CA Final Paper 8 Indirect Tax Law Chapter 2 V S Datey

Classification tells you rate of duty, while valuation tells you on what value that rate should apply

Thousands of products – Not possible to list all and state duty of each product

Goods have to be classified and sub-classified and then rate of each sub-classification is to be specified

Tariff to specify rate of duty payable on each Article - Central Excise Tariff Act and Customs Tariff Act.

Harmonised Commodity Description and Coding System developed by World Customs Organisation (WCO) (That time called as Customs Cooperation Council). Based on International convention of Harmonised System of Nomenclature (HSN). It is six digit classification

WCO in its various committees discusses classification of individual products and gives classification opinion on them.

Almost all Countries have adopted HSN

Indian Customs adopted this nomenclature w.e.f. 28-2-1986. Central Excise Tariff also adopted HSN based classification w.e.f. 1-3-1986.

Customs Tariff and Central Excise Tariff have added two more digits for further precision to make it 8 digit classification.

In case of doubt, HSN is a safe guide for ascertaining true meaning of any expression used in the Act, unless there is an express different intention indicated in the Tariff itself - CCE v. Wood Craft Products Ltd. - 77 ELT 23 = (1995) 3 SCC 452 (SC - 3 member bench order).

Even opinions expressed by WCO Committee are given due importance.

Classification of goods from groups to sub-groups to sub-sub groups

Arrangement similar to menu in a Hotel

All goods classified in 20 Sections in Excise Tariff and 21 Sections in Customs Tariff.

Sections are divided into 96 chapters in Excise Tariff and 98 Chapters in Customs Tariff. Chapter 77 is blank in both Tariffs.

A ‘section’ is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections is related to a broader class of goods.

For Example - Section I is ‘Animal Products’, Section VII is ‘Plastics and Articles thereof’, Section XI is ‘Textile and Textile Articles’, etc.

Section Notes are given at the beginning of each Section, which govern entries in that Section.

These section notes are applicable to all Chapters in that section.

Each of the sections is divided into various Chapters and each Chapter contains goods of one class.

For example, Section XI relates to Textile and Textile Articles and within that Section, Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on.

Some Chapters are divided into sub-chapters e.g. Chapter 72 (Iron and Steel) is divided into I – Primary Materials, II – Iron and Non-Alloy Steel, III – Stainless Steel and IV – Other Alloy Steel.

Chapter Notes are given at the beginning of each Chapter, which govern entries in that Chapter.

Central Excise Tariff has four columns - (1) Tariff Item (2) Description of goods (3) Unit and (4) Rate of Duty. In Customs Tariff, there are five columns - (1) Tariff Item (2) Description of goods (3) Unit (4) Standard Rate of Duty (5) Rate of duty for Preferential Area.

Lower customs duty in case of import of some specified goods from Myanmar, Bangladesh, Mauritius, Seychelles, Nepal, Tonga etc.

Each chapter and sub-chapter is further divided into various headings depending on different types of goods belonging to same class of products.

The tariff is designed to group all goods relating to same industry and all the goods obtained from the same raw material under one Chapter in a progressive manner as far as possible.

First two digits indicate chapter number. Two more digits are added to make ‘headings’. Thus, ‘headings’ have four digits. Further 2 digits are added for sub-classification, which are termed as ‘sub-headings’. Last 2 digits are added for sub-sub-classification, which is termed as ‘tariff item’. Rate of duty is indicated against each ‘tariff item’ and not against heading or sub-heading.

Single dash (-) at the beginning of description indicates a group, while two dashes (- -) at the beginning indicate a sub-group. The single dash (-) indicates primary classification of article covered by the heading, while double dash (- - ) is the sub-classification of the preceding article which has single dash (-) i.e. it is a sub-classification of primary classification.

Triple dash (- - -) and quadruple dash (- - - -) indicate sub-sub- classification of immediately preceding description of article, which has ‘-‘ or ‘- -‘. In other words, a single dash or double dash may be followed by either three dashes or four dashes. Both three dashes or four dashes are used to indicate 8 digit classification i.e. ‘tariff item’.

A Ready Made Garments

AA - Men's wear AA-1 - - Suits AA-2 - - Shirts AA-3 - - Other AB - Ladies

wear AB-1 - - Salwar AB-2 - - Skirts AB-3 - - Other AC - Other

Third column of tariff is ‘Unit’ which is unit of measure. The unit of measure is indicated by abbreviations. Some abbreviations are as follows – cc – Cubic Centimetre, cm – Centimeter(s), g - gram(s),, l – litre, m – metre, mt – Metric Tonne, t – Tonne, u – Number,

The use of the unit is optional

Abbreviation ‘%’ in Column 4 indicates that duty is charged ‘ad valorem’ on the value of goods as calculated in section 4 of Excise Act or section 12 of Customs Act.

Rules for Interpretation of Schedule to Tariff are given in the Tariff itself. These are termed as ‘General Interpretative Rules’ (GIR).

The titles of Sections and Chapters are provided for ease of reference only; for legal purposes, refer the heading and sub-heading. Read corresponding Section Notes and Chapter Notes (Rule 1 of GIR). If there is no ambiguity or confusion, the classification is final. If classification is not possible, then only go to other rules of GIR. The rules are to be applied sequentially.

If goods are incomplete or un-finished, but classification of finished product is known, find if the un-finished item has essential characteristics of finished goods. If so, classify in same heading - Rule 2(a).

Examples - Motor vehicle not yet fitted with wheels, battery or tyres * Bicycles without saddles and tyre – but not forgings and castings

Second part of rule 2(a) of GIR further provides that the heading will also include finished goods removed un-assembled or disassembled i.e. in SKD or CKD packs. [second part of Rule 2(a)].

As per rule 2(b), any reference to a material or substance includes a reference to mixtures or combinations of that material or substance with other material or substance.

The classification of goods consisting of more than one material or substance shall be according to the principles contained in rule 3.

Find out which heading is specific and which heading is more general. Prefer specific heading.- Rule 3(a).

Example - VIP bag is a ‘Plastic Article’ in common parlance, but if there is a specific entry ‘suitcases’, that entry will prevail over general entry ‘plastic articles’

If problem is not resolved by Rule 3(a), find which material or component is giving ‘essential character’ to the goods in question - Rule 3(b).

For example, if a set consists of drawing instruments (90.17), pencil (96.09) and pencil sharpener (82.14), put up in a leather case (4201.90); the set will be classifiable under 90.17 i.e. drawing instrument.

Mobile phone with additional features like radio receivers, music players, email, net browsers, calculator, alarm, computing etc. is still ‘mobile handset’ as principal function continues to be ‘telephony’ and in trade parlance also, the goods are sold as cellular or mobile phones - MF(DR) circular No. 17/2007-Cus dated 19-4-2007.

Sometimes, a floppy diskette is attached to a book. On the other hand, a manual is supplied along-with software. In the former case, the 'essential character' of the goods is 'book', while in later case, the 'essential character' is 'software'. Hence, the goods will be classified according to 'essential character' as per rule 3(b).

Latter the better - If both are equally specific, find which comes last in the Tariff and take it - Rule 3(c).

Most akin goods - If you are unable to find any entry which matches the goods in question, find goods which are most akin - Rule 4 [This is last rule as classification cannot be kept hanging for ever]

Classification cannot cover goods specifically excluded from Central Excise Tariff e.g. Live animals [chapter 1 of CETA] trees, cut flowers [chapter 6 of CETA], Cereals – wheat, jawar, bajra,[chapter 10 of CETA], soya bin, copra, seeds [chapter 12 of CETA]

As per rule 5, cases for camera, musical instruments, drawing instruments, necklaces etc. specially shaped for that article, suitable for long term use will be classified along with that article, if such articles are normally sold along with such cases.

Packing materials and containers are also to be classified with the goods except when the packing is for repetitive use.

Classification of parts is subject to notes in Sections and Chapters.

Broadly, parts suitable solely for a particular machine generally fall in the same heading number in which main item falls.

Parts of general use (bolt, screw, rope etc.) are not to be classified as part of any particular machine. ‘Parts of General Use’ are to be classified in their respective specified heads

A word in statute should be construed in its popular sense and not in the strict or technical sense (unless Tariff uses technical words).

‘Popular sense’ means that which people conversant with the subject matter with which the statute is dealing, would attribute to it.

Examples – Coconut, windshield, carbon paper

Ends use not relevant unless Tariff is specifically based on end use

Wikepedia is an external aid of construction of Statute. It may be looked into for gathering information but is not an authentic source.

Use of dictionary, BIS standards etc. can be made but Trade Parlance most important

Advisable to see Tariff to see how it is arranged

Try to classify following items – Mineral Water, Software, Screw Driver, Ball Pen, Onion

Government can grant exemption from excise duty – partial or complete – conditional or unconditional by issuing a notification – section 5A(1) of CEA and section 25(1) of Customs Act

Tariff has to be read along-with exemption notification to find exact rate of duty

Notifications are issued by Government by notifying in Official Gazette

They become effective on the date issued [section 5A(5) of CEA and section 102(4) of Customs Act]

Notification subordinate to Act. Notification cannot be with retrospective effect

CE, CE(NT), Cus, Cus(NT) and Ser suffix to indicate type of Notification

Tariff Rate is as prescribed in Tariff

Effective Rate is as specified in exemption Notification

Nil duty means the Tariff itself specifies duty as ‘Nil’

Exempt from duty means exempted by a notification

Unconditional Exemption is compulsory, if duty is fully exempt - Section 5A(1A)

Conditional Exemption is at option of Assessee

Assessee manufactured various components of TV sets. These were assembled for testing of each set. Then the sets were disassembled and then transported as parts to other units (satellite units) of assessee to be reassembled and marketed. Individual serial numbers were given. Assessee contended that the clearance was of ‘parts’ of TV set and not complete TV.

The goods have to be classified as finished/complete goods and not as parts. If only parts were manufactured and matching and numbering functions were done at satellite units, it would have been removal of parts of TV sets.

Salora International Ltd. v. CCE (2012) 9 SCC 662 = 284 ELT 3 (SC)

Assessee was manufacturer of jute carpets with surface entirely of polypropylene. The content of jute was 51.45% to 52%. Assessee claimed classification as ‘Jute Carpet’ under 5702.12, while department insisted on classification under ‘Other Carpets’ under 5202.90.

Since the goods consist of two or more textile materials, it has to be classified on the basis of that textile material which predominates by weight over any other single textile material. Further, a jute carpet is a specific description which prevails over a general description. Trade parlance test can be applied only when the term or expression has not been specifically defined in the Tariff. Applying these principles, the product is classifiable as ‘jute carpet’ only. - CCE v. Champdany Industries (2009) 241 ELT 481 (SC).

Classification of product tells us rate of excise duty applicable on the product

The Tariff is based on HSN, which is internationally approved

GIR contains rules of classification of product. In addition to GIR, trade parlance is important in

classifying a product The Tariff has to be read along with exemption

notifications to find effective rate as which excise duty is payable

Thanks and best wishes for the exam