GST: Issues & confusion in classification of automobile parts & accessories

The issues and controversy in the classification of the automobile parts and accessories arises because of the rate differences. Most of the motor vehicles are taxed at 28% and parts and accessories at lesser rates, but since the parts and accessories are supplied for motor vehicles, they also get taxed at the same rate as motor vehicles.

Generally, automobiles are covered under the Chapter 87 of Section XVII of the Customs Tariff Act (CTA). The broad headings under the Chapters are as follows:

8701 – Tractors (other than tractors of heading 8709)

8702 – Motor vehicles for the transport of ten or more persons, including the driver

8703 – Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702) including station wagons and racing cars.

8704 – Motor vehicles for the transport of goods

8705 – Special purpose motor vehicles, other than those principally designed for the transport of persons or goods (for example breakdown lorries, crane lorries, fire fighting vehicles, concrete mixers, lorries, spraying lorries, mobile workshops, mobile radiological units)

8706 – Chassis fitted with engines, for the motor vehicles of headings 8701 to 8705

8707 – Bodies (including cabs), for the motor vehicles of headings 8701 to 8705

8708 – Parts and accessories of motor vehicles of headings 8701 to 8705

8709 – Works trucks, self-propelled, not fitted with lifting or handling equipment, of the type used in factories, warehouses, dock areas or airports for short distance transport of goods; tractors of the type used on railway station platforms; parts of the foregoing vehicles

8710 – Tanks and other armoured fighting vehicles, motorised, whether or not fitted with weapons and parts of such vehicles

8711 – Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side-cars

8712 – Bicycles and other cycles (including delivery tricycles), not motorised

8713 – Carriages for disabled persons, whether or not motorised or otherwise mechanically propelled.

8714 – Parts and accessories of vehicles of headings 8711 to 8713

8715 – Baby carriages and parts thereof

8716 – Trailers and semi trailers; Other vehicles, not mechanically propelled; parts thereof

If you see the heading 8708 – parts and accessories of motor vehicles, the confusion starts if such parts find place as a specific entry in some other heading and general inclusion in this heading.

The goods mentioned in the heading 8708 are as follows:

870810 – Bumpers and part thereof

870821 – Safety seat belts

870830 – Brakes assembly and part thereof

870840 – Gear boxes and part thereof

870850 – Drive-axles with differential, whether or not provided with other transmission components.

870870 – Road wheels and parts and accessories thereof

870880 – Suspension systems and parts thereof (including shock absorbers)

870891 – Radiators and parts thereof

870892 – Silencers (mufflers) and exhaust pipes; parts thereof

870893 – Clutches and parts thereof

870894 – Steering wheels, steering columns and steering boxes; parts thereof

870895 – Safety airbags with inflator system; parts thereof

870899 – Others

If you go through the above items, there may be many parts which though are specifically mentioned in some other Chapter heading but may get included in Chapter heading 8708.

While reading the Chapter headings equal importance should be given to Section and Chapter Notes also. Chapter 87 is part of Section XVII. This Section in its notes, serial number 2 specifically excludes few goods from this chapter mentioned as follows:

The expression “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:

(a) Joints, washers or the like of any material (classified to their constituent material or in the heading 8484) or other articles of vulcanised rubber other than hard rubber (heading 4016)

(b) Parts of general use, as defined in Note 2 to Section XV, of base metal (Section XV), or similar goods of plastics (Chapter 39);

(c) Articles of Chapter 82 (Tools)

(d) Articles of heading 8306 (Bells, gong and the like, non electric of base metal; statuettes and other ornaments, of base metal; photograph, picture or similar frames, of base metal; Mirrors of base metal

(e) Machines and apparatus of headings 8401 to 8479, or parts thereof, other than the radiators for the articles of this Section; articles of heading 8481 or 8482 or, provided they constitute integral parts of engines and motors, articles of heading 8483;

(f) Electrical machinery or equipment (Chapter 85)

(g) Articles of Chapter 90 (Optical, Photographic, Cinematographic, Measuring, Checking, Precision, Medical or Surgical Instruments and Appartus; Parts and Accessories thereof);

(h) Articles of Chapter 91 (Clocks and Watches and parts thereof);

(i) Arms (Chapter 93);

(j) Lamps or lighting fittings of heading 9405; or

(k) Brushes of a kind used as parts of vehicles (heading 9603).

Other than above exceptions, Note 3 further specifically excludes parts and accessories mentioned in Chapters 86 to 88, if they 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 of accessory. Meaning thereby, the parts and accessories would not be classified under the heading 8708 if:

a) They are excluded in Note 2

b) They are suitable not only for motor vehicle

c) They are specifically covered under some other Chapter or heading which are more specific.

There are contradicting judgements from various courts including the Apex court. In the case of Uni Products India Limited, Honourable Supreme Court held that the car mats are specifically excluded from the scope of the heading 8708 and will be more specifically covered under the heading 5703, even though they are solely used for motor vehicles only. Important guidelines were laid down in this case as follows:

• Even though HSN Explanatory Notes have persuasive value, but the level or quality of such persuasive value is very strong.
• Section Notes and Chapter Notes are of utmost importance to determine classification.
• The most specific description shall be preferred to headings providing general description as per Rule 3(a) to General Rules of Interpretation.

In the case of Intel Design Systems (India) Pvt Ltd, the Honourable Supreme Court held that parts falling under Chapter heading 87 should be classified under this heading only if the following conditions are satisfied:

• They should be used solely or principally for motor vehicles and
• They should not be excluded as per the Section notes mentioned earlier.

In GST, as well the Authority for Advance Rulings have been giving contradicting views on this subject. In the case of Wabco India Limited the AAR held that insulated electrical wire and cable will be covered under the heading 8544 and not 8708.

Similarly in the case of Nexture Technologies Pvt Ltd AAR held that many parts mentioned in the application shall be covered under the Chapter 39 and not under 8708.

In the case of Hyva India Pvt Ltd the AAR held that hydraulic cylinders / kits will specifically fall under the heading 8412 and not under 8708.

Considering the litigation history on this matter and presently differential GST rates for parts and accessories and the relevant motor vehicles, the confusion and chaos is natural. There is no clarity, the automobile parts and accessory suppliers are in big risk if they choose a wrong classification. The situation may improve only if the GST rates are aligned, and slabs reduced to just a few. The small and medium industries are suffering because of their supplies are though covered under different Chapter with a lessor GST rate, but at present taxed at a higher rate, because they are exclusively and solely used for motor vehicles and are not covered in the exclusions. The working capital issues are forcing many industries to shut shop.

The GST council should seriously look into this matter and take corrective action immediately.