Revenue needs proper evidence to reject classification done by assessee

Commissioner of Customs And Central Excise Vs D.L. Steels Etc. (Supreme Court of India)

Held that Revenue needs to adduce proper evidence to show that the goods are classifiable under a different heading than that claimed by the assessee. The onus is on the Revenue to establish that the item in question falls in taxing category as claimed by them.

Facts-

M/s. D.L. Steels (respondent), had imported two consignments of ‘anardana’ from Pakistan, vide Bills of Entry dated 15th December 2005 and 9th March 2006. For taxation they classified the goods under the tariff sub-heading 1209.99.90, attracting BCD @ 5% plus education cess @ 2%. However, the customs authorities contend that the goods must fall under sub-heading 0813.40.90, and accordingly, are liable for BCD @ 30% plus education cess @ 2%.

In show cause notice it was alleged that fresh pomegranate falls under the Heading 0810, and the goods, being nothing but the dried form of fresh pomegranate fruit seeds, would fall under Heading 0813, an entry which covers the dried form of all items falling under Headings 0807 to 0810. Consequently, sub-heading 0813.40.90 would be applicable to the goods.

The adjudicating authority confirmed the differential duty. However, Commissioner (A) allowed the appeal. Revenue preferred appeal before CESTAT which was also dismissed. Being aggrieved, revenue has preferred the present appeal.

Conclusion-

Held that when the Revenue challenges the classification made by the assessees, the onus is on the Revenue to establish that the item in question falls in taxing category as claimed by them. The burden is on the Revenue to adduce proper evidence to show that the goods are classifiable under a different heading than that claimed by the assessee.

Held that in the context of the present case, once we accept the finding of fact recorded by the CESTAT that ‘anardana’ is a dried product of local ‘daru’ or wild pomegranate, which grows in mid hill conditions and which fruit in its fresh form is different from the pomegranate included in clause 7 to Heading 08.10, as this wild pomegranate is not consumed as a fresh fruit, the contention of the Revenue must fail. GRI 3, which in the absence of the Heading, Section or Chapter Notes, prescribes the order of priority as – (a) specific description, (b) essential character, and (c) the Heading that occurs last in numerical order, and even GRI 4 – the heading appropriate for the goods “to which they are most akin”, supports our conclusion and finding.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

These appeals raise a common question – should dried pomegranate seeds, domestically known as ‘anardana’, be classified under Heading 0813 of the Tariff entries issued under the Customs Tariff Act, 1975,¹ as claimed by the Commissioner of Customs, Amritsar,² or under Heading 1209 as claimed by the importers?³

2. For brevity, we will only refer to the specific facts in the case of M/s. D.L. Steels, wherein the respondent had imported two consignments of ‘anardana’⁴ from Pakistan, vide Bills of Entry dated 15^th December 2005 and 9^th March 2006. For taxation they classified the goods under the tariff sub-heading 1209.99.90, attracting basic custom duty at the rate of 5% plus education cess at the rate of 2%. However, the customs authorities contend that the goods must fall under sub-heading 0813.40.90, and accordingly, are liable for basic custom duty at the rate of 30% plus education cess at the rate of 2%.

3. To this end, the Office of the Assistant Commissioner, Rail Cargo, Amritsar,⁵ issued a show-cause notice dated 27^th March 2006, which inter alia stated that fresh pomegranate falls under the Heading 0810, and the goods, being nothing but the dried form of fresh pomegranate fruit seeds, would fall under Heading 0813, an entry which covers the dried form of all items falling under Headings 0807 to 0810. Consequently, sub-heading 0813.40.90 would be applicable to the goods.

4. The goods were released provisionally by the customs authorities on the execution of a bond. By assessment order dated 31^st May 2006, the adjudicating authority confirmed the differential duty of Rs.82,136/- under Section 28(2) of the Customs Act, 1962, and imposed a personal penalty of Rs.82,000/- under Section 114-A read with Section 112 of the Customs Act on the respondent. Levy of interest under Section 28AB was directed.

5. Similar orders based on identical grounds classifying the goods under sub-heading 0813.40.90, imposing differential duty, interest, and penalty were passed in the cases of the other respondents as well.

6. First appeals preferred by the respondents were allowed by the Commissioner (Appeals), Central Excise, Jalandhar, on the ground that the goods were the dried form of a type of pomegranate which, when fresh, is not consumed as a fruit. Accordingly, Heading 0810, which applies to the type of pomegranate which is consumed as a fruit, would have no relevance to the type of pomegranate from which the goods are obtained. Additionally, it was observed that the respondents’ contention would also prevail in light of the policy condition attached to sub-heading 1209.99.90 of the Indian Export/Import Policy,⁶ which specifically states – “import of pomegranate seeds will be free”.⁷

7. Aggrieved, the Revenue preferred appeals before the Customs, Excise and Service Tax Appellate Tribunal,⁸ which, in the case of the respondent, was dismissed vide order dated 18^th July 2008 inter alia citing the certificate of Dr. Y.S. Parmar University of Horticulture and Forestry, Solan, to hold that the goods do not fall under the ambit of Heading 0813. The CESTAT observed that words in a taxing statute must be construed in the same sense as understood in common or trade parlance, and the Revenue had failed to lead any evidence to support its contention that in trade parlance, the goods are understood as dried fruits. Reference was made to the observation in the Import Policy which had classified the goods under the sub-heading 1209.99.90. Adverting to the Explanatory Notes to the Heading 1209, it was held that as the goods did not fall in the list of items expressly excluded from sub-heading 1209.99.09, they very well stood included in the sub-heading 1209.99.90. Accordingly, sub-heading 0813.40.90 was not applicable, and the appeal was dismissed.

8. Similar orders were passed by the CESTAT in the cases of other respondents as well. Resultantly, the Revenue is in appeal before us.

9. The Harmonised System of Nomenclature,⁹ developed by the World Customs Organisation, has been adopted in India by way of the Customs Tariff Act, 1975, though there are certain entries in the Schedules to this Act which have not been assigned HSN codes. The Harmonised System is governed by the International Convention on Harmonised Commodity Description and Coding System, which was adopted in 1983, and enforced in January, 1988. This multipurpose international product nomenclature harmonises description, classification, and coding of goods. While the primary objective of the HSN is to facilitate and aid trade, the Code is also extensively used by governments, international organisations, and the private sector for other diverse purposes like internal taxes, monitoring import tariffs, quota controls, rules of origin, transport statistics, freight tariffs, compilation of national accounts, and economic research and analysis. In the present times, given the widespread adoption of the Harmonised System by over 200 countries, it would be extremely difficult to deal with an international trade issue involving commodities, without adverting to the Harmonised System. The Code is the bedrock of custom controls and procedures. The HSN consists of over 5000 commodities groups, which are structured into 21 Sections and 97 Chapters, which are further divided into four and six digit sub­headings. Many custom administrations, like India, use an eight or more digit commodity coding system, with the first six digits being the HSN code.

10. Classification under the Harmonised System is done by placing the good under the most apt and fitting sub-heading. This is done by choosing the appropriate Chapter, Heading, and sub-heading respectively. To facilitate interpretation and classification, each of the 97 Chapters in the HSN contain corresponding Chapter Notes, General Notes, and Explanatory Notes applicable to the Headings and sub-headings within that Chapter. In addition, there are six General Rules of Interpretation¹⁰ applicable to the Harmonised System as a whole.

11. GRI 1 states that the titles of Sections, Chapters, and sub-Chapters are provided for ease of reference only. Therefore, they have no legal bearing on classification. Classification is to be effected: (a) according to the terms of the Headings and any relative Section or Chapter Notes; and, (b) provided the Headings or Chapter Notes do not otherwise require according to the provisions thereinafter contained, viz., GRIs 2 to 6. Thus, it is clear from the above that: (i) the Headings, and, (ii) the relative Section or Chapter Notes must be considered before classification is done. Only after this exercise is done, if a conflict in classification still persists, the subsequent GRIs are to be resorted to. GRI 2 is not germane to the present case and therefore, we make no reference to it. GRI 3 provides for classification in the event when the goods are classifiable under two or more Headings. As per GRI 3, when by application of GRI 2(b) or for any other reason, the goods are, prima facie, classifiable under more than one Heading, then; (a) the ‘most specific description’ is preferred, (b) a mixture of different goods will be classified as that good which gives the mixture its ‘essential characteristic’, and (c) when goods cannot be classified with reference to (a) or (b), they should be classified under the Heading which occurs last in the numerical order.¹¹ The order of priority therefore is; (a) specific description, (b) essential character, and (c) the Heading which occurs last in numerical order. However, GRI 3 can only take effect provided the terms of the Heading or Section or Chapter Notes do not otherwise require. GRI 4 states that when the goods cannot be classified in accordance with the aforementioned rules, they shall be classified under the heading appropriate for the goods “to which they are most akin”. GRI 5 applies exclusively to cases and packing material, and therefore, is not apropos. GRI 6 states that the classification of goods in the sub­headings of a Heading shall be determined according to the terms of those sub-headings and any related Notes, and mutatis mutandis to the above GRIs, on the understanding that only sub-headings at the same level are comparable.

12. We would, at this stage, take on record the well-settled principle that words in a taxing statute must be construed in consonance with their commonly accepted meaning in the trade and their popular meaning.12 When a word is not explicitly defined, or there is ambiguity as to its meaning, it must be interpreted for the purpose of classification in the popular sense, which is the sense attributed to it by those people who are conversant with the subject matter that the statute is dealing with. This principle should commend to the authorities as it is a good fiscal policy not to put people in doubt or quandary about their tax liability. The common parlance test is an extension of the general principle of interpretation of statutes for deciphering the mind of the law-maker. However, the above rule is subject to certain exceptions, for example, when there is an artificial definition or special meaning attached to the word in a statute, then the ordinary sense approach would not be applicable.¹³

13. The two contesting Headings along with the relevant General, Chapter and Explanatory Notes are extracted below:

“Chapter 8: Edible Fruit and Nuts; Peel of Citrus Fruit or Melons

Chapter Notes.

1.- This Chapter does not cover inedible nuts or fruits.

xx                        xx                        xx

General:

This Chapter covers fruit, nuts and peel of citrus fruit or melons (including watermelons), generally intended for human consumption (whether as presented or after processing).

xx                        xx                        xx

08.10 – Other fruit, fresh.

081010 – Strawberries

081020 – Raspberries, blackberries, mulberries and loganberries

081030 – Black, white or red currants and gooseberries

081040 – Cranberries, bilberries and other fruits of the genus Vaccinium

081050 – Kiwifruit

081060 – Durians

081090 – Other

0810.90 Other

This heading covers all edible fruits not falling in any preceding heading of this Chapter nor included in other Chapters of the Nomenclature (see the exclusions in the General Explanatory Note to this Chapter).

It therefore includes:

(1) – (6)

(7) Boysenberries, rowan berries, elderberries, sapodilla (naseberries), pomegranates, cactus figs (prickly pears), rose hips, persimmons (kakis), jujubes, medlars, longans, litchi, soursops, sweetsops and fruit of the species Asimina triloba also known as pawpaws.

xx                        xx                       xx

08.13 – Fruit, dried, other than that of headings 08.01 to 08.06; mixtures of nuts or dried fruits of this Chapter.

0813.10 – Apricots

0813.20 – Prunes

0813.30 – Apples

0813.40 – Other fruit

0813.50 – Mixtures of nuts or dried fruits of this Chapter

(A) Dried fruit.

This heading includes dried fruits which when fresh are classified in headings 08.07 to 08.10. They are prepared either by direct drying in the sun or by industrial processes (e.g., tunnel-drying).