Customs Act | Statutory Tariff Headings And HSN Notes Prevail Over Common Parlance In Customs Classification : Supreme Court

The Supreme Court on Tuesday (January 6) observed that the 'Aluminum Shelves' imported for mushroom cultivation cannot be classified as 'parts of agricultural machinery' but are liable to be classified as 'aluminium structures', attracting a customs duty. A bench of Justices JB Pardiwala and R Mahadevan resolved the long-standing dispute over the classification of aluminium shelving systems used in mushroom farms for the purpose of attracting custom duty on the import of aluminium shelving. Moreover, the bench fundamentally restructures how goods are classified for customs duty and laid down seven-point mandatory framework by downgrading the routine reliance on the “common parlance” or “trade parlance” test and affirmed the primacy of express or implied statutory guidance flowing from tariff headings, section and chapter notes, HSN Explanatory Notes, and technical expressions used in the tariff entries. The dispute was that the respondent-importer had imported the aluminium shelving to be used in mushroom cultivation and had claimed classification of the imported item under Customs Tariff Item (CTI) 84369900, covering “parts of agricultural machinery”, which attracts nil customs duty. Opposing the importer's classification, the Revenue classified the goods under CTI 76109010 as “aluminium structures”, attracting 10% basic customs duty along with applicable levies. While the original and appellate customs authorities accepted the Revenue's view, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reversed these findings, holding the goods to be agricultural machinery parts. This prompted the Revenue to approach the Supreme Court. Before the Supreme Court, the issue was whether the imported aluminium shelving should be classified under Chapter 84 as parts of agricultural machinery, or under Chapter 76 as aluminium structures. In addressing this issue, the Court undertook an extensive examination of core principles governing tariff classification under the Customs Tariff Act, 1975. Setting aside the impugned CESTAT order, the judgment authored by Justice J.B. Pardiwala held that the Tribunal had erred in straightaway applying the “common parlance” test, without first giving due primacy to the express or implied statutory guidance emerging from the tariff headings, section and chapter notes, HSN Explanatory Notes, and the technical language employed in the tariff entries. The Court said that when the wording of the tariff headings covers aluminium shelving as 'structure' being supported by other equipment, such as watering or composting systems, therefore it would be inappropriate to consider aluminium shelves to contribute as to any mechanical function. “These shelves do not contribute to their operation; they merely serve as a surface for the devices to perform their functions. A surface supports an object but does not become a part of it. To illustrate, a car needs a road to operate. One could even create a custom race track for a specific race car, enabling it to be driven solely on that track. However, it is never disputed that the road is not a 'part' of the car.”, the court explained with the help of an example. Since Heading 7610, which covers aluminium structures, is an eo nomine entry that directly encompasses the imported shelving, the goods clearly met the HSN definition of “structures” as assembled aluminium components that remain in position once installed, thereby excluding the need to apply the common parlance test. “Thus, broadly speaking, the common or trade parlance test cannot be invoked where the statute, either explicitly or implicitly, provides definitive guidance. Explicit statutory guidance exists where the legislature provides a specific definition or a clear criterion for a term within the Act itself. Conversely, implicit guidance is found where the terms employed are scientific or technical in nature, or where the statutory context indicates that the words must be construed in a technical sense. It is only in a state of statutory silence, where the legislative intent remains unexpressed, that the tribunals or courts may resort to the common or trade parlance test.”, the court said. Further, the following governing principles were culled out with regard to the application of the common or trade parlance test while dealing with classification disputes under taxation laws: "a. The common or trade parlance test must be applied restrictively. Its function is limited to ascertaining the common or commercial meaning of a term found within a tariff heading or its defining criterion. b. The trade or common parlance test can be invoked when dealing with a classification dispute only when the following conditions are satisfied. i. The governing statute, including the relevant tariff heading, Section Notes, Chapter Notes, or HSN Explanatory Notes, does not provide any explicit definition or clear criteria for determining the meaning and scope of the tariff item in...

Customs Act | Statutory Tariff Headings And HSN Notes Prevail Over Common Parlance In Customs Classification : Supreme Court

Yash Mittal

The Court summarised the principles relating to classification tests and use of trade parlance.

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