While taxing manufacturing of goods in the indirect tax regime in India, the rate of duty varies depending on the type of good. Such goods are classified through chapter-headings and tariff item numbers or entries which provide a description of the type explaining its inherent character along with rate of duty. In the erstwhile regime, such classifications were laid down in Schedule 1 to the Central Excise Tariff Act, 1985 and a similar modified list has also been laid down to determine GST rates. These classifications also contain certain notes in the legislation to provide for better interpretation to determine the right entry under the right heading for a particular good. Although such statutory classifications exist, confusion in classifying a particular good still arises at times due to the possibility of one good coming under multiple headings or entries. Disputes arise due to this between assessees and the revenue as the rate of duty changes with a heading. To overcome such situations, the jurisprudence of this classification has developed different tests. All in all, these tests and the chapter notes usually form the basis of classification in cases of such disputes.
The Supreme Court, in the recent case of Commissioner of Central Excise v. Uni Products India Ltd. has adjudicated on one such dispute (erstwhile excise regime) to determine the correct chapter heading of the good “car matting”. It has notably favoured the assessee by preferring statutory interpretation and clarifications over jurisprudential tests in this issue.
The assessee was engaged in manufacturing car matting products which are used as floor mats inside a vehicle. The assessee was of the opinion that such goods come under tariff entry 5702/03 under Chapter 57 (Schedule 1, Central Tariff Act) dealing with carpets and other textile floor coverings having a rate of duty of 8% and paid tax accordingly. However, the revenue issued a show-cause notice claiming that car matting should come under the tariff entry 8708 under Chapter 87 (Schedule 1, Central Tariff Act) dealing with parts and accessories of motor vehicles attracting a rate of duty of 16% and demanded for pending tax and incidental penalties. A dispute arose through litigation and after respective commissioners gave orders favouring the revenue, CESTAT passed an order favouring the assessee which was challenged before the Supreme Court in the instant matter.
Arguments of the Revenue
Firstly, the revenue contended that car mattings should be treated as car accessories rather than textile coverings by referring to “Harmonized Commodity Description and Coding System”, Explanatory Notes issued by the World Customs Organisation in 2002 (“HSN Notes”). Under Section XVII and sub-heading III of the HSN Notes, there are explanatory notes provided for the category of “Parts & Accessories”. These notes state that a product would not come under this category unless it is principally used as a part or accessory used in vehicles coming under Chapters 86 to 88. It also states that a product would be excluded from being a part or accessory if it is more specifically covered in a different chapter through means of nomenclature. The revenue contended that car mattings are for specific use in a car only and hence being an accessory to a car or a vehicle becomes its principal use. As a result, it contended that car mattings would be more identifiable as a car accessory than a textile carpet.
The order of the commissioner and the revenue also referred to the Chapter 57 of the HSN Notes which deals with carpets and floor coverings and observed the following excerpt:
“The above products are classified in this chapter whether made-up (i.e. made directly to size, hemmed, lined, fringed, assembled etc.) in the form of carpet squares, beside rugs, hearth rugs, or in the form of carpets for installation in rooms, corridors, passages or stairs, in the lengths for cutting and making up. They may also be impregnated (i.e. with latex) or packed with woven or non-woven fabrics or with cellular rubber or plastics.”
The commissioner thus concluded on the basis of the above that the explanation only refers to simple carpets which are manufactured in specific shapes and sizes and have the manufacturing process similar to the above. As car mattings have further processes involved in reaching the final product, it would not qualify as a simple carpet and is outside the purview of Chapter 57. The relevant excerpt from the commissioner’s order in favor of the revenue is as follows:
“B-3 From the above explanation, it is seen that, carpets covered under Chapter 57 are simple carpets in running length may be made up directly to size, hemmed, lined, fringed, assembled etc. in the form of carpet squares, or in the form of carpet installation in rooms, corridors, passages or stairs and not certainly covers car mattings which undergo further processing like moulding, chemical treatment to provide strength to the carpet fabric as per customer requirement, lamination as per customers requirements, and trimming for fixing in the vehicle with NamdA fixing on the back. The car mattings although is of textile carpet origin are not ordinary carpets as explained in the Explanatory Notes of HSN for Chapter 57 and certainly not covered under Chapter 57.”
The revenue also cited three judgments where car mattings have been treated as parts and accessories of motor cars. These cases are Collector of Central Excise, Bombay-II v. Sterling India, Collector of Central Excise v. Swaraj Mazda and Jyoti Carpet Industries v. Commissioner of Central Excise, Jaipur-I. Amongst the three, only the judgments in Sterling India and Jyoti Carpet Industries talks about the issue of classification of car mattings into the appropriate tariff heading and the latter followed the decision of the former. Although these judgments classified the product in question under tariff heading 8708 as parts and accessories of vehicles, the said order does not contain any reason or justification to the decision. These judgments were delivered by CEGAT, Delhi (erstwhile equivalent tribunal of CESTAT).
Lastly, the arguments involving the tests of “popular meaning”, “common parlance” and “marketability” were also considered. These three tests have been developed through judicial precedents over the years and have been held as a deciding factor when disputes and confusion arises towards classifying a good or product under the appropriate or correct tariff heading. Although these tests are corollary to each other and have similar meanings and implications, they have been developed and observed through different judgments. The popular meaning test or common parlance test have been laid down in the cases of Plasmac Machine Manufacturing Co. Pvt. Ltd. v. Collector of Central Excise, Bombay [1991 Supp.(1) SCC 57] and Dabur India Ltd. v. Commissioner of Central Excise, Jamshedpur [(2005) 4 SCC 9]. These tests talk about how a product is understood and referred to in the popular meaning of it by consumers in the market. Where there is evidence as to the popular use or reference of a product in a particular category, the product is held to be classified under such category as the product is understood in such a manner in the common parlance.
In the case of “marketability test” which was applied in A.P. State Electricity Board v. Collector of Central Excise, Hyderabad [(1994) 2 SCC 428], what is of primary importance is the market in which a product exists. If a product is observed to be marketable in a particular group or category of products, then the appropriate tariff heading would be in such category where it is being marketed. In the present case, car mattings as available in the market where parts and accessories of vehicles are sold and not in markets of carpets or floor coverings, it was argued in this reference that car mattings should be classified under the heading of parts and accessories.
Judgment & Analysis
The core issue to be decided by the Supreme Court was whether the product of car mattings should be classified under Chapter 87 or Chapter 57 of the Central Excise Tariff of India, i.e, whether they should be considered a product within the category of parts & accessories of motor vehicles or that of carpets & textile floor coverings.
In regard to the above CEGAT judgments cited by the revenue wherein orders were passed where car mattings were classified under Chapter 87, the Court first observed that given the lack of any proper justification or direct negation of or engagement with a competing argument of classifying car mattings under Chapter 57, such decisions do not hold good to reason. Secondly it observed that the orders being that passed by CEGAT do not hold any precedential value before the Supreme Court.
The judgment of the Supreme Court mainly based itself on the HSN Notes in regard to rules of classification discussing how a product should be classified in cases where a product may come under multiple headings. The rules state that a specific description must be preferred over a wider description meaning thereby that a description under a tariff heading which clearly identifies a product in a better manner than the other description of a possible heading, the former should always be preferred. This rule has been given under Explanation Note IV (b) to Rule 3(a) under the Rules of Interpretation of the HSN Notes. The rule is similar to Clause 3(a) of the General Rules of Interpretation of the First Schedule to the Central Tariff Act, 1985. Most significantly, the explanatory rule in the HSN Notes contains an example to it which directly deals with the issue at hand. The relevant excerpt is reproduced under:
“(iv) It is not practicable to lay down hard and fast rules by which to determine whether one heading more specifically describes the goods than another, but in general it may be said that:-
(a). ** ** **
(b) If the goods answer to a description which more clearly identifies them, that description is more specific than one where identification is less complete.
Examples of the latter category of goods are:
(1) Tufted textile carpets, identifiable for use in motor cars, which are to be classified not as accessories of motor cars in heading 87.08 but in heading 57.03, where they are more specifically described as carpets.
As can be observed from the first example above, textile carpets which are used in motor cars are to be classified under heading 57.03 (of the HSN Notes) rather than under heading 87.08. The example is given as a practical example to preferring of a specific heading over a wider heading in terms of identification of a product. The example applies on all fours to the core issue before the Court and directly answers the question of classification of car mattings. The above excerpt was also observed and accepted by the CESTAT in its order favoring the assesses and which set aside the commissioner’s order favoring the revenue.
Although the HSN Notes are issued by the Worlds Customs Organisation, it has a strong persuasive value in India as recognized in the cases of CCE v. Wood Craft Products Ltd. [(1995) 3 SCC 454], Collector of Central Excise v. Bakelite Hylam [1997 (91) E.L.T. 13 (S.C.)], Collector of Customs v. Business Forms Ltd. [(2005) 7 SCC 143] and Holostick India Ltd. v. Commissioner of Central Excise [(2015) 7 SCC 401]. The Supreme Court in the present case also recognized this persuasive value.
Accepting the explanatory note IV in the HSN Notes and placing strong reliance on the example which co-incidentally deals directly with the issue at hand, the Supreme Court disregarded the judicial tests of common parlance and marketability to determining the issue of classification. The Court observed that such tests of interpretation are only to be used and considered where there is a possibility of a particular good to come under entries of multiple heads. However, in the present case, explanatory notes to the HSN Notes and chapter notes under Chapter 57 show that firstly, car mattings have been specifically excluded from Chapter 87 and secondly, textile carpets include all kinds of floor coverings where the textile materials serve as the exposed surface of an article when in use. Further, the Court also observed that revenue classified car mattings under tariff entry 8708 (“other”) which is a residuary entry and not specific, whereas the tariff entry of 5703 directly deals with floor coverings and is more specific. As a result, the product is clearly more identifiable under Chapter 57 and there was no necessity to use interpretive tests of common parlance and marketability. The relevant excerpts from the judgment are reproduced as under:
“25. We do not find any error in such reasoning. Chapter 87 of the Central Excise Tariff of India does not contain car mats as an independent tariff entry. We have reproduced earlier the various parts and accessories listed against tariff entry 8708. All of them are mechanical components, and revenue want car mats to be included under the residuary sub-head “other” in the same list. The HSN Explanatory Notes dealing with interpretation of the rules specifically exclude “tufted textile carpets, identifiable for use in motor cars” from 87.08 and place them under heading 57.03. Revenue’s argument is that the Explanatory Notes have persuasive value only. But the level or quality of such persuasive value is very strong, as observed in the judgments of this Court to which we have already referred. Moreover, the Commissioner himself has referred to the Explanatory Notes in the order-in original while dealing with the respondent’s stand. Thus, we see no reason as to why we should make a departure from the general trend of taking assistance of these Explanatory Notes to resolve entry related dispute. Now, on referring to these Explanatory Notes, we find that one category of carpets [Textile carpets (Chapter 57)] has been excluded specifically from parts and accessories. In our opinion, the subject-item does not satisfy the third condition specified in Section XVII of the Explanatory Notes in relation to “III-Parts and Accessories”. A plain reading of clause (C) thereof, which we have quoted above, excludes “textile carpets” (Chapter 57).
26. The main argument of the appellant is that because the car mats are made specifically for cars and are used also in cars, they should be identified as parts and accessories. But if we go by that logic, textile carpets could not have been excluded from Parts and Accessories. We have referred to such exclusion in the preceding paragraph. It has also been urged on behalf of the revenue that these items are not commonly identified as carpets but are different products. The Tribunal on detailed analysis on various entries, Rules and Notes have found they fit the description of goods under chapter heading 570390.90. We accept this finding of the Tribunal. Once the subject goods are found to come within the ambit of that sub-heading, for the sole reason that they are exclusively made for cars and not for “home use” (in broad terms), those goods cannot be transplanted to the residual entry against the heading 8708. As we find the subject-goods come under the chapter-heading 570390.90, and the other entry under the same Chapter forming the subject of dispute in the second order of the Commissioner, in our opinion, there is no necessity to import the “common parlance” test or any other similar device of construction for identifying the position of these goods against the relevant tariff entries.”
Under the GST regime, a list of rates for goods & services similar to Schedule 1 of the Central Tariff Act has been laid down as “GST Rates”. Under these rates, there is no separate entry for the product of car mattings. The categorisation of goods in relation to the present issue is the same as that of the erstwhile regime under Schedule 1. Tariff entries 5702 and 5703 deal with carpets and floor coverings etc., with a rate of duty of 6% under CGST and SGST and that of 12% under IGST. Similarly, tariff entry 8708 deals with parts & accessories of motor vehicles with a rate of duty of 14% under CGST and SGST and that of 28% under IGST. Therefore, the difference in rate of duty is similar to that of erstwhile regime where parts & accessories have a comparatively much higher rate than that of carpets and textile coverings. Disputes in classification of car mattings can arise in the GST regime as well and the present Supreme Court judgment should act as precedent in settling of such disputes. As the issue in the present case deals solely with the question of classification of a good, the judgment should hold good in the GST regime as much as in the earlier indirect tax regime.