ByNarasimhan B.L. & Rohan Muralidharan
In order to take pleasure in the large-ranging ramifications of the judgment, we may possibly get started with a temporary assessment of the judgment alone. The dispute ahead of the Supreme Courtroom was about the classification of electrical relays for use in railway signaling equipment.
At this juncture, we may possibly pause to be aware that ascertainment of classification of merchandise and expert services is critical to decide the charge of tax. Classification below Customs, Central Excise, and Products and Expert services Tax (GST) regulations are dependent on the Harmonised Program of Nomenclature (HSN) which is an internationally formulated mechanism for the classification of merchandise. HSN is divided into 21 Sections and 98 Chapters, each of which contains Notes on how to classify the articles of that Segment. For this posting, it is enough to be aware that Chapters 86 and 87 (slipping below Segment XVII) deliver the classification of locomotives and vehicles and parts thereof respectively.
Based on their exceptional use in the railways, the assessee in Westinghouse sought to classify these relays below Heading 8607 as parts of railway locomotives. This claim was grounded in Observe 3 to Segment XVII which restricts the phrases “parts” and “accessories” to parts and accessories acceptable for use solely or principally with the articles classifiable below Chapter 86 to 88. The assessee argued that the relays are principally made for use with railway locomotives and hence are classifiable as part of railway locomotives below Heading 8607.
On the other hand, the Section sought to classify the relays independently below Heading 8536 as electrical equipment on the ground that Observe 2(f) to Segment XVII particularly excluded “electric equipment” from getting categorized below Segment XVII, regardless of whether or not it is identifiable as getting for the merchandise of that Segment.
The Supreme Courtroom ultimately agreed with the assessee and held that the relays are classifiable as part of locomotives below Heading 8607. In so holding, the SC applied the “sole or principal use” examination of Segment Observe 3 to the exclusion of the embargo in Observe 2. A single may possibly summarise this conclusion therefore: “if an item is solely or principally employed with the articles of Segment XVII (which involves railway locomotives and motor cars), then it is classifiable thereunder, notwithstanding distinct exclusions to the contrary.” A reading through of this proposition may possibly prompt a easy issue, “will the exact logic use to other parts as perfectly?” It is this issue with which this posting is anxious.
The Supreme Courtroom ultimately agreed with the assessee and held that the relays are classifiable as part of locomotives below Heading 8607.~
Implications for the car sector
Ironically, the success of the assessees in Westinghouse Saxby offers a grave hazard to lots of other taxpayers. The “sole or principal use” examination, sought to be applied for classification of parts below Chapters 86 and Chapter 87 to the exclusion of all other ailments/qualifications, can be applied to just about just about every posting equipped for use in the auto industry.
For instance, the parts of motor cars classifiable below Chapter 87 appeal to an IGST charge of 28% whilst the parts which are not classifiable below Chapter 87 frequently appeal to a decreased charge of 18% or considerably less. Resultantly, thinking of the charge arbitrage, importers and domestic suppliers of such parts – regardless of whether specifically to an auto manufacturer or to sellers/component brands – will will need to revisit the classification adopted for all their merchandise.
This is especially so in the situation of parts that are tailor made-made for vehicles. Even more, the previously mentioned examination will be similarly relevant to parts that are equipped to the following-income market.
Let us think about the example of valves for car engines which are currently categorized below Heading 8481 (18%) as per the concomitant Explanatory Notes to Chapter 84. Applying the logic used by the Courtroom in the Saxby situation, one would be compelled to classify valves below Heading 8708 or 8607 inspite of there getting a distinct entry for valves in Chapter 84.
Taking into consideration the abundance of such products and solutions (Liquid crystal display screens employed in dashboard displays, electrical motors, switch panels, automotive chains, oil seals, transmission belts, fasteners, etcetera.) to which this logic may possibly use, the prospective disruption of Westinghouse Saxby can’t be overstated.
Apart from the tidal wave of Exhibit Cause Notices that may possibly ensue, escalating the tax charge on an currently strained industry is not the beacon of hope with which the money yr 2021 should to get started.
The fallout of this principle extends beyond what is normally found as “automobile parts”. There are analogous Notes in other Sections of HSN such as Notes to Segment XVI (Chapter 84 & eighty five) and Segment XVIII (Chapter ninety). Consequently, the classification of products and solutions that are if not slipping below the previously mentioned Sections may possibly also be impacted because of to this judgment.
The modalities of a de facto improve in tax charge will just take time and hard work to iron out. On the fundamental issue of how the ongoing preparations can adapt to this transform, the pursuing concerns arise:
– Will deal rates call for renegotiation?
– Can debit notes be issued for differential payment of tax? Will this appeal to desire?
– Can the recipients avail credit score of this differential payment?
– How will B2C transactions be influenced?
These are superior issues that call for superior solutions. That getting said, only time will inform how much the ripples of Westinghouse Saxby will unfold.
(The authors are Principal Companion and Principal Associate of Lakshmikumaran & Sridharan Lawyers. Sights expressed are their have.)