SC Judgement in the case of Westinghouse Saxby Farmer Ltd V. CCE

Introduction

Classifying goods is a difficult task as it demands a thorough understanding of technology as well as legal interpretation skills. Over the last three decades, the government has taken steps to simplify tax administration, including the classification of goods, in order to make doing business easier. The World Customs Organization created  a code called the Harmonized Commodity Description and Coding System ( HSN Code) to guarantee uniformity in classification for cross-border transactions.

India adopted the HSN Code in 1986, and it has been exposed to several interpretations since then. Despite the fact that the HSN explanatory notes are not legally enforceable, the courts have often taken them into consideration while deciding cases relating to classification of goods.

The Westinghouse decision

The decisions in the said case primarily pertains to whether ‘relays’ created by the assessee and used solely for railway signalling equipment fell under Chapter 86, as claimed by the assessee, or Chapter 85, as asserted by the Department.

Rather than applying the trinity test to categorise the parts, the Supreme Court decided the issue based entirely on one criteria: whether the products are for ‘sole and principal use’ in the items and goods described in Chapter 86. Other two tests, whether the component is excluded under Note 2 to Section XVII and whether the part is not goods or article in any other Chapter heading, were not applied by the Court. The Court used Note 3 to Section XVII to determine that the ‘relays’ would be categorised as part of railways under Chapter 86 and not as electronic items under Chapter 85. It’s worth noting that the classification issue in this case arose under the Central Excise Tariff and dates back to 1994, while the HSN explanatory notes were made applicable to the Central Excise Tariff on February 28, 2005.

This threw into doubt a stance previously established by the Supreme Court in the following decisions:

In Intel Design Systems (India) Pvt. Ltd. vs. CCE, the court decided that, in addition to the ‘sole and principle use test’ set forth in Section Note 3 of Section XVII, the products should not be excluded from Section XVII by using Section Note 2 of the same section.

 In CCE vs. UNI Products India Ltd, it was decided that the specific heading covering the items would take precedence over the generic heading, and the explanatory comments would be persuasive. Furthermore, if the HSN explanatory notes clearly exclude goods from the wording “parts and accessories,” they will not be classed under CTH 8708.

In light of the foregoing, it is reasonable to conclude that the Supreme Court’s decision in Westinghouse is per incuriam to the degree that it does not appreciate the relevant Section Note nor consider its previous decisions.

The consequential effect of Westinghouse judgment

Despite the fact that the case’s outcome was contrary to the Department’s legal position, it has been exploiting this decision to increase tax revenue from the automobile and other industries. The Customs Department began questioning the classification that had previously been recognized by it and used by the automobile industry as a result of the abovementioned judgment. The Goods and Services Tax (GST) Department launched a similar probe into domestic sales. Because the amount of duty on items classified under Chapter 87 is higher than on commodities classified under many other chapter headings, it has resulted in higher tax outgo for importers, impacting already strained margins and increasing litigation.

CBIC Instruction on Westinghouse judgment

Taking note of the situation, the CBIC, in a commendable move, issued Instruction No. 01/2022-Customs on January 5, 2022, noting that the Supreme Court’s ruling in the Westinghouse case is inconsistent with its previous decisions and issued an instruction for its officers on applying the judgement which are as follows:

1. The Board stated that the judgment should not be applied to broader concerns and should be limited to the facts provided in cases involving “relays” used in railway signaling equipment.

2. It was clarified that items classified under Section XVII shall be classified based on the relevant circumstances and taking into account the judgments on the subject matter as well as the HSN explanatory notes.

3. It re-emphasized the importance of the HSN explanatory notes in deciding classification.

Conclusion

The Westinghouse ruling struck a balance between the larger goal of ‘group classification’ in the context of ‘principal use’ against the specific exemptions under Note 2(f) of Section XVII of the Tariff Acts. The Instruction’s recommendation that all classification matters must take into account a holistic view of all relevant factors, from HSN explanation notes to section and chapter notes, is unquestionable.

The Instruction appears to be a graceful attempt to qualify the Westinghouse decision’s application by preventing the tax administration from applying it immediately. Because of the various caveats contained in the Westinghouse judgment, the immediate impact of the Instruction may be that it will be implemented sparingly. Due to the fact that Circulars bind tax authorities, the Instruction allows tax officials to avoid the Westinghouse ruling even in a similar instance, in the light of the ongoing review proceedings in the  Supreme Court. In the upcoming review proceedings, it will be interesting to watch how the concerns mentioned in the Instruction are resolved.

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