ThroughNarasimhan BL & Rohan Muralidharan
In order to appreciate the broad ramifications of judgment, we can begin with a brief review of judgment itself. The dispute before the Supreme Court concerned the classification of electrical relays intended for use in railway signaling equipment.
At this point, we can stop to note that determining the classification of goods and services is important in determining the tax rate. Classification under customs, central excise, and goods and services tax (GST) laws is based on the Harmonized Nomenclature System (HSN) which is an internationally developed mechanism for classifying goods. HSN is divided into 21 sections and 98 chapters, each containing notes on how to classify the articles in this section. For this article, it suffices to note that Chapters 86 and 87 (which fall under Section XVII) respectively provide the classification of locomotives and automobiles and their parts.
Based on their exclusive use in railroads, the Westinghouse appraiser sought to classify these relays in heading 8607 as parts of railroad locomotives. This claim was based on Note 3 to Section XVII which limits the terms “parts” and “accessories” to parts and accessories that can be used only or mainly with articles classified in Chapters 86 to 88. The assessor argued that relays are primarily designed for use with railway locomotives and are therefore classified as part of railway locomotives in heading 8607.
On the other hand, Commerce sought to independently classify relays in heading 8536 as electrical equipment on the grounds that Note 2 (f) to Section XVII specifically excluded “electrical equipment” from being classified in the section. section XVII, whether or not they are identifiable. as being for the goods in this section.
The Supreme Court ultimately agreed with the appraisee and ruled that the relays can be classified as part of locomotives under heading 8607. In that decision, the SC applied the “exclusive or primary use” test to the section Note 3 excluding the embargo in Note 2. One could summarize this decision as follows: “if an article is exclusively or mainly used with articles of section XVII (which includes railway locomotives and motor vehicles), then it is classifiable under it, notwithstanding specific exclusions to the contrary. A reading of this proposition may prompt a simple question: “Will the same logic apply to other parties as well?” This is the question that is the subject of this article.
The Supreme Court finally ruled in favor of the person assessed and ruled that the relays can be classified as part of the locomotives under heading 8607.~
Implications for the automotive sector
Ironically, the success of those appraised at Westinghouse Saxby poses a serious threat to many other taxpayers. The ‘exclusive or main use’ test, intended to be applied for the classification of parts in Chapters 86 and 87 to the exclusion of all other conditions / qualifications, can be applied to almost any item supplied for use in the automobile industry.
For example, motor vehicle parts classified in Chapter 87 are subject to an IGST rate of 28%; while parts that are not classified in Chapter 87 generally benefit from a lower rate of 18% or less. Therefore, given the rate arbitration, importers and domestic suppliers of these parts – whether direct to an automaker or to component dealers / manufacturers – will need to review the classification adopted for all of their products.
This is particularly the case in the case of custom designed parts for automobiles. In addition, the above analysis will also apply to parts supplied to the aftermarket.
Take the example of automotive engine valves which are currently classified in heading 8481 (18%) in accordance with the accompanying explanatory notes to Chapter 84. Applying the logic employed by the Court in Saxby, one would be obliged to classify them. valves under headings 8708 or 8607 despite the existence of a specific entry for valves in chapter 84.
Given the abundance of such products (LCD screens used in dashboard displays, electric motors, switch panels, automotive chains, oil seals, drive belts, fasteners, etc.) that this logic can be applied to. ‘apply, the potential disruption to Westinghouse Saxby cannot be overstated. .
Aside from the Show Cause Notices tidal wave that could ensue, raising the tax rate on an already strained industry is not the silver lining that fiscal 2021 should begin with.
The benefits of this principle extend beyond what are generally considered “auto parts”. There are similar notes in other sections of the HSN such as the notes relating to Section XVI (Chapters 84 and 85) and Section XVIII (Chapter 90). Thus, the classification of products which otherwise fall under the above sections may also be affected due to this judgment.
The terms of a de facto tax rate increase will take time and effort to iron out. On the fundamental question of knowing how the current systems can adapt to this change, the following questions arise:
– Will the contractual prices have to be renegotiated?
– Can debit notes be issued for the differential payment of tax? Will it generate interest?
– Can beneficiaries avail themselves of the credit of this differential payment?
– How will B2C transactions be affected?
These are good questions that need good answers. That being said, only time will tell how far the ripples of Westinghouse Saxby will spread.
(The authors are the senior partner and senior partner of Lakshmikumaran & Sridharan Attorneys. The opinions expressed are their own.)