Same Part, Same HSN Code for Years and Now a Big GST Demand

Summary: Auto-part manufacturers that consistently followed particular HSN classifications from the Central Excise era into GST are increasingly confronting demands alleging that their products should instead have been classified as motor-vehicle parts under heading 8708, historically attracting a higher GST rate. The dispute can create substantial retrospective tax, interest and penalty exposure even where the manufacturer openly disclosed the HSN and tax rate on invoices and returns. This article examines the tariff principles governing classification, particularly the Section XVII Notes, and the Supreme Court’s decision in Westinghouse Saxby Farmer Ltd., while highlighting CBIC Instruction No. 01/2022-Customs and Instruction No. 25/2022-Customs, which caution against mechanically extending that ruling to every automobile part. It further examines challenges to invocation of Section 74 where classification and tax rates were fully disclosed, the consequences of converting proceedings to Section 73, limitation disputes under Section 168A, cum-tax valuation, Section 128A relief, debit-note recovery and ITC implications. The article also considers Section 11A, introduced to address short-payment resulting from generally prevalent practices, and the September 2025 GST rate rationalisation for auto parts. It concludes with practical steps manufacturers can take to defend classification disputes, preserve limitation objections, challenge allegations of fraud or suppression and strengthen documentation for future assessments.

The story

Take a small factory that makes springs for cars. It has been running since the Central Excise days. It always classified its springs under one tariff heading, paid duty on that basis, and passed every audit.

When GST came on 1 July 2017, the factory gave the same HSN code in its registration, printed it on every invoice, showed it in every return, and paid 18% GST, the rate for that code. Year after year, the department received these returns and said nothing.

Then, in 2024, an audit team arrived. They said: “These springs go into cars. So they are car parts under heading 8708. The rate is 28%, not 18%.” They worked out the 10% difference on all sales since 2017, added interest for every year, added a penalty, and issued a notice.

The owner never collected 28% from anyone. He collected 18%, paid 18%, and his customer took credit of 18%. Now he must pay the extra 10%, with interest and penalty, from his own pocket, on sales five or six years old. For a small unit, this can be more than the profit of all those years put together.

This is happening across the auto parts industry today. This article explains, in simple words, why it happens, why it is unfair, and what a manufacturer can do. Wherever a notification, circular or judgment is relied on, its actual words are given, so that the reader can check for himself.

Why the fight is about one number: 8708

Heading 8708 of the Customs Tariff covers “parts and accessories of the motor vehicles of headings 8701 to 8705”. Until 21 September 2025 it carried 28% GST. But most parts also have their own specific heading at 18%: springs under 7320, nuts and bolts under 7318, rubber parts under 4016, plastic parts under 3926, bearings under 8482, wiring harnesses under 8544. The same spring could be 18% one way and 28% the other way. That 10% gap, over several years, is what these notices are made of.

How is the right heading decided? The GST rate notification itself answers this. The Explanation to Notification No. 1/2017-Central Tax (Rate) dated 28 June 2017 says:

“(iii) ‘Tariff item’, ‘sub-heading’, ‘heading’ and ‘Chapter’ shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

(iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification.”

In plain words: the headings and the rules for reading them under GST are the very same as under the Customs Tariff, which is what Central Excise also followed. A manufacturer who carried his old heading into GST did exactly what this notification told him to do.

The Customs Tariff also has two special rules for vehicle parts, in the Notes to Section XVII. Note 2 says the expressions “parts” and “parts and accessories” do not apply to certain listed articles, “whether or not they are identifiable as for the goods of this Section”, and the list begins with “parts of general use, as defined in Note 2 to Section XV, of base metal”, which covers bolts, nuts, springs and similar items. Note 3 says that references 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. So the first question is always: does the tariff itself keep this item out of 8708? If it is a part of general use, it stays in its own heading even if it is fitted into a car.

Where the department’s argument comes from

Most of these notices rely on the Supreme Court’s judgment in Westinghouse Saxby Farmer Ltd v. Commissioner of Central Excise, Calcutta, Civil Appeal No. 37 of 2009, decided on 8 March 2021, reported at 2021 (376) ELT 14 (SC). That case was about relays made only for railway signalling. The Court held that they fell under heading 8608 as parts of railway signalling equipment and not under 8536.90 as ordinary electrical relays, because, in the Court’s words, “the relays manufactured by the appellant are used solely as part of the railway signaling/traffic control equipment” and the “sole or principal user test” in Note 3 applied. Officers now say: “If a relay made for railways is a railway part, then a spring made for cars is a car part.”

But the government’s own tax board has said this is wrong. By Instruction No. 01/2022-Customs dated 5 January 2022, issued after taking the opinion of the Additional Solicitor General, the CBIC told its officers:

“…the judgement in case of M/s. Westinghouse Saxby has decided the classification of the commodity ‘relays’ used in railway signalling equipment of Chapter 86 and not parts of goods falling under Chapter 87. The judgement itself does not refer to it’s wider applicability to any other case or issue of a similar nature.”

The department’s review petition against the judgment, Review Petition (Civil) D. No. 802/2022, was dismissed on 10 August 2022. Doubts were raised whether the January instruction still stood. The CBIC answered by Instruction No. 25/2022-Customs dated 3 October 2022, again after taking the opinion of the Additional Solicitor General:

“…it is clarified that the instruction 01/2022 dated January 05, 2022 has brought out distinguishing reasons as to how the decision of the Supreme Court would apply only to the goods in the facts and circumstances… classification of various parts of Section XVII is to be decided taking into account all facts, details of individual cases, all the decisions on the subject matter, and the HS Explanatory Notes…”

A manufacturer facing a Westinghouse-based notice should place both instructions before the officer. They are binding on the department’s own officers.

To be fair, some decisions go the other way. In G.S. Auto International Ltd v. Collector of Central Excise, Chandigarh, 2003 (152) ELT 3 (SC), the Supreme Court held that specially designed bolts, nuts and pins made for vehicles, which the market did not treat as ordinary fasteners, were vehicle parts. And in our own State, the Appellate Authority for Advance Ruling in Saddles International Automotive & Aviation Interiors (P.) Ltd. (Order/AAAR/AP/03 (GST)/2024 dated 26 April 2024, confirming AAR No. 13/AP/GST/2023 dated 15 December 2023) held that car seat covers fall under 8708 at 28%. So the question is genuinely debatable. And that single fact is the manufacturer’s strongest shield, as we shall see.

Why it is unfair

GST is a tax on the customer. The manufacturer only collects it and passes it on. If he charged 18% in good faith, he collected 18%, no more. When someone says years later that it should have been 28%, that extra 10% was never collected and cannot be collected now. The sales are over. So he pays a tax he never received, with interest under Section 50 from 2017 and a penalty on top. A tax that should have cost him nothing becomes a loss from his own money.

One big misunderstanding about input tax credit

Many manufacturers believe there is no use trying to recover the extra tax from the customer, because the customer cannot take credit on such old purchases. This is only half true.

Section 34(3) of the CGST Act allows a supplier who has charged less tax than payable to issue a debit note to the customer for the difference. There is no time limit in the Act for issuing a debit note. The question is only whether the customer can take credit of the tax in it within the time limit in Section 16(4). That time limit was changed by the Finance Act, 2020 with effect from 1 January 2021, and the CBIC explained the change in Circular No. 160/16/2021-GST dated 20 September 2021:

“…w.e.f. 01.01.2021, in case of debit notes, the date of issuance of debit note (not the date of underlying invoice) shall determine the relevant financial year for the purpose of section 16(4) of the CGST Act.”

So a debit note issued today for a sale of 2018 gives the customer a fresh window for credit, counted from this financial year. The age of the original sale does not, by itself, block the credit.

The real catch is elsewhere. Section 17(5)(i) of the CGST Act, as amended by the Finance (No. 2) Act, 2024, blocks credit of:

“(i) any tax paid in accordance with the provisions of section 74 in respect of any period up to Financial Year 2023-24.”

Section 74 is the section used when the department alleges fraud, wilful misstatement or suppression of facts. Rule 53(3) of the CGST Rules goes further:

“Any invoice or debit note issued in pursuance of any tax payable in accordance with the provisions of section 74 or section 129 or section 130 shall prominently contain the words ‘Input Tax Credit Not Admissible’.”

So if the demand stays under Section 74, the customer cannot take credit and the manufacturer cannot pass on the burden.

Turn this around and the strategy is clear. If the demand is under Section 73, the section for ordinary cases with no fraud, there is no block. And even a Section 74 notice can become a Section 73 case, because Section 75(2) of the CGST Act says:

“Where any Appellate Authority or Appellate Tribunal or court concludes that the notice issued under sub-section (1) of section 74 is not sustainable for the reason that the charges of fraud or any wilful-misstatement or suppression of facts to evade tax has not been established against the person to whom the notice was issued, the proper officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of section 73.”

Once that happens, the manufacturer issues a debit note, the customer takes credit, and the customer has little reason to refuse payment. That is why fighting the “fraud” label is not only about a smaller penalty. It decides whether the tax can be passed on at all.

What a manufacturer can do

1. Fight the classification. It is the department’s job to prove it.

The Supreme Court in Hindustan Ferodo Ltd v. Collector of Central Excise, Bombay, (1997) 2 SCC 677, held that the burden of proving that goods fall under a particular heading is on the Revenue, and if the Revenue leads no evidence the classification claimed by the assessee must be accepted. It said the same in HPL Chemicals Ltd v. Commissioner of Central Excise, Chandigarh, (2006) 5 SCC 208. An officer’s opinion is not proof. Prepare your side: a simple note on what the product is, drawings, catalogues, a chartered engineer’s certificate, and the bills of entry of anyone importing the same item, showing the heading customs accepted.

2. Say there was no suppression, so Section 74 cannot apply.

If your HSN code and rate were printed on every invoice and shown in every return, nothing was hidden. In Pushpam Pharmaceuticals Co. v. Collector of Central Excise, Bombay, 1995 Supp (3) SCC 462, the Supreme Court explained that “suppression” in a tax statute means a deliberate act, and that a mere failure to disclose is not suppression unless it was deliberate and with intent to evade. Cosmic Dye Chemical v. Collector of Central Excise, Bombay, (1995) 6 SCC 117, held that intent to evade must be proved even for misstatement or suppression. The CBIC itself, in paragraph 3.3 of Instruction No. 05/2023-GST dated 13 December 2023, said:

“…section 74(1) can be invoked only in cases where there is a fraud or wilful mis-statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful mis-statement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.”

That instruction was issued in the context of secondment cases, but the words of paragraph 3.3 are general and apply to every Section 74 notice. The Allahabad High Court relied on it in Safecon Lifescience Pvt Ltd v. Additional Commissioner Grade 2, 2025 (9) TMI 919, and set aside a Section 74 case where no evidence of fraud was on record. And if the fraud charge fails, Section 75(2), quoted above, makes it a Section 73 case.

3. Check the time limit.

Section 73(10) says the order “shall” be issued within three years from the due date of the annual return for the year concerned; Section 74(10) gives five years. If fraud is not proved, the older years may already be out of time. There is also a court battle over the three notifications that extended these limits under Section 168A: Notification No. 13/2022-Central Tax dated 5 July 2022, Notification No. 9/2023-Central Tax dated 31 March 2023 and Notification No. 56/2023-Central Tax dated 28 December 2023. The Gauhati High Court (Barkataki Print and Media Services v. Union of India, [2024] 166 taxmann.com 586, decided 19 September 2024, followed in Mahabir Tiwari v. Union of India, WP(C) 567/2024, decided 2 June 2025) struck down Notification 56/2023. The Madras High Court (Tata Play Ltd v. Union of India, [2025] 176 taxmann.com 357, decided 12 June 2025) struck down both 9/2023 and 56/2023. The Telangana High Court (Brunda Infra Pvt Ltd v. Additional Commissioner of Central Tax, WP 1154/2024 and batch, decided 2 January 2025) and the Patna High Court (Barhonia Engicon Pvt Ltd v. State of Bihar, CWJC 4180/2024, decided 27 November 2024) took the opposite view. The Supreme Court has issued notice in HCC-SEW-MEIL-AAG JV v. Assistant Commissioner of State Tax, SLP (C) No. 4240 of 2025, and the matter is pending. Raise the time-limit objection in every reply and appeal until it is decided.

4. Ask for the cum-tax benefit.

If you collected only the invoice price, Rule 35 of the CGST Rules allows that price to be treated as inclusive of tax and the tax worked backwards by the formula given in the rule: tax amount = (value inclusive of taxes × tax rate) ÷ (100 + tax rate). This lowers the taxable value, the tax, the interest and the penalty. Ask for it even if the officer has not offered it.

5. Know the reliefs on interest and penalty.

Under Section 73(5) and (8), if the tax with interest is paid before the notice or within 30 days of it, no penalty is payable; otherwise Section 73(9) fixes the penalty at 10% of the tax or Rs 10,000, whichever is higher. Under Section 74(5), (8) and (11) the penalty is 15% if paid before the notice, 25% within 30 days of the notice, and 50% within 30 days of the order. There was also an amnesty under Section 128A for 2017-18, 2018-19 and 2019-20 that waived interest and penalty in full on Section 73 demands. Notification No. 21/2024-Central Tax dated 8 October 2024 fixed 31 March 2025 as the last date for paying the tax in ordinary cases, and Circular No. 238/32/2024-GST dated 15 October 2024 required the application in Form GST SPL-01 or SPL-02 within three months of that date, that is, by 30 June 2025. That window has closed. But the same Notification 21/2024 fixed a different date for a second class of cases: where the order is passed by the proper officer “in pursuance of the direction of the Appellate Authority or Appellate Tribunal or a court” redetermining the tax under Section 73, the date is six months from the date of that order. So if your notice for those three years was under Section 74, and an appellate authority, the Tribunal or a court holds that there was no fraud and sends the case back under Section 73 as required by Section 75(2), you can still get the full waiver by paying the tax within six months of the redetermination order. For the first three GST years, defeating the fraud label can therefore remove interest and penalty completely.

6. Use the debit note route where it is open.

If your case is, or becomes, a Section 73 case, issue a debit note under Section 34(3) so that credit is available to the customer under Section 16(4) counted from the year of the debit note, and take up payment with the customer. Remind the customer that the 180-day payment condition in the second proviso to Section 16(2) applies to debit notes too.

7. Fix your contracts.

Every purchase order should have a clause letting you recover any extra tax found payable later, including because of a change in classification.

8. Use the “revenue neutral” argument, with care.

If your customer would have taken full credit of whatever tax you charged, the government lost nothing overall. In Nirlon Ltd v. Commissioner of Central Excise, Mumbai, (2015) 58 taxmann.com 28 (SC), the Supreme Court said that “when the entire exercise was revenue neutral, the appellant could not have achieved any purpose to evade the duty”, and set aside the extended-period demand. But in the same case the demand for the normal period was upheld. So this argument helps against the fraud charge and the longer time limit, not against the tax itself.

9. Ask the government to close the past through industry bodies.

The Finance (No. 2) Act, 2024 inserted Section 11A in the CGST Act from 1 November 2024. It says that if the Government is satisfied that “a practice was, or is, generally prevalent regarding levy of central tax (including non-levy thereof) on any supply of goods or services or both” and a higher tax was actually payable, the Government “may, on the recommendation of the Council, by notification in the Official Gazette, direct that… the central tax in excess of that payable on such supplies, but for the said practice, shall not be required to be paid”. Classifying auto parts under their specific headings was exactly such a general practice. Bodies like ACMA, SIAM and the local chambers should press the GST Council to recommend a notification under Section 11A for the past period.

10. Take an advance ruling for the future.

If a product’s classification is genuinely uncertain, an advance ruling under Sections 95 to 98 gives certainty going forward. Two limits: the first proviso to Section 98(2) bars a ruling where the question is “already pending or decided in any proceedings in the case of an applicant”, and under Section 103 the ruling binds only the applicant and his jurisdictional officer.

11. Reply early, appeal properly, and go to the High Court where the notice is plainly wrong.

Give a full reply at the very first stage, whether it is an audit observation under Section 65, an ASMT-10 under Section 61 or a DRC-01A intimation, because that is where your record is built. If the demand is confirmed, the first appeal under Section 107(6) needs a pre-deposit of 10% of the disputed tax, subject to a maximum of Rs 20 crore of central tax (reduced from Rs 25 crore by the Finance (No. 2) Act, 2024 from 1 November 2024). The appeal to the GST Appellate Tribunal under Section 112(8) needs a further 10% of the remaining disputed tax, also capped at Rs 20 crore of central tax (reduced from 20% and Rs 50 crore by the same Act). The Tribunal is finally working: its Principal Bench in New Delhi began hearing cases on 16 February 2026, and State Benches have started. The special filing window for old backlog cases, first fixed at 30 June 2026 by the notification of 17 September 2025, was extended to 31 July 2026 by notification dated 30 June 2026 and has now closed; new orders get the normal three months under Section 112(1). Where Section 74 is used without a single fact suggesting fraud, a writ petition in the High Court under Article 226 may be worth considering.

12. Keep your papers in order.

Ask to cross-examine anyone whose statement the department relies on. If you pay anything through Form GST DRC-03 during the dispute, write clearly that it is paid under protest. And review the classification of every product now, so that the past dispute does not keep growing.

GST 2.0: good news, but only for the future

At its 56th meeting on 3 September 2025 the GST Council recommended, in the words of the official press release, a “Uniform rate of 18% on all auto parts irrespective of their HS code”, and stated that “the changes in GST rates of all goods except pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and bidi, will be implemented with effect from 22 September 2025.” This was given effect by Notification No. 9/2025-Central Tax (Rate) dated 17 September 2025, which superseded Notification No. 1/2017-Central Tax (Rate) from 22 September 2025. So from that date the 18%-or-28% fight over auto parts is over.

But this looks only forward. For sales from 1 July 2017 to 21 September 2025, the old two-rate system still applies, and every notice for those years continues. Even so, the Council’s decision helps. If the government itself found the position so confusing that it merged the rates into one “irrespective of their HS code”, that is the best proof that the classification was genuinely unclear. And a genuinely unclear question can never be called fraud or suppression. This is exactly the situation Section 11A was written for.

Closing thoughts

There is nothing wrong in the department checking a classification. What is wrong is doing it years later, on a code printed on every invoice, using the fraud section, and asking a manufacturer to pay from his own pocket a tax he never collected.

Three changes would make this fair. First, when the HSN code was openly declared, the dispute should be raised under Section 73 only. Second, a change in classification should apply from the date it is decided, not backwards. The Council itself did this at its 54th meeting on 9 September 2024, when it recommended that the “GST rate on car seats classifiable under 9401 to be increased from 18% to 28%” and added that “this uniform rate of 28% will be applicable prospectively”; the change took effect from 10 October 2024. Third, audits under Section 65 should be completed within a fixed time.

Until then, a manufacturer’s best protection is a clean paper trail, an early and complete reply, and a firm refusal to let an honest difference of opinion be called evasion.

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By Suneel Kumar Kota, Advocate, Kota Associates, Gudur, SPSR Nellore District, Andhra Pradesh

The views expressed are personal and are meant for general awareness. This is not legal advice. Readers should take professional advice on the facts of their own case.