Comprehensive Guide to Classification of Goods and Services under GST

Under GST, goods and services are classified into different tax rate categories:
– Goods: Exempt (essential items), 5% (mass consumption items), 12% (standard goods), 18% (majority of items), and 28% (luxury and sin goods)
– Services: Exempt (education, healthcare), 5% (transport), 12% (non-AC restaurants, mid-range hotels), 18% (IT, telecom, AC restaurants), and 28% (luxury hotels, gambling)
HSN codes classify goods, while SAC codes classify services. Proper classification ensures compliance with tax regulations

Table of Contents

1. Need for Classification
2. Overview of HSN
3. Application of GIR in Tariff
4. Classification in case of conflict between various headings
5. Other provisions relating to classification
6. Classification of Parts
7. Classification of Services
8. Principles of Classification

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1. Need for Classification

There are innumerous variety of goods and services. It is not possible to apply one common tax rate to all goods and services. It is also not possible to list all types of goods and services and specify GST rate against each of such goods and services.

Hence, the only option is to classify the goods on basis of groups and sub-groups and specify GST rate against each sub-group of items. In case of service also, only broad description can be given for providing abatements and exemptions to various type of services.

The most scientific way of classifying goods is on basis of HSN. The HSN classification is used in customs, central excise and Foreign Trade Policy. The classification is also followed by DGCIS (Director General of Commercial Intelligence & Statistics).

The common classification reduces transaction costs and reduce diversion of classification among different agencies.

Under GST, goods will have to be classified on basis of HSN. There is no other scientific way the goods can be classified.

The Customs Tariff Act is based on HSN. That Tariff will be used to classify goods under GST.

The GST rates have been notified on basis of Customs Tariff.

Classification of a product is to be done by consignor only – Classification of a product is to be done by consignor only. It cannot be changed or questioned at consignee’s end – Steel Authority of India Ltd. v. CCE (2022) 382 ELT 10 = 142 taxmann.com 392 (SC).

Classification is responsibility of supplier, purchaser is not obliged to indicate classification – Classification is the responsibility of supplier, purchaser is not obliged to indicate classification of goods he is purchasing – UOI v. Bharat Forge (2022) 93 GST 731 = 141 taxmann.com 731 = 64 GSTL 3 (SC).

1.1 Background of HSN

As international trade increased, need was felt to have universal standard system of classification of goods to facilitate trade flow and analysis of trade statistics. Hence, Harmonised Commodity Description and Coding System (Generally referred to as ‘Harmonised System of Nomenclature’ or simply ‘HSN’) was developed by World Customs Organisation (WCO) [www.wcoomd.org].

This is an International Nomenclature standard adopted by about 200 Countries to ensure uniformity in classification in International Trade.

HSN is a multi-purpose international product nomenclature developed by WCO (World Customs Organisation). It comprises about 5,000 commodity groups, each identified by a six digit code, arranged in a legal and logical structure. The system is used by more than 200 countries. Over 98% of the merchandise in international trade is classified in terms of HS – WCO website – quoted in Hitachi Home and Life Solutions v. CC (2012) 285 ELT 504 (CESTAT), where it was held that HSN automatically classifies the trade parlance test.

Harmonised System (HS) provides commodity/product codes and description upto 4-digit (Heading) and 6-digit (Sub-Heading) levels only and member countries of WCO are allowed to extend the codes upto any level subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level classification to indicate specific statistical codes for indigenous products and also to monitor the trade volumes – Chapter 4 Para 2.2 of CBIC’s Customs Manual, 2023.

HS is amended periodically in a cycle of 4/6 years, taking note of the trade flow, technological progress etc. Member countries including India are under obligation to amend the Tariff Schedules in alignment with HS – Chapter 4 Para 2.3 of CBIC’s Customs Manual, 2023. (Latest changes have been brought into effect on 1-1-2022).

For purpose of uniform interpretation of HS, the WCO has published detailed Explanatory Notes to various headings/sub-headings. WCO in its various committees discusses classification of individual products and gives classification opinion on them. Such information, though not binding in nature, provides a useful guideline for classifying goods – Chapter 4 Para 2.4 of CBIC’s Customs Manual, 2023.

Customs Tariff uses 8 digit nomenclature. ITC (HS) published by DGFT has 10 digit classification.

Permissibility of import and export is governed by the DGFT’s ITC(HS) [Import Trade Control (Harmonised System)] classification of import and export goods, published by DGFT. The nomenclature arranges goods as in the HS to regulate Foreign Trade Policy and collating the statistical analysis of imports and exports of the country – Chapter 4 Para 2.11 of CBIC’s Customs Manual, 2023.

Methodology of classification of goods – In the Tariff Schedule, commodities/products are arranged in a fixed pattern with the duty rates specified against each of them. The pattern of arrangement of goods in the Tariff is in increasing degree of manufacture of commodities/products in the sequence of natural products, raw materials; semi finished goods and fully finished goods/article/machinery, etc. The Indian Customs Tariff has 21 Sections and 98 Chapters. Section is a group consisting of a number of Chapters which codify a particular class of goods. The Section notes explain the scope of chapters/headings, etc. The Chapters consist of chapter notes, brief description of commodities arranged at four digit, six digit and eight digit levels. Every four- x digit code is called “heading” and every six digit code is called a “sub-heading” and 8 digit code is called a “Tariff Item” – Chapter 4 Para 2.1 of CBIC’s Customs Manual, 2023.

1.2 Sections, Chapters and headings in Tariff

A ‘section’ is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections is related to a broader class of goods e.g. Section I is ‘Animal Products’, Section VII is ‘Plastics and Articles thereof’, Section XI is ‘Textile and Textile Articles’, Section XVII is ‘Vehicles, Aircrafts, Vessels and associated transport equipment’, etc. 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.

Central Excise Tariff is divided in 20 sections, while there are 21 sections in case of Customs Tariff.

Section divided in Chapters and chapters in sub-chapters – Each of the sections is divided into various Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and Textile Articles and within that Section, Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on.

Some Chapters are divided into sub-chapters e.g. Chapter 72 (Iron and Steel) is divided into

• Primary Materials
• Iron and Non-Alloy Steel
• Stainless Steel
• Other Alloy Steel.

Chapter Notes – Chapter Notes are given at the beginning of each Chapter, which govern entries in that Chapter.

Headings and sub-headings within the Chapter – Each chapter and sub-chapter is further divided into various headings depending on different types of goods belonging to same class of products.

For instance, Chapter 50 relating to Silk is further divided into 5 headings. 5001 relates to Silk worm cocoons, 5002 relates to raw silk, 5003 relates to silk waste etc. The headings are sometimes divided into further sub-headings. For example 5003 10 means ‘silk waste not carded or combed’, while 5003 90 means ‘other silk waste’. These are preceded by single dash. 5003 90 is further classified as 5003 90 10 (Mulberry silk waste), 5003 90 20 (Tussar waste) and 5003 90 90 (Other).

Grouping of goods – In the Tariff Schedule, commodities/products are arranged in a fixed pattern with the duty rates specified against each of them. The pattern of arrangement of goods in the Tariff is in increasing degree of manufacture of commodities/products in the sequence of natural products, raw materials, semi finished goods and fully manufactured goods/article/machinery etc. – Chapter 4 Para 2.1 of CBIC’s Customs Manual, 2023.

Eight Digit classification in customs – All goods are classified using 4 digit system. These are called ‘headings’. Further 2 digits are added for sub-classification, which are termed as ‘sub-headings’. Further 2 digits are added for sub-sub-classification, which is termed as ‘tariff item’. Rate of duty is indicated against each ‘tariff item’ and not against heading or sub-heading.

1.3 Searching HSN Code on CBIC website

Search facility is available on website. The search can be on basis of technical description as well as description through trade or commercial description. It is available at pre-login and post-login. Go to Home> Services> User Services > Search HSN Code. The search is based on Artificial Intelligence and Machine language linked with e-invoice declaration data base – https://www.gst.gov.in dated 6-1-2022.

1.4 Import Policy aligned with Customs Tariff and HSN

Import Policy has been specified item-wise, termed as ITC (HS) 2022 [Import Trade Classification (Harmonised System) of Import Items, 2022].

The ITC (HS) 2022 is aligned with Customs Tariff, which has been amended w.e.f. 1-1-2022.

ITC (HS) 2022 has been notified vide DGFT Notification No. 54/2015-20 dated 9-2-2022. Updated ITC (HS) 2022 is available on website of DGST (https://dgft.gov.in).

2. Overview of HSN

Following is broad grouping of goods in HSN:

• Animal Products (Section I – Chapters 1 to 6)
• Vegetable Products (Section II – Chapters 6 to 14)
• Animal or vegetable fats and oils (Section III – Chapter 15)
• Prepared foodstuffs, beverages (Section IV – Chapters 16 to 24)
• Mineral Products (Section V – Chapters 25 to 27)
• Products of Chemicals and allied industries (Section VI – Chapters 28 to 38)
• Plastics and Rubber and their articles (Section VII – Chapters 39 and 40)
• Raw hides and Skins, Leather and articles (Section VIII – Chapters 41 to 43)
• Wood, cork, straw and their articles (Section IX – Chapters 44 and 46)
• Pulp of wood, Paper, Paper-board and articles (Section X – Chapters 47 to 49)
• Textile and Textile Products (Section XI – Chapters 50 to 63)
• Footwear, Headgear, Umbrellas, Articles of human hair (Section XII – Chapters 64 to 67).
• Articles of stone, plaster, ceramic, mica, glass (Section XIII – Chapters 68 to 70)
• Pearls, precious metals (Section XIV – Chapter 71)
• Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin etc.). (Section XV – Chapters 72 to 83)
• Machinery and mechanical appliances, electrical equipments, television etc. (Section XVI – Chapters 84 and 85)
• Vehicles, Aircrafts, vessels and associated transport equipment (Section XVII – Chapters 86 to 89)
• Optical, photographic, medical, surgical instruments, clocks, musical instruments (Section XVIII – Chapters 90 to 92)
• Arms and Ammunition (Section XIX – Chapter 93)
• Misc. Manufactured articles like Furniture, toys etc. (Section XX – Chapters 94 to 96)
• Works of Art, collectors’ pieces and antiques (Section XXI – Chapters 97 to 98).

2.1 Rules for Interpretation of HSN

Rules for Interpretation of HSN are given in the HSN itself. These are termed as ‘General Interpretative Rules’ (GIR).

GIR (General Interpretative Rules) are to be applied for interpretation of Tariff, if classification is not possible on the basis of tariff entry and relevant chapter notes and section notes.

Following are the steps of classification of a product as per GIR:

1. The titles of Sections and Chapters are provided for ease of reference only; for legal purposes, refer the heading and sub-heading. Read corresponding Section Notes and Chapter Notes (Rule 1 of GIR). If there is no ambiguity or confusion, the classification is final. You do not have to look to classification rules or trade practice or dictionary meaning. If classification is not possible, then only go to GIR. The rules are to be applied sequentially.
2. If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be established, find technical or dictionary meaning of the term used in the tariff. You may also refer to BIS or other standards, but trade parlance is most important.
3. If goods are incomplete or unfinished, but classification of finished product is known, find if the unfinished item has essential characteristics of finished goods. If so, classify in same heading – Rule 2(a).
4. If ambiguity persists, find out which heading is specific and which heading is more general. Prefer specific heading.- Rule 3(a).
5. If problem is not resolved by Rule 3(a), find which material or component is giving ‘essential character’ to the goods in question – Rule 3(b).
6. If both are equally specific, find which comes last in the Tariff and take it – Rule 3(c).
7. If you are unable to find any entry which matches the goods in question, find goods which are most akin – Rule 4.
8. In case of mixtures or sets too, the procedure is more or less same, except that each ingredient of the mixture or set has to be seen in above sequence. As per rule 2(b), any reference to a material or substance includes a reference to mixtures or combinations of that material or substance with other material or substance.
9. Packing material is classified along with the goods except when the packing is for repetitive use – Rule 5

2.2 Coding of dashes

Single dash (-) at the beginning of description of any article in Tariff indicates a group, while two dashes (- -) at the beginning indicate a sub-group. The single dash (-) indicates primary classification of article covered by the heading, while double dash (- -) is the sub-classification of the preceding article which has single dash (-) i.e. it is a sub-classification of primary classification.

Triple dash (- – -) and quadruple dash (- – – -) indicate sub-sub-classification of immediately preceding description of article, which has ‘-’ or ‘- -’. In other words, a single dash or double dash may be followed by either three dashes or four dashes. Both three dashes or four dashes are used to indicate 8 digit classification i.e. ‘tariff item’.

Goods to fall in tariff entry with double dash (- -) have to satisfy specification of single dash (-) preceding them – Schenectady Herdilla Ltd. v. CCE (2007) 208 ELT 110 (CESTAT).

Following hypothetical example illustrating classification of ‘Ready Made Garments’ will make the distinction clear [Note that this is not actual extract from the tariff]

A		Ready Made Garments
AA	–	Men’s wear
AA-1	– –	Suits
AA-2	– –	Shirts
AA-3	– –	Other
AB	–	Ladies wear
AB-1	– –	Salwar
AB-2	– –	Skirts
AB-3	– –	Other
AC	–	Other

The ‘ready made garments’ are classified as

• Men’s wear
• Ladies wear
• Other.

The men’s wear and ladies wear are further sub-classified. Thus, ‘Other’ in AA-3 means men’s wear other than suits and shirts, while ‘other’ in AC means all ready made garments excluding Men’s wear and Ladies wear.

Rule 6 of Interpretation Rules of Schedule to Tariff state that Classification of goods in sub-headings shall be determined in terms of those sub-headings. Only sub-headings at the same level are comparable e.g. in aforesaid example, AB-1 and AB-3 can be compared, but AB-3 cannot be compared with (say) AA-3.

2.3 Standard unit of quantity

Third column of tariff is ‘Unit’ which is unit of measure. The unit of measure is indicated by abbreviations. Some abbreviations are as follows – cc – Cubic Centimetre, cm – Centimeter(s), g – gram(s), g/cm³ – Gram per cubic centimeter, l – litre, m – metre, mt – Metric Tonne, t – Tonne, Tu – Thousand in number, u – Number, Vol. – Volume, W- Watt.

In many cases, these units are impractical in trade.

3. Application of GIR in Tariff

GIR (General Interpretative Rules) are to be applied for interpretation of Tariff, if classification is not possible on the basis of tariff entry and relevant chapter notes and section notes.

Rules to be applied sequentially – The Rules are to be applied sequentially. Rule 1 gives precedence to Section Notes/Chapter Notes while classifying a product – Chapter 4 Para 2.6 of CBIC’ Customs Manual, 2023.

Classification is to be first tested in light of Rule 1. Only when it is not possible to resolve the issue by applying this rule, recourse is taken to Rules 2, 3 and 4 in seriatim [Though rules nowhere state that these should be applied sequentially, the general arrangement and wording does clearly indicate that intention].

Titles are for reference – Titles of sections or chapters cannot be used for classification. The titles of sections and chapters are provided for use of reference only, and have no legal importance for purposes of classification. (Rule 1)

Rule 1 – The titles of Sections and Chapters are provided for ease of reference only; 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 provisions hereinafter contained.

Section Notes and Chapter Notes have overriding effect – Classification is to be determined only on the basis of description of the heading, read with relevant section or chapter notes. Since these notes are part of the Act itself, these have full statutory (legal) backing.

If the description read with section or chapter notes is not enough to correctly classify the goods, following further rules have been provided:

3.1 Classification of Incomplete or un-assembled Goods

Any reference to complete goods also includes incomplete or unfinished goods, if such incomplete or unfinished goods have the essential characteristic of finished goods. [First part of Rule 2(a)]. The heading will also include finished goods removed unassembled or disassembled i.e. in SKD or CKD packs. [second part of Rule 2(a)].

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 meter without its totalling device.

In Salora International Ltd. v. CCE (2012) 9 SCC 662 = 284 ELT 3 (SC), assessee manufactured various components of TV sets. These were assembled for testing of each set. Then the sets were disassembled and then transported as parts to other units (satellite units) of assessee to be reassembled and marketed. Individual serial numbers were given. It was held that the goods have to be classified as finished/complete goods and not as parts. It was held that if only parts were manufactured and matching and numbering functions were done at satellite units, it would have been removal of parts of TV sets.

Functional test is test for ‘essential character’ – In Shivaji Works Ltd. v. CCE – 1994 (69) ELT 674 (CEGAT); it was held that functional test is correct test for determining character of a product, i.e. ‘primary function’ is ‘essential characteristic’. Unless the incomplete goods are able to function as finished goods, this rule is not applicable.

3.2 Un-assembled finished goods

Second part of rule 2(a) of GIR further provides that the heading will also include finished goods removed un-assembled or disassembled i.e. in SKD or CKD packs. [second part of Rule 2(a)].

This provision is essential because sometimes, goods cannot be despatched in fully assembled condition. These are despatched in SKD (semi-knocked down) or CKD (completely knocked down) condition and assembled at site. As we saw in previous chapter, in such cases, assembly at site does not amount to manufacture. The goods are, in fact, fully manufactured in the factory itself. These are sent in SKD or CKD condition only for convenience of transport.

3.3 Classification of Mixture or Combinations

Any reference in heading to material or substance will also include the reference to mixture or combination of that material or substance with other materials or substance e.g. ‘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 2(b)].

4. Classification in case of conflict between various headings

While applying the aforesaid rules, some conflict may arise e.g., (a) a mixture or combination containing more than one material may be classifiable under more than one headings by applying rule 2(b). If it contains two items A and B, one classification may be on the basis of ‘A’ and other on the basis of ‘B’ (b) There may be two descriptions which may both seem possible.

In such cases, rule 3 states as follows—

Rule 3 – When by application of sub-rule (b) of rule 2 or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as given in rule 3(a), 3(b) or 3(c).

In CCE v. Simplex Mills Co. Ltd. 2005 (181) ELT 345 = 140 STC 125 (SC 3 member bench), it was observed that rule 3 must be understood only in the context of rule 2(b).

Specific Description preferable over general heading – The heading which provides most specific description shall be preferred to heading providing a general description. [Rule 3(a)] – noted in Speedway Rubber v. CCE 2002 AIR SCW 2181 = 50 RLT 255 = 143 ELT 8 (SC) * CCE v. Maharshi Ayurveda Corpn Ltd. 2006 (193) ELT 10 (SC).

Only such goods as cannot be brought under the various specific entries in the tariff could be attempted to be brought in residual entry – State of Karnataka v. Durga Projects Inc. (2018) 4 SCC 633 (SC 3 member bench).

Rule 3(a) – 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, 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.

VIP bag is a ‘Plastic Article’ in common parlance, but if there is a specific entry ‘suitcases’, that entry will prevail over general entry ‘plastic articles’. – A Nagaraju Bros. v. State of AP – (1994) 95 STC 1 = 72 ELT 801 (SC).

4.1 Classification as per Essential Character

If Mixture and Composite goods consisting of different materials or different components cannot be classified based on above rule i.e. rule 3(a), it should be classified as if they consisted of the material or component which gives it their essential character [Rule 3(b)].

For example, 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(b) can be applied only when identification under rule 3(a) providing for preference to more specific heading is impossible – CCE v. Jocil Ltd. (2011) 1 SCC 681 = 263 ELT 9 (SC).

Pre-dominance cannot be merely on basis of weight or volume – Simplistic way of going by pre-dominant weight or volume can sometimes give absurd conclusions – For example a cup of coffee, which is pre-dominantly hot water with very small quantity of coffee, cannot be classified as water – It has to be classified as coffee only – Similarly Ice-cream is neither pre-dominantly ice nor cream nor sugar – Other example is tablet of medicine where essential drug is not pre-dominant either by weight or volume – Thus, pre-dominance of a component may not matter at all cases except where such pre-dominance is essential character of product – There can also be a case where more than one component is equally important i.e. Milk shake – Commissioner of Customs (Prev.) v. Anutham Exim (P.) Ltd. [2021] 131 taxmann.com 30 (CESTAT).

Meaning of ‘set of articles’ – Distinction between laptop and desktop – ‘Set of article’ should consist of more than one item, each complementing the work of another and retaining their individual identity all the time – CC v. Acer India P Ltd. (2007) 218 ELT 17 (SC). In this case, it was held that a desktop computer is a combination of CPU with monitor, mouse and keyboard as a set. A desktop computer does not lose individual identities of CPU, monitor, mouse and keyboard. Not only they are marketable as separate items but are also used separately. On the other hand, a laptop (notebook computer) comes in an integrated and inseparable form. It is a combination of CPU, monitor, mouse and keyboard. A laptop cannot be said to be set of CPU with monitor mouse and keyboard – confirming Tribunal decision in CC v. Acer India P Ltd. (2007) 208 ELT 132 (CESTAT).

Tablet computer – A tablet computer is Automatic Data Processing Machine (8471) and not mobile phone (8517) – MF(DR) circular No. 20/2013-Cus dated 14-5-2013.

4.2 If both are specific – Latter the better

If two or more headings seem equally possible and the dispute cannot be resolved by any of the aforesaid rules, if both the headings appear equally specific, the heading which occurs last in numerical order is to be preferred (i.e. latter the better). [rule 3(c)].

If product can fall under 4406.90 or 4408.90, classification under 4408.90 would be appropriate heading for classification – CCE v. Kitply Industries (2011) 272 ELT 3 (SC).

5. Other provisions relating to classification

Other provisions are as follows:

Akin Goods – Last Rule of classification – If the classification is not possible by any of the aforesaid rules 1, 2 and 3, then it should be classified under the heading appropriate to goods to which they are most akin [rule 4 of GIR].

This is only a last resort and a desperate remedy to resolve the classification issue, as the matter of classification cannot be kept hanging indefinitely.

5.1 Classification of packing containers and packing materials

Rule 5 for interpretation of schedule to Customs Tariff Act and CETA specifically provides for classification of packing material and packing cases.

Rule 5. In addition to the foregoing provisions, the following rules shall apply in respect of the goods referred to therein:

• 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.
• 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.

As per this rule, cases for camera, musical instruments, drawing instruments, necklaces etc. specially shaped for that article, suitable for long term use will be classified along with that article, if such articles are normally sold along with such cases. Further, packing materials and containers are also to be classified with the goods except when the packing is for repetitive use.

This provision is obviously made to ensure that the packing and the goods are charged at same rate of duty.

In Print-O-Pack v. CCE (2012) 275 ELT 95 (CESTAT), assessee was placing sugar cone (ice-cream cone) in Aluminium foil cone. It was held that Aluminium foil cone is used only as packing and entire goods will be classified as ‘ice-cream cone’ only.

5.2 Goods can be compared at the same level only

Sub-Headings can be compared only at the same level [Rule 6].

This means that if one heading contains 5-6 sub-headings, these sub-headings can be compared with each other. However, sub-heading under one heading cannot be compared with sub-heading under a different heading. Thus, first heading has to be decided and then one of the sub-headings within that heading has to be selected.

6. Classification of Parts

Classification of parts is subject to notes in Sections and Chapters. Question of classification of parts is relevant for parts of machinery, electrical equipment, vehicles, instruments, arms, furniture and toys (Chapters 82 to 96).

In Electrosteel Castings v. CCE 1989 (43) ELT 305 (CEGAT), it was observed that ‘part’ is a component whose absence will disable a machine or appliance. It must be regarded as an essential ingredient or part of that machine.

A part is an essential component of the whole without which whole cannot function Accessory is something supplementary or subordinate in nature and need not be essential for actual functioning of the product – CCE v. Insulation Electricals (2008) 224 ELT 512 (SC).

Broadly, parts suitable solely for a particular machine generally fall in the same heading number in which main item falls. However, there are many exceptions –

• Parts of general use are not to be classified as part of any particular machine. ‘Parts of General Use’ are to be classified in their respective specified heads and not to be classified under the heading of the machine where they are used.
• Parts are to be classified as parts if separate heading is available for parts, as per section note 2 to section XVI and section note 2 to section XVIII (e.g. there is separate heading for parts of engine).
• Various articles as specified in notes to sections XVI and XVII are not to be classified as parts of any particular machine [e.g. articles of leather, belts, tools and appliances, instruments, clocks, watches etc.]
• The direction that parts are to be classified along with that machine appears only in section XVI. However, in Camlin Ltd. v. CCE 2000 (121) ELT 178 (CEGAT), it was held that application of this note should be made to goods falling under other sections also. Where parts are not of general use, these are to be classified under the heading of main article (even when the Article falls under section other than section XVI).

6.1 Parts of General Use

Parts of general use are defined as

• tube and pipe fittings, stranded wire, ropes, cables, chains, nails, screws, bolts, springs (other than clock springs) of base metal i.e. Iron and Steel, Copper, Aluminium, Tin, Nickel, Lead, Zinc etc. or of plastic
• Padlocks, locks; mountings and fittings suitable for furniture, doors, windows etc.; clasps, buckles, eyelets; sign-plates, name plates; frames of pictures; mirrors; of Iron and Steel, Copper, Aluminium, Tin, Nickel, Lead, Zinc etc. or of plastic.

These parts are to be classified in their respective heading and not as part of the machine or equipment e.g. a bolt used in a vehicle will be classified as ‘bolt’ and not as ‘motor vehicle part’. Plastic piping and fitting will be classified under Plastic articles (3917) only, even if used as machine component.

6.2 Part of part is part of whole

A part of part is part of whole.

Tyre is a part of cycle. ‘Valve’ is a part of the tyre. Hence, ‘valve’ will be treated as part of ‘cycle’.

Part of a cycle tyre is part of cycle.- CCE v. MP(I) Ltd. – 1990 (46) ELT 68.

It is settled law that a part of part is also a part of the main product – Lakhanpal National Ltd. v. CCE – 1996 (88) ELT 87 (CEGAT SMB).

A starter armature which is a part of automobile starter motor is a part of automobile. – Sahney Steel and Press Works Ltd., Bombay v. UOI – 1988 (36) ELT 94 (Bom HC).

A component of component of a machine is a component of machine. – Audio Vision Electronics v. CC – 1987 (31) ELT 796 (CEGAT).

Ball bearing is part of machine. Hence part of ball bearing is also part of machine as part of part is also a part. – Needle Roller Bearings v. CCE 2000 (124) ELT 577 (CEGAT).

7. Classification of Services

Scheme of Classification of Services has been notified by Government as Annexure to Notification No. 11/2017-CT (Rate) dated 28-6-2017.

The classification of services is based on United Nations Central Product Classification – CBIC press release dated 11-6-2018.

Since Customs Tariff has 1 to 98 Chapters, chapter No. 99 has been given for services. The service classification is 6 digit code.

The services have been classified in five broad sections as follows:

• Section 5 – Construction service
• Section 6 – Distributive Trade Services, Accommodation, Food service
• Section 7 – Financial and related Services
• Section 8 – Business and Production Services
• Section 9 – Community, social and personal services

This section number forms third digit e.g. construction services commence with ‘995’.

The sections are divided into headings which is a four digit code. These are divided in groups which becomes a fifth digit code. Its further division is made in ‘Tariff Item’ which is a six digit code.

Often there is overlapping and some activities can fall in more than one tariff items.

In this book, the classification of services, as given above, has been followed, as far as possible.

Explanatory Notes to the scheme of classification of services – CBIC has issued explanatory notes to scheme of classification of services, vide CBIC press release dated 11-6-2018, as a guiding tool. It has been clarified that when a service is based on its description, specific description shall be preferred over a more general description.

7.1 Most unscientific way of classification of services

The classification of services is based on United Nations Central Product Classification – CBIC press release dated 11-6-2018.

The classification as done is not at all suitable to Indian conditions.

The grouping of services is haphazard. Many of the services as given in the classification are not relevant for India at all.

On the other hand, many services which are relevant in the context of Indian GST law, do not find proper place in classification of services.

In some cases, services fall under two or more heads.

Service code is not SAC – The term often used in returns under GSTN is ‘SAC’ i.e. Service Accounting Code. This term was used in service tax law. This is really hang over of the past, as there is no concept of ‘accounting code’ in GST. It seems in the application for registration under GST, they are still using old service tax accounting codes, though the classification of services under GST is entirely different.

8. Principles of Classification

Classification is to be done on basis of entries in Tariff. However, there are some general principles of classification.

Words used in Tariff are to be understood in the sense these are understood in the trade. This is ‘trade parlance theory’. The trade parlance is more important than dictionary or technical meaning, unless the word is specifically defined in the Tariff itself.

HSN is very important guide in classifying a product and it should be normally followed.

End use is generally not relevant for classification, except when the tariff description so requires and classification is relating to function of the product.

8.1 Trade Parlance Theory

Since the primary objective of the Excise Act is to raise revenue, resort should not be had, for purpose of classification, to the scientific and technical meaning of the terms and expressions used therein, but to their popular meaning, that is to say, the meaning attached to that by those using the product.

The burden of proof that a product is classifiable under a particular tariff head is on the revenue and must be discharged by proving that it is so understood by the consumers of product in common parlance – CCE v. Vicco Laboratories 2005 (179) ELT 17 (SC 3 member bench).

Criteria for classifications are given in the Tariff. However, basic principle of classification, devised more than a century ago by Justice Pollok in Grenfell v. IRC (1876) 1 Ex D 242 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. This has been confirmed by Supreme Court in various cases like Indo International Industries v. CST (1981) 3 SCR 294 = 8 ELT 325 = AIR 1981 SC 1079 = 1981 (2) SCC 528 = 47 STC 359 (SC) * Ramavatar Budhaiprasad v. Asstt. STO 12 STC 286 = (1962) 1 SCR 279 = AIR 1961 SC 1325 * Dunlop India Ltd. v. UOI – (1976) 2 SCC 241 = (1976) 2 SCR 98 = AIR 1977 SC 597 = 13 ELT 1566 (SC) * Pleasantime Products v. CCE (2010) 1 SCC 265 = 243 ELT 641 (SC) * CTT v. Kartos International (2011) 6 SCC 705 = 6 GST 144 = 10 taxmann.com 202 = 40 VST 210 = 268 ELT 289 (SC) * CCE v. Wockhardt Life Sciences (2012) 5 SCC 585 = 277 ELT 299 (SC) * CCE v. Connaught Plaza Restaurant P Ltd. (2012) 286 ELT 312 (SC) * CCE v. Hindustan Lever Ltd. (2015) 10 SCC 742 = 51 GST 81 = 60 taxmann.com 470 = 323 ELT 209 (SC) * CCE v. Uni Products India Ltd. 2020 (372) ELT 465 (SC).

Trade understanding is highly relevant in classifying a product – Hewlatt Packard India Sales v. CC (Imports) (2023) 383 ELT 241 = 2 Centax 236 (SC). In this case, it was held that All in one Desk Top Computer cannot be termed as portable computer even if weighs less than 10 Kg as trade does not understand it as portable.

Natural and ordinary meaning to be considered – When an expression is not defined in the Act, natural and ordinary meaning of such expression must be kept in view – CC v. Gujarat Perstorp Electronics Ltd. (2005) 7 SCC 118 = 186 ELT 532 (SC 3 member bench).

Department is also of view of trade parlance is relevant, unless tariff requires technical meaning -While classifying goods, the foremost consideration is the ‘statutory definition’. In the absence of any statutory definition, and any guideline provided by HS explanatory notes, the cardinal principle would be the way goods are known in ‘common parlance’. – – The ‘trade meaning’ should be given due importance unless the Tariff itself requires that the terms should be interpreted in a strict technical sense. Technical dictionaries should be used in such circumstances -Chapter 4 Paras 2.7 and 2.8 of CBIC’s Customs Manual, 2023.

8.2 Dictionary meaning/technical literature

Apex Court in Indo International Industries v. CST, UP – AIR 1981 SC 1079 = (1981) 3 SCR 294 = 1981 (2) SCC 528 = 47 STC 359 = 8 ELT 325 (SC) – held

“In interpreting items in statutes like Excise Tax Act or Sales Tax Act, where diverse products, articles and substances are classified, resort should be had, not to the scientific and technical meaning of terms and expressions used, but to their popular meaning i.e. the meaning attached to them by those dealing with them. If any term or expression has been defined in the enactment then it must be understood in the sense in which it is defined, otherwise, common parlance or commercial parlance has to be obtained.”.

In absence of any definition of any word or expression in statute, it would be permissible to refer to the dictionary meaning of that expression. – Star Paper Mills Ltd. v. CCE – 1989 (43) ELT 178 (SC).

If final conclusion cannot be derived from ‘Trade Parlance’, dictionary meaning or technical meaning can be looked into. However, normally, words and terms used in a taxing statute are to be construed as per trade practice and not in the sense attached to it for scientific or technical purposes unless intention of legislation to the contrary is shown. – CCE v. Cellulose Products of India Ltd. – 1995 (75) ELT 882 (CEGAT).

In CCE v. Krishna Carbon Paper Co. – 1988 (37) ELT 480 (SC) = 1989 (20) ECR 273 (SC) = (1989) 72 STC 280 (SC) = 1988 (Supp) 3 SCR 12 = AIR 1988 SC 2223 = (1989) 1 SCC 150 also, it was held that in order to ascertain correct meaning of a fiscal entry, reference to a dictionary is somewhat delusive guide, as it gives all the different shades of meaning – quoted with approval in Hewlatt Packard India Sales v. CC (Imports) (2023) 383 ELT 241 = 2 Centax 236 (SC).

In Kerala State Electricity Board v. CC, Madras – (1995) 80 ELT 346 (CEGAT) also, it was held that dictionary meaning is a delusive guide for classification and the classification of goods should be done in terms of section note, chapter note and description of the item and in terms of trade parlance.

However, in some cases, e.g. CST v. Jaswant Singh Charan Singh – AIR 1967 SC 1454 = 19 STC 469 (SC), dictionary was used as an aid.

Limited use of ISI/BIS standards – ISI classification is for quality control and is not relevant for classification of goods, which has to be determined according to popular or commercial meaning – Indian Aluminium Cables Ltd. – AIR 1985 SC 1201 = 21 ELT 3 (SC) = 1985 (3) SCC 284 = (1987) 64 STC 180 (SC) * also Wetoco v. CCE 1992 (62) ELT 584 * Ugar Sugar Works Ltd. v. CCE – 1993 (68) ELT 224 (CEGAT). * Veto Co. v. CCE – 1992 (62) ELT 584 (CEGAT) * Wipro Ltd. v. CCE (2001) 136 ELT 885 (CEGAT) * Goodrich Farewell Exporters v. CC (2010) 252 ELT 428 (CESTAT).

Wikipedia and google not an authentic source, but can be looked at for gathering information – In a short time of its existence, the powerful Wikipedia (free Encyclopedia) and Google have caught attention of Courts. In Ponds India v. CTT (2008) 8 SCC 369 = 227 ELT 497 = 15 VST 256 (SC). It was noted that Wikipedia is an external aid of construction of Statute. It may be looked into for gathering information but is not an authentic source. It was noted that in USA, since 2004, more than 100 decisions have cited Wikipedia, including 13 from Federal Appeals Court. However, it cannot be used for judicial decisions or in critical issues.

Wikipedia is treasure of knowledge but is based on crowed-sourced and user-generated editing model. It is not completely dependable – Hewlatt Packard India Sales v. CC (Imports) (2023) 383 ELT 241 = 2 Centax 236 (SC).

8.3 HSN and Classification

Customs Tariff is based on Harmonised System of Nomenclature (HSN), GST rates are specified on basis of tariff heads in customs.

In CCE v. Wood Craft Products Ltd. – 77 ELT 23 = (1995) 3 SCC 452 = 1995 AIR SCW 1963 (SC – 3 member bench order), it has been held that as per Statement of Objects and Reasons of Central Excise Tariff Bill, 1985, new tariff has been introduced, based on HSN to reduce classification disputes. Thus, in case of doubt, HSN is a safe guide for ascertaining true meaning of any expression used in the Act, unless there is an express different intention indicated in the Tariff itself. – confirmed in CC v. Business Forms 2002 (142) ELT 18 = 50 RLT 375 = (2005) 7 SCC 143 (SC 3 member bench) – same view in O K Play (India) v. CCE AIR 2005 SC 1023 = (2005) 2 SCC 460 = 180 ELT 300 (SC 3 member bench) * CC v. Gujarat Perstorp Electronics Ltd. (2005) 7 SCC 118 = 186 ELT 532 (SC 3 member bench) * CCE v. Phil Corporation Ltd. (2008) 223 ELT 9 (SC) * Hindustan Unilever v. CCE (2008) 228 ELT 374 (CESTAT) * LML Ltd. v. CC (2010) 10 SCC 503 = 258 ELT 321 (SC) * M P Agencies v. State of Kerala (2015) 7 SCC 103 = 50 GST 279 = 55 taxmann.com 420 = 318 ELT 22 = 79 VST 337 (SC) * Holostick India Ltd. v. CCE (2015) 7 SCC 401 = 51 GST 38 = 57 taxmann.com 321 = 318 ELT 529 (SC). * Hewlatt Packard India Sales v. CC (Imports) (2023) 383 ELT 241 = 2 Centax 236 (SC).

Explanatory Notes by World Customs Organisation- For purpose of uniform interpretation of HS, the WCO has published detailed Explanatory Notes to various headings/sub-headings. WCO in its various committees discusses classification of individual products and gives classification opinion on them. Such information, though not binding in nature, provides a useful guideline for classifying goods – Chapter 4 Para 2.4 of CBIC’s Customs Manual, 2023.

8.4 Relevance of End Use in classification

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.

End use to which product is put is not determinative of classification. Statutory fiscal entry, basic character, function and use of product are relevant factors – CCE v. Carrier Aircon Ltd. (2006) 5 SCC 596 = 199 ELT 577 = 147 STC 421 (SC).

End use at hands of purchaser is not concern of assessee and cannot be consideration for classifying the goods at the hands of manufacturer – CCE v. Gopsons Papers Ltd. (2015) 62 taxmann.com 220 = 324 ELT 5 (SC).

In Dunlop India v. UOI – 1983 (13) ELT 1566 (SC) = (1976) 2 SCR 98 = (1976) 2 SCC 241 = AIR 1977 SC 597 it has been held that end use is irrelevant for classification, unless definition so requires – same view in CCE v. Mannampalakkal Rubber (2015) 7 SCC 124 = (2007) 217 ELT 161 (SC) – followed in Goodlass Nerolac Paints Ltd. v. CCE – 1992 (60) ELT 392 (CEGAT) – same view in Goyal MG Glasses v. CCE (2014) 309 ELT 327 (CESTAT).

If the wording of heading is clear enough to understand the issue, there is no need to resort to end use for classification unless specifically mentioned in the tariff – CCE v. Unicon Connectors (2008) 232 ELT 205 (CESTAT 3 member bench). In this case, it was held that connector with wire is still connector and cannot be treated as wire or cable.

In Mukesh Kumar Aggarwal v. State of MP – (1988) Supp SCC 232 = 68 STC 324 = 178 ELT 3 = AIR 1988 SC 563, it has been held that ‘user test’ is logical but not conclusive. Particular use to which an article can be applied in hands of a special consumer is not determinative of the nature of the goods. Even description used by the seller or nature of business of buyer is not conclusive – in this case, it was held that leftovers after extraction of ‘poles’ of eucalyptus tree has to be considered as ‘firewood’ and not ‘timber’, even if the particular buyer was a timber dealer and the dealer purchased goods to manufacture woodware and furniture etc. as well as pulp – following this judgment, in Mysore Agro Service Centre v. State of Karnataka – (1993) 90 STC 401 (Kar HC DB), it was held that lime – a chemical – cannot be classified as ‘pesticide’ only because some purchasers use it as pesticide. In this case, it was rightly observed that if tax is levied depending on the purpose for which it is purchased, same article may be taxed at different rates. That cannot be the legislative intention at all.

End use to be considered if classification is related to function of goods – If the tariff demands, classification can and should be as per end use. Articles of Plastic are classifiable under Chapter 39.26. However, a plastic article specially designed as automobile part will be classified as ‘Part of Motor Vehicle’ and not as ‘Article of Plastic’. If an article has alternate uses, its predominant use is highly relevant.

8.5 Technical and scientific term must be understood in technical sense only

If the legislature has adopted a technical term, then that technical term has to be understood in the technical sense and not on basis of market parlance – Reliance Cellulose Products Ltd. v. CCE 1997 (93) ELT 646 (SC) = (1997) 1 SCC 215 = 1997 AIR SCW 3495 = AIR 1997 SC 3414. * CCE v. Connaught Plaza Restaurant P Ltd. (2012) 286 ELT 312 (SC) * Parle Agro v. CCT (2017) 7 SCC 540.

Rule that the words should be construed in a popular sense is not applicable in all cases. The said rule is a qualified rule. Where the nature of product in question is highly technical and scientific in nature, the words used will have to be given technical or scientific meaning – Chemical and Fibres India v. UOI 1982 (10) ELT 917 (Bom HC) – quoted with approval in DCL Polyester v. CCE 2005 (181) ELT 190 (SC).

Chemical compound has to be classified as per chemistry and explanatory notes and not as per popular understanding. – Godrej Soaps Ltd. v. CC (2000) 115 ELT 710 (CEGAT). Where classification is to be determined by scientific parameters, trade terminology is irrelevant. – Benny Petrochem v. CCE 2000 (123) ELT 634 (CEGAT).

Technical meaning prevails in certain cases – In Akbar Badruddin Jiwani v. CC – 1990 (2) SCC 203 = 47 ELT 161 (SC) = AIR 1990 SC 1579, it was held that if the tariff entry is used in a scientific or technical sense or when there is conflict between entries in the tariff, common parlance will not prevail – same view in CCE v. Wockhardt Life Sciences (2012) 5 SCC 585 = 277 ELT 299 (SC).

Provisions of Motor Vehicles Act do not determine classification – Provisions of Motor Vehicles Act do not determine classification of a motor vehicle – Mahindra and Mahindra v. CCE (2008) 222 ELT 474 (CESTAT).

8.6 Burden of classification on department

Onus of establishing that an article falls in a particular tariff lay upon the revenue. -. -. – Even if evidence produced by assessee is rejected, the appeal of assessee has to be allowed (as Revenue has not discharged the onus of establishing a classification) – Hindustan Ferodo Ltd. v. CCE 1997(2) SCC 677 = 89 ELT 16 SC = 17 RLT 807 = 106 STC 214 (SC).

Burden of proof of classification of goods is on department – Hewlatt Packard India Sales v. CC (Imports) (2023) 383 ELT 241 = 2 Centax 236 (SC).

The burden of proof that a product is classifiable under a particular tariff head is on the revenue and must be discharged by proving that it is so understood by the consumers of product in common parlance – CCE v. Vicco Laboratories 2005 (179) ELT 17 (SC 3 member bench).

The burden of proof is on the taxing authorities to show that the particular case or item in question is taxable in the manner claimed by them. It is for the taxing authority to lay evidence in that behalf even before the first adjudicating authority. – UOI v. Garware Nylons Ltd. (1996) 10 SCC 413 = AIR 1996 SC 3509 = 87 ELT 12 (SC) – followed in Polyglass Acrylic Mfg Co. v. CC 2003 (153) ELT 276 (SC) * HPL Chemicals v. CCE (2006) 5 SCC 208 = 197 ELT 324 (SC) * Ponds India v. CTT (2008) 8 SCC 369 = 227 ELT 497 = 15 VST 256 (SC)* Voltas Ltd. v. State of Gujarat (2015) 7 SCC 527 = 51 GST 357 = 57 taxmann.com 16 = 80 VST 12 (SC 3 member bench) * CCE v. Hindustan Lever Ltd. (2015) 10 SCC 742 = 51 GST 81 = 60 taxmann.com 470 = 323 ELT 209 (SC).