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CLASSIFICATION OF GOODS

BASICS OF CTA, 1975 1. Give the column headings as prescribed in the Schedule to the Customs Tariff Act, 1975. Ans. In Customs tariff, there are 5 columns: (1) Tariff Item; (2) Description of Goods; (3) Unit of measurement; (4) Standard rate

of duty & (5) Preferential Rate of duty. Customs Tariff Act, 1975

Tariff Item Description of Goods Unit Standard rate of duty Preferential rate of duty (8 Digit Code) ……………… …….. …… ………..

2. Briefly explain “standard unit of quantity” with reference to the First Schedule to the Customs Tariff Act, 1975.

(Nov 2006 - 3 Marks) Ans. The “standard unit of quantity” refers to the unit in which commodity chargeable with customs duty shall be measured. Duty

rates are specified in the First Schedule with reference to the “standard unit of the quantity”. Standard unit of quantity is specified for each tariff item. It may differ from goods to goods. Some of the standard units are: (a) Kg (Kilogram); (b) Cm (Centimeter); (c) U (Number of Units)

3. What is the purpose of Interpretation rule regarding Customs Tariff?

(CA Final - MTP - March 2018, 5 Marks) (CA Final - MTP - October 2018, 5 Marks) Ans. Purpose of Interpretation Rule: Customs Tariff Act, 1975 contains a set of six rules which deals with interpretation of the

Tariff while classifying the goods covered therein. These rules are referred as “General Rules of Interpretation (GRI)”. The purpose of these rules is to give direction as to interpretating the nomenclature in the Schedule.

These rules are contained in Customs Tariff Act and hence, they form part of the Tariff Schedule. These have statutory backing. RULE 1

4. Write a brief note with specific reference to Rule 1 of the RULES OF INTERPRETATION of the First Schedule to

Customs Tariff Act, 1975. (Nov 2010- 4 Marks) (CA Final - MTP - August 2018, 5 Marks)

Ans. Rule 1 of General Rules for Interpretation (GRI) makes the following provision: (i) It provides that titles of section and chapter are for ease of reference only. (ii) Classification shall not be determined on basis of titles of section and chapter. Classification shall be determined on basis

of terms (terminology/wordings) of headings and relative section or chapter notes. (iii) Where it is not possible to determine classification on basis of terms of heading and relative section or chapter notes, then

classification of goods shall be determined by following other rules. RULE 2: UNASSEMBLED / DIS-ASSEMBLED GOODS 5. Write a brief note on the classification of incomplete / unfinished articles with reference to Rule 2(a) of the

Interpretative Rules to the First Schedule of the Customs Tariff Act. (Nov 2011 -Marks 3)

Ans. Rule 2(a) of General Rules of Interpretation (GRI) deals with classification of incomplete/ unfinished goods. It provides that Incomplete / unfinished goods having essential characteristics of complete/finished goods are classifiable under same heading under which complete or finished goods fall.

e.g.,

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… A calculator cleared without cell shall still be classifiable under heading of ‘Calculator’ since though incomplete it still have essential characteristics of a complete calculator.

… Similarly, a ceramic statue (Ganesh Ji) on which painting is still pending (and therefore it is still unfinished) will still be classifiable under the heading of ceramic statue.

VEWVOX SYSTEMS – 2017-SC .

TV cleared in SKD Condition = Complete TV; not ‘parts of TV’: • TV Set cleared in SKD condition were to be treated as ‘complete TV’ classifiable under Heading 85 28 and not under Heading 85 29

as ‘parts of TV’. • Hence, duty payable on such clearances was that applicable on Complete TV.

6. Write a brief note on the classification of goods cleared in unassembled / disassembled form with reference to

Rule 2(a) of the Interpretative Rules to the First Schedule of the Customs Tariff Act.

Ans. Rule 2(a) of General Rules of Interpretation (GRI) deals with classification of goods cleared in unassembled / disassembled form. It provides that goods cleared in unassembled / disassembled form is classifiable under same heading under which goods cleared in assembled form fall.

7. Write a brief note on the classification of goods mixed with other substances with reference to Rule 2(b) of the

Interpretative Rules to the First Schedule of the Customs Tariff Act.

Ans. Rule 2(b) of General Rules of Interpretation (GRI) deals with classification of goods mixed with other material or substance. It provides that reference in a heading to any goods shall also cover mixture of such goods with other material or substance.

AMRIT FOOD – 2015- SC

Product Milk Shake Mix Facts Assessee manufactured milk shake mix – which is basically ‘dairy produce’

Assessee added stabilizers to improve consistency and shelf-life. Assessee classified products as "dairy products" under Heading 0404. .

Held Milk Shake Mix continue as "dairy products", even after addition of stabilizers … Main purpose of addition of stabilizers was to maintain product consistency and to improve shelf life; merely because

it improves body and texture and adds some smoothness thereto, would not change basic character of product. .

RULE 3: SELECTION OUT OF MULTIPLE HEADINGS 8. Explain Rule 3 of the “Rules for Interpretation of the Customs Import Tariff Schedule”.

(Nov 2004- 3 Marks) Ans. Rule 3 lays down the principle for determining classification of good when it is prima facie classifiable under more than one

heading. It provides for application of following principles consecutively: (a) Heading which provides specific description shall be preferred over heading giving general description. (b) Mixtures, composite goods consisting of different materials or made up of different components or goods put up in a set

shall be classified as that material part which provides essential character. (c) Where classification can’t be decided with reference to (a) or (b), heading occurring last in the numerical order shall

be preferred. 9. A book often contains a CD. If software is purchased, a manual is given alongwith CD. The CD contains the

software. Thus, in both cases, there is a book and CD. What test shall be applied while classifying such products? [ICWA Inter, June 2004]

Ans. As per Rule 3(b) of the General Rules of Interpretation (G.R.I.) of classification of goods, composite goods consisting of different materials or items in a set shall be classified as if they consisted of that material part which gives them their essential character.

The case presented to us represents “items in a set”. Thus, the test to be applied for determination of applicable heading is of "essential character". Applying that test, classification shall be determined as stated below:

(a) Classification of “Software CD alongwith the manual”:-- Software provides “essential character” in this situation and hence, it should be classifiable as “software”.

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(b) Classification of “Book alongwith CD”:-- Book provides “essential character” in this situation and hence, it should be classifiable as “Book”.

10. Does the principle ‘later the better’ apply in classifying goods?

[May 2005 / Nov 2012 – 1 marks] Ans. Yes, Rule 3(c) of the General Interpretative Rules provides for selection of later heading over other applicable headings.

RULE 4: AKIN RULE 11. Explain the ‘Akin Rule’ of interpretation of Schedule?

[May 2006 / May2012 – 2 marks] Ans. Rule 4 of GRI provides that goods which cannot be classified in according with other rules of classification that shall be classified

under the heading which is appropriate to the goods to which they are most akin / similar.

Instruction No. 4- Cus- dated 21st March, 2017

• Leggings for ladies are akin to ‘tights’ and thus, classifiable as ‘tights’. Leggings and tights are used interchangeably in the trade parlance. As trade parlance is the major factor for deciding the classification in absence of other reliable factors, the classification of leggings with tights seems to be the most logical.

• Leggings shall not be classifiable as ‘trousers’ as trousers are formal wear, having two seams per leg. .

MISCELLANEOUS EXPLANATORY NOTES TO HSN 12. What do you understand by HSN commodity description? Discuss briefly its relevance to the Indian Customs

Tariff Act. (5 Marks)

Ans. HSN is abbreviation of “Harmonized System of Nomenclature”, the international system of classification of product which was developed by Customs Cooperation Council of Brussels to ensure uniformity in classification of goods world-wide. The notes attached to HSN which help in clarification of scope and extent of heading of HSN are called “Explanatory Notes to HSN”.

When India became a signatory to General Agreement to Trade and Tariff (GATT, for short --- now called World Trade Organization (WTO)}, it became a necessity for Indian Government to adopt principles of HSN system. Consequently, in 1975, Customs Tariff Act was amended in lines with the HSN system.

Relevance : As stated earlier, the Customs Tariff Act has been modeled along the lines of HSN system, therefore, in case of any

classification disputes; explanatory notes to HSN can be referred to, but, subject to specific provisions in the Tariff itself. Where entry in Customs Tariff is completely aligned with HSN, then HSN have very high persuasive value [RECKIT & COLMAN

OF INDIA – 1994- SC] TRADE PARLANCE THEORY 13. Explain briefly the significance of “TRADE PARLANCE TEST” with respect to classification of goods under the

Customs Tariff Act, 1975. [May 2011 -3 Marks]

Ans. Significance of ‘TRADE PARLANCE TEST”: Trade parlance test means that while classifying goods, understanding of goods in the trade shall be considered. This test says that while interpretating any tariff entry as to coverage of any particular goods therein, regards shall be given to the understanding, which the persons dealing in the goods (i.e., traders) keep. This test is preferred over scientific or technical understanding. For example, … ‘Dabur Lal Dant Manjan’ is not understood as ‘ayurvedic medicine / medical preparation’ in trade parlance. Its understanding

in the trade is as ‘toilet preparation’ and thus, it shall be classified accordingly.[SREE BAIDYANATH AYURVED BHAWAN LTD- 2009-SC]

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… ‘Soft-serve’ sold by Connaught plaza restaurant ltd (McDonalds) to its various franchisees will be classifiable as ‘Ice-cream’ and not as ‘dairy produce’ [CANNOUGHT PLAZA RESTRAURANT P LTD – 2012- SC]

It shall be noted that Customs Tariff Act provides for general principles to be followed while classifying the goods. These rules are referred as ‘GRI (General Rules of Interpretation)’. These being statutory principles shall be preferred over trade understanding of the product. But if statutory principles are not clear, then test of trade parlance shall be given due weightage.

COSMETIC VS MEDICAMENT 14. Mr. X imports a cream called as ‘Moisture-BN’ which has certain pharmaceutical contents. The cream is

prescribed by dermatologists for curing dry skin conditions and at the same time is also available without prescription of a medical practitioner. Mr. X classifies the cream as a medicament since it has pharmaceutical contents and is being prescribed by dermatologists for treating dry skin conditions.

However, the PO is of the view that the cream should be classified as a cosmetic/toilet preparation as (i) the same is mainly used for ‘care’ of the skin and (ii) can also be purchased without prescription of a medical practitioner. The PO contends that even if a cosmetic product contains certain subsidiary pharmaceutical contents or even if it has certain subsidiary curative value, it would still be treated as cosmetics only.

What do you think should be the correct classification of the cream; a medicament or a cosmetic/toilet preparation?

Support your answer with the help of a decided case law, if any. [ICAI RTP – NOV 2014]

Ans. The issue for consideration before us is whether product manufactured by assessee, CREAM, is medicament (medicinal preparation) or cosmetic/toilet preparation. Classification of product is governed by General Rules of Interpretation as contained in CTA, 1975. While determining applicable description of goods for the product, ‘common parlance theory’ shall be applied. In terms of common parlance theory, due regard shall be given as to understanding of product by the person dealing in the product. In common parlance, a product is ‘medical preparation’ if it is ‘for cure’ (Medicinal products are used to treat or cure some medical

condition) a product is ‘cosmetic/toilet preparation’ if it is ‘for care’ (cosmetic products are used in enhancing or improving a

person's appearance or beauty)

Hon’ble SC in case CIENS LABORATORIES – 2013 - SC held that ‘Moisture-BN’ is essentially for cure as it is prescribed by doctors in dry skin conditions and hence, it shall be classified as ‘medicament’ only. Following significant observations were made by SC in this regard: When a product contains pharmaceutical ingredients that have therapeutic or curative properties, the proportion of such ingredients is not invariably the decisive factor in classification. The relevant factor is the curative attributes of such ingredients that render the product a medicament and not a cosmetic. A product that is used mainly in curing or treating ailments or diseases and contains curative ingredients, even in small quantities, is to be treated as a medicament.

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Miscellaneous – CA final Study Material, May 2019

• Whether the mobile battery charger is classifiable as an accessory of the cell phone or as an integral part of the same? Nokia India Private Limited - 2015 – SC: mobile battery charger is an accessory to mobile phone and not an integral part of it. Further, battery charger cannot be held to be a composite part of the cell phone, but is an independent product which can be sold separately without selling the cell phone.

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PROJECT IMPORT – CUSTOMS TARIFF HEADING 98.01 15. Write a note on ‘’PROJECT IMPORTS” under the Customs Tariff Act, 1975 enumerating the eligible projects.

(May 2009 6 Marks) Ans. Literally speaking, ‘project imports’ means import for a project (to be set up in India). Project Imports Scheme is a concept, unique to Indian Customs, wherein all the goods imported for the purpose of setting up

of Industrial Project or substantial expansion of existing industrial projects is subjected to single classification under heading 98.01 of Customs Tariff Act, 1975 and subjected to single rate of duty instead of merit assessment of imported goods into different headings. Project Import Scheme facilitates setting up of and expansion of INDUSTRIAL and other PROJECTS.

Normally, imported goods are classified separately under different tariff headings and assessed to applicable Customs duty. But as a variety of goods are imported for setting up an industrial project, their separate classification and valuation for assessment to duty becomes cumbersome.

Further, the suppliers of a contracted project, do not value each and every item or parts of machinery which are supplied in stages. Hence, ascertaining values for different items delays assessment leading to demurrage and time and cost overruns for the project.

Therefore, to facilitate smooth and quick assessment by a simplified process of classification and valuation, the goods imported under Project Import Scheme are placed under a single Tariff Heading 9801 in the Customs Tariff Act, 1975. The Central Government has formulated the Project Import Regulations, 1986 prescribing the procedure for effecting imports under this scheme.

Eligible Projects: The benefit of “project import scheme” is available only in respect of certain specified and notified projects. Some Examples of “Eligible Projects”

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Guidance Note for Importers and Exporters : IGST levy on machineries imported under Project Import Scheme: In the GST regime, for the purpose of levying IGST all the imports under the project import scheme will be classified under heading 9801 and IGST shall be levied @ 18%. .

1. Power Projects 2. Water Supply Projects 3. Drinking Water Supply Projects for supply of water for human or animal consumption 4. Pipeline projects for the transportation of crude oil, petroleum products or natural gas 5. Digital cinema development projects 6 METRORAIL project or Monorail project for urban public transport