SC dismissal of review petition on HSN codes setback for industry

Auto component industry may have to pay up to 15% basic Customs duty and 28% GST

Industry, particularly the auto components segment, has reasons to worry after the Supreme Court dismissed a review petition filed by the finance ministry over classification of goods on the basis of the harmonised system of nomenclature (HSN) codes. This case originally related to excise duty, but it has implications for Customs duty and the goods and services tax (GST), too.

Original case

The original case related to the classification of relays used in Railways. In HSN codes, exclusions are sometimes given in some chapters. For instance, chapter 85 (the two digits refer to chapters under HSN codes) covers electrical apparatus for switching on or protecting electric circuits, including relays. Chapter 86 covers parts of railway or railway locomotive or rolling stock. There is a note for exclusion, which says that the goods that come under chapter 85 would not be covered under 86, even if used for railways.

The excise duty rate was higher on products under chapter 85 than those under chapter 86.

That was the settled principle of classification till the Westinghouse Saxby Farmer case reached the Supreme Court. The court ruled in March 2021 that relays will come under chapter 86 as these are predominantly used in railways in this case.

The ruling benefited the company. However, it was against other industries. Say, many high value auto components such as  internal combustion (IC) engines come under chapter 84 and 85 and auto comes under chapter 87. Now basic Customs duty (BCD) is 7.5-10 per cent for goods under chapters 84 and 85 and up to 15 per cent for those under chapter 87.

Similarly, the GST rate is 18 per cent for the goods under chapters 84 and 85, but it is 28 per cent if these goods fall under chapter 87.

Hence, after the recent SC ruling, the auto component industry would have to pay up to 15 per cent BCD and 28 per cent GST for these  components. If the principle of exclusion is applied, the industry would be paying 7.5-10 per cent BCD and 18 per cent GST for these components.

Meanwhile, the Central Board of Indirect Taxes and Customs (CBIC) acknowledged the problem and issued an instruction in January 2022 that the Supreme Court ruling was case specific and can’t be applied generally. It referred to earlier judgments that did not figure in the Westinghouse case to bring forth its point.

However, the CBIC instruction can’t override SC judgment. To overcome this, the revenue department under the finance ministry filed a review petition in the Supreme Court. The court recently dismissed the petition.

Shield for industry

Saurabh Agarwal, tax partner at EY said that technically the instruction can act as a shield for the industry, provided ground level authorities follow the spirit of the  instruction and don’t raise classification disputes merely on the basis of end-use test as laid down in the Westinghouse ruling.

“To bring this issue to end, the CBIC can consider bringing specific entry in the rate notification irrespective of classification,” he suggested.