In Commissioner of Customs (Import) v. M/s Welkin Foods, the Supreme Court (SC) dealt with the dispute over the classification of the aluminium racks as part of the agricultural machinery. However, the SC in this case discussed and clarified the framework for the classification of the product under the Act.

THE WELKIN FOODS JUDGEMENT

The dispute arose from an importation of aluminium shelves for mushroom agriculture with an automatic watering system and floor drain as part of agricultural machinery under heading 8436900, which attracts a nil rate of duty. However, the Customs authorities classified aluminium shelving as an aluminium structure under 76109010, which attracts a basic rate of 10%, a countervailing duty of 12.5%, and a customs cess of 3%.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) disagreed with the authorities' contention and held aluminium shelves as machinery specially used for the mushroom growing industry and had no other commercial purpose. The CESTAT further relied on the Trade Parlance Test and observed that aluminium shelves were commonly known as “Mushroom growing racks” rather than an aluminium structure.

Later, the Hon'ble SC overruled the CESTAT decision and held that, rather than relying on the parlance test at the beginning for classification, the product should first be classified according to the Relevant Tariff Heading, Section Notes, Chapter Notes, and then GRI, but starting with GRI 1, then proceeding to GRI 2 to 6 only if required. The Bench agreed with the authorities on the classification of aluminium shelves under 76109010 as an aluminium structure based on their characteristics and the tariff provision. It further held that being merely marketed for the mushroom agriculture industry cannot alter the proper tariff classification under the Act.

THE CLASSIFICATION HIERARCHY

The SC in the Welkin Foods articulated and explained the process of how products should be classified under the Harmonized System Nomenclature (HSN). The First Schedule of the Act lays down the foundation for the classification of the imported goods, which are referred to as GRIs^[1]. GRI 1 is the first step of the framework that mandates that every imported good must be classified according to the terms of the relevant tariff heading, and with the relevant section and chapter notes.

However, where classification cannot be determined under GRI 1, subsequent GRIs come into play. GRI 2(a) ensures that unfinished or unassembled goods that possess a substantial character to function as finished goods must be classified as finished products. GRI 2(b) ensures that a heading that covers a particular material also includes goods that are partially made of that material or substance. However, if a product does not fit in one heading because of mixed composition, the classification will be done according to the GRI 3 rules. GRI 3 provides preference to those headings whose description matches the product. GRI 4 is used very rarely, only when GRI 1-3 were not able to classify the product, while GRI 5 was used only for the classification of containers and packing material, and GRI 6 provides procedural rules for finding the correct subheading.

The SC opined that GRIs are used to provide a uniform and structured framework for classification. The Court further used the analogy of “locked doorways” to use GRI in sequence, exhausting them in order, and not to use it randomly, and also relied on Secure Meters Limited v. Commissioner of Customs, New Delhi^[2], which reiterated the same principle. The Bench also clarified the applicability of Explanatory Notes with reference to the Commissioner of Central Excise, Salem v. Madhan Agro Industries (India) Private Ltd., which held that Explanatory Notes are only used as binding guidance when the first Schedule of the Act is fully aligned with the HSN heading. If there is any deviation from the statute, then the statute will prevail over the explanatory notes.

THE USE OF TRADE PARLANCE IN INDIAN CUSTOM LAW

According to the statutory language of the Act and settled jurisprudence of the SC, it is affirmed that when a particular term is not defined under the statute, then it must be understood in the way that is recognized by the persons dealing with it. The expressions such as “Trade Parlance”, “Popular Parlance”, and “Commercial Parlance” reiterated the principle of “Common Parlance”. The basis behind this principle is that taxation statute implemented for the purpose of generating revenue and addressing the general public at large. So, the words used in the statute should be commonly interpreted by people dealing with them. The SC in the Dunlop India Ltd v. Union of India^[3], where the department classified Vinyl Pyridine Latex, a type of rubber, according to its technical meaning; however, the court held that the statutory interpretation given in the statute must accord with the understanding of the people involved in the concerned trade and commerce activity with the subject. Technical and scientific classification can only be used in a limited way.

The Parlance test can be applied in every case. It must be used after examining the statutory language. The SC also settled the jurisprudence where a Parlance test cannot be applied. In Akbar Badrudin Giwani v. Collector of Customs, Bombay^[4], the issue concerned whether calcareous stone could be classified as “marble” because it was merely known as marble in trade. However, the court held that the meaning of “Marble” could not be classified from the Trade Parlance test since Tariff Entry distinguishes “Marble” from travertine and calcareous stone. Tariff entry will be useless if all the stones were treated as marble. Accordingly, statutory language must prevail over the Trade Parlance.

FUTURE IMPLICATIONS AFTER WELKINS FOOD

The Welkins Food judgment created a roadmap for the classification of products under the Act. Earlier, the importers were classifying the product based on their commercial identity in the relevant market. The SC position in the Judgment explicitly elucidated how the product should be classified by examining the statutory language. Trade Parlance Test can only be considered when the product is not defined under the Act. The Court opined that the Parlance Test can only be used in a supplementary role when the Act is not able to classify the product.

The Court further created an impact from a litigation perspective, like a product made for the particular industries; then the customs officer should not directly classify it in that tariff heading; it should match the characteristics and attributes with the Tariff Heading. The Judgment reaffirmed the position of the GRI in classifying the product. GRI is not optional but mandatory for classifying goods. The authorities must start with the GRI 1 and proceed accordingly. The principle will lead to a reduction in unnecessary litigation and provide a blueprint for importers to classify the goods under the Act.

The Welkins Foods Judgment reaffirmed that the customs classification must be done based on the statutory language of the Act rather than the commercial understanding of the product in the relevant market. The SC emphasized on the sequential and disciplined use of GRI, Tariff Headings, and Section Notes for classification to reduce arbitrary classification and to align with international standards for classification.

1. https://www.wcoomd.org/-/media/wco/public/global/pdf/topics/nomenclature/instruments-and-tools/hs-interpretation-general-rules/0001_2012e_gir.pdf?la=en. ↑

2. Secure Meters Limited v. Commissioner of Customs, New Delhi, 2015 AIR SCW 4832. ↑

3. Dunlop India Ltd v. Union of India, 1977 AIR 597. ↑

4. Akbar Badrudin Giwani v. Collector of Customs, Bombay, 1990 AIR 1579. ↑