Classification of goods in Customs Tariff Act ('CTA') plays an essential role for businesses involved in international trade. Correct classification of goods helps in compliance with Customs laws, payment of correct duties and not missing on applicable exemptions and benefits.
The classification of parts of motor vehicles in CTA has been one of the major areas of tussle between the tax authorities and the industry. This is because the rate of tax, if classified as a part of the vehicle is usually higher than when the part is classified based on individual characteristics and features of the goods.
Before going into the issues of disputes with department and judicial decisions, it is also imperative to understand what constitutes a part of a motor vehicle. Parts are different goods in a motor vehicle which may be machinery, assembly, sub-assembly, electrical, mechanical and various other items, in absence of which the motor vehicle cannot function. However, there may be other goods which are not primarily required for the functioning of the motor vehicle. Therefore, each part of the motor vehicle is examined based on the characteristics of such goods for classification in CTA.
While classifying a product, Section and Chapter notes provided in the CTA along with the General Rules of Interpretation ("the GRI") provide vital information for appropriately classifying a product in the CTA.
The CTA provides that motor vehicles are covered under Chapter 87 of Section XVII of the CTA. It is important to note that Chapter Heading 8708 provides for "parts and accessories of the motor vehicles of headings 8701 to 8705". Thus, parts and accessories of the motor vehicle are to be classified under headings 8701 to 8705. However, in terms of Rule 3(a) of the GRI in case any product is classifiable under more than 1 heading, the one which provides the most specific description is to be preferred over the heading which provides a general description.
The revenue authorities have consistently disputed the classification adopted by taxpayers which has given rise to increased litigation. However, the Courts also have been divided w.r.t. the principles of classification and have given divergent decisions, creating uncertainty in the industry and rampant demands by the tax authorities.
The Supreme Court in the case of Westinghouse Saxby Farmer Ltd1, examined the issue of classification of 'relays' meant for use in the railway signaling systems. The Court applied the 'principle use test' and held that relays meant solely for use in railway signaling equipment would merit classification alongside the heading pertaining to railway signaling equipment based on pre-dominant or principle use of that 'Relays' in railway signaling equipment and not individually as 'relays'.
Further, in the case of CCE Vs. vs UNI Products India Ltd.2, the Court laid emphasis on taking assistance of Explanatory notes and the GRI to resolve the classification issue. The Hon'ble Supreme Court relied upon the 'principle use' instead of 'intended use'. The Court held that specific heading covering the goods would prevail over the general heading, thereby car matting will be classified under the heading of carpets, which is the principle use and not in the heading pertaining to vehicle parts or accessory, which will be the intended use.
However, it is important to note that in the case of CCE Vs. Carrier Aircon Ltd.3, the Supreme Court has held that the notion of principle use cannot be used to determine the classification of goods. It was further held that in case the concept of principle use is used for determining classification, half of the classification entry would become redundant and that other crucial factors such as specification, description and material used in manufacturing are also important for determining classification.
Recently, in the case of Auto Fit Car Interiors Pvt. Ltd. vs. UOI4, the Kerala High Court while deciding the issue of classification of car seat and steering cover (made of textile/ cotton), whether classifiable under parts of motor vehicle or goods made-up of textile articles, has held that car seat covers are accessories rather than standalone textile articles, and thus rightly classifiable under heading parts and accessory of motor vehicle.
In view of the above judgements, classifying parts and accessory of motor vehicles has become chaotic. The revenue authorities based on the legal position in the case of Westinghouse Saxby supra initiated investigation inquiries against players in the automobile sector demanding tax on the ground that such parts and accessories are solely or principally intended to be used in manufacture of motor vehicles. The GST and Customs authorities have disregarded the tax positions which were earlier widely used and accepted by them earlier. Such one-sided approach indicates that the issue of classifying parts and accessories of a motor vehicle is far from settled.
Various decisions of the Supreme Court on the issue of classification of parts and accessories of automobiles have highlighted the complexities involved in classifying goods, with no unanimous parameters of test. It is a settled principle that judgements cannot be blindly applied on an adhoc basis, but there is an urgent and significant need for a comprehensive evaluation of each case as it is. The anomalies in interpretation of the rules of classification and contrary decisions on principles of classification of parts and accessories have made business difficult for both the taxpayer and the tax authorities, hence both must tread the way very carefully to avoid unnecessary litigation and disruption to business.
Footnotes
1. 2021 (3) TMI 291- SC)
2. 2020 (372) E.L.T. 465 (S.C.)
3. 2006 (199) E.L.T. 577 (S.C.)
4. W.P.(C) No. 4325 of 2015
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