Navigating the Complex Waters of Harmonized System Classification: A Tale of Auto Components and Legal Precedents

[Joshua Ebenezer]

by Dr Joshua Ebenezer | Principal Consultant, Nucov Facil-Trade.

In the intricate world of international trade, the process of classifying goods under the HSN in India has unfolded like a strategic game between importers and customs authorities, especially notable in the automobile sector. The landscape of auto component classification, marked by its propensity for higher customs duties, has consistently been a focal point for the Revenue's scrutiny. The plot thickened with the implementation of the GST on July 1, 2017, setting the GST rate for auto components at a steep 28%.

Unexpectedly, a past Supreme Court verdict from July 2003 concerning G.S Auto International [2003 (1) TMI 700 - SUPREME COURT], which ratified the classification of various vehicle fasteners under heading 8708 using the 'sole and primary use' criterion, resurfaced. Despite the court's clear stance, which contradicted the Revenue's opposing view—a stance that had remained dormant for more than a decade—this decision suddenly found new relevance.

Armed with this precedent, customs formations were directed to scrutinize filings under the G.S Auto International ratio, sparking a flurry of notices for differential tax on components destined for motor vehicle use. This action seemed to disregard the guiding principles outlined in the Section Notes under Section XVII and EN to HSN.

This situation escalated with two pivotal developments: the increase in the peak customs duty rate for several auto components to 15%, and the influential Westinghouse Saxby [2021 (3) TMI 291 - SUPREME COURT] decision by the Supreme Court. The latter effectively opened the floodgates, convincing even the skeptics within the Revenue of the 'sole and principal use' test for classification under 8708.

Fortunately, prudence prevailed, and directives were issued to customs formations to adhere to the Section Notes, HSN Explanatory Notes, and a series of Supreme Court rulings that reinforced these classification standards, moving beyond the singular perspective offered by Westinghouse Saxby.

Just when the industry began to find respite, the Tribunal Delhi's involvement in the case concerning M/s Continental Automotive Brake Systems India Private Limited - 2024 (3) TMI 1145 - CESTAT NEW DELHI presented a fresh challenge. The tribunal's deliberations on the classification of Electronic Control Units (ECUs) for Electronic Stability Systems (ESCS) used in vehicles took centre stage.

The Tribunal concluded that neither the Anti-lock Braking Systems (ABS) nor the ESCS manufactured, nor the ECUs imported could be classified under CTH 9032, thus siding with the Revenue's argument to classify the ECUs under CTH 8708. This decision, echoing the use of ECUs in ESCS, marks a significant moment for the auto industry, given the vast number of vehicles now equipped with ESCS and ABS. The implications are vast, potentially leading to substantial differential duty demands.

This analysis sheds light on the tribunal's findings and underscores the critical role of the Electronic Stability Control (ESC) system-a cornerstone of modern vehicle safety, emphasizing the nuanced understanding required for fair and accurate classification.

As we stand at this juncture, the auto industry must brace for an extended discourse on classification, potentially escalating to the Supreme Court. Amidst these challenges lies an opportunity for clarity and advocacy, ensuring that the journey toward equitable classification standards continues with vigour and purpose.