Classification of Excisable Goods - Central Excise Practice Manual (OLD) - Central Excise

Classification of goods There are thousands of varieties of manufactured goods and all goods cannot carry the same rate or amount of duty. It is also not possible to identify all products individually. It is, therefore, necessary to identify the numerous products through groups and sub-groups and then to decide a rate of duty on each group/sub-group. This is called 'Classification' of a product, which means determination of heading or sub-heading under which the particular product will be covered. Once the liability of payment is established, the next question is what is the amount of duty payable. The three step process is (a) Correctly classify the goods (b) Correctly determine the rate of duty. (c) Find its assessable value. Central Excise Tariff in India follows the principles of HSN (Harmonized System of Nomenclature) for classification of goods. Schedule one of the Central Excise Tariff Act, 1985 has been divided into 21 sections and 98 chapters. It consist eight digit classification. Generally the system of classification is such that it begins with raw material and ends with finished product. CETA Versus CEA - Central Excise Act (CEA) and Central Excise Tariff Act (CETA) are linked together as follows - (a) Section 2 of CETA states that rate at which duties of excise shall be levied under CEA are as specified in schedule to CETA (Schedule to CETA contains 91 chapters) (b) Section 3(1) of CEA specifies that duty shall be levied and collected on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the Schedule to the Central Excise Tariff Act (CETA). Thus, both Acts are linked to each other. CETA Versus HSN - CETA is based on International convention of Harmonised System of Nomenclature (HSN), called Harmonised Commodity Description and Coding System. This is an International Nomenclature standard adopted by most of the Countries to ensure uniformity in classification in International Trade. Though CETA generally follows HSN pattern, it is not a copy of HSN. Often, there are wide variations between HSN and CETA. The CETA also varies significantly from Customs Tariff , though both are based on HSN. Schedules - CETA consists of two schedules - The first schedule gives basic excise duties leviable on various products. Second schedule gives list of items on which special excise duty is payable. (Second schedule contains only few items.) Sections and Chapters of CEA - Sections Tariff is divided in 21 sections. Each of 21 sections is related to a broader class of goods. Section Notes are given at the beginning of each Section, which govern entries in that Section. These notes are applicable to all Chapters in that section. Chapters Further each of the sections is divided into various Chapters and each Chapter contains goods of one class. Chapter Notes - Chapter Notes are given at the beginning of each Chapter, which govern entries in that Chapter. Rules for Interpretation of CETA - Rule 1 General The titles of Sections, Chapters and Sub-Chapters are provided for ease of reference only. Overriding effect of section notes and chapter notes For legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions. Rule 2(a) Incomplete or unfinished goods / assembled or disassembled goods Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled. Some illustrations in HSN Explanatory notes are - * a machine or apparatus normally incorporating an electric motor is classified in the same heading even if presented without motor. * Passenger coach not fitted with seats will still be a passenger coach * Motor vehicle not yet fitted with wheels, battery or tyres * Bicycles without saddles and tyres * Photographic camera without an optical element * Electric supply metre without its totalling device. Rule 2(b) Mixture or Combination Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3. For example 'Article of Gold' will include an Article which is made partly of Gold. Reference to goods of a given material or substance shall also include reference to goods consisting wholly or partly of such material or substance. Rule 3 When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows: Rule 3(a) Specific description is preferable over general description the heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods. Thus, for classification of electric shaving machine, description of Heading 85.10 i.e. 'Shavers and Hair clippers, with self contained electric motor' is more specific than description of Heading 85.09 i.e. Electro-mechanical domestic appliances with self-contained electric motor' Rule 3(b) Composite goods / mixtures - Essential characteristics prevail mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable. If a set consists of drawing instruments (90.17), pencil (96.09) and pencil sharpener (82.14), put up in a leather case (4201.90); the set will be classifiable under 90.17 i.e. drawing instrument. Rule 3(c) Last is the best when goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration. Rule 4 Akin goods Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin. Rule 5 Special Provisions for classification In addition to the foregoing provisions, the following rules shall apply in respect of the goods referred to therein: Rule 5(a) Special Cases / containers camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar containers, specially shaped or fitted to contain a specific article or set of articles, suitable for long-term use and presented with the articles for which they are intended, shall be classified with such articles when of a kind normally sold therewith. This rule does not, however, apply to containers which give the whole its essential character; Rule 5(b) Packing Material / Containers (Repetitive use material) subject to the provisions of (a) above, packing materials and packing containers presented with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods. However, this provision does not apply when such packing materials or packing containers are clearly suitable for repetitive use. Rule 6 Goods are comparable at the same level only For legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings and any related sub-heading Notes and, mutatis mutandis, to the above rules, on the understanding that only sub-headings at the same level are comparable. For the purposes of this rule the relative Section and Chapter Notes also apply, unless the context otherwise requires. General Explanatory Notes 1. Where in column (2) of this Schedule, the description of an article or group of articles under a heading is preceded by "-", the said article or group of articles shall be taken to be a sub-classification of the article or group of articles covered by the said heading. Where, however, the description of an article or group of articles is preceded by "--", the said article or group of articles shall be taken to be a sub-classification of the immediately preceding description of the article or group of articles which has "-". Where the description of an article or group of articles is preceded by "---" or "----", the said article or group of articles shall be taken to be a sub-classification of the immediately preceding description of the article or group of articles which has "-" or "--". 2. The abbreviation "%" in column (4) of this Schedule in relation to the rate of duty indicates that duty on the goods to which the entry relates shall be charged on the basis of the value of the goods fixed, defined or deemed to be, as the case may be, under or in subsection (2) read with sub-section (3) of section 3 or section 4 or section 4A of the Central Excise Act, 1944, the duty being equal to such percentage of the value as is indicated in that column. Additional Notes In this Schedule,— (1) (a) "heading", in respect of goods, means a description in list of tariff provisions accompanied by a four-digit number and includes all sub-headings of tariff items the first four-digits of which correspond to that number; (b) "sub-heading", in respect of goods, means a description in the list of tariff provisions accompanied by a six-digit number and includes all tariff items the first six-digits of which correspond to that number; (c) "tariff item" means a description of goods in the list of tariff provisions accompanying either eight-digit number and the rate of the duty of excise or eight- digit number with blank in the column of the rate of duty; (2) the list of tariff provisions is divided into Sections, Chapters and Sub-Chapters; (3) in column (3), the standard unit of quantity is specified for each tariff item to facilitate the collection, comparison and analysis of trade statistics. Trade Parlance Theory - Criteria for classifications are given in the CETA. However, basic principle of classification, devised some one hundred years ago by Justice Pollok continues. As per this principle, a word in statute should be construed in its popular sense and not in the strict or technical sense. 'Popular sense' means that which people conversant with the subject matter with which the statute is dealing, would attribute to it. Statutory definition overrides Trade parlance - The 'trade parlance' is relevant only when Statute does not define the words. If words are defined in the Statute, 'trade parlance' is not relevant. - Indo International Industrial v. CST, UP - SC(1981) End Use relevant only in limited cases - Generally, a product can be used for various purposes and it is not correct to classify the goods on the basis of its final use. Supreme Court in Dunlop India v. UOI , -SC(1983) have held that end use is irrelevant for interpretation, unless definition so requires.