The Endless Excise Exercise

The Indian customs and excise tariff schedule is a daunting maze of classifications, qualifications and notifications. No wonder it is the favourite hunting ground for the army of advocates and tax consultants who make more than just a living splitting hairs over its myriad provisions. Although there is an abundance of case laws on the issue, disputes over classification of goods for excise purposes abound.

It is instructive to look at how this legal nightmare is set into motion. The rates at which excise duties are levied on manufactured goods are specified in the Schedule to the Central Excise Tariff Act, 1985. These rates are prescribed by the Parliament. However, the Central Government is empowered to grant an exemption or reduce the rate of excise duty on any good by issuing a notification. The constitutional and delegated powers are similar in respect of Customs duties.

The Customs or Excise Tariff Schedule contains detailed description of goods on which the customs or excise duties are leviable. These descriptions are popularly known as classification of goods for the purposes of customs or excise duties. Thus, before the rate of duty applicable to any good can be known, it becomes imperative to determine the classification of such goods.

The process of classifying the goods may not be easy in all cases. In complicated cases, the classification process entails an in-depth examination of the scope and intent of the relevant competing entries in the tariff schedule. At times, overlapping or seemingly overlapping description of goods makes it difficult to reach a definite conclusion. The entries may be so highly competitive that different persons may reach different conclusions. And each argument could sound equally convincing.

Thus, it is not surprising that quite often disputes arise between the assessees and the excise department on classification of goods. An elaborate procedure is prescribed in customs and excise laws to deal with such disputes. The Assistant Commissioner of Customs and Central Excise passes the primary order. If his finding is not acceptable to the assessee or the department, an appeal can be filed to Commissioner (Appeals). A tribunal (CEGAT), comprising technical and judicial members, functions as the second appellate authority. On classification matters, the appeal against an order of the tribunal lies directly to the Supreme Court. To that extent, the tribunal is virtually of the status of a high court. The high courts, of course, can entertain a dispute directly by virtue of their writ powers.

It is, however, ironical that the elaborate machinery that has been prescribed for deciding classification disputes has in fact led to a proliferation in the number of disputes. In most cases the disputes are carried to the arena of the Supreme Court for final verdict. In the process the Supreme Court has delivered large number of judgements in individual cases. The concerned parties draw upon the expertise and skill of experienced counsels to convince the Supreme Court about their case by resorting to hair-splitting arguments. Invariably, the apex court is burdened with the task of scrutinising evidence, seeking expert opinions, and looking up numerous decided cases.

Despite the countless number of case laws that have evolved over time, fresh cases with equally weighty arguments from both sides have poured in, thanks to the legal geniuses on both sides! Sometimes even though the issue involved is simple, the finality in this regard is not acceptable without the intervention of the apex court.

Some recent judgements should illustrate this point. In Modi Rubber Ltd vs Union of India and Others 1997 (72) ECR 264(SC), the question involved was whether polypropylene liner fabric (PPLF) was classifiable as a fabric or as a component of machinery. PPLF was imported by the appellant and used as liner components of machinery. It serves to protect the rubber coated tyre fabric from atmosphere moisture and dust. The liner fabric is an essential part of the working of the machinery, and the manufacturing process cannot be carried out in its absence.

The appellant claimed that PPLF should be classified as a part of the machinery and not as a fabric. After deliberating on the issue at various departmental levels, the government rejected this contention. It ordered that PPLF was more properly in the nature of an accessory to the equipment and it could not be considered as a component part of any machinery. This was a fairly logical and reasonable finding. But the importer did not accept it. The classification was ultimately settled when the Supreme Court upheld the order of the government. Significantly, PPLF was imported in running length and not in pieces. Therefore, by no stretch of imagination could it be considered as a component of machinery.

In LML Ltd vs Collector of Central Excise 1997(72) ECR 267 (SC), the classification of steel pieces left over from steel sheets used in the manufacture of scooters, became the bone of contention. The leftover pieces are irregular in shape. The question involved was whether they should be classified as waste and scrap or as steel sheets for excise purposes. The excise departments accumulated wisdom favoured the latter. The tribunal, however, preferred the classification of waste and scrap. Interestingly enough, the apex court did not agree with either. After analysing the scope of various competing entries, the court ruled that the classification of leftover pieces as shapes and sections. Of course, shapes and sections attracted the same rate of duty as waste and scrap.

There is no dearth of such examples. We are familiar with seats for scooters, tractors, jeeps etc. They are made of latex foam sponge. Theres nothing to fight over that, or so you would think. You couldnt be further from the legal truth. A dispute did arise over whether these seats should be classified as parts/accessories of motor vehicles or as latex foam sponge? And in M M Rubber Co Ltd vs CCE Madras 1997 (71) ECR 773(SC), the apex court held them to be classifiable as parts of motor vehicles!

Similarly, when a dispute arose over whether decorative laminates are articles of plastics or not, the apex court, referring to its earlier judgement, had to remind the litigants: (The expression) `articles of plastics refer to articles made wholly of commodity commercially known as plastics and not articles made from plastics along with other material.

Theres another instance you wouldnt have believed if anyone told you that printed cartons are products of the printing industry! But thats exactly what the Supreme Court categorised them as, in its judgement in Rollatainers Ltd vs Union of India 1994 (72) ELT 793 (SC).

There is a maze of such decisions and judgements on classification. The customs tariff schedule has more than five thousand entries describing various goods. Equally spread out is the central excise tariff schedule. Moreover, there are numerous statutory explanatory notes provided in the tariff schedules. Still, disputes arise on classification.

Importantly, the classification for excise tariff may not necessarily hold well for customs tariff and vice versa. Apart from customs and excise disputes, classification disputes also emanate from sales tax schedules and import and export policy schedules. You pick up any tax journal and it is full of judgements on classification disputes of various kinds. Existence of far too many rates in any tax structure breeds classification disputes. The process of rationalising all the tax structures need be pursued most expeditiously. In this task, the states, in particular, are lagging far behind.

It is essential to unify the descriptions in various commodity classification schedules for charging duties and taxes, whether levied by the centre, states or local bodies. This will save enormous time at all stages, apart from improving compliance and increasing tax revenues. Surely, the litigants can use the money spent on resolving classification disputes for much better purposes.

(The author is a Joint Secretary in the Ministry of Finance)The classification entries in the tariff schedule could be so highly competitive that different persons may reach different conclusions. And each argument could sound equally convincing.