The Supreme Court’s decision in Westinghouse Saxby Farmer Ltd. v. CCE, Calcutta[1] (‘Westinghouse decision’) evoked an intriguing discussion on the classification of ‘relays’ used as part of Railway signalling systems. Recently, the Central Board of Indirect Taxes & Customs (‘CBIC’) issued Instruction No. 01/2022-Customs, dated 5 January 2022 (‘Instruction’), respectfully recording their disagreement with the Westinghouse decision while responding to references from the trade over the classification of ‘automobile parts’ in the light of the Westinghouse decision. The authors explore the on-ground impact of the Instruction.
A debrief
The Westinghouse decision examined the classification of ‘relays’ meant for use as part of Railway signalling systems. The Revenue disputed the assessee’s classification of the relays under Chapter Heading 8608 of the Central Excise Tariff Act, 1985 (‘Tariff Act’) and sought to re-classify them under sub-heading 8536.90. The Calcutta Bench of the CESTAT agreed with the Revenue to rule that relays were classifiable under sub-heading 8536.90.
The Apex Court applied the ‘principal use test’ embodied in Note 3 to Chapter XVII of the Tariff Act and held that the relays were more appropriately classifiable under CH 8608 in this specific case as they were manufactured and supplied to the Railways solely for use as part of railway signalling equipment.
The Supreme Court disagreed with the Revenue’s classification of relays under CH 8536 in view of the settled principle that Rule 3(a) of the General Rules For Interpretation of this Schedule (‘Interpretative Rules’) in the First Schedule to the Tariff Act are invokable only when goods are classifiable under two or more Headings (either by application of Rule 2(b) of the Interpretative Rules or for any other reason). The Supreme Court also rejected the Revenue‘s plea that relays were excluded from CH 8608 per Note 2(f) in Section XVII of the Tariff Act by finding that Note 2(f) excluded only goods that were independently capable of being marketed as electrical equipment (for use other than as railway signalling equipment) and did not affect goods which were suitable for use principally with railway signalling equipment.
The Instruction: Import and impact
Emphasizing that classification of goods under Section XVII is a complex issue, the Instruction drew attention to prior decisions of the Apex Court where Note 2(f) was preferred over the ‘principal use test’ in Note 3 which had not been considered in the Westinghouse decision to indicate an apparent dissonance vis-à-vis classification of other parts of goods falling under Section XVII of the Tariff Act.
Responding to trade representations regarding classification of ‘automobile parts’ under CH 8608, the Instruction clarified that the Westinghouse decision was highly specific as it classified relays used in railway signalling systems under CH 8608 and did not extend to goods falling under CH 87 or to any other case of a similar nature. The Instruction adverted to the valuable opinion of the Ld. Additional Solicitor General of India and advised field formations to factor in aspects such as the operative facts, HS Explanatory Notes[2], Section and Chapter Notes while classifying products for assessment. The Instruction also made passing mention to a Review Petition filed by the Revenue against the Westinghouse decision.
The decisions cited in the Instruction are stated to rank the exclusions in Note 2 above the ‘principal use’ test. The authors analyse the decisions quoted to assess the situation.
- In Intel Design Systems[3], the controversy centred on classification of contractors, switches, control box, etc. when used in ‘parts of tanks, armoured fighting vehicles’ for the Defence Ministry, GOI. The Apex Court considered the competing entries of Heading 8710 (Vehicles other than Railway or Tramway Rolling Stock and Parts and Accessories) against the Revenue’s claim for classification under sub-heading 8536.90 (Electricals) and held that the accurate classification would be sub-heading 8536.90 on a combined reading of Rule 1 of the General Interpretive Rules, Note 2 (f) to Section XVII (which also governs Chapter 87) and the HSN Explanatory Notes. Significantly, the goods under consideration were specifically covered under Csub-heading 8536.90 and were not addressed in CH 8710 though they were used as part of goods that would fall under CH 87. It was in this specific context that the Apex Court preferred the exclusions in Note 2 over the ‘principal use’ of the goods, to seal the classification of the goods under Heading 85.36.
- In Uni Products[4], ‘car matting/carpets’ were sought to be classified under Heading 5703 (Carpets and other floor coverings) whereas the Revenue claimed classification under CH 87. The Apex Court noted that Clause C of III – Parts and Accessories in HSN Explanatory Notes to Section XVII specifically excluded textile carpets. The Apex Court declined to apply the ‘principal use’ test to bring the goods within CH 87 as the car mats were categorically covered under CH 57 and specifically excluded from CH 87 by the HSN Explanatory Notes. It is noteworthy that here, the goods could have been covered either under CH 57 or 87 and the Apex Court found that because they were specifically covered under CH 57, there was no necessity to employ the ‘principal use test’ for ascertaining classification.
Do the HSN explanatory notes impact the stance adopted in Westinghouse Saxby?
Relays find specific mention in Heading 8536 and are also implicated under Heading 8608 as mechanical/electro-mechanical signalling for Railways and Note 2(f) to Section XVII of the Tariff Act excludes electrical machinery/equipment of CH 85. Suffice it to say, there is plenty of wiggle-room for deciding where relays must be classified. On the one hand, the HSN Explanatory Note 7(e) to Part III in Section XVII lists ‘electrical signalling apparatus in trains’ as an example of electrical apparatus in CH 85 excluded by Note 2(f) to Section XVII of the Tariff Act. At the same time, the HS Explanatory Note 3 to Part III in Section XVIII lays out the ‘principal use’ test and when it would be triggered, clearly stating that when a part or accessory can fall in one or more other Sections as well as in Section XVII, its final classification is determined by its principal use.
Way forward and conclusion
It is clear from the above abstract that the decisions quoted in the Instruction were rendered in highly specific, factual scenarios. The Westinghouse decision effected a balance between the larger objective of ‘group classification’ in the context of ‘principal use’ against the specific exclusions in Note 2(f) of Section XVII of the Tariff Act. The Instruction’s advice that all classification matters must countenance a holistic of all relevant aspects starting from HSN explanatory notes to the section and chapter notes is beyond reproach.
The Instruction appears to be a graceful attempt to qualify the operation of the Westinghouse decision by indirectly restraining the tax administration from applying it. The immediate impact of the Instruction may be that the Westinghouse decision will be applied sparingly, in light of the several caveats contained therein. Seeing as Circulars are binding on tax authorities[5], the Instruction enables tax authorities to bypass the Westinghouse decision even in an identical case, in light of the Review Petition seemingly pending before the Supreme Court. It remains to be seen how the concerns raised in the Instruction are settled in the review proceedings.
[The authors are Sai Prashanth, Joint Partner and Krithika Jaganathan, Principal Associate, in the GST Advisory team in Lakshmikumaran & Sridharan Attorneys, Chennai]
[1]2021 (3) TMI 291 - Supreme Court
[2] “Harmonized Commodity Description and Coding System”, Explanatory Notes issued by the World Customs Organisation (2002).
[3] Intel Design Systems (India) Pvt. Ltd. v. CCE - 2008 (223) E.L.T. 135 (S.C.)
[4] CCE v. Uni Products India Ltd. - 2020 (372) E.L.T. 465 (S.C.)
[5] CCE, Vadodara v. Dhiren Chemical Industries - 2002 (143) E.L.T. 19 (S.C.)
