Relays manufactured for use only as Railway signaling was classifiable under heading 8536 following equipment predominant use or sole/principal use test – SC
ABCAUS Case Law Citation
ABCAUS 3466 (2021) (03) SC
Important case law relied referred:
Central Excise vs. Simplex Mills Co. Ltd (2005) 3 SCC 51
A. Nagaraju Bros vs. State of AP 1994 Supp( 3) SCC 122
In the instant case, the assessee had challenged the order passed by the Customs Excise and Service Tax Appellate Tribunal (CESTAT) upholding the classification of “Relays” and the consequent demand.
The appellant was a wholly owned State Government Company and engaged in the manufacture of “Relays” used as part of the Railway signaling system. Though essentially relays are electrical equipment, they may also form part of Railway signaling equipment.
While the normal electrical relays fall under Tariff item No. 8536.90, ‘Railways and Railways signaling equipment’ fall under No. 8608.
Due to change in the effective rate of excise duty under both sub-headings, the appellant got approval from the Assistant Collector, Central Excise for relays manufactured to classified as Railway signaling equipment, including relays under subheading 8608 and not under 8536 in the First Schedule to the Central Excise Tariff Act.
However, the controversy arose when based on a CBIC Circular which stated that ‘plugin type relays’ are to be classified under heading 8536.
As a result, the Assistant Commissioner passed separate Orders confirming the demand and penalty was also levied.
The Commissioner (Appeals) confirmed the classification made by the Adjudicating Authority and the consequential differential duty demanded. However, he set aside the penalty.
The question before the Hon’ble Supreme Court was as to whether the “Relays” manufactured and used only as Railway signaling equipment would fall under Chapter 86, Tariff Item 8608 as claimed by the appellant or under Chapter 85 Tariff Item No.8536.90 as claimed by the Department ?
The Hon’ble Supreme Court observed that Rule 3 of the First Schedule of the Central Excise Tariff Act, 1985 deals with cases where goods are classifiable under two or more subheadings. However, Rule 1 of these Rules makes it clear that “the titles of Sections, Chapters and Sub Chapters are provided for ease of reference only and that for legal purposes, classification shall be determined according to the terms of the Headings and any relative Section or Chapter Notes and provided such headings or Notes do not otherwise require, according to the provisions of the rules that follow.”
Further, Rule 2(a) speaks about “Article”, Rule 2(b) speaks about “material or substance” as well as “goods of a given material or substance” and Rule 3 speaks about “goods”.
The Hon’ble Supreme Court noted that the Department had invoked General Rule3(a) whereas it was held by the Court that the General Rules of Interpretation will come into play, as mandated in Rule 1 itself, only when no clear picture emerges from the terms of the Headings and the relevant section or chapter notes ; and that in any case, Rule 3 of the General Rules 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’ manufactured by the appellant are not even classifiable under Chapter Heading 8608, the Authorities could not fall back upon Rule 3(a) of the General Rules.
The Hon’ble Supreme Court stated that there is a fundamental fallacy in the reasoning of the Authorities, that Rule 3(a) of the General Rules will apply, especially after they found that ‘relays’ were not classifiable under Chapter Heading 8608, on account of Note 2(f) of Section XVII.
The Hon’ble Supreme Court stated that what is recognized in Note 3 can be called the “suitability for use test” or ‘the user test’. While the exclusion under Note 2(f) maybe of goods which are capable of being marketed independently as electrical machinery or equipment, for use otherwise than in or as Railway signaling equipment, those parts which are suitable for use solely or principally with an article in Chapter 86 cannot be taken to a different Chapter as the same would negate the very object of group classification.
The Hon’ble Supreme Court said that the Department ought not to have overlooked the ‘predominant use’ or ‘sole/principal use’ test acknowledged by the General Rules for the Interpretation of the Schedule.
The Hon’ble Supreme Court held since the goods were previously classified under Subheading 8536.90, but a revised classification list, classifying them under subheading 8608, submitted by the appellant, was approved by the competent Authority. Therefore in view of such specific approval of the classification list, it was not proper on the part of the Authorities to invoke Note 2(f) of Section XVII.
Accordingly, the question was answered in favour of the appellant and against the Revenue.
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