service’ means service for physical well-being such as, sauna and steam bath, Turkish bath, solarium, spa, reducing or slimming salons, gymnasiums, yoga, meditation, massage (excluding therapeutic massage) or any other like service.

• ‘any service provided or to be provided to any person, by any other person, in relation to cosmetic surgery or plastic surgery, but does not include any surgery undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, degenerative diseases, injury or trauma’.

As can be seen, the above terms actually refer to services that are personal in nature. However, clause (b) specifically does not restrict that the said services should only be used for personal consumption. Rather it imposes a general restriction with an exception where such supplies are used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply. In other words, either there is a direct nexus where the registered person supplies the same class of service, or such registered person is engaged in making a composite or mixed supply, i.e., more than one supply with one of the supplies being either beauty treatment, health services or cosmetic and plastic surgery.

This necessitates the need to understand the meaning of the terms ‘composite supply’ or “mixed supply”. The relevant definitions are reproduced below for reference:

Both the above terms indicate that there must exist more than one supply of goods or services or both being made in conjunction with each other. Therefore, it becomes necessary to understand what is meant by the phrase “two or more taxable supply of goods or services or both, supplied in conjunction with each other” for the purpose of this entry. Let us understand this with the help of an example. A company organizes a 4-day residential training course in a 5-star hotel charging a lump sum fee of Rs. 1,00,000 plus GST per participant. The same includes, apart from training charges, charges towards participants stay, food & beverage, travel arrangements (including hiring vehicles for airport/ railway station pick-up/ drop), one-time spa coupon, etc.,

There are more than two supplies involved in this case, such as training service, F&B, rent-a-cab services, health and fitness centre, etc. In this case, it can be said that there are two or more taxable supplies involved as the recipient of supply actually receives/consumes the said supplies. Therefore, the supplier will be eligible to claim input tax credit even of such specified items, as they are used for making a taxable supply of goods or services or both. It is imperative to note that each of the activities undertaken for the recipient is taxable in nature, and the same is undertaken in conjunction with each other while providing the main service of training.

However, even the above example can have some twists. If out of 100 participants, 70 participants have paid for the course, 20 are free participants, and 10 are employees of the organizer who also attend the seminar, the eligibility to claim input tax credit gets a bit changed. Free participants would imply no taxable supply as there is no consideration, and therefore, tax is not leviable. Since there is no taxable supply involved, the question of the inward supplies being used to make a composite or mixed supply does not arise and therefore, eligibility to claim input tax credit to the extent of 20 participants would be an issue. The same treatment would apply even when own employees are attending the course or organizing team members avail the same service. To the extent own employees are attending the course for free/employees of the team organizing the course are also using the said facilities, it cannot be said that the same is used for making an outward taxable supply and therefore, the input tax credit to that extent would not be eligible.

Similarly, there can be instances where though there are various activities undertaken by the supplier, the question of composite/mixed supply does not arise. For instance,

• A film producer undertaking production of a film has entered into an agreement for a lock-stock-barrel transfer of all rights in the movie, once the shooting is completed. GST is paid at the applicable rates on the outward supply, i.e., transfer of copyrights. In the course of shooting, the film producer incurs the expense of beauticians for the acting crew. The beauticians’ levy GST on their service charges. Can it be said that the film producer has actually further supplied the said service of beauticians to the distributor along with the main supply, i.e., transfer of copyrights or there is a single supply only, and therefore the question of mixed and composite supply does not arise?

• Similar example applies in the context of news channel/entertainment channel where the service provided is the sale of advertising slots. However, in order to create the content/ news broadcasting, expenses of beauty parlour are incurred, and GST is paid on the same. The same would also be covered under the blocked credit list,
and input tax credit would not be eligible on the same as well.

• Another example would be of an actor/ actress who has undergone  cosmetic surgery with the intention of getting a new assignment and paid GST on the charges levied by the Doctor. Can the actor/actress claim input tax credit on the grounds that the services are used as a part of a composite / mixed supply? The answer to this is apparently negative.

We may also need to look into a scenario where the service recipient arranges for the material used in the delivery of the above service, and the supplier of service merely performs the said service. The question then remains whether the recipient can claim the input tax credit of GST paid on materials. Is a view possible that the restriction of beauty treatment, health services, cosmetic and plastic surgery is to be read in the context of the supply of services only? Such a view is possible for the simple reason that all the three terms refer to an activity done on another person, i.e., a service. However, such a view is likely to be litigative since the Revenue is going to interpret it strictly, and any expense which has a distant relation to the above items would be treated as blocked credits only.

MEMBERSHIP OF A CLUB, HEALTH AND FITNESS CENTRE
A plain reading of the entry would indicate that the restriction applies to membership of a club or membership of a health and fitness centre. This would mean that the restriction applies when there is an inward supply of service and not goods. This implies that if a taxable person has set up a health and fitness centre within his Place of Business and procures various equipment, the same would not get covered within the purview of health and fitness centre service and therefore, restriction might not apply. One may refer to the decision in the case of ITC Ltd. vs. Commissioner [2018 (12) GSTL 182 (Tri. – Kol.)] wherein the Hon’ble Tribunal had allowed the credit in respect of health and fitness centre opened in the premises of the taxpayer for the benefit of the employees. Similarly, if certain services are received with respect to such a centre, the restriction would not apply as the same applies only for membership services of a club or a health and fitness centre.

Let us first analyse the restriction w.r.t membership of a club. The term ‘club’ has not been defined under GST. However, the term ‘club or association’ was defined under service tax vide section 65 (25aa) as under:

“club or association” means any person or body of persons providing services, facilities or advantages, primarily to its members, for a subscription or any other amount, but does not include —

(i) any body established or constituted by or under any law for the time being in force; or

(iv) any person or body of persons associated with press or media;

From the above, it is apparent that under the service tax regime also, the levy of service tax was on club or association service, but the claim of credit was restricted only to the extent of membership of a club. It, therefore, becomes necessary to understand the distinguishing factor between clubs and associations.

In layman’s terms, a club may be a for-profit/non-profit organization established with the end objective to provide various facilities to its’ members. A club can be in the form of a members’ club, such as CCI, Bombay Gymkhana, etc., or even non-member clubs, such as Club Mahindra, Country Club, etc. Such clubs offer services which are purely personal in nature and meant for consumption of the member. In the context of membership clubs providing services that are personal in nature/ meant for personal consumption, there has been substantial litigation on the same under the CENVAT regime before the amendment of the definition of input services, specifically excluding the same from its’ scope. In Racold Thermo Ltd. vs. Commissioner [2016 (42) STR 332 (Tri. – Mum.)], the Hon’ble Tribunal had allowed the CENVAT credit on annual club membership, concluding that the same was used to promote sales and purchase activity by attending to clients and holding conferences. On the contrary, for periods after 1st April, 2011, the Tribunal has consistently denied the CENVAT credit on club membership services [Cenza Technologies Pvt. Ltd. – 2017 (4) GSTL 150 (Tri. – Che.) and Marathon Electric India Pvt. Ltd. – 2016 (45) STR 253 (Tri. – Hyd.)].

On the other hand, an association is an organization, generally non-profit, established with the end objective of the collective benefit of members. Some examples of an association can be:

• a co-operative housing society which is an association of members/ owners of houses who have come together with the objective of benefiting the members by maintaining the building/ complex and its’ facilities.

• Trade associations, such as CII, NASSCOM, etc., are associations where industry participants join hands with a stated objective of representing the industry before various forums, working towards the welfare of the members, etc.

• Recently, a new organization called BNI has started its’ Chapters across various cities. It is nothing but a networking organization where different businesses can take annual memberships and get a chance to showcase their business offerings at the periodic meetings organized by the Chapter. The members can also transact between them through the BNI network, which is advertised as one of the key benefits of joining the BNI network.

As such, it can be said that a club is an organization that provides services personal in nature/ meant for personal consumption and not for the general welfare of all members. On the other hand, an association works towards the general cause for the benefit of all members with no element of personal nature/ personal consumption being involved. This aspect has also been recognized under the CENVAT regime wherein in the case of BCH Electric Ltd. vs. Commissioner [2013 (31) STR 68 (Tri. – Del.)], the Tribunal had allowed the CENVAT credit of service tax paid on membership fees of IEEMA, an association of engineering products manufacturers. Even after the amendment in 2011, in Commissioner vs. Zensar Technologies Ltd. [2016 (42) STR 570 (Tri. – Mum.)], the Tribunal had allowed the CENVAT credit on service tax paid on membership fees of CII. In essence, though there is no specific exclusion for membership services provided by professional associations, the same should not be covered under the blocked credit entry.

It should also be kept in mind that while under the pre-amendment regime, there was no exception provided for claiming input tax credit on such supplies, post-amendment, exception is provided when it is obligatory on the part of the employer under any law, for the time being in force, to arrange for such facilities for his employees.

RENT-A-CAB
This restriction has been discussed in detail in the previous article [BCAJ, March 2022], dealing with the restriction under clauses (a), (aa) & (ab) of Section 17 (5). Readers may kindly refer to the same.

LIFE AND HEALTH INSURANCE
The terms ‘life insurance’/ ‘health insurance’ has not been defined under the GST law. The general interpretation would be that policy instruments titled  life insurance/health insurance shall be covered by the restriction provided u/s 17 (5) (b). However, when a business takes a life insurance/health insurance, it is generally for their employees, and at times because it is mandatory on such business to extend the insurance cover to the employees.

However, there are different types of policies that an employer takes for his employees. For instance, the Workmen Compensation Insurance Policy taken for construction workers to meet mandatory labour laws. In such policies, it is actually the employer who gets insured and not the employees, as it safeguards the employer in case of any untoward accident resulting in injury to the employee. It is an insurance policy where the risks of the employer are subsumed by the insurance company. In the context of such policies, the Hon’ble Karnataka HC in the case of Ganesan Builders Ltd. vs. CST, Chennai [2019 (20) GSTL 39 (Mad.)] had held that the CENVAT credit was allowable as the insurance policy was employer-specific and not employee-specific. This was despite the fact that the definition of input service did not provide any exception to cases where it was obligatory to provide insurance facilities to their employees. Also, under the CCR, 2004, the exclusion applied only when the said services were used for personal consumption of the employee, w.r.t which the HC has held to the contrary.

Of course, the restriction applies only to specific insurance policies and not for other policies such as travel insurance, fire insurance, etc., on which the input tax credit will be allowed.

TRAVEL BENEFITS EXTENDED TO EMPLOYEES ON VACATION
At times, employers themselves arrange for vacation travel of employees and their family members by booking them for a travel package or reimbursing the cost of travel. In such cases, the benefit of the input tax credit is specifically restricted subject to the exception that it is obligatory on the employer’s part to provide such facilities to the employee.

However, there are also other instances where an employer extends travel benefits to the employees, such as:

•    Relocation – An employee working in one location may be transferred to another location, and the employer might arrange for travel of the employee/ his family members as well as transportation of their belongings.

•    Joining – This is similar to relocation, with the only difference being that this occurs when a company hires an employee belonging to another city. As a joining incentive, the company arranges/bears the cost of relocation.

•    Training – An employer might arrange for the employee to undergo certain training which necessitates the employee to travel to a different city/ country, and the cost incurred during such travel for training is borne by the employer.

•    Marketing – In the course of employment, an employee might be required to travel extensively, especially when involved in a sales/ marketing role. The entire travel expenses are borne by the employer. In Ramco Cements Ltd. vs. Commissioner [2017 (5) GSTL 105 (Tri. – Che.)], the Tribunal has allowed the CENVAT credit of tax paid on air travel agency services /tour operator services used to book tickets for travel of employees for marketing/business promotion. In Netcracker Technologies Solutions India Private Limited vs. Chief Commissioner [2017 (4) GSTL 10 (Tri. – Hyd.)], the Tribunal had held that travel insurance of employees for business travel was eligible for CENVAT credit.

Though the above are in the nature of travel benefits, they cannot be categorized as being extended to employees on vacation. Therefore, the restriction to claim input tax credit cannot be extended to the above.

CLAUSE (g) – GOODS OR SERVICES OR BOTH USED FOR PERSONAL CONSUMPTION
This takes us to clause (g), which restricts the claim of an input tax credit on goods or services or both used for personal consumption. For the purpose of this clause, the scope of the term ‘personal consumption’ needs to be analysed.

Neither the term ‘personal consumption’ nor ‘personal’ has been defined under GST. Therefore, we need to refer to the dictionary meaning to understand the scope of the term ‘personal’. The Oxford Dictionary refers to ‘personal’ as “your own; not belonging to or connected with anyone else”.

At this juncture, we should also refer to section 37 (1) of the Income-tax Act, which specifically prohibits the claim of expenses that are personal in nature. While analysing the scope of section 37 (1), in the case of Galgotia Publications Private Limited vs. ACIT [ITA No. 1857/Del/2015], the Hon’ble Tribunal has held that there cannot be a nature of personal expenses when the assessee is a company, an entity recognized by law as a legal person and existing independently with its’ own rights & liabilities. Therefore, no element of personal expenses by Directors/ Office bearers can be attributed unless there is sufficient documentary evidence in support.

The above indicates that while interpreting the term ‘personal consumption’, it has to be referred to as the consumption of the taxable person in the context of whom the eligibility to claim input tax credit needs to be looked into. Owing to the decision of the ITAT, even expenses incurred for Key Managerial Personnel, i.e., directors, office bearers, etc., may be covered within the scope of personal expenses/ consumption. The question that therefore remains is if any expenses are incurred for the welfare of the employees and not covered under any other clauses of section 17 (5), whether the same would be hit by clause (g) or not?

For instance, a Mumbai based company has hired a new employee who will be relocating to Mumbai along with his family. As a facilitation measure, the company arranges for the travel of the employee and his family members and the transportation of their belongings to Mumbai. The company also arranges for  temporary accommodation in a hotel for ten days to assist the employee in settling. The company also pays brokerage to a real estate agent for helping the employee find permanent accommodation. None of the expenses incurred by the employer in the above activities is specifically covered under any of the clauses of section 17 (5) – except perhaps the F&B expenses incurred during hotel stay for ten days.

The question that remains is whether this can be treated as a personal expense of the employer as it is consumed by the employee? It is important to note that such expense is allowable u/s 37 (1) as business expenses as this is nothing but personnel expenses, i.e., the expense incurred for the staff. However, the Bombay HC has, in the case of Commissioner vs. Manikgarh Cement [2010 (20) STR 456 (Bom.)] held that mere allowability of expense under income tax cannot be a yardstick to determine eligibility to claim the  credit. A nexus between the input/input service has to be established with the business activity of the taxpayer in order to demonstrate eligibility to claim the credit.

While a strong view to suggest that such expenses are not covered u/s 17 (5) (g) would prevail, it is also important to note that the Authority for Advance Ruling (AAR) has held to the contrary. For instance, in Chennai Port Trust’s case [2019 (28) GSTL 600 (AAR-GST)], the Authority has held that input tax credit on expenses incurred (procurement of inputs/ capital goods/ services) for in-house hospital is for personal consumption of the employees and therefore covered u/s 17 (5) (g).

The entry can also be analysed from a different perspective, especially in the context of goods. Let us take an example of a company having constructed a housing colony for its’ employees. The company also acquires various household equipment, which are installed at each of the houses in the colony. As per entry 4 (b) of Schedule II, where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, the usage or making available of such goods is a supply of services. In other words, a view can be taken that the act of making available the goods at the houses in the housing colony for the personal use of employees is actually a supply of service, and therefore, the corresponding input tax credit cannot be denied. Of course, there would be implications on the same from an output liability perspective, in view of entry 2 of Schedule I.

The scope of clause (g), therefore, appears to be controversial, especially till the term ‘personal consumption’ is not defined/ analysed by the Judiciary to provide more clarity.

CONCLUSION
Be it Direct Taxes or Indirect Taxes, when it comes to allowing the benefit of expenses/tax paid on expenses where there is an element of personal nature, the legislature’s intention has always been to deny the same. The same is further implemented by overzealous tax officers who do not miss any opportunity to label a particular expense as being personal in nature and deny the benefit. Therefore, taxpayers always need to be very careful when claiming input tax credit in respect of goods or services where there is an element of ‘personal’ consumption prevailing. Clauses (b) and (g), both revolve around this mindset of the legislature, and therefore, the taxpayers need to tread cautiously when analysing the same.

Once the determination of the nature of supply is done, the next question that arises is the rate applicable on such supply. There is a lot of confusion about the entry under which a particular goods / service should be classified in view of conflicting rates prescribed under the respective Rate Notifications, coupled with conflicting rulings by the Authority for Advance Ruling from different locations. This, despite the Rate Notifications specifically providing that rules for the interpretation as provided for under the Customs Tariff Act, 1975 shall also apply for the interpretation of headings covered under the said Notification.

In one of our earliest articles, ‘Principles of Classification’ (BCAJ, November, 2017), we had discussed in detail the subject of Classification under GST. In this article, we have attempted to identify a few instances dealing with Classification – both of a supply as goods vs. services, and the applicable rate on a supply along with conflicting AARs’ which add fire to this controversy.

GOODS VS. SERVICES – INTANGIBLES
The perennial controversy about determining what constitutes goods and what constitute services, although settled by the Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh [2004 (178) ELT 22 (SC)] (the ‘TCS case’), used to be a burning issue under the earlier regime and continues to be so even under the new GST regime. This is because the definition of the said terms u/s 2 of the CGST Act, 2017. Section 2 (52) defines ‘goods’ to mean 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. Similarly, section 2(102) defines ‘services’ to mean 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.

The first controversy which pertains to the issue of goods vs. services is in relation to intangibles. The issue of whether software, being an intangible property, is goods or service was already settled by the Apex Court in the TCS case wherein the Hon’ble Court had laid down the conditions for treating an intangible property as goods. Keeping that in mind, in view of the provision of Schedule II of the CGST Act, 2017, if the supply results in transfer of title in goods, the same would constitute supply of goods; while if there is transfer of right in goods without transfer of title thereof, the same would constitute supply of services. However, while dealing with this aspect another recent decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income Tax [Civil Appeal Nos. 8733-8734 of 2018], though in the context of income-tax, will always have an important bearing. In this case, the Court had held that licenses granted by way of End-User License Agreements were nothing but sale of goods. The relevant extracts of the decision are reproduced below for reference:

52. There can be no doubt as to the real nature of the transactions in the appeals before us. What is ‘licensed’ by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this Court in the context of a sales tax statute in Tata Consultancy Services vs. State of A.P., 2005 (1) SCC 308 (see paragraph 27).

In view of the above decision, an issue arises in case of import / export transactions through online mode. Such import / export transactions are not regulated through the Customs channel, and therefore, when payment is made for import of software or received for export of software, the nature of the transaction, i.e., whether the same pertains to purchase / sale of goods or service becomes particularly important. For example, if a person purchases all the rights which subsist in an intangible property / a license, the same would undoubtedly amount to supply of goods. The question that would arise in case of import of such goods is whether GST would be payable treating the same as ‘import of services’ or the same would be liable to tax under the proviso to section 5 of the IGST Act, 2017, i.e., the tax would be levied and collected under the Customs Act, 1962? If the latter view is taken, perhaps such transaction would not attract any IGST since there is no mechanism for levy of tax on intangibles under the Customs Act.

An even larger issue may crop up in the case of export transactions, especially when supply is under payment of IGST where there is a system for automated refund. Since the supply of intangibles is not routed through the customs system, the refund for such transactions may not be automatically processed and would therefore necessitate such exporters to file separate refund applications which can give rise to challenges as the Jurisdiction Officer may reject the refund claim on the simple ground that the same falls within the purview of Customs who may not at all be aware of the entire transaction.

GOODS VS. SERVICES – SALE VS. SERVICE
Entry 3 of Schedule II presumes an activity of job-work as service. While under the earlier regime job-work was defined to mean any activity amounting to manufacture, GST law defines the same to mean any treatment or process undertaken by a person on goods belonging to another registered person and the expression ‘job worker’ shall be construed accordingly. However, it would be incorrect to read this definition on a standalone basis, especially when the statute provides for concepts relating to composite supply / mixed supply which needs to be used when determining the nature of supply. Based on this, one would need to arrive at a conclusion whether a particular activity amounts to supply of goods or supply of service as job-work.

This discussion becomes important since there are specific instances where if the activity is treated as supply of goods, the same attracts tax at a different rate, while when treated as supply of service the applicable rate is different. At times where credit is not available fully, this would also involve cost ramifications. One such instance is observed in the context of newspapers. Supply of newspaper attracts nil rate of tax. However, the activity of printing of newspaper, which is classified as service, attracts tax @ 5%. Therefore, it becomes important to determine whether the supply being made is classifiable as supply of goods / services. Of course, while the answer to this question would depend on the facts of each case, the issue becomes more controversial in view of Circular 11/11/2017-GST dated 20th October, 2017 wherein the Board has clarified as under:

4. In the case of printing of books, pamphlets, brochures, annual reports and the like, where only content is supplied by the publisher or the person who owns the usage rights to the intangible inputs, while the physical inputs including paper used for printing belong to the printer, supply of printing [of the content supplied by the recipient of supply] is the principal supply and therefore such supplies would constitute supply of service falling under heading 9989 of the scheme of classification of services.
5. In case of supply of printed envelopes, letter cards, printed boxes, tissues, napkins, wall paper, etc. falling under Chapter 48 or 49, printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, the predominant supply is that of goods and the supply of printing of the content [supplied by the recipient of supply] is ancillary to the principal supply of goods, and therefore such supplies would constitute supply of goods falling under respective headings of Chapter 48 or 49 of the Customs Tariff.

While in the first case the Board has clarified that the supply of printing service is the principal service, in the second case it has been clarified that supply of goods is the predominant supply. It is difficult to fathom how both the transactions can be dealt with differently as in both the cases the intention of the recipient is to receive back printed material from the job-worker. It is common for publishers to outsource printing activity and the dominant intention is to receive the printed content which is used by them to further supply such printed content.

In fact, this Circular also appears to be contrary to the principles of job-work which have been laid down by the Supreme Court in the case of Prestige Engineering (India) Ltd. vs. CCE Meerut [1994 (73) ELT 497 (SC)] which explained what shall and what shall not constitute job work. The primary rule laid down by the Court was that job work should not be narrowly understood as requiring the job worker to return the goods in the same form as this would render the Notification itself redundant since the definition specifically contemplated ‘a manufacturing process’, but it also cannot be so widely interpreted as to allow an arrangement where the process involved substantial value addition. It is imperative for the readers to note that the above clarification has also been followed by the Authority for Advance Ruling in the case of Sri Venkateswara Enterprises [2019 (30) GSTL 83 (AAR – GST)]. However, in another case, that of Ashok Chaturvedi [2019 (21) GSTL 211 (AAR – GST)], the Authority has held that the principal supply was that of goods and therefore the printed content would be classified under Chapter 49 and taxed accordingly.

A similar issue exists in the hospitality sector where there is confusion as to whether tobacco products such as cigarettes, hookah, etc., supplied and consumed in a restaurant shall be classified as supply of goods or supply of service as a part of restaurant services? The Advance Authority has, in the case of MFAR Hotels & Resorts Private Limited [2020 (42) GSTL 470 (AAR – GST – TN)], held that cigarettes supplied in the restaurant will be treated as supply of goods as the same is not naturally bundled with the service of the restaurant. However, it would appear that the ruling has not taken into consideration Entry 6(b) of Schedule II which deems a composite 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 as supply of service. If aerated beverages, which also attract the higher rate of tax as well as compensation cess supplied in a restaurant can be treated as supply of service, there is no logical reasoning to not extend the same benefit to tobacco as the same also falls within the basket of goods supplied for human consumption, irrespective of whether or not the same is injurious to health!

RATE CLASSIFICATION – GOODS
As discussed in the earlier article also, the Rate Notifications under GST provide that the classification of any goods / services in a particular rate / exemption entry shall be done applying the rules for interpretation as provided for under the Customs Tariff Act, 1975. The said rules were discussed in detail in the said article. However, since the introduction of GST there have been several items the classification of which has continued to be under dispute. In this article, we have attempted to identify and discuss such cases.

The first class of goods which has seen substantial classification dispute is ‘tobacco’ which comes in different forms and varied rates have been notified depending on the nature of the product. The following table summarises the different rates applicable to different types of tobacco:

A particular area of dispute has been as to what constitutes tobacco leaves. The Board has, vide Circular 332/2/2017 – TRU clarified that tobacco leaves shall mean leaves of tobacco as such, broken tobacco leaves and stems. This issue has been examined in detail in the context of Central Excise. The Tribunal has, in the case of Yogesh Associates vs. CCE, Surat II [2006 (195) ELT 196 (Tri – Mum)] wherein the Tribunal held that raw leaf treated with tobacco solution Quimam and other flavours including saffron water did not result in the leaf undergoing any irreversible change and the same continued to remain raw, unmanufactured tobacco leaf. This decision was also approved by the Apex Court in 2006 (199) ELT A221 (SC). However, there have been conflicting decisions from the Authority for Advance Ruling in the context of GST w.r.t. classification of tobacco products in different forms.

In the case of Shailesh Kumar Singh [2018 (13) GSTL 373 (AAR – GST)] and Pragathi Enterprises [2018 (19) GSTL 327 (AAR – GST)]), the Authority has held that dried tobacco leaves which have undergone the process of curing are not covered under Schedule I Entry 109 but will be covered under Schedule IV Entry 13. In Sringeri Yogis Pai [2019 (31) GSTL 357 (AAR – GST)] the Authority has further held that cured tobacco leaves would also get covered under Schedule IV Entry 13.

However, in Suresh G. [2019 (023) GSTL 0483 (AAR – GST)], the Authority has held that sun-cured tobacco leaves would get covered under Schedule I and therefore attract GST at 5%. The Authority held as under:

‘6. It is well-known fact that the fresh or green leaves are having no commercial marketability. Only after the long process of curing the tobacco leaves become capable for marketing. Therefore legislature imposed tax only on cured tobacco leaves which are capable of being traded. As per serial number 13 of Schedule-IV of Notification No. 1/2017-Central Tax (Rate), dated 28-6-2017 “un-manufactured tobacco” is brought under 28% taxable category. But the entry itself clearly specified that unmanufactured tobacco, tobacco refuse (other than tobacco leaves) is taxable at the rate of 28%. Since tobacco leaves are specifically excluded from Schedule-IV Sl. No. 13 it will squarely come under Schedule-I of Sl. No. 109 and taxable at the rate of 5%. Therefore tobacco leaves including the leaves cut from plant, dry leaves, cured leaves by applying natural process ordinarily used by the farmers to make them fit to be taken to market shall qualify for 5% tax rate. It is common knowledge that without curing tobacco leaves cannot be consumed. The curing in relation to tobacco leaves means removal of moisture from the tobacco leaves. Section 2(c) of the Central Excise Act, 1944 specified that the term “curing” includes wilting, drying, fermenting and any process for rendering an unmanufactured product fit for marketing or manufacture. Hence, the unavoidable process of curing of tobacco leaves to make it fit for marketing will qualify the word “curing” mentioned in Chapter 24 of the Customs Tariff Act, 1975.’

The above view has also been followed in the case of Alliance One Industries Private Limited [2020 (32) GSTL 216 (AAR – GST – AP)] and K.S. Subbaih Pillai & Co. (India) Pvt. Ltd. [2020 (32) GSTL 196 (AAR – GST – AP)].

It is therefore clear that there is a lot of confusion with regard to the correct classification of tobacco under GST. Further, with tobacco being liable to tax under Reverse Charge also, the need for a correct solution becomes more important since if a wrong classification is applied there will be an effect on both fronts, outward supplies as well as inward supplies. It therefore becomes more important for the taxpayer to determine the correct classification of the product being dealt with by him to avoid future litigation. In other words, it would be safe to say that applying a wrong classification would not only be injurious to customers’ health, but also to the taxpayers’ health!

The next controversy revolves around classification of fryums. This is because while there is no specific entry for fryums under GST, Entry 96 of Notification 2/2017 – CT (Rate) exempts papad, by whatever name known, from GST except when served for human consumption. On the other hand, there are different entries in the Rate Notification so far as namkeen is concerned. The following table summarises the different rates applicable to namkeen in different forms:

Therefore, the questions which need deliberation are:
* Whether fryums can be treated as papad?
* If not, under which entry will fryums qualify?

The reason behind the need to determine whether fryum can be classified as papad or namkeen arises in view of the decision of the Tribunal in the case of Commissioner of Central Excise vs. TTK Pharma Ltd. [2005 (190) ELT 214 (Tri – Bang)]. The Tribunal had held that fryums can be marketed as namkeen only after they are fried, just like papad. However, the tax implication if this classification is not accepted is substantial because if fryums are classified as papad, the same are exempted from GST, while if classified as namkeen, the same would get classified under Schedule III and become liable to GST at 18%. Thus, the difference is substantial and therefore one needs to be careful while deciding the classification of fryums.

This aspect has also been dealt with by the AAR in the case of Sonal Products [2019 (23) GSTL 260 (AAR – GST)] and Alisha Foods [2020 (33) GSTL 474 (AAR – GST)]. In both instances, the Authority has held that fryums are classifiable as namkeen and not papad and therefore the same would be taxable at 18%. The Authority relied on the decision in the case of TTK Pharma Ltd. vs. Collector of Central Excise [1993 (63) ELT 446 (Tribunal)]. However, it has failed to appreciate that the Tribunal had used the word namkeen / papad interchangeably while dealing with the applicability of an exemption Notification. The Authority further referred to the decision in the case of Commissioner of Commercial Taxes, Indore vs. TTK Healthcare Ltd. [2007 (21) ELT 0197 (SC)]. However, the Authority has again failed to appreciate that the dispute in the said case was whether or not fryums could be treated as cooked food. The Authority has further concluded that the classification was to be done as per the meaning construed in the popular sense and as understood in common language.

It is important to note that the Authority has failed to appreciate that the process followed for making of papad / fryums is similar. In fact, both become ready for human consumption only when fried and when fried, both rather partake the character of namkeen. In this sense, the decision of the Authority to not treat fryums as papad appears to be on shaky ground.

The next item which has seen its fair share of controversy is parantha. Entry 97 of Notification 2/2017-CT (Rate) exempts bread (branded or otherwise) from tax, except when served for consumption, and pizza bread. Bread is something which is generally an accompaniment with the main meal of the day and is cooked in different styles using different ingredients. It is known by different names across the globe. If one does a search for ‘List of Breads’ on Wikipedia, it can be seen that even the roti, chapati, naan, kulcha, dosa, etc., which are consumed in different parts of India and known by different names are also types of bread. However, there is a separate entry for plain chapati or roti under Schedule I of Notification 2/2017-CT (Rate) and the same is taxed at 5%. But other forms of Indian bread do not find a specific entry in the Rate Notifications. This gives rise to the classification issue.

The first such issue reported was in the classification of ‘Classic Malabar parota’ or ‘Whole Wheat Malabar parotta’. The Authority for Advance Ruling has in the case of Modern Food Enterprises Private Limited [2018 (18) GSTL 837 (AAR – GST)] held that there is a substantial distinction between parotta and bread in terms of preparation, use and digestion and, therefore, exemption given to bread cannot be extended to parotta. However, in Signature International Foods India Private Limited [2019 (20) GSTL 640 (AAR – GST)], the Authority has held that paratha was similar to roti and therefore classifiable under Schedule I of Notification 1/2017-CT (Rate) and therefore attracts GST @ 5%. Surprisingly, in this case the Authority proceeded to conclude that naan / kulcha which were not defined anywhere would be classifiable under the residuary entry in Schedule III of Notification 1/2017-CT (Rate) and therefore attract GST @ 18%.

RATE CLASSIFICATION – SERVICES
Let us now look at similar issues while determining the applicable tariff entry for services. The first issue which arises is with classification of certain services provided to Government, whether Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity. The relevant entry for discussion is Entry 3(vi) of Notification 11/2017-CT (Rate) which provides for tax at 12% on composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided to the Central Government, State Government, Union territory, a local authority or a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession. Vide the explanation, it has also been clarified that the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, State Government or any local authority in which they are engaged as public authorities.

Despite the above clarification, there has been substantial confusion as to when a service would be classified under this entry, because when services are being provided to Government it is difficult to distinguish whether the service is for use other than for commerce, industry or any other business or profession. There have been conflicting AARs on this issue as well. In A2Z Infra Engineering Ltd. [2018 (18) GSTL 760 (AAR – GST)], the Authority held that services provided to a Power Distribution Company would be covered under the scope of ‘for use other than for commerce, industry, or any other business or profession’ and therefore concessional tax rate would not be applicable in such a case. A similar view was also followed in the case of Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited [2019 (020) GSTL 0788 (AAR – GST)] as well. In fact, in a recent decision the Appellate AAR in the case of Vijai Electricals Ltd. [2020 (42) GSTL 153 (App. AAR)] wherein despite the appellants submitting an opinion from the Government Departments that the activities of the recipient were non-commercial in nature, the denial of benefit of concessional rate of tax was upheld.

In the case of Tata Projects Limited [2019 (24) GSTL 505 (AAR – GST)], service provided to the Nuclear Fuel Complex engaged in the manufacture and enrichment of nuclear fuel for production of electricity which is a business and commercial activity, the concessional rate of 12% will not be available.

However, the Appellate AAR has in the case of ITD Cementation India Limited [2019 (25) GSTL 315 (AAAR)] set aside the order of the AAR and held that supply of service for construction of multi-modal terminal was for infrastructural development of waterways of India and not meant for commerce and business. A similar view was taken in the case of Vikram Sarabhai Space Centre [2019 (25) GSTL 129 (AAR – GST)] also.

There are many taxpayers who are providing service of this kind to Government and in many cases the contract values are inclusive of GST. Prompt clarification on what constitutes ‘commerce, industry, business or profession’ would be most welcome as there would be severe financial consequences if the end conclusion is not beneficial to the taxpayers.

Another burning issue in the context of services provided to Government is what constitutes ‘pure services’? Entry 3 of Notification 12/2017-CGST (Rate) provides exemption to pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory, or local authority, or a Governmental authority, or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution, or in relation to any function entrusted to a Municipality under Article 243W of the Constitution. However, what constitutes ‘pure service’ has not been defined either under the Notification or the Act / Rules.

This has resulted in substantial confusion since taxpayers intend to claim the benefit of the exemption Notification while the tax authorities look at ways to deny the same. In fact, the AAR has on multiple occasions held that only such service where there is no involvement of even an incidental supply of goods would be covered within the scope of ‘pure service’. In fact, in the case of Harmilap Media (P) Limited [2020 (33) GSTL 89 (AAR – GST)], while determining whether or not advertising service would classify as pure service, the Authority held in the negative since there is an element of supply of goods involved, though not material. Fortunately, this anomaly has been sought to be removed by way of insertion of Entry 3A to the Notification which now provides that the exemption shall extend to composite services also, provided that the value of goods involved in the supply is not more than 25% of the total value. This amendment will perhaps put the dispute to rest.

The next dispute revolves around classification of services relating to transport of goods. There are two rates notified for the service of GTA, one being 5% in case the service provider opts to not claim ITC and 12% where the service provider opts to claim ITC. What constitutes ‘GTA’ has been defined to mean any person who provides service in relation to transport of goods by road and issues a consignment note, by whatever name called. The first controversy which prevails is whether for classification as a GTA is the supplier compulsorily required to issue a consignment note? A perusal of the Rate Notification does indicate towards the same. However, the Appellate AAR has in the case of K.M. Trans Logistics Private Limited [2020 (35) GSTL 346 (AAAR -– GST)] while dealing with this issue held that once the possession of goods is transferred to the transporter, irrespective of whether the consignment note is issued or not, he becomes a GTA and would therefore be liable to tax accordingly.

However, in the case of Liberty Translines [2020 (41) GSTL 657 (App. AAR – GST)], in a case involving sub-contracting in transportation business, the Authority held that issuance of a consignment note by the sub-contractor transporter to the main transporter would not make him a GTA and the service would be classified under the entry of ‘renting of vehicles’ and would therefore attract tax at 18%, irrespective of whether the main contractor opts to pay tax under the 5% scheme / 12% scheme, thus involving substantial cost implications for the main contractor. It is, however, important to note that in the case of Saravana Perumal [2020 (33) GSTL 39 (AAR – Kar)] involving a similar fact matrix, the AAR has held that the services provided by the sub-contracting transporter to the main transporter would also get classified as GTA.

CONCLUSION
The above discussion clearly indicates that the classification issue will continue even under the GST regime. Of course, the same will be on multiple fronts, ranging from classifying an activity as that of goods or service or none, and then proceeding to determine the correct tariff classification. The controversy will get more pronounced with conflicting decisions from the AAR which will only add fuel to the fire. However, the taxpayers will need to be more cautious and careful, especially where there is confusion on the classification, because incorrect classification may have serious ramifications on the business.