Background

1. Hon’ble Supreme Court in the case of Westinghouse Saxby Farmer Ltd. v. Commissioner of C. Ex. 2021 (376) E.L.T. 14 (S.C.) decided on 08.03.2021 held that the ‘relays’ capable of use solely as part of the Railway signalling equipment should be classified under heading 8608 and not as normal electrical relays under heading 8536. The said decision was rendered in the context of the Central Excise Act, 1944 wherein with effect from 28-2-1993 the effective rate of excise duty on the goods falling under heading 8536 became much higher than the effective rate of duty for the goods falling under heading 8608.

2. The aforesaid decision re-ignites the controversy as regards the classification of the ‘parts’ of various vehicles, aircraft, vessels and associated transport equipment. The essential issue is whether all the ‘parts’ of such vehicles meant for sole use with the said vehicles are always to be classified along with the said vehicles under Chapter 86 to 89 or are required to be classified in other Chapters based on the application of the general rules of interpretation.

3. The ratio of the aforesaid decision has resulted in divergent practices being followed by the authorities under the Customs Law wherein while undertaking the assessments, the automobile parts (hitherto classified under other Chapters) came to be classified under Chapter 87 as ‘parts’ of the subject vehicles.

4. In the present analysis, we consider the crux of the aforementioned decision and examine the correctness of the same. We also consider the recently issued CBIC Instruction (No. 01/2022-Customs dated 05.01.2022) that seems to also suggest a view that is divergent from the aforementioned decision.

5. We also submit that the correct classification of the ‘parts’ will have a bearing not only under the Customs Law but even under the GST Law since the GST rate notifications require the application of the Customs HSN.

Supreme Court

6. In the subject controversial case (Westinghouse) the appellant was engaged in the manufacture of “Relays” which are used as part of the Railway signalling equipment. A ‘Relay’ is an electrically operated switch, used to control a circuit. They may also be used where several circuits must be controlled by one signal. The undisputed facts in the case were that the ‘relays’ manufactured by the appellant were for sole use as part of the Railway signalling equipment. Now the two headings (that were in dispute) are as under (emphasis supplied):

Heading Description
8536 Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, relays, fuses, surge suppressors, plugs sockets, lamp-holders and other connectors, junction boxes), for a voltage not exceeding 1,000 volts; connectors for optical fibres, optical fibre bundles or cables
8608 Railway or tramway track fixtures and fittings; mechanical (including electro-mechanical) signalling safety or traffic control equipment for railway, tramways, roads, inland waterways, parking facilities, port installation or air-fields; parts of the foregoing

7. The case of the department was that the ‘relay’ in question should fall under heading 8536 (more specifically 8536.90.90 at the relevant time) and not under 8608 as claimed by the appellant. The reasoning of the department was this:

i. That Note 2(f) of Section XVII (that covers Chapter 86) says that the expression “parts” appearing in Chapter 86 does not apply to electrical machinery or equipment, covered by Chapter 85 and since ‘relay’ is specifically covered in Chapter 85 (8536), the same stands excluded from Chapter 86.

ii. That Rule 3(a) of the “General Rules for Interpretation of the First Schedule” to the Central Excise Tariff Act, 1985 says that the Heading which provides the most specific description shall be preferred to the Heading providing a more general description and hence the most specific heading (8536) should be preferred over the more general description (i.e. ‘parts’ of Railway signalling equipment under 8608)

8. The Hon’ble Supreme Court negated both the aforementioned arguments as under:

i. That Note 2(f) has to be read along with Note 3. Note 3 calls for the “suitability for use test” or ‘the user test’ to say that ‘parts’ meant for sole use with the goods covered under Chapter 86 to 88 shall be classified therein only that contains a reference to ‘parts’. Heading 8608 provides for including ‘parts’ for the Railway signalling equipment. Further, the exclusion under Note 2(f) may be of goods that are capable of being marketed independently as electrical machinery or equipment, for use otherwise than in or as Railway signalling equipment. Those parts which are suitable for use solely or principally with an article in Chapter 86 cannot be taken to a different Chapter as the same would negate the very object of group classification.

ii. That Rule 3(a) cannot be invoked in the present case since the same can be invoked only when the particular goods are classifiable under two or more Headings, either by application of Rule 2(b) or for any other reason and since the department itself has invoked Section Note 2(f) (in terms of Rule 1 to the general rules of interpretation) the invocation of Rule 3 is self-contradictory.

9. The Hon’ble Supreme Court, therefore, held that ‘relay’ meant for sole use as part of the Railway signalling equipment shall fall under heading 8608.

CBIC Instruction

10. The aforementioned decision did not find acceptance with the department and rightly so. CBIC in its wisdom issued Instruction No. 01/2022-Customs dated 05.01.2022 questioning the ratio of the decision on the following grounds:

i. That as per the HSN Explanatory Notes, three conditions are to be fulfilled for the goods to be classified under the chapters of Section XVII viz.

a. They must not be excluded by the terms of Note 2 to section XVII; and

b. They must be suitable for use solely or principally with the articles of chapters 86 to 88; and

c. They must not be more specifically included elsewhere in the Nomenclature.

Therefore the goods excluded in terms of Note 2 to section XVII cannot be classified under Chapter 86 to 88 even if it satisfies the other two conditions (viz. that it is for sole or principal use with the articles of chapter 86 to 88 or are not more specifically included elsewhere in the HSN).

iii. That the Hon’ble Supreme Court in the given judgment itself has acknowledged the complexity of the issue and has pointed to the undesirability of generalizing the decisions of one case to others.

iii. That the Hon’ble Supreme Court has not considered the decisions rendered in the past wherein it has given precedence to Note 2 while determining the correct classification of the ‘parts’.

iv. That the department has filed a review petition against the given judgment on the aforesaid grounds.

v. The CBIC Instruction also directs the Customs officers to consider all the above facets while making the assessment of ‘parts’ and pass a speaking order considering the aforementioned grounds.

Our take

12. In our humble view, the Hon’ble Supreme Court ought to have considered Note 2 of Section XVII in its entirety. For ready reference, the same is reproduced below (relevant portion – emphasis supplied):

“2. The expressions “parts” and “parts and accessories” do not apply to the following articles, whether or not they are identifiable as for the goods of this Section:

 (f) electrical machinery or equipment (Chapter  85);”

13. The plain reading of the aforesaid note will suggest that the given note seeks to clarify that the expression ‘parts’ shall not apply to the stipulated articles (e.g. ‘relay’ covered under heading 8536) whether or not they are identifiable as “for” the goods in the given Section XVII. Hence even if ‘relay’ can be identified as “for” the stipulated goods (Railway signalling equipment falling under heading 8608) the same being specifically covered under Chapter 85 is required to be excluded from meriting classification under Chapter 86.

14. We also submit that the Hon’ble Court ought to have considered the fact that the aforesaid manner of reading the Note 2 also stands approved vide the HSN Explanatory Notes (that has been drafted by WCO who has formulated the HSN) and has been accepted by the Apex Court as an authoritative source to settle any controversy related to the interpretation of the HSN.

15. We also submit that the theory of ‘group classification’ propounded in the given judgement is required to be considered in the context of the rules of interpretation wherein Rule 1 itself assets that the classification should be determined according to the terms of the headings and any relative Section or Chapter Notes. Hence where Section Note provides for a specific manner of undertaking the classification as regards the ‘parts’, the same is required to be upheld.

16. The CBIC Instruction, therefore, seeks to lay down the correct law and suitably directs the officers to follow the same while assessing under the Customs Law.

Way forward

17. The given CBIC Instruction will certainly be welcomed by the industry as it will avoid unwarranted litigation. It is also hoped that the ratio of the given Instruction is also applied in the context of GST when it comes to the classification of such ‘parts’.

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