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2021 (1) TMI 585 - AAR - GSTClassification of goods - product Fusible Interlining Fabrics of Cotton - classifiable under Chapter 52 or Chapter 59? - HELD THAT - The dispute regarding classification of fusible interlining cloth which is partially coated with plastic by the dot printing process i.e. whether it is covered under Chapter 52 to 55 or Chapter 59 has repeatedly come up before different authorities. In it s Circular No.24/Coated Fabric/88-CX.1 dated 02.09.1988 CBEC has referred to the production process. The finished woven fabric passed over preheated rolls having a high surface temperature and the heated substance was then pressed to a printing roll having fine dots engraved on it. High-density polyethylene powder was taken in a hopper that sat on the engraved printing roll filling the dots. As a result the pre-heated fabric got printed with plastic dots. The powder in between the engraved dots was scrapped by a doctor blade provided in the hopper. The dot printed cloth then passed through a heated chamber where the plastic melted and fused with the piece of cloth. CBEC concluded that the fusible interlining merited classification under Heading 5903 if the above printing process covered one side of the fabric with a continuous and adherent film or layer of plastic that made the fabric impervious. In Circular No.5/89 dated 15.06.1989 CBEC discussed the significance of the insertion of Chapter 2(c) in Chapter 59 by the Finance Act 1959. After the insertion of the said note the fusible interlining cloth made by discrete coating with plastic by dot printing process became classifiable under Heading 5903. CBEC clarified that before that such cloth had been covered under Chapter 52 to 55 depending upon the textile materials used. Chapter Note 2 (c) was omitted w.e.f. 16.03.1995. CBEC vide Circular No.433/66/98-CX.6 dated 27.11.1998 tried to clear the air about the classification of fusible interlining cloth in the context of removal of Chapter Note 2(c) from Chapter and drew attention to the Finance Act 1995 that broadly aligned the Central Excise Tariff to the Tariff Act. The significance of the alignment was that the Explanatory Notes to the HSN code or the Chapter Notes to Chapter 59 of the Tariff Act had not contained any provision like Chapter Note 2(c) to Chapter 59 of the Central Excise Tariff Act 1985. The said Chapter Note 2(c) was therefore deleted by the Finance Act 1995 - The difference arises from the application of the provisions of the explanatory notes to the HSN Code. In the said explanatory notes to Chapter 59 textile fabrics which were spattered by spraying with visible particles of thermoplastic material and were capable of providing a bond to other fabrics or materials on the application of heat and pressure were classifiable under Heading 5903. According to Circular No.433/66/98-CX.6 dated 27.11.1998 such classification should be treated as an exception to Chapter Note 2(a)(4) to Chapter 59. CBEC Circular No. 433/66/98-CX-6 dated 27/11/1998 is relevant even today and has persuasive value. Further Chapter Note 2(a)(4) to Chapter 59 says that fabrics partially coated or partially covered with plastics and bearing designs resulting from these treatments are excluded from Heading 5903 and are usually covered in Chapter 50 to 55 58 or 60 depending on the materials used. At the same time according to the Explanatory notes to the HSN code textile fabrics which are spattered by spraying with visible particles of thermoplastic material and are capable of providing a bond to other fabrics or materials on the application of heat and pressure are classifiable under heading 5903. Also the process of manufacture of the fusible interlining of fabrics of cotton. On going through the headings chapter note of Chapter 52 as well as the explanatory notes to HSN with respect of the headings 5208 to 5212 we find that it does not cover laminated fabrics or fabrics coated with plastics. Hence it can be safely concluded that Fusible Interlining fabrics of cotton will not be covered under Chapter 52 of the First Schedule to the Customs Tariff Act 1975 - The product Fusible Interlining Fabrics of Cotton of the applicant M/s Girish Rathod(Jay Ambey) Ahmedabad is correctly classifiable under Heading 5903 of Chapter 59 of the First Schedule to the Customs Tariff Act 1975.
The core legal question considered is whether the product 'Fusible Interlining Fabrics of Cotton' is correctly classifiable under Chapter 52 or Chapter 59 of the tariff schedule, specifically under the present Goods and Services Tax (GST) regime aligned with the Customs Tariff Act, 1975.
The issue arises from a historical and ongoing dispute over the classification of fusible interlining fabrics, which are cotton fabrics partially coated with pulverized plastic powder by a dot matrix printing process. The classification impacts applicable tax rates and compliance obligations. Issue-wise Detailed Analysis: 1. Historical Classification and Amendments: Initially, under the Central Excise regime, fusible interlining fabrics were classified under various chapters (50 to 55) depending on the fabric nature. Specifically, cotton fusible interlining fabrics were classified under Chapter 52. In 1989, an amendment introduced Note 2(c) to Chapter 59, mandating that fusible interlining cloth made by discrete coating of plastic by dot matrix process be classified under Chapter Heading 5903 (textile fabrics impregnated, coated, covered or laminated with plastics). The Board issued Circulars clarifying that to merit classification under Heading 5903, the fabric should have a continuous and adherent plastic film on one side, be impervious, and satisfy conditions in Chapter Note 2 of Chapter 59. Later, the requirement of a continuous plastic layer was removed, but the fabric still needed to be impervious. In 1995, Note 2(c) was deleted, raising classification doubts. The Board issued a Circular in 1998 asserting that the deletion did not change classification under Heading 5903, but this Circular was challenged and ultimately held invalid by the Madras High Court for violating Section 37B of the Central Excise Act, which protects quasi-judicial powers of authorities. The Madras High Court ruled that deletion of Note 2(c) restored the pre-1989 position, i.e., classification under Chapters 50 to 55 depending on fabric nature. The Division Bench upheld the quashing of the Circular but remanded the matter for adjudication on merits. The Appellate Tribunal later confirmed that classification under Chapter 59 post-deletion of Note 2(c) was illegal and the product should be classified under Chapter 52. Similar rulings were made by other High Courts, including the Allahabad High Court, reinforcing that post-deletion of Note 2(c), fusible interlining fabrics should be classified under Chapters 50 to 55 based on fabric predominance. 2. Characteristics of the Product and Test Report: The applicant submitted a test report from the Ahmedabad Textile Industry's Research Association (ATIRA), an authoritative textile research institute, describing the product's characteristics:
The report confirms the fabric is only partially coated, porous, and not impervious. 3. Legal Framework and Interpretation of Tariff Chapters: The classification under the GST regime is governed by the First Schedule to the Customs Tariff Act, 1975, which aligns with the Harmonized System of Nomenclature (HSN). The relevant chapters are:
Chapter Notes to Chapter 59 specify exclusions from Heading 5903, including:
The Explanatory Notes to HSN for Heading 5903 require three conditions for classification under that heading:
The test report shows that the applicant's product meets conditions (2) and (3) but the coating is not visible to the naked eye, raising a question on condition (1). 4. Treatment of Competing Arguments and Circulars: The applicant argued that the product should be classified under Chapter 52 as the coating is non-continuous, invisible, and the fabric remains porous, thus excluded from Chapter 59 by virtue of Chapter Note 2(a)(1) and (4). The applicant relied on earlier judicial rulings supporting classification under Chapter 52 post-deletion of Note 2(c). However, the Authority noted CBEC Circular No. 433/66/98-CX.6 dated 27.11.1998, which treats fusible interlining cloth as an exception to the exclusion in Chapter Note 2(a)(4), classifying it under Heading 5903. The circular considers such fabrics as spattered with visible particles of thermoplastic material capable of bonding on heat and pressure, thus fitting Heading 5903. The Authority also referred to the Appellate Authority for Advance Ruling, West Bengal's reasoning, which upheld the circular's view and noted that the circular has persuasive value despite the Madras High Court's quashing of an earlier circular on procedural grounds. The applicant did not dispute the circular's correctness or applicability, and the Authority found it reasonable to accept the circular's classification approach. 5. Application of Law to Facts and Final Reasoning: Despite the coating not being visible to the naked eye per the test report, the Authority reasoned that the condition (1) in the Explanatory Notes to HSN does not explicitly distinguish between polymer coating and film coating and only requires visibility of the coating. The product's coating, though non-continuous and invisible as a film, is a polymer coating and bears a dot matrix design visible under examination. Conditions (2) and (3) are clearly met as per the test report. The product is flexible and not fully embedded in plastic. The Authority concluded that all three conditions for classification under Heading 5903 are fulfilled. Further, the Authority examined Chapter 52 headings and found that these do not cover laminated or coated fabrics with plastics, reinforcing that the product does not fall within Chapter 52. 6. Reliance on Precedents: The Authority relied on several advance rulings and judicial decisions including:
These authorities consistently held that fusible interlining fabrics of cotton are classifiable under Chapter 59, Heading 5903. Significant Holdings: "The product 'Fusible Interlining Fabrics of Cotton' of the applicant is correctly classifiable under Heading 5903 of Chapter 59 of the First Schedule to the Customs Tariff Act, 1975(51 of 1975)." Core principles established include:
The Authority's final determination is that the product is not classifiable under Chapter 52 as a plain woven cotton fabric due to its plastic coating, even if partial and non-continuous, but falls within the scope of Chapter 59, Heading 5903, which covers textile fabrics impregnated, coated, covered or laminated with plastics, other than those excluded by Chapter Notes.
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