Motor vehicles are an inextricable part of modern life commutation. The industry has grown clouds & skies over last century and is today one of the largest sectors in the economic scheme of things. While it’s no less than a magic to experience a motor vehicle as a single unit, but in reality this manufacturing marvel is nothing but an amalgam of lakhs of parts, spares, components & accessories that are aesthetically engineered & interconnected in a manner to function in sync with each other. Now, it is very much possible that the various parts so assembled can either be the parts of general use or the parts of specific use but in all likeliness, the parts would always be so designed that it fits the use for a particular type, class, model & variant of a motor vehicle.
This brings us to this new classification puzzle of whether all such parts & child components are always to be classified only as the parts of the vehicle under heading 8708 or whether it needs to be classified based on its independent constituents & utility being taxable at the rate of tax as applicable. Now it is important to note here that the rate of tax, if classified as parts of the vehicle is 28% and same when classified based on the products own features in most probability can be 18% (Thanks to this being the largest tax bracket covering the major spectrum of goods).
Now, in order to arrive at the appropriate classification of these items used in the motor vehicle, it is important to refer to the tariff classification as issued by the CBIC read with its Schedules and as guided by the Interpretative rules, Section Notes, Chapter Notes as supported by the explanatory notes to the HSN as issued by the World Customs Council, Brussels.
The basic principle provided in rule 1 is that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. Further, Rule 3(a) of these rules provides that heading which provides the most specific description shall be preferred to headings providing a general description.
Now, the heading 8708 provides for “PARTS AND ACCESSORIES OF THE MOTOR VEHICLES OF HEADINGS 8701 TO 8705”. On the plain & isolated reading of heading 8708 alone, one might conclude that all parts of motor vehicles merit classification under heading 8708. However, as stated above, to arrive at appropriate classification, it is of paramount importance to decipher the various section notes, chapter notes along with interpretative rules.
To elaborate further, Chapter 87 is covered by Section XVII and as per note 2(b) to section XVII, the “Parts of general use” (as defined in Note 2 to Section XV, of base metal (Section XV), or similar goods of plastics (Chapter 39)) are to be excluded from section XVII. Further, note 3 of section XVII provides that parts of chapter 86 to 88 do not merit classification under these chapters, if the said parts are not suitable for use solely or principally with the articles of those Chapters.
Therefore, the exclusions carved out in Section XVII are the deeming fictions and may be looked at as an exclusive escape routes from the clutches of coverage under chapter 87. Thus, the parts of motor vehicles are to be classified under heading 8708 only if they are not excluded as per section note 2(b) and if the parts are specifically used in the motor vehicle.
Now, the moot question that arises is whether the preference be given to note 2(b) of section XVII or note 3 of XVII or both should be referred to arrive at the appropriate classification. The guiding yardstick can be derived from various judicial precedents on the classification issues.
Let us begin with the judgements of rendered by the Hon’ble Apex court of India in this regard. Firstly, in the case of GS Auto International Ltd Vs Collector of C.Ex., Chandigarh (2003 (152) ELT (3) SC), the Hon’ble Supreme Court of India has referred both the above notes. However, to the despair of automobile industry, The Apex court concluded that for classification under CTH 8708, the test to be applied is whether the goods are suitable for use solely or primarily with articles of CTH 8701 to 8705. If the answer is in the affirmative, the goods will be classifiable under CTH 8708, but if the answer is in the negative, they would have to be classified under respective CTHs.
Further, in the recent Advance ruling rendered in the case of M/s. A Raymond Fasteners India Pvt Ltd 2021 (1) TMI 895, Appellate authority relying heavily on the decision of G.S. Auto (supra) held that Metal Nuts with metrical threading, and Metal Spring Nuts, will be considered as parts of motor vehicles and accordingly will merit classification under the Tariff Item 8708 99 00 and not under 7318.
However, in case of Intel Design Systems (India) Pvt. Ltd. vs Commr. of Cus. & C. Ex. 2008-TIOL-18-SC-CX the Hon’ble Supreme Court of India held that parts falling under CTH 87 would only be covered under CTH 87 provided they fulfil both the conditions (1) they must be identifiable as being suitable for use solely or principally for vehicles falling under Chapter 87 and (2) they must not be excluded by the provisions of Section Note XVII and therefore, it was held that as goods such as contractors, switches, control box etc., fall under the category of excluded goods under the chapter notes. Thus, even though they are used specifically, solely or principally with the armoured vehicles of chapter heading 8710, they are classifiable under chapter heading 8536.90 only.
Further, CCEx vs Raja Forgings & Gears Ltd 2009 (233) E.L.T. 404 (Tri-Del). In the said judgement, the Hon’ble Tribunal had referred both the above Supreme Court judgments and held that for the to be classifiable as parts of motor vehicles under CTH 8708, it must satisfy both the tests as held in Intel design (supra).
On combined analysis of the aforementioned two judgements of the apex court, it can be observed that in case of GS Auto International, the Hon’ble Supreme Court had considered only the first test i.e., ‘sole or principal use’ and not the second test i.e., ‘exclusion from the chapter notes’. However, in case of Intel design, the court has specifically stated that as per Explanatory Notes to HSN, both the conditions i.e., inclusion as well as exclusion should be simultaneously satisfied to arrive at the appropriate classification. Therefore, the judgement in case of Intel design, which is in favour of the assessee would hold the ground.
At this juncture reference is drawn to another judgment rendered by the apex court in the case of CCE, Delhi-iii Vs M/s. Uni Products India ltd 2020 (5) TMI 63 – SC, wherein the Hon’ble Supreme Court of India has affirmed the decision of tribunal and held that the car mats are specifically excluded from the scope of CTH 8708 and are fulfilling the requisites mentioned in CTH 5703, hence they are appropriately classifiable under CTH 5703, even though they are used solely and principally in motor vehicles. In the said case few important guidelines are laid down by the Supreme court such as:
- Even though HSN Explanatory Notes have persuasive value only, but the level or quality of such persuasive value is very strong, as observed in numerous judgments.
- Section Notes and Chapter Notes are of utmost importance to determine classification.
- The most specific description shall be preferred to headings providing general description as per Rule 3(a) to GI Rules.
Now, one needs to consider the cardinal principle of “later the better” as upheld by the Hon’ble Apex court in the case of D.V. LAKSHMANA RAO v. STATE OF KARNATAKA, wherein, it is held that “if there are two conflicting judgments of the Supreme Court with equal number of Judges, the later will prevail over the earlier but where the earlier judgment is of a larger bench and the later judgment is of a smaller bench, then the decision of the larger bench will be binding.” It is pertinent to note from the various judgements rendered by the apex court above, the judgment rendered in the case of G.S. Auto is the earlier one while all the apex judgments are rendered by a two member bench.
Reference here also needs to be given an important legal maxim “Generalia Specialibus non derogant” as also upheld by the Hon’ble Apex Court in the case of Commissioner of Income Tax, Patiala & Ors. Vs. Shahzada Nand& Sons & Ors, MANU/SC/0113/1 966= AIR 1966 SC 1342 = 1966 (60) ITR 392 (SC) which conveys that the General things do not derogate special things i.e., General statements or provisions do not derogate special statements or provisions.
Applying the above principle in the present case, the classification stated under Chapter 8708 covers parts of a motor vehicle being a general heading to cover various parts of the motor vehicles. This heading is given in a general context to cover various parts of the motor vehicles. Now, let’s say, if a specific part is also mentioned in another chapter heading with a clear and specific description of that product, then it would be a classification homicide to ignore the specific classification with a clear description and instead classifying the product under the general heading which only states “Parts & Accessories”.
To understand the above, let us take an example of Car seats. Now, no one can deny that the seats installed in the cars are also a part of the motor vehicle, however the seating industry never classifies the same under heading 8708 and instead it is classified under heading 9401 being Seats of a kind used for motor vehicles.
Lastly, one also needs to pay reference to the Explanatory Notes to HSN as issued by the World Customs Council, Brussels which states that the headings Parts or Accessories apply only to those parts or accessories, which comply with all of the following conditions:
- they should not be excluded from Section Note 2 of Section XVII; and
- they must be used solely or principally with the articles of Chapter 86-88; and
- they must not be specifically covered elsewhere in the nomenclature.
Further, while explaining the scope of Note 2 to the section XVII, it categorically states that “this note excludes the following parts or accessories, whether or not they are identifiable as for the articles of this section.” Now, here it categorically states that the exclusion be made from the section XVII i.e., as parts of motor vehicles, even if it is identifiable as the articles of this section.
Now, it is important to note that the decision rendered by the Hon’ble Apex Court in the case of G.S Auto International (2003) does not refer to the Explanatory Notes to the HSN classification, while the decision rendered by the Hon’ble Apex court in the case of Uni Products (2020) also considers the explanatory notes to the HSN. In fact, the differentiator between the two above decisions is that the apex court in the case of G.S. Auto is rendered on the wrong premise without considering the important material that governs the interpretation of the classification of goods.
Reference in this regard must be given to the legal doctrine “Per incurium” which when literally translated would mean as "through lack of care", it is a device within the common law system of judicial precedent i.e., a finding of per incuriam means that a previous court judgment has failed to pay attention to relevant statutory provision or precedents.
From the above detailed explanation, it can be stated that although the spectrum of the goods that can be covered within the ambit of the term “parts or accessories of the motor vehicle” is very wide, however one needs to note that the scope of its coverage cannot merely lye on the test of such parts being designed solely & principally for usage in the motor vehicles. If it is so, then nothing could come out of the clutches of being called as the “parts or accessories of the motor vehicles”, since all the parts would have special design & dimensions for each class and variant of a vehicle.
Therefore, while interpreting a law, it would be incorrect to rely only on one condition and blatantly ignoring the other condition as provided in the same section notes. Further, if there is any conflict, then the same needs to be harmonised based on understanding the bonhomie between Note (2) and (3) to the Section XVII taking support from the explanatory notes issued therein.
While it is clear that the ‘Parts of General use’ as specially excluded by way of section note (2) and thereby cannot be considered as a parts or accessories of the motor vehicle and therefore it is now for the CBIC to proactively come out with an immediate clarification on this matter, which otherwise would only have to bite the dust with one more round of litigation right up to the apex court. In the meanwhile, auto sector needs to get its classification professionally vetted, yet again in order to avoid any further turmoil, as any negligence on this count alone can bite them dearly which is 10% of the gross to be specific.
- CA. Ravi Kumar Somani
- CA. Payal Bhutada