GST implication on non metals clad with precious metals, Goods and Services Tax - GST

[Gautam Godhwani]

This is mainly a classification query. Chapter 71 of the Tariff deals with precious metals, but seems to cover only "precious metals or base metals clad with precious metals" at Note 1(b).

What would be the case for non metals clad with precious metals ? Such as wood clad with gold or silver ? By extension, what would be the HSN of wooden items covered with silver and sold as decorative pieces ? Given the fact that these items are sold only at jewelery shops as silver articles and the majority part of value is of silver only ?

Can the "essential nature" test, or for that matter the "commercial identity test" be used to classify the same under Chapter 71 and avail the benefit of a 3% tax rate ?

Posts / Replies

[Shilpi Jain]

The answer would depend on the nature of article. Is it a clock or only a decorative piece or anything else?

Also classification can get highly technical many times and it would not be possible for anyone to give you an outright answer in such situations. you should look at taking help from a professional who would understand the usage, techincalities of your product and then classify as per the classification rules and notes.

[Gautam Godhwani]

Thanks for the prompt reply. The items in question are mantelpiece or decorative items falling under the following para of HSN Explanatory Notes -

(E) Other articles for domestic or similar use, for example, busts, statuettes and other figures for interior decoration; jewel cases; table centre-pieces, vases, jardinières; picture frames; lamps, candelabra, candlesticks, chandeliers; mantelpiece ornaments, decorative dishes and plates, medals and medallions (other than those for personal adornment); sporting trophies; perfume burners, etc.

But the catch is that they are not WHOLLY made of silver, only partly made of silver since it is covered with a sheet of silver (base material being wood or MDF). They are not watches or clocks which have a separate heading.

They usually comprise of decorative items of carved wood on which silver is covered such as busts and statuettes, figures, household items, trophies, toys meant for display purpose, candle holders, wooden box (sandook) covered with silver, wooden charpai with the 4 supportive legs covered with silver, etc.

[Gautam Godhwani]

The case of State of Gujarat v. Titan Industries Ltd [2017 (2) TMI 521 - GUJARAT HIGH COURT] was regarding the classification of the “Nebula” watch – a watch made of 18 karat gold along with silver or other precious metals in which the value of the precious metals remains 90 to 95%. The watches were sold by and large at jewellery shops and were not sold in normal ordinary watch shops. Thus, the jewellery watches were normally marketed by the jeweller in their showrooms. It was put on record that these watches were manually polished and individually inspected, cleaned and then assembled. That the value of watch used was not more than 2 to 5%.

It was held that mainly because the Nebula watch which carried the mechanism of a watch, it would still not lose the characteristic of jewellery.

It was held that the words “article or jewellery” used in Entry No. 13(ii) of Second Schedule of the VAT Act were required to be given the widest possible meaning and not required to be read in a narrow or restricted sense. Thus, it was held, that this product would fall under Entry 13(ii) of the 2^nd schedule, and not the residuary entry 87 of the 2^nd schedule of the Gujarat VAT Act.

It would be interesting to note that the dictionary meaning of term “jewel / jewellery” was taken from the Law Lexicon dictionary, which stressed upon the feature of “personal adornment”.

Distinguishing factors for the non-applicability of the judgment –

That there was no relevant, specific entry for watches and clocks in Schedule 2 of the Gujarat VAT Act, as are there in the GST Tariff.

That even in the dictionary meaning of the term “jewel / jewellery” – the feature of personal adornment was stressed upon. That since wall clocks are not for wearing on the person but for hanging on the wall – this judgment cannot be made applicable.

In Titan Industries Ltd. (Jewellery Division) v. Commissioner of Central Excise, Chennai – III 2017 (8) TMI 1211 - CESTAT CHENNAI) it was held that a miniature toy car made out of FRP (Fibreglass Reinforced Plastics) mould coated with gold constituent of 200g and FRP mould weighing 300g was an article of gold classifiable under Chapter 71 of Central Excise Tariff Act. On the behalf of the assesse, it was submitted that the subject item, namely miniature cars would be rightly classifiable as “articles of gold” under Chapter 71 of CETA 1985 and these were exempted from payment of duty as per Sl. No. 171 of the Table to the Notification No. 6/2002 dt. 1.3.2002 by virtue of definition of “article of gold” as appearing in the Explanation under Sl. No. 171 of the said Notification.

The respondent intended to classify the same in Chapter Heading 95.03 which dealt with “other toys: reduced size (scale) models and similar recreational models, working or not; puzzles of all kinds”. Moreover, it was contended by the respondent that gold only constituted a minor element by mass.

But it was held that since the majority cost was of because of the gold being used in the miniature car, and since the item was “…anything (other than ornaments), in a finished form, made of, or manufactured from or containing, gold…”; the same was classifiable under Heading No. 71.01.

Distinguishing the decision: This decision, rendered just before the start of the GST Regime, although prima-facie appears to be in favour of the principle that taxability is to be determined on basis of component which forms the majority cost, loses sight of the fact that there was no exclusionary clause in Chapter 71 relating to toys and other such articles. That in the incumbent GST Regime, Chapter 71 expressly excludes watches and clocks vide Note 3(l) of the Chapter.

Although these cases are inapplicable because of the exclusionary clause of Chapter 71 which removes watches and clocks from the purview of the chapter, it cannot be said for other products or silver articles WHICH DO NOT HAVE A SEPARATE EXCLUSIONARY clause.

Thus the question is - are there any other JUDICIAL PRECEDENTS such as these which basically state that silver articles, in which the major part of value is of silver and are also sold at jewelry shops can avail the beneficial rate of 3% ?

[Gautam Godhwani]

Also, if say a product - for example a photoframe - finds itself under two headings - one under Chapter 71 (precious metals chapter) and one under other chapter for wooden articles - can Rule 3(b) of GRI be applied which relates to the "essential character test" ?

The essential character being the silver covering since these articles are identifiable and brought primarily for their decorate value, which sans the silver would have no meaning ?

[KASTURI SETHI]

(i) Rule 3(b) of GRI comes into play only when goods cannot be classified Rule 3(a) and Rule 3(c) comes into play only when goods cannot be classified under Rule 3(b) ----Supreme Court in the case of Moorco (India) Ltd. Vs. Collector of Customs, Madras reported as - 1994 (9) TMI 68 - SUPREME COURT.

(ii) Nestle India Ltd. Vs.CCE - 1999 (5) TMI 371 - CEGAT, MUMBAI and Little Star Foods P Ltd. Vs. CCE reported as 2006 (3) TMI 761 - CESTAT BANGALORE

(iii) 'Pen stand fitted with clock' will be called 'pen stand with clock' and NOT 'clock with pen stand' as original character of 'pen stand' continues to prevail-----CEGAT in the case of Gift & Time Products Vs. CCE - 1998 (7) TMI 271 - CEGAT, NEW DELHI.

(iv) L.M. VAN MOPPES DIAMOND TOOLS INDIA LTD., MADRAS Versus COLLECTOR OF CUSTOMS, MADRAS - 1986 (2) TMI 187 - CEGAT, NEW DELHI.

[Gautam Godhwani]

Thank you for the prompt response, Sir. My querry is not relating to clocks and watches - that has already been solved. It is about other silver articles.

[KASTURI SETHI]

Sh.Gautam Godhwani Ji,

O.K. That was just an example.

[Gautam Godhwani]

Respected Sir,

Could the products being sold as silver articles be covered under Chapter 71 ? My main concern is that Note 7 of Chapter 71 of Tariff excludes a variety of processes such as soldering, brazing, welding, hot-rolling or similar mechanical means a covering of precious metal - but this note is in context of base metal clad with precious metal.

What is the scenario for base material - such as wood - instead of base metal ?

Can wooden articles with a covering of silver (majority value being of silver and them being sold to only jewelry shops) be considered silversmiths' wares and articles of gold under HSN 711411 ?

Could a beneficial rate of 3 percent be availed ?

A second method could be going into the particular HSN for each and every wooden article underneath the silver covering. If the particular classification of such wooden article is something which is excluded explicitly by Chapter 71 - such as clocks or for that matter walking sticks - then it is clear the beneficial rate of 3 percent is impossible to avail.

But what about other items ? If they are not excluded in Chapter 71 ?

Regards,
Gautam.

[Gautam Godhwani]

Respected Experts, are there any judicial precedents supporting the position of imposition of beneficial rate of 3 percent on wooden items covered with silver ?

[KASTURI SETHI]

Sh.Gautam Godhwani Ji,

How can you come out of the 'noose' of the scope and definition of 'composite supply' ? You have yourself mentioned that both are integrally related. Here silver and wood cannot be separated. If separated, what will happen, you are well conversant with that scenario. Why you expect such case law ? Pl. enlarge my horizon of knowledge in this context/scenario.