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TMI Blog2023 (12) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... of classification under the CTH. The decisions in Sarvotham Care [ 2015 (8) TMI 250 - SUPREME COURT] ] and Ashwani Homeo [ 2023 (5) TMI 191 - SUPREME COURT ] thus clearly explain the legal position to be that nomenclature alone would not constitute a defining basis for the purposes of answering a question of classification. When the aforesaid principles are applied to the facts at hand, it becomes clear that merely because the appellant or others had chosen to describe the products as smart speakers, the same could have neither been accepted as being conclusive of the issue that arose nor could the description of the products detracted from the right of the appellant to urge the AAR to examine the issue of classification by applying the dominant function test. The tests evolved by courts in connection with the issue of classification such as nomenclature, common parlance, principal function, primary and incidental purpose are all aids and rules of guidance liable to be cumulatively borne in consideration in order to ascertain the true character of a product. While none of those tests are accorded preeminence, it is ultimately for the authorities to ascertain which of those rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of Echo Family Devices and which the appellant claims to be essentially communication devices with an inbuilt speaker. From the synopsis which was placed by the appellant before the AAR, the common features and functionality attributes of the Echo Family Devices was described as follows: Common features of Echo Family Devices: The Echo family devices are communication devices with inbuilt speaker with Alexa Technology built in it. They can perform multiple functions, including answering questions, playing music, reading news/ audiobooks, providing traffic, weather and other real-time information and controlling smart devices. The Subject Echo Devices do not support cellular services. They require an internet connection to perform their functions i.e. they do not have modem incorporated in them. These devices are Bluetooth enabled, which makes it possible to connect such devices with user's phone and/or external speaker. When the devices are connected to the user's phone, they can play audio stored in the user's phone. When they are connected to an external speaker, the audio output is played through the external speaker instead of the internal speaker. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us retaining their principal attribute, namely, of being a speaker as generally understood. In view of the above and bearing in mind the General Rules for Interpretation [GI Rules] for import tariff as well as Note 3 to Section XVI of the Customs Tariff Act, 1975 [Act], the AAR has come to conclude that they are classifiable as smart speakers under CTH 8518 and more particularly Tariff Entry 8518 22 00. 5. Insofar as Echo Show Devices are concerned, the AAR has taken the view that the primary function of these devices is to act as a display or a monitor and thus enabling the playback of videos from web channels, to display video content during video calling as well as for viewing motion pictures. It thus proceeded to hold that those devices are monitor/display not incorporating television reception apparatus and thus liable to be placed under CTH 8528 and more specifically Tariff Entry 8528 59 00. 6. While evaluating the appropriate classification of Echo Flex, the AAR has accepted the stand of the appellant that it is a communication device and thus classifiable under Tariff Entry 8517 62 90. Proceeding then to consider the Echo Studio Device, the AAR has found it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riff Act, 1975? (iii) Whether three (3) impugned devices, namely Echo Show 5, Echo Dot 4th Generation and Echo Dot 4th Generation with clock- are eligible for exemption under Sl. No. 20 of Notification No. 57/2017-Cus dated 30.6.2017? 11. Appearing in support of the appeal, Mr. Lakshmikumaran addressed the following submissions. Taking us through the impugned order, Mr. Lakshmikumaran pointed out that the AAR had itself captured the various features of the 11 subject devices and understood them in the following terms: S.No. Device Particulars/Features 1. Echo 4th generation with Model No. L4S3RE Built-in smart home hub (ZigBee and Halo), temperature sensor and an ultrasonic-based presence and motion detection feature, which can be used to detect when a person enters or exists a room. The device is MIMO enabled. 2. Echo Dot 4th generation with Model No. B7W64E Similar features as that of the Echo 4th generation device. However, Echo Dot 4th generation does not support MIMO and the sound quality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dio with Model No. O2T2V3 Echo Studio is different from the other Echo devices, in terms of its superior sound quality. It is capable of delivering 3- dimensional surround sound and can decode and render Dolby Atmos, Dolby Digital 5.1, 7.1 audio formats. The device also has the feature of tuning the speakers in terms of its orientation, placement and room acoustics basis the room it is placed in. The device also has a temperature sensor and a smart home hub, that can control other smart devices. The device is MIMO enabled. 9. Echo Auto Media Transmission Device with Model No. BP39CN Echo Auto has all the common features, except it does not have a speaker for audio playback. The inbuilt speaker of Echo Auto is meant for use only during initial device set up. The device is meant to be used in a vehicle and allows its users to connect their smartphones to the device. The device uses the data services of the smartphone to access the cloud and perform its functions. It does not have a screen or speakers for playing media. The device is also not MIMO enabled. 10. Echo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into tangible results in sync with the command which had been originally given. 14. Mr. Lakshmikumaran pointed out that in order to obviate any confusion with respect to classification of the 11 devices and for the purposes of obtaining clarity, the AAR was moved by way of a comprehensive application dated 09 March 2021. According to Mr. Lakshmikumaran, a ruling on classification was sought in respect of the 11 Echo devices. It was his submission that the subject of classification of goods under the First Schedule of Import Tariff placed in the Act is foundationally governed by the GI Rules. According to Rule 1 of the GI Rules, Mr. Lakshmikumaran submitted, the goods were liable to be classified in accordance with the terms of the Chapter Heading as well as the relevant Section and Chapter Notes. Our attention was drawn to the Heading of Section XVI whose title appears to suggest its intent to covers all mechanical and electrical appliance/equipment as well as Electrical machinery and equipment falling under Chapters 84 and 85 respectively. Reliance was specifically placed on Note 3 placed in Section XVI which reads as follows: 3. Unless the context otherwise requires, comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the AAR in the impugned order is untenable and liable to be set aside. 17. Mr. Lakshmikumaran further pointed out that the AAR, Mumbai while dealing with a similar product, namely, Apple HomePod had ultimately come to recognize the same to be a convergence device as distinguished from a normal speaker and thus liable to be classified under CTH 8517. Mr. Lakshmikumaran invited our attention to the following passages from that decision: 11. Considering the attributes of the device in question, which is capable of receiving voice commands, covert such voice commands into text to perform multiple tasks, e.g., stream music from the internet or another Apple device, retrieve information available in the net like weather, traffic, news, sports updates etc., regenerate such information back to the user in the form of music/speech, and also act as a home automation device to control reconditioners, locks, lights etc., it is clear that the product in question has multiple facets, and therefore, its classification would depend upon identifying the essential character of the device. The product consists of an Apple designed A8 chip, a six-microphone array, a seven-tweeter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take of law or fact and thus warranting no review. 19. Mr. Lakshmikumaran then submitted that the opinion expressed by the AAR is liable to be set aside on a more fundamental plane. It was his submission that the scope of Tariff Headings and Entries falling thereunder are liable to be interpreted and understood bearing in mind the synergy which must be recognized to exist when it comes to the subject of classification, especially since India follows the Harmonized System of Nomenclature [HSN]. Our attention in this respect was drawn to the Binding Tariff Information [BTI] decisions rendered by the competent authorities in England as well as the European Union and which had consistently held that Echo family devices were classifiable under CTH 8517. The aforesaid determinations have been placed on the record compendiously as Annexures 11, 12 and 13. 20. Mr. Lakshmikumaran also drew our attention to the Circular of the Central Board of Excise Customs [ Board ] dated 05 September 2013 which was called upon to evaluate the classification of Bluetooth Wireless Headsets to be used alongside mobiles and cellular phones. It would appear from a reading of the aforesaid Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b heading 8517.62. 5. In view of the above, the Board is of the view that Bluetooth Wireless headsets for mobile phones/cell phones is correctly classified in heading 85.17, sub -heading 8517.62, by application of GRI 1 (Note 3 to Section XVI), 3(b) and 6. 21. Mr. Lakshmikumaran submitted that ultimately the issue of classification would have to be evaluated bearing in mind the well-settled principal function test which courts have consistently employed. According to learned counsel, merely because the devices could also or incidentally perform the function of a speaker or a monitor would not detract from the principal function of those devices being recognised to be the reception, conversion and transmission of data. It was the submission of learned counsel that merely because the appellant may have advertised the subject devices as smart speakers on its web portal, would also not be determinative since the name or nomenclature of a product cannot always be accepted to be a valid criterion for classification or for the said test being applied in complete disregard of the functionality of a product. Mr. Lakshmikumaran in this respect sought to draw sustenance fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the impugned Echo 4th generation devices and the Echo Studio accepting voice commands with WI-FI capability would at best qualify as smart speakers and that those devices would thus be classifiable as hearable devices as per the Notification No. 12/2022-Customs dated 01 February 2022 issued by the Ministry of Finance. Mr. Kumar laid stress on the following parts of that notification: Explanation . - For the purposes of this notification, hearable devices mean: - (i) true wireless stereo (TWS), headphones, earphones and similar devices like earbuds, neckbands, headsets, etc., whether or not combined with a microphone, being capable of connecting through a wireless medium; and (ii) portable bluetooth speakers comprising of an amplifier and loudspeaker(s) with maximum output power not exceeding 40 Watts, having battery as a source of power and capable of wireless connectivity through bluetooth. 25. Mr. Kumar further submitted that the AAR Mumbai s decision relating to Apple Home Pods is of little relevance since as per the scheme of the Customs Act, 1962 [the 1962 Act], advance rulings pronounced by the AAR bind only the concerned applicant and the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neration, Echo Dot 4th Generation and Echo Dot 4th Generation with Clock and thus be liable to be categorized under CTH 8518, and more specifically Tariff Entry 8518 22 00. 29. It then proceeded to consider the claim for exemption and which rested on the provisions contained in the exemption Notification dated 30 June 2017, as amended vide Notification dated 01 February 2021. It becomes pertinent to note that the appellant had claimed exemptions in respect of Echo Show 5, Echo Auto, Echo Flex, Echo Dot 4th Generation and Echo Dot 4th Generation with Clock. The principal conditions for the purposes of extension of exemption benefits in relation to the impugned devices were recognized to be the device falling either under Tariff Entries 8517 62 90 or 8517 69 90 together with the subject products not being MIMO enabled. Since the AAR had already held that the Echo Show 5, Echo Dot 4th Generation and Echo Dot 4th Generation with Clock devices were not classifiable under CTH 8517, it held that they would not be covered by the aforenoted exemption Notification. It, however, accepted the extension of exemption benefits to Echo Auto and Echo Flex since they were not MIMO enabled and mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the manufacturer had itself chosen to describe the product as a shampoo , it was liable to be classified under CTH 3305, the heading relating to preparations for use on hair. While dealing with the question which stood posited, the Supreme Court observed as under: - 21. At the outset, we may mention that the product known as Nizral shampoo gives the nomenclature of the product as shampoo. However, the respondent claims that it is a patent or proprietary medicament as its essential characteristic is therapeutic in nature. It is the common case of the counsel for the parties that the predominant use of the product in question is to be taken into consideration while deciding the classification issue. Therefore, it is to be determined as to whether the product in question is primarily used as a shampoo or it is used as a medicament . To find answer to this question, it is necessary to keep in mind the essential characteristics of the product. 22. When the matter is examined from the aforesaid perspective we come to the conclusion that the respondent is correct in submitting that the essential properties of the product are medicinal in nature . It is clear from the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... os, a local burning sensation, itching, irritation and oily/dry hair may occur, but are rare, during the period of use of Nizral shampoo 2%. In rare instances, mainly in patients with chemically damaged hair or grey hair, a discolouration of the hair has been observed. Overdosage Not expected as Nizral shampoo 2% is intended for external use only. In the event of accidental ingestion, only supportive measures should be carried out. In order to avoid aspiration, neither emesis nor gastric lavage should be performed. 26. Thus, not only is limited period use stated, another important feature that appears in the literature supplied by the respondent is the information for the patient , describing the user of the product as a patient . It is as under: Patient information Ketoconazole shampoo 2% Nizral shampoo 2% You have been advised by your doctor to use this shampoo to treat dandruff. This leaflet gives you some information that you should keep in mind while using Nizral shampoo. It also gives some background information on dandruff, which is important for you to deal with it. Please read this leaflet carefully to get the best results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hree Baidyanath Ayurved Bhavan Ltd. (supra)]. The connotations of common parlance test could further be understood from the case of Alpine Industries (supra), that the primary object of such taxing statute being to raise revenue and various products being differently classified for that purpose, the entries are not to be understood in their scientific and technical meaning; rather the terms and expressions used in tariff have to be understood by their popular meaning, that is the meaning attached to them by those dealing with or using the product. Further, as observed in G.C. Jain (supra), the words and expressions, unless defined in the statute have to be construed in the sense in which persons dealing with them understand i.e., as per trade understanding and usage. Yet further, there is no fixed test or static parameter for correct classification of a product and it essentially depends on the meaning assigned to it by the persons concerned with it. One of the essential factors for determining whether a product falls under Chapter 30 or not is as to whether the product is understood as a pharmaceutical product in common parlance. However, the quantity of medicament used in a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forts on the part of the appellant to take the product in question to Chapter 33 merely because of its label carrying the expression Hair Oil while ignoring the preceding significant expressions Homeo and Arnica . As observed by this Court in BPL Pharmaceuticals (supra), for a product to be taken to Chapter 33, it has first to be a cosmetic . Similarly, reference to Note 1(e) of Chapter 30 also turns out to be of no relevance because the product in question cannot be said to be a preparation of Heading 3305 and then having insignificant or subsidiary therapeutic or prophylactic properties. As regards the product in question, which is essentially made of Homeopathic medicines which have therapeutic and prophylactic uses, it cannot be said to be carrying only subsidiary pharmaceutical value. Putting it differently, we are satisfied that the product in question, AHAHO, is predominantly of pharmaceutical value and the item of cosmetic therein, i.e., hair oil, is nothing but a medium for appropriate use of that pharmaceutical value. 90. In regard to the above, we find the consideration of this Court in the case of BPL Pharmaceuticals (supra) to be apposite to the questions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This aspect, in our view, is itself sufficient to reject the contentions of the appellant and the observations of the Adjudicating Authority. The Tribunal has rightly dealt with the matter in accordance with the law applicable to the facts of the present case. 36. It is thus evident from the aforenoted principles as enunciated by the Supreme Court that the mere description of the product as a hair oil or shampoo would not be conclusive for the purposes of classification under the CTH. The decisions in Sarvotham Care and Ashwani Homeo thus clearly explain the legal position to be that nomenclature alone would not constitute a defining basis for the purposes of answering a question of classification. When the aforesaid principles are applied to the facts at hand, it becomes clear that merely because the appellant or others had chosen to describe the products as smart speakers, the same could have neither been accepted as being conclusive of the issue that arose nor could the description of the products detracted from the right of the appellant to urge the AAR to examine the issue of classification by applying the dominant function test. 37. In our considered opinion, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thus compelling one to acknowledge this capability as constituting the principal component of that machine and the said features being its principal function. The legal fiction created by Note 3 unerringly commands us to reach this conclusion. 41. Of equal significance is the ambit of CTH 8517 and which includes apparatus for transmission or reception of voice, image or other data including apparatus used for communication in either a wired or wireless network environment. The appellant had sought to place the seven devices in question in Tariff Entry 8517 62 90 and which fell within the umbrella entry of machines for the reception, conversion and transmission or regeneration of voice, images or other data. The devices, as we have found above, clearly qualified and fell within the range of products which CTH 8517 covered. 42. CTH 8518, on the other hand stood confined to loudspeakers, headphones and earphones. It brought within its ambit single or multiple loudspeakers whether or not mounted in enclosures, as well as headphones and earphones and other like articles. As would be evident from a plain reading of CTH 8518, the said Tariff Heading does not even purport to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is evident from the description of their features. Those three subject devices while undoubtedly comprising of a display monitor could also perform the varied functions which the other Echo Family devices could conduct in a WI-FI environment. Undisputedly, the three devices could not only be used for playback of video content or for accessing streaming services, they could also be used for video calling and messaging. Mere monitors cannot possibly perform those functions nor can such attributes be said to be found in monitors generally. 46. Ultimately, it was incumbent upon the AAR to ascertain the principal function of the seven devices. This was an obligation which was placed not just in terms of Note 3 placed in Section XVI of the First Schedule to the Act but also in light of the principle well settled by numerous precedents rendered on the subject with respect to composite machines and thus clearly contemplating those which could perform multiple functions complementarily or alternatively, to be classified as if consisting only of that component or that machine which constitutes the principal function. Viewed from that angle, we are of the firm opinion that it would be wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the classification of a product. For the purposes of classification the relevant factors inter alia are statutory fiscal entry, the basic character, function and use of the goods. When a commodity falls within a tariff entry by virtue of the purpose for which it is put to (sic produced), the end use to which the product is put to, cannot determine the classification of that product. 15. Tariff Heading 84.15 covers air conditioning machines which control and maintain temperature and humidity in closed places. The main function of air-conditioning system is to control temperature which is not done by a chiller. A reading of Tariff Entry 84.15 would show that it is intended to cover only those machines which comprise elements for changing temperature and humidity and chillers would fall outside the purview of the said entry. The function of the chiller is only to chill water or bring it to a very low temperature, and it is the air-handling unit having an independent and distinct function which produces the effect of air conditioning, controlling the temperature and the humidity. The chiller itself does not do any air conditioning as it is designed only to refrigerate or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the multifunctional machines, it is necessary to look into some relevant provisions. Rule 3(a) of the General Rules for the Interpretation of the First Schedule (which along with the Second Schedule specifies the rates at which duties of customs shall be levied under the Customs Act) provides: 3. (a) The heading which provides the most specific description shall be preferred to headings providing a more general description. Further, Rule 3(b) of the same reads as follows: 3. (b) 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. 16. In addition, Note 3 to Section XVI (which includes both Chapter 84 and Chapter 85) reads as follows: 3. Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem of classification. We take note of the determinations made by competent authorities in jurisdictions overseas with respect to similar convergence devices and which too though not strictly binding on the AAR, would have merited due consideration and are liable to be accorded deserved weightage while answering an issue of classification. Ultimately the raison d etre for adoption of the HSN system is to aid international commerce as well as to achieve uniformity and certainty in trade and commerce. Those determinations are not only representative of how such products have come to be classified globally, they would also be germane and relevant to answer questions of classification when raised. 52. The Board s view, as expressed, albeit in respect of Bluetooth Wireless Headsets, also duly acknowledges the function of products which are principally concerned with transmission or reception of voice, images and data. The Circular took due notice of the fact that while ordinary Headphones carry only audio signals, Bluetooth Wireless Headsets are designed to be active participants in a networked environment and thus enabled to receive and transmit voice and data across a wireless netw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the mere inclusion of Bluetooth speakers under the heading of hearable devices also does not convince us to doubt the views expressed hereinabove. 55. As would be evident from the findings and conclusions recorded hereinabove, the impugned devices perform a host of functions including reception, conversion and transmission of voice or other data to produce the requisite final output warranting their classification under CTH 8517. We are also of the firm opinion that merely because these devices could if so chosen by the user also be used as mere speakers, the same would not justify us recognising their primordial attribute to be that of a speaker alone. 56. Since for reasons aforenoted, we have found ourselves unable to uphold the view taken by the AAR denying the classification of Echo Show 5, Echo Dot 4th Generation and Echo Dot 4th generation with Clock under CTH 8517 and more particularly Tariff Entry 8517 62 90/8517 69 90, the denial of exemption benefits to those products would also not sustain. 57. We, consequently answer the questions of law as framed by holding that the eleven devices are correctly classifiable under CTH 8517 and more particularly under T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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