Requirement Of Clarification In The Upcoming Union Budget 2019 / GST Council Meet, Concerning The Contradictory AAR Ruling Holding Engines Used Solely In Railways, Classifiable Under Chapter 84 Attracting 18% GST And Not Under Chapter 86 Attracting Concessional 5% GST.
Case Name : In re Cummins India Limited (GST AAR Maharashtra)
Appeal Number : No. GST-ARA-66/2018-19/B-162
Date of Judgement/Order : 19/12/2018
In this case, the applicant M/s Cummins India Ltd, has raised the undermentioned question before the Hon’ble AAR, for determination viz.
Question: Whether engine manufactured and supplied solely and principally for use in railways/locomotives are classifiable under HSN Heading 8408 or under HSN Heading 8607 of the Customs Tariff (which has been borrowed for classification purposes under GST regime) as a part used solely or principally for Railways or Tramway Locomotives or Rolling Stock?
Observations & Findings of Hon’ble AAR:
“The applicant has submitted that they are manufacturers of various products one of which are “engines” (‘subject engine’) manufactured for Railways/Locomotive manufacturers as per the design specifications provided by them and are ‘solely and principally’ used in railways/locomotive engines. These subject engines have sole use of main propulsion in railways/locomotives and have no alternate usage. The issue before us is whether the subject engines manufactured by applicant are classifiable under heading 8408 as Compression- Ignition Internal Combustion Piston Engines (Diesel or Semi- Diesel Engines) or under heading 8607 as ‘Parts of Railways or Tramway Locomotives or Rolling-Stock’.
The applicant has submitted that the rationale behind introducing GST with varied rate structure, is evident from the fact that entire Chapter 86 which covers in its fold articles such as railways, locomotive, rolling stock and parts thereof which are of substantial significance for public at large is subject to a levy of GST at the rate of 5%. According to them this submission also find force by Circular No. 30/4/2018-GST dated January 25, 2018 which clarifies that goods supplied to railways, which are classified under Chapter 86 attract GST at the rate of 5%.
We find that Circular No. 30/4/2018-GST dated January 25, 2018 has clarified that only the goods classified under Chapter 86, supplied to the railways attract 5% GST rate with no refund of unutilised input tax credit and other goods [falling in any other chapter], would attract the general applicable GST rates to such goods, under the aforesaid notifications, even if supplied to the railways. Therefore it is very important to classify subject engines, whether the same falls under Chapters 8408 or 8607.
Section Note 2(e) of the Section XVII of the Customs Tariff clearly states that the expression “parts” and “parts and accessories”, whether or not they are identifiable as for goods of this section, do not apply to the machines or apparatus of heading 8401 to 8479 …………. It is very clear from a reading of the said Note 2 (e) that the subject engines which are “Compression-Ignition Internal Combustion Piston Engines “,running on diesel or semi-diesel, cannot be called as parts of goods of Chapter Headings 86 to 88 of the GST Tariff. What this note effectively states is that the subject engines (being compression-ignition internal combustion piston engines), have individual entity and cannot be called as parts of goods falling under Chapters 86 to 88…………..
Hence in view of the above discussions we find that the subject engines manufactured and supplied for use in railway, locomotives are classifiable under HSN Heading 8408 and not under Heading 8607 of the Customs Tariff………
Author’s Humble Take on above Ruling:
In order to have proper appreciation of the facts of the case and to have clear understanding of the issue under consideration, it will be desirable and worthwhile to consider the nature, purpose and applicability of the applicable chapter, section and tariff heading under the Customs Tariff Act and the GST Act, having a direct bearing on the subject matter under consideration.
The classification of goods under the Goods and Services Tax regime is expressly aligned to Chapter/ Heading / Sub-heading / Tariff item under the First Schedule to Customs Tariff Act, 1975 (‘Customs Tariff) and warrants reliance on the rules of interpretation and Section/ Chapter/ General Explanatory note thereto, which provide prescription for interpretation of the Customs Tariff (refer to Explanation (iii) & (iv) in the CGST Rate Notification 1/2017 dated June 28, 2017).
It is pertinent to mention here that Customs Tariff Act follows the common classification system, which is popularly called the Harmonized System of Nomenclature (HSN), developed by the World Customs Organization and is used/ accepted world over.
Section XVI of the Customs Tariff Act containing Tariff Headings/ HSN Classification under Chapters 84 & 85, deals, inter alia, with machinery and mechanical appliances. It deals with the general category of machinery and mechanical appliances, attracting a higher rate of GST @ 18%.
Section XVII of the Customs Tariff Act deals with special items like vehicles, aircraft, vessels and associated transport equipments. Chapter 86 coming under this Section deals exclusively with Railway or Tramway Locomotives, rolling stock and parts thereof; Railway or Tramway track, fixtures and fittings and parts thereof, attracting a concessional GST rate of 5%. This Chapter exclusively deals with specific goods relating to Railway, Tramway and parts thereof.
In coming to the conclusion that the engines manufactured by the applicant, although being exclusively and solely used in Indian Railways, were classifiable under Chapter 84 and not Chapter 86 of the Customs Tariff Act, the Hon’ble AAR has relied heavily on
Note 2(e) of Section XVII – Chapter 86 of Customs Tariff Act, which is being reproduced as under:
“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:-
(e) Machines and apparatus of heading Nos. 84.01 to 84.79, and parts thereof; articles of heading No. 84.81 or 84.82 and provided they constitute integral parts of engines or motors, articles of heading No. 84.83.”
Thus the Hon’ble AAR have interpreted the above Note 2(e) to conclude that the expression parts and parts and accessories do not apply to machines or apparatus of headings 8401 to 8479, or parts thereof and as such, the engine manufactured and supplied for use in railway, locomotives are classifiable under HSN Heading 8408 and not under Heading 8607 of the Customs Tariff.
However, in the said Ruling, somehow this crucial fact has been overlooked that the said Note 2(e) has to be read together in conjunction with the immediately succeeding Note 3 of Section XVII & Chapter 86 of Customs Tariff Act, which reads as under:
“3. References in Chapters 86 to 88 to ‘parts’ or accessories do not apply to parts or accessories which are not suitable for use solely or principally with the articles of those Chapters. A part or accessory which answers to a description in two or more of the headings of those Chapters is to be classified under that heading which corresponds to the principal use of that part or accessory.”
In relation to Chapter Note 3, HSN heading reads as:
“(B) Criterion of sole or principal use.
(1) Parts and accessories classifiable both in Section XVII and in another Section.
Under Section Note 3, parts and accessories which are not suitable for use solely or principally with the articles of Chapters 86 to 88 are excluded from those Chapters.
So, this Section Note of HSN makes it clear that final classification is determined by its principal use. The effect of Note 3 is therefore 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.
The classification of goods owing to sole and principal usage thereof in view of Section Note 3 is a widely regarded and accepted position of law and the same is also supported by Circular No. 17/ 90-CX.4, dated 9-7-1990 which clarified that gear, gear boxes per se classified under chapter 84 would attract classification under chapter 86 when specifically designed for use with vehicles of Section XVII. It is to be noted here that though the referred clarification was issued under the erstwhile excise regime, but since the excise tariff too was based on HSN as customs tariff is, an interpretation thereunder would squarely apply to present matter also.
Classification of goods owing to its sole and principal usage is supported by a plethora of judicial precedents. In this regard attention is invited to the decision of Hon’ble Tribunal in the case of Hi-tech Industries Limited vs. Commissioner of Customs, Bangalore (2005 (180) ELT 0356]wherein an identical issue in the context of classification of goods on the basis of principal or sole use of the goods was involved. As a matter of fact, the facts of the said case are applicable mutatis mutandis in present factual matrix. the Hon’ble Tribunal While deciding the case in the favour of the assessee relied on the observations of the Commissioner (Appeals) while passing the Order in Appeal as under:
“It is observed that the impugned product imported by the appellants is a web camera. From the technical literature submitted at the time of personal hearing, it is observed that the camera is not an ordinary camera and functions only with the computer and this camera has got very specific functions and it works basically as a part of the computer and cannot function independently on its own. Thus, it is observed that the web camera imported by the appellant is not an ordinary camera and does not function independently. The image can be captured only when it is connected with the computer. Thus, from the above, it can be seen that the product imported by the appellants is not an ordinary camera and therefore will not fall under chapter 90 as held by the lower authority. The proper classification will be under chapter 84.73 or 84.71. Besides, a perusal of the aforesaid judgment of the Hon’ble Tribunal also clearly indicates that all those items which come along with the computer are to be treated as spares and accessories. Thus, in view of the submissions made by the appellants and in view of the case law referred to by the appellants at the time of personal hearing, it is observed that the proper classification of the product under classification would be under chapter 8473.30 or 84.71 and not under chapter 90 as held by the lower authority. I set aside the order passed by the lower authority and allow the appeal filed by the appellants.”
The above decision of the Hon’ble Tribunal has further been affirmed by the Hon’ble Supreme Court in Commissioner vs. Hi-Tech Computers – 2015 (321) E.L.T. A274 (S.C.)
It is also pertinent to mention here that a similar issue came up for consideration before the Hon’ble CESTAT in the case of Bajaj Auto Ltd. v. Collector of Central Excise, Pune, 1994 (74) E.L.T. 599, where the question as to whether the unspecific parts of IC engines used in motor vehicles are parts of motor vehicles or not, came up for consideration.
The Hon’ble CESTAT gave the answer in the affirmative and observed as under:
“These parts of IC engines which were the main parts in the locomotive should also be termed as part of the locomotive and not as IC engines coming under the general category. Central Board of Excise and Customs had to consider the issue as to whether a radiator assembly supplied to Indian Railways is to be classified under sub-heading 8607.00 or otherwise. The Board observed that product radiator assembly is designed according to the specifications of the Indian Railways and is for use solely and principally with locomotives of Heading 8601 and 8602. It is clarified that the radiator assembly is not to be classified as parts of IC engines under Heading 8409. This understanding of the Central Board of Excise and Customs is discernible from circular No. 16/90 dated 11-6-1990, which still holds good. If radiator assembly manufactured for Railways for being fitted in locomotives is to be classified under Heading 8607, we do not find any justification in the department taking a view that integral parts of IC engines which form locomotive are outside Chapter Heading 86.”
Similarly, the Hon’ble CESTAT in the case of “Diesel Components Works vs. Commissioner of Central Excise 2000(70) ECC 277, have also categorically observed and held that the parts of compression-ignition, internal combustion piston engines, captively consumed in reconditioning the diesel locomotives of Zonal Indian Railways, were classifiable under tariff heading 86.07 under Chapter 86 only and not under the general tariff headings of 84 and 85 of Customs Tariff Act.
In the above Ruling, it was an undisputed fact that the engines manufactured by the applicant Cummins were strictly as per the designs provided by the Railways and the subject engines ipso facto were not capable of generic use since the same had been manufactured to cater to a specific design and configuration. Infact the said engines did not have any other buyer and hence, could not be supplied by the applicant otherwise than to railways/locomotive manufacturer for specific railways application.
In view of customized design/ specification, lack of usage other than in railways/locomotive engines, it is evident that said engines were indeed manufactured solely and principally for its usage by the Railways/Locomotive manufacturers as a part of railways/ tramway/ locomotive and hence, qualify the test of Section Note 3 of Section XVII.
In such a case the subject engines merit their classification under chapter 86 as ‘parts of railways or tramway locomotives or rolling stock’ notwithstanding a probable separate classification under any other chapter of the Customs Tariff.
The Legislature has strategically and intentionally provided for an altogether separate and independent Chapter 86 in Section XVII of the Customs Tariff Act dealing exclusively with specific goods and parts & accessories used or supplied exclusively in Railways or Tramway Locomotives, rolling stock and parts thereof and considering the Indian Railways as of strategic and national importance and of substantial significance for public at large, a concessional GST rate of 5% (with no ITC) has been provided for goods, parts and accessories used specifically and exclusively in Indian Railways, falling under that chapter.
All the goods and items falling under Chapter 86 in Section XVII of the Customs Tariff Act may be having their respective independent classifications under Chapter 84 or 85 attracting a higher GST rate of 18%, but the very fact of their end usage in Indian Railways, solely and exclusively, entitles them to be classified under Chapter 86 so as to be eligible for a concessional GST rate of 5% (with no ITC).
Any contrary interpretation or conclusion in this regards, will make redundant and defeat the very essence, purpose and Legislative Intent of introducing the separate Chapter 86 in Schedule XVII of the Customs Tariff Act, for goods and parts & accessories, used solely and exclusively in Indian Railways, so as to make them eligible for a concessional GST rate of 5% (with no ITC).
Therefore in view of the above factual propositions and legal precedents, a suitable clarification either by way of an explanation or otherwise is requested to be made in the relevant and applicable provisions of GST Act in the upcoming Union Budget 2019/ upcoming GST Council Meet so as to ensure correct and proper interpretation and application of the same and to do away with any uncertainty or ambiguity in this regards.
Source- In re Cummins India Limited (GST AAR Maharashtra); Appeal No. GST-ARA-66/2018-19/B-162; 19/12/2018