COMMISSIONER (ADJUDICATION) IS NOT EMPOWERED TO DECIDE CLASSIFICATION OF GOODS

[Mr. M. GOVINDARAJAN]

                 Imports and Export of goods are to be classified according to the Tariff item number mentioned against them in the Customs Tariff.  This is a unique 8 digit code for all items based largely on the International System viz., Harmonized System of Nomenclature adopted by almost all countries.  Onus to establish tariff classification of goods is on the Department. The Supreme Court has laid down the following parameters for determination of classification of goods:

§         HSN along with the Explanatory Notes provide a safe guide for interpretation of an entry;

§         Equal importance to be given to Rules of Interpretation of the Tariff;

§         Functional utility, design, shape and predominant usage have also got to be taken into account.

In 'Bharti Airtel V. Commissioner of Customs, Chennai (SEA-Imports) - [2009 -TMI - 32619 - CESTAT, CHENNAI] the tribunal decided that the Commissioner (Adjudication) is not empowered to decide classification of goods. The details of the said case law are as follows:

                        During the year 2006 some telecom companies such as Bharti Airtel, Vodafone Essar South Ltd., Vodafone Essar Digilink Fiber Cables had imported optical fiber cables and the Tamil Nadu Telecommunications Ltd., (TNTL) imported materials to manufacture optical cable fibers (OFC).  The said importers availed exemption in terms of Notification No. 24/2005-Cus, dt. 1.3.05 which gives exemption from basic customs duty on import of various Information Technology Agreement bound goods falling under CSH 8544 70 of the Customs Tariff and goods imported for the manufacture of such goods.  The exemption is subject to the assessee following the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996.

                        Assessment of imports of OFCs and other goods to manufacture OFCs through various ports were taken up for scrutiny and notices were issued. It was alleged that all consignments of OFCs imported fell under CSH 900110. It was further alleged that the importers wrongly availed the exemption under the Notification No. 24/2005-Cus.

                        The Commissioner found that the Optical Fibers cables involved in all these cases fell under CSH 9001 10 as they did not conform to the tariff description of CSH 8544 70. Heavy penalties are imposed on the executives of the said companies. For his decisions the Commissioner following the ruling of the Authority for Advance Rulings in the case M/s Alcatel India Limited decided during the year 2005. In this case that the Authority clarified that the imports would be classified under heading 9001 10 00 of the Customs Tariff Act.  The Authority had found that the Optical Fiber Cable in question had fibers without individual sheathing.  The Authority came to the conclusion on information received from Directorate of Information Technology (DIT). The DIT had clarified that fiber was not a fiber unless it was complete with coating.   If coating was to be treated as sheathing, then the fiber should be taken to be already 'individually sheathed' once it emerged as a fiber on completion of its manufacturing process.   Sheath was a separate cover and each fiber was enclosed in its own protective sheath to add further protection.  Subsequently these individually sheathed optical fibers were fitted with a common sheath and/or armor and other protective mechanisms to form a telecommunication cable.  The Authority found the product Alcatel wanted to import was fibers without individual sheathing as the sheathing the fibers had was an integral part of the fiber and not the sheathing referred to in the tariff description of OFC of CSH 85447090.

                        In the appeal before the tribunal the appellants placed the following submissions:

·        The importers had demonstrated with power point presentation, standard text books on the subject and the samples that the goods in question fell under CSH 85447090, but the Commissioner had not considered those submissions;

·        The Commissioner relied on a Circular of the Board No. 12/2006, dated 28.2.2006 which had advised the field officers that cables of 9001 should not be classified under 854;

·        Commissioner erroneously following the Circular in deciding the classification of the goods to be 900101;

·        The Commissioner had not applied his mind and classified the goods as proposed in the Notice without examining the merits;

·        As per Sec. 28J of the Customs Act, 1962 an advice issued by the Authority for Advance Ruling is binding on the Commissioner and the party seeking advice and none else. The Commissioner had relief on the impugned Advance Ruling incorrectly and decided the classification dispute;

·        The penalties imposed on the assesses and the personal penalties imposed on the executives of the assessees are unjustified;

·        Once the assessee had declared the description of the goods imported correctly, it was the duty of the assessing officer to correctly assess the goods.

The Department submitted the following before the tribunal:

·        The Commissioner could validly rely on the ruling of the AAR for its persuasive value;

·        The impugned goods were similar to the OFCs considered by the AAR;

·        Fibers of the impugned goods not being individually sheathed, they did not fall under CSH 854470 but fell under CSH 900110.

The tribunal after hearing both sides analyzed the case in detail. The tribunal found that an Optical Fiber Cable consists of three main regions-

§         A central cylinder or core;

§         A surrounding layer of material called 'cladding'; and

§         An outer coating over the cladding.

The core transmits the light waves; the cladding keeps the light waves within the core and provides some strength to the core. The cladding had a lower refractive index than that of the core.   In order to keep the light in the core, the outer coating is a protective layer applied over the fiber cladding to provide physical and environmental protection for the fiber. OFCs are usually presented on reels and may be several kilometers in length. These OFCs usually end in connectors at either end and are used in optical instruments such as endoscopes. OFCs comprising individually sheathed fibers carry data, run into several kilometers and are also rolled on reels.

                        The tribunal also analyzed the entries in the respective heads. The competing entries are:

Ø      Sub Heading 8544.70 of the Customs Tariff - Insulated (including enameled or anodized) wire, cable (including coaxial cable) and other insulated electric conductors whether or not fitted with connectors; optical fiber cables, made up of individually sheathed fibers, whether or not assembled with electric conductors or fitted with connectors.

The HSN Explanatory Notes on this sub heading reads as - "The heading also covers optical fiber cables, made up of individually sheathed fibers, whether or not assembled with electric conductors or fitted with connectors. The sheaths are usually of different colors to permit identification of the fibers at both ends of the cable…. Optical fiber cables are used mainly in telecommunications because their capacity for transmission of data is greater than that of electric conductors"

Ø      Sub Heading 9001.10 of the Customs Tariff covers, inter alia, optical fiber cables not covered by CH 8541 and the entry reads as - "Optical fibers and optical fiber bundles; optical fiber cables other than those of heading 8544; sheets and plates of polarizing material; lenses (including contact lenses), prisms, mirrors and other optical elements, of any material, unmounted, other than such other elements of glass not optically worked"

The HSN Explanatory Notes on this sub heading reads - "Optical fiber cables of this heading (which may be fitted with connectors) consist of a sheath containing one or more optical fiber bundles, the fibers of which are not individually sheathed".

The tribunal found that in the case of OFCs considered by the Commissioner, the fibers were not individually sheathed and each fiber instead had coating which was part of the fiber itself.  As the fibers of the OFCs were not individually sheathed they fell under CSH 9001 10 and not CSH 8544 70.   Since the Commissioner to arrive at his decision relied on the ruling of AAR his order is liable to be set aside.

                        The tribunal held that classification of the goods along with the valuation and import policy was a major aspect of assessment, the proper officer was entrusted with.   The assessees have been penalized by the Commissioner unfairly.  Even in a case where the goods are classified by the proper officer in a hearing other than the one declared, penalty is not justified.   The tribunal did not find the penalties imposed by the Commissioner to be justified in law.

                        The Commissioner has denied exemption to materials imported by Tamil Nadu Telecommunications Limited on a finding that the OFCs manufactured were goods falling under CSH 9001 and the exemption was available only if the final products of CSH 8544.   Accordingly he denied the exemption under the Notification No. 24/2005-Cus, dated 1.3.05 to materials imported by TNTL. The tribunal found that the order of the Commissioner was without jurisdiction. The Commissioner (Adjudication) has no powers to decide the classification.   On this ground also the order of the Commissioner deserves to be set aside.  The tribunal directed that the classification dispute shall be decided de novo which the Commissioner shall initiate and complete on giving adequate opportunities to present their case before a decision is taken.