By Parul Nagpal and G Sriram
The Supreme Court’s decision in Westinghouse Saxby Farmer Ltd. v. CCE, Calcutta (Westinghouse decision) evoked an intriguing discussion on the classification of ‘relays’ used as part of Railway signalling systems. Here is the first part of the deep analysis of Westinghouse judgement.
The automobile and auto component manufacturing industry has been amongst those leading industries in India which have often knocked the taxman’s doors to seek clarity on the HS classification of components manufactured by them. The recent instance of such representation was driven by the ambiguity arising pursuant to the decision of the apex court in the case of Westinghouse Saxby Farmer Ltd.2in March 2021 (“WSF judgment”).
As the case pertains to the classification of “Relay” used in railway signalling equipment, it is important to note that it is not the conclusion but the manner of reaching such conclusion which allowed players in the auto-component industry to have divergent views on its implications. Consequently, recently the CBIC clarified3 its view on the implication of the WSF judgment on assessment of “automobile parts” and also informed the stakeholders that a review petition has been filed against the said judgment, which brought about interesting discussions amongst industry experts.
Key takeaways from the WSF judgment:
As discussed above, the decision in the said case primarily pertains to the classification of ‘Relay’ which is generally an electrically operated switch, used to control a circuit and may also be used where several circuits must be controlled by one signal. Though essentially relays are electrical equipment, they may also form part of Railway Signalling Equipment as in the said case.
The moot question was whether the “Relays” would be classified under Tariff Item 8608 as claimed by the appellant or under Chapter 85 Tariff Item No. 8536 as claimed by the Department. The relevant extract of tariff heads has been reproduced below:
Chapter Heading 8536 covers “Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, relays, fuses, surge suppressors, plugs sockets, lamp holders and other connectors, junction boxes), for a voltage not exceeding 1,000 volts; connectors for optical fibres, optical fibre bundles or cables.“
Chapter Heading 8608 covers “Railway or tramway track fixtures and fittings; mechanical (including electromechanical) signalling safety or traffic control equipment for the railway, tramways, roads, inland waterways, parking facilities, port installation or airfields; parts of the foregoing“.
It is important to note that both, Chapter 85 and 86 are part of Section XVII of the HS Classification and therefore, the appropriate classification is to be determined after inter-alia analysing the section notes together with respective chapter notes and the General Rules of Interpretation (GRI). The apex court ruled in favour of classifying “Relays” under Heading 8608, as claimed by the appellant. The key observations in this regard have been summarised below:
- Rule 3 of the GRI can be invoked only when a particular good is classifiable under two or more Headings, either by application of Rule 2(b) or for any other reason. Once the authorities have concluded that by virtue of Note 2(f) of Section XVII, ‘Relays’ are not classifiable under Heading 8608, the Authorities could not fall back upon Rule 3(a) of the GRI.
- Note 2(f) above may not apply in the said case, as the Department has overlooked the application of Note 3 of the said Section which is reproduced below:
“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.“
- It is conceded by the Revenue that the “Relays” are used solely as part of the railway signalling/ traffic controlequipment. Therefore, the invocation of Note 2(f) overlooking the “sole or principal user test” indicated in Note 3, is not justified.
The consequential thoughts and effect of the WSF judgment:
“The law declared by the Supreme Court is the law of the and If so, we do not see acceptable reason why it, in declaring the law in supersession of the law declared by it earlier, could not restrict the operation of the law as declared to future and save the transactions, whether statutory or otherwise that were effected on the basis of the earlier law.”
– K Subba Rao (Former Chief Justice of India)
Therefore, though the decisions are to be respected in their own spirits, such judgments are often closely debated amongst field experts and trade players to understand the possible disruptions in the conventional way of interpreting the law and conducting trade. Likewise, the WSF judgment too tempted us to deliberate on certain key aspects in ensuing paragraphs.
- Did the WSF judgment deviate from the conventional method of classification?
Under the Harmonised System (HS)of classification, the GRI is considered as the foundational support structure to resolve any classification dispute that may arise basis plain reading of the text. Therefore, any conclusion on the classification of goods is ought to be reached only after compliance with the GRI. In this regard, Rule 1 provides that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. It is only when the classification cannot be determined basis the said rule, we can proceed to the next rule to determine the same.
At this juncture, it is important to note that HS classification also includes Explanatory Notes which serve as an important guide in determining the correct classification of goods as it explains the interpretation of specific notes covered in all Sections and Chapters. Further, the significance of Explanatory Notes has also been acknowledged time and time again by the apex court. Therefore, it has widely concurred that the very first step towards classification involves the study of Section and Chapter Notes; and thereafter understanding the interpretation of the same basis the Explanatory Notes.
If we apply the above rationale in the WSF judgment, it is noted that for deciding whether Note 2 to Section XVII can precede over Note 3, a reference to Explanatory Notes is ought to be made. Further, only if the Explanatory Notes do not provide any clear guidance, the matter should be left to the judicature to decide.
In the Explanatory Notes, it is observed that in S. No. III of the General section discusses the scope of “Parts and Accessories” and provides for interpretation of notes covered by Section XVII. The relevant extract of the note reads as under:
“It should, however, be noted that these headings apply only to those parts or accessories which comply with all three of the following conditions:
(a) They must not be excluded by the terms of Note 2 to this Section (see paragraph (A) below); and
(b) They must be suitable for use solely or principally with the articles of Chapters 86 to 88; and
(c) They must not be more specifically included elsewhere in the Nomenclature”
Basis the study of the Explanatory Notes, it may be inferred that the object is to restrict the classification of parts covered by Note 2 to Section XVII, only to respective chapters where such parts are covered. Thus, classification of such parts along with the headings of the products it is principally or solely used with, may not be appropriate. However, as highlighted by CBIC as well, the aforementioned explanation was not brought up for discussion in the WSF judgment and therefore, it can be said that the apex court may have deviated from the conventional method of classification.
- Implications of extended application of the WSF judgment on the automobile sector
Given the magnitude of deliberations involved in this part of the discussion, we will proceed to advance our views on Part II of this article series.
(Parul Nagpal is a Director with Indirect Tax practice of Ernst & Young and is a part of the Infrastructure, Industrial & Consumer Products unit.)
(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)