Before the introduction of GST on July 1, 2017, there was a multiplicity of rates of duty in Central Excise and therefore, a hugely controversial situation about classification, leading to the need for use of interpretation rules far to often which were challenged in the courts. There were far too many judgments relating to interpretation, which led to the writing of volumes of books on the issue of interpretation. Now, the present GST in India has actually two rates, 12 per cent and 18 per cent, which would create classification problems and thereby, harbour similar interpretation problems though not as many as before.
Here I am discussing some of the interpretation problems which will or will not continue, though I do not claim that there will be no other such interpretation issue that would be taken to court. One of the interpretation issues that will no longer continue will be regarding the exigibility of intermediate goods. Earlier, the issue of determining which was an intermediate product, that is to say, which was used in the making of another product in the process of manufacture in the same factory or sometimes in another factory but was in fact not a finished product that is not a manufacture product. Marketability was a very important criterion in deciding whether the so-called goods were liable to the central excise tax. What was marketability was a big issue on which there were several Supreme Court judgments. The substance of these judgments was that goods would be marketable even if they are not actually marketed as long as they are capable of being marketed. The position was quite on a razor’s edge. That position has now improved after GST has been introduced because manufacture is not the taxable event but supply. Even if intermediate goods pay duty, they would get the input credit and therefore, the revenue aspect is not involved. Theoretically, the earlier position has not changed but the controversy has been removed.
Another issue of interpretation that was prevalent was about the classification of multi-functional machines. The issue arose about multi-functional machines and the classification could change depending on the use. The Supreme Court gave a very relevant judgment in the case of Xerox India Ltd vs. Commissioner of Customs, Mumbai – 2010 (260)ELT161(SC). The issue was about the classification of a multi-functional machine, which works as printer, fax machine, copier and as scanner when it is attached to a computer. The importer wanted to classify it under Item 8471 where the duty was nil. This item covers automatic data processing machines and units thereof, one of the units being “combined input and output units”. The Revenue wanted to classify it under the residual Item 8479 (machines having individual functions not specified elsewhere) where the rate of duty was 7.5 per cent. The importer argued that the machine works with the computer as its input and output unit. The Supreme Court took into account the fact that the multi-functional machine in question had about 85 per cent of the total parts and components, along with manufacturing cost, allocated to printing. This clearly shows that the printing function emerges as the principal function and gives the multi-functional machine its essential character. Since the printer is included in Item 8471, the classification of the machine under this heading was justified and accepted by the Supreme Court. Specifically, the sub-item 8471.60 was chosen by the court. This sort of controversy still remains since 12 per cent and 18 per cent will be applicable to many chapters mainly in the machinery chapters 84 and 85. To this extent the introduction of GST has not helped.
There was another issue about the residuary tariff entry. The principle that the Supreme Court enunciated in several judgments was that where in a tariff entry there were several sub-entries, the classification should be in one of the sub-entries and it is only in the last resort that the residual entry which is known as ‘others’ should be accepted. The same problem still continues and the Supreme Court’s verdict that the ‘parent entry’ should be preferred to the residuary entry still remains valid.
The conclusion is that while the GST has removed some of the interpretation issues, several such issues continue to haunt the taxpayers.
The writer is member, Central Board of Excise & Customs (retired)
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