2025 (4) TMI 1166 - HC - GST

Challenge to Circular No. 235/2024-Goods and Services Tax ( GST ) dated 11th October 2024 issued by the Joint Secretary Tax Research Unit Department of Revenue Ministry of Finance Government of India - Classification of Roof Mounted Package Unit (RMPU) air conditioning machines used for railways - to be classified under HSN code 8415 or 8607? - HELD THAT - Considering that the Show Cause Notice has now been issued to the Petitioner the Petitioner would file a reply to the Show Cause Notice. The Show Cause Notice shall proceed before the Adjudicating Authority who shall take into consideration all the relevant material including the advance rulings by different state authorities the reply of the Petitioner as also the impugned circular. The proceedings shall continue before the Adjudicating Authority and the final order shall be passed which shall be however subject to the outcome of this petition. It is made clear that the final order shall not be given effect without further orders of this Court. List on 9th May 2025.

Summary

The primary legal question considered by the Court is the correct classification under the Harmonised System of Nomenclature (HSN) of Roof Mounted Package Unit (RMPU) air conditioning machines used for railways, specifically whether these goods fall under HSN code 8415 or 8607 for the purposes of Goods and Services Tax (GST) rate application.

Closely related to this is the question of the validity and jurisdictional competence of the Circular No. 235/2024-GST issued by the Department of Revenue, Ministry of Finance, which mandates classification under HSN 8415, thereby attracting a higher GST rate of 28%, contrary to prior classification under HSN 8607 with an 18% GST rate. The Court also considered the effect of the circular on the adjudicatory process and the binding nature of advance rulings issued by various Advance Ruling Authorities in different states.

Another issue implicitly considered is the procedural aspect regarding the issuance of a Show Cause Notice (SCN) after the hearing and the Court's direction on the continuance of proceedings before the Adjudicating Authority, including the interim protection against coercive action.

Regarding the core classification issue, the relevant legal framework includes the Customs Tariff Act, 1975, specifically Section Notes 2 and 3 of Section XVII, which exclude goods classified under headings 8401 to 8479 (including 8415 for air conditioning machines) from being considered parts covered under Chapter 86 (which includes 8607). The GST notifications and schedules prescribing rates for different HSN codes also form part of the legal framework.

Precedents considered include three advance rulings from the Authorities for Advance Ruling in Uttar Pradesh, Madhya Pradesh, and Himachal Pradesh, all of which classified the RMPUs under HSN 8607, attracting the lower GST rate of 18%. These rulings were issued on the basis that the RMPUs are manufactured specifically for Indian Railways and supplied exclusively to them, thus falling within the ambit of Chapter 86.

The Court's interpretation of the circular emphasized that the Department's clarification was issued to explicitly confirm that RMPUs are to be classified under HSN 8415, aligning with the Customs Tariff Act's Section Notes. The circular clarified that air conditioning machines (HSN 8415) are excluded from the definition of parts under Chapter 86 (HSN 8607), thereby attracting a higher GST rate.

The Petitioners' key argument was that the circular was without jurisdiction because it usurped the adjudicatory authority's power to determine classification and disregarded binding advance rulings. They contended that longstanding classification under HSN 8607 and the resultant GST rate of 18% formed the basis of their commercial agreements and business operations, and the circular's reclassification would disrupt their business.

The Respondent's position, as reflected in the circular, was that the classification under HSN 8415 is correct as per the tariff notifications and customs classification notes, and the circular merely clarified this position to remove any ambiguity.

The Court examined the advance rulings and noted that while these rulings favored classification under HSN 8607, the circular represents a policy clarification by the Department. The Court acknowledged the Petitioners' apprehension that the circular might render the adjudicatory process meaningless but allowed the proceedings before the Adjudicating Authority to continue, with the direction that the final order would be subject to the outcome of the writ petition and could not be given effect without the Court's further orders.

Regarding the procedural issue, the Court noted that a Show Cause Notice dated 12th March 2025 was issued to the Petitioners after the hearing on 18th March 2025, raising demands based on the circular. The Petitioners were permitted to file a reply within 30 days from the date of the Court's order, and the Adjudicating Authority was directed to consider all relevant materials, including the advance rulings, the Petitioners' reply, and the impugned circular, before passing any final order.

The Court's treatment of competing arguments balanced the statutory interpretation of tariff classification under the Customs Tariff Act and GST notifications against the practical implications of the circular and the binding nature of advance rulings. The Court did not invalidate the circular but preserved the adjudicatory process and interim protection for the Petitioners.

The Court concluded that classification of RMPUs under HSN 8415 as per the circular is supported by the tariff classification notes and GST schedules, but the final determination must be made by the Adjudicating Authority after considering all relevant evidence and rulings. The circular is not without effect but does not preclude adjudicatory scrutiny. The Petitioners' challenge to the circular's jurisdictional validity remains open for final adjudication.

Significant holdings include the Court's recognition that:

"Machines and apparatus of heading 8415, which include Air conditioning machines, are excluded from the ambit of 'parts' covered under heading 8607 as per Section note 2 of Section XVII of Customs Tariff Act, 1975."

and that:

"The final order shall not be given effect without further orders of this Court."

Core principles established are that tariff classification under GST must align with the Customs Tariff Act and associated section notes, and while circulars issued by the Department can clarify classification, they do not oust the jurisdiction of the Adjudicating Authority or the binding effect of advance rulings without due process. The Court emphasized the necessity of adjudicatory proceedings to consider all relevant material before final determination.

On the procedural front, the Court preserved the Petitioners' right to reply to the Show Cause Notice and ensured that no coercive action would be taken pending the final adjudication of the writ petition, thereby safeguarding due process and the Petitioners' commercial interests during litigation.