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 second part of the deep analysis of Westinghouse judgement.
In Part I of the article series, initially, the readers were briefed on the key takeaways from the decision of the apex court in the case of Westinghouse Saxby Farmer Ltd. The decision in the said case was primarily centred towards preferential application of Note 3 to Section XVII of HS Classification which provides that parts and accessories are to be classified with those headings of Chapter 86 to 88 which corresponds to the principal use of such parts and accessories. If the parts and accessories cannot be classified as such, they would be classified only in the relevant chapters they pertain to.
Further, later in the article, the readers were informed on consequential thoughts and the effect of the WSF judgment. Part (a) to the said discussion included our thoughts on the apex court’s likely deviation from the conventional method of classification while pronouncing the ruling in the WSF judgment. In this article, we would analyse the implication of the said judgment on the automobile component industry and government at large.
The consequential thoughts and effect of the WSF judgment (Contd….):
- Implications of extended application of the WSF judgment on the automobile sector
Prior to the WSF judgment, Note 3 of Section XVII was never brought up for discussion by the trade players as it was believed that Note 2 would take precedence over any other note. Consequently, the parts and accessories of articles that are specifically classifiable under a particular chapter were not considered for classification under any other chapter.
However, pursuant to the said judgment, irrespective of the exclusion in Note 2, it was opined that if a part or accessory of the automobile (classified in Chapter 86 to 89) can be proved to be of being used solely or principally thereof, it should be classified under the same group as of such automobile.
At this juncture, it is pertinent to note that the above opinion formed the basis of the WSF judgment may or may not be beneficial to the assessee since the revised classification may lead to a reduction or rise in the rate of BCD and IGST, depending on the nature of parts/ accessories dealt in.
Consequently, the said opinion has resulted in drastic disruptions in trade practices as the trade players across the industry started receiving notices/ summons issued by the Department wherein the parts of motor vehicles which were erstwhile classified under specific HSN was disputed and consequently, the differential tax was demanded by proposing the classification which is relevant for parts of motor vehicles, wherein the rate of tax is higher.
Further, it is important for the readers to note that the demand for differential tax by tax authorities is not the only concern to be addressed by the industry players. There are several other issues that are likely to impact global trade preferences and the same has been discussed below:
- The HS classification is prescribed by the World Trade Organisation (WTO) and thus, followed by all participating countries including India. Any decision to classify a product by disregarding the conventional methods of classification is likely to be inconsistent with the classification followed by other participating countries of WTO.
- India has entered Foreign Trade Agreements (FTA) with several countries wherein preferential import benefit would be granted to the importers upon undertaking imports from specified countries therein. It is noted that such benefits notified by the Government are also linked to HS codes of the goods. Therefore, if the classification is changed pursuant to WSF judgment, it would not only prevent the importer for claiming future FTA benefits but also pose a risk of denial of benefits granted in the past.
- The importers in India are free to import/ export any goods into the country except for goods specifically restricted by the Government. Such restricted goods are also notified basis HS codes and can be imported into/ exported out of India subject to grant of license. Any change in classification of restricted goods may leave such license redundant.
- As per the WSF judgment, a change in existing classification of automobile parts or accessories is permitted only if the principal use of such parts or accessory for the automobile vehicle is established. Consequently, though for all supplies made to the OEMs, a change in classification may be permitted, in case of supplies made to end-customers or distributors, the component manufacturers must continue with existing scheme of classification. This would lead to complexity in supply chain and, also require modification in ERP set-ups to implement such changes.
- The WSF judgment may also impact the government adversely
It is also important to understand the government too is impacted by the WSF judgment for reason that a change in classification of parts or accessories to an HS code attracting a lower rate of taxes would result in loss of revenue to the exchequer. Further, the indirect tax-related policies of the government are prepared basis statistical data of imports and exports available with the government. Therefore, in case the classification of parts or accessories of automobiles is changed to the relevant group of such automobiles, it will be very challenging to estimate the import/ export of particular parts; and thus, would impair the government’s policy-making committees to a greater extent.
The way forward:
Having discussed the various facets of the impact of the WSF judgment, it appears that judgment is likely to pose challenges to stakeholders engaged in the automobile component industry. It is noted that while delivering the judgment, the apex court has acknowledged that no single universal test can be laid down for the classification of products and therefore, such issues are to be decided by only considering all the facts and details of individual cases.
Consequently, the CBIC too had clarified that wider application of such judgment is still conditioned on the study of HS Explanatory notes, Section or Chapter notes and various decisions on the subject matter. Therefore, it is imperative that the application of the WSF judgment on automobile parts or accessories has not been ruled out completely.
Further, given the precedents wherein the apex court itself has referred to the Explanatory Notes while pronouncing other decisions on HS classification, the developments around the review petition filed by the government would be interesting to look forward to. Also, it may be noted that the apex court has not issued any stay order for the WSF judgment yet. Therefore, in absence of such a stay, the order of the apex court will be the law of land and ought to prevail despite the variance in the stand taken by it in other decisions.
Given the ambiguities arising on account of the WSF judgment, it is recommended that HS classification of parts and accessories of automobile products should be analysed in detail and relevant measures, as appropriate, be taken to safeguard any adverse action.
(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.)