Classification of Goods and Services

a)

Commercial/ Trade Parlance

If meaning of goods/service is not defined in relevant places in GST Act, then, meaning of the goods/service has to be judged in the manner understood by the people dealing with it, i.e., the goods/service should be understood in the commercial sense. This rule has been consistently applied by various courts to decide the classification of the product. For example, whether the product should be classified as cosmetic or medicament shall be judged by the manner in which the people dealing the product understand.

This is the basic principle to determine the classification of goods or service. Affidavits from persons like customers, distributors, dealers along with purchase orders from customer, description of product in invoice raised by supplier, normally substantiate the manner in which the product is understood in the commercial parlance

Dunlop India vs. UOI 1983 (13) ELT 1566 (SC)

Indian Aluminium Cables Ltd. vs. UOI 1985 (37) ELT (SC)

Collector of Central Excise, Kanpur vs. Krishna Carbon Paper Co. 1988 (37) ELT 480 (SC)

Commissioner vs. Pio Food Pack 1980 (6) ELT 353 (SC)

Reliance Cellulose Products Ltd., Hyderabad vs. Collector of Central Excise, Hyderabad 1997 (93) ELT 646 (S.C)

b)

Definition given in statute or chapter note/section note etc.

The principle of classification of product as per trade parlance is not absolute principle. The statute making authority has the power to define the product in a particular manner. The said doctrine of commercial understanding should be departed where the statute either in the Act or chapter note or in Schedule or anywhere else defines the product in a particular manner. The definition in the statute will take precedence over the commercial understanding of the product in the trade.

Akbar Baharuddin vs. Collector of Central Excise, 1990 (47) ELT 161 (SC)

c)

Description in HSN has persuasive value

The Customs Co-ordination Council (CCCN) working under WTO has published Harmonized System Nomenclature (HSN) which is normally adopted by all countries who have signed the GATT Agreement for the purpose of classification of the products for Customs. In India, classification under Central Excise and in various State VAT is also based on HSN. The classification made in GST is also based on HSN. Harmonized System Nomenclature published by CCCN gives a detailed description of various products which are covered under a particular heading or sub-heading. The description in HSN is very helpful in deciding the classification of the product.

Wood Crafts Products Ltd.,1995 (77) ELT 23 (SC)

Business Forms Ltd., 2002 142-ELT-18 (SC)

d)

Most specific description to be preferred over general description

It is a general principle of classification that most specific description shall be preferred over a more general description.

Dunlop India Ltd. vs. Union of India 1983 (13) ELT 1566 (SC)

Moorco (India) Ltd. vs. CCE (SC)

e)

Functional use of the product

Functional use of the product can certainly be one of the factors in determining the classification, but cannot be the sole criteria for determining the classification. Normally use of the product is not relevant as the product is required to be classified in the condition in which it is supplied. However, sometimes, tariff heading itself provides the use of the product. In such a case, the ultimate use of the product is very important for classifying the product. the goods are to be classified on the basis of their primary function.

Atul Glass Industries vs. Collector of Central Excise,1986 (25) ELT 473 (SC)

f)

Essential characteristics of goods or service

The product is purchased and sold due to its essential characteristics. The principles for determining the essential characteristics are —

(a) Cost of components of the product

(b) Functionality of the product

Xerox India Ltd. vs. CENVAT Credit 2010 (260) ELT 161 (SC) CCE,

Hyderabad vs. Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC)

g)

Importance of expert opinion and other evidentiary value

It has been consistently held that expert opinion is to be taken to understand the nature of product but cannot decide the classification of the goods. It has no binding effect, but only guiding effect on the authorities because ultimately, decision of proper classification of the product is to be decided by the jurisdictional authority.

Guest Keen Williams Ltd. vs. Collector - 1997 (95) ELT A144 (SC)

h)

Importance of ISI specification

Sometimes, the taxable person also affixes ISI mark on the product. The ISI specification certifies the quality of the product and not the name or character. View of the ISI shall be looked at some amount of credibility for deciding the classification. It can be used as specialised material in expert opinion, but other tangible consideration should also weigh while determining the classification. Therefore, description of product in ISI has limited value in determining the classification of goods.

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i)

Importance of Finance Minister's speech

Finance Minister in the Finance Bill may make certain reference while introducing the changes. Speech of the Finance Minister represents the manner in which the authorities have understood the change. Therefore, the speech of the Finance Minister can be helpful in deciding the classification.

ECHJAY Industries vs. UOI1988 (34) ELT 42 (Guj)

j)

Importance of trade notice, circulars etc.

Section 168 of GST Act empowers the Board or the Competent Authority of the State wherever it considers necessary for the purpose of uniformity in implementation of the Act to issue such orders, instructions or directions to GST Officers as may deem fit. Similar provisions are contained in section 37B of Central Excise Act. It has been consistently held that trade notices, tariff advices, circulars, press notes etc. issued by the authorities are hardly relevant for the purpose of classification of the product under Central Excise Act as it cannot override the true meaning or interpretation of underlined statutory provisions. The classification has to be decided by the authorities based on the description of relevant tariff entry and not on the basis of tariff advice or instructions or circulars etc.

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k)

Chemical examination only provides content and not classification

Very often, the authorities insist upon testing of the product in order to determine the true composition of product and nature of the product. Section 154 of GST Act also provides taking of samples. It has been consistently held that the role of Chemical Examiner is only to provide the content of the product or the nature of the product, but not to decide classification of the product. Mention of classification in the test report shall be ignored.

Stadfast Paper Mills vs. Dr. Kohli, Former Collector of Central Excise, Baroda and Others 1983 (12) ELTb 744 (Guj.)

l)

Provision of relevant time

Sometimes, the tariff description of the entry may be amended over a period of time. While classifying the product, the tariff description of relevant period should only be used for classification. For example, say, goods are supplied in the month of August, 2017. Further assume there is amendment in the tariff entry in April, 2018. The classification of the product based on tariff description in August, 2017 should only be considered while classification for supplies made in August, 2017. Subsequent amendment will not be relevant for the purpose of deciding the classification.

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m)

Burden to prove classification on department

It has been held under Central Excise Act that burden to prove is primarily on the excise authorities to establish whether particular products falls under one tariff heading or another when the manufacturer has classified the product in a particular tariff heading and the department intends to classify it in a different heading. The department must produce enough evidence to substantiate that the product must classify differently. In other words, the burden of proof of particular classification is on the department. This burden can be shifted to the assessee when the classification adopted by him is not totally correct.

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n)

Exemption notification cannot interpret tariff heading or sub-heading

Sometimes, the department provides exemption to a particular product and specifies the tariff entry for that product. In such cases, the department has been taking plea that the product should be classified under the heading mentioned in the exemption notification. It has been consistently held that exemption notification cannot interpret the tariff entry nor it can provide norms for the purpose of classification. The classification of product must be decided based on description of tariff entry.

Mechanical Packing Industries vs. UOI 1987 (32) ELT 35 (Bom.)

o)

Beneficial classification

It is a well established principle that when the goods are classified under two different items or said items or ambiguous sentences leave reasonable doubt about its meaning, then benefit of doubt is given to the manufacturer and the classification should be adopted which is beneficial to the manufacturer. This is based on the principle that when the legislature has not clearly laid down the provisions of law benefit of doubt is given to the manufacturer.

Garware Nylons Ltd. vs. UOI 1980 (6) ELT 249 (Bom.)

p)

Jurisdiction to decide classification

The jurisdiction to decide the classification is on the jurisdictional officers of the supplier of goods/service. The classification cannot be decided by the jurisdictional officer of recipient of goods/service. They have no authority to change the classification adopted by supplier of goods/service

Sarvesh Refractories, 2007 (218) ELT 488 (SC)