Classification not determined by end use

EXPERT EYE

One of the cardinal principles of classification, which is often not taken into account by those entrusted with the job of classification, has now been enunciated by the Supreme Court in one of its latest judgements, in the case of CCE vs Carrier Aircon Ltd.

The issue was about the classification of an industrial chiller, which is primarily used to refrigerate or chill water. But chillers are mostly used in air-conditioning system. The Supreme Court decided that the chiller is fundamentally a refrigerating machine (84.14 of Customs & Excise Tariff) and it does not become an air-conditioning machine just because 90 per cent chillers are used in air-conditioning machine (84.15). So the decision of the Supreme Court is that goods are to be classified by what they are and not by what they are used for. End-use is only one of the factors that can be taken into account along with the other factors such as statutory entry in the tariff, the basic character, function of the goods and understanding of the trade in the market parlance.

This issue has not been without its due share of controversy and ramifications. In several judgements, the Supreme Court had earlier held that end-use is not relevant. In the case of Dunlop India vs UOI, the Supreme Court held that Vinyl Pyridine Latex is rubber though it is used as resin also, because in the market parlance it was known as rubber. Same was held in the case of Indian Aluminium Cables Ltd vs UOI.

However, there are certain tariff descriptions where the end use is incorporated in the tariff. In Chapter 27 of the Customs and Excise tariff, motor spirit, kerosene, jute batching oil, textile oil etc. have been defined on the basis of their use for the specific purposes. So here the end use is relevant statutorily.

The Supreme Court also said in the case of Sonic Electrochem vs STO that sales tax on Jet Mat would be considered as a mosquito repellent, and therefore as an insecticide on the basis of its use. In some tariff descriptions, the use is the main determinant. Some chemicals are described as penetraters, retarders, accelerators, etc. They have to be taken on the basis of their use in the industry concerned, such as leather industry or rubber industry.

Where use is relevant, the predominant use is to be taken into account and not a casual use, held the Supreme Court in the case of Annapurna Carbon Industries Co vs State of Andhra Pradesh. Karnataka High Court has also held in the sales tax case of Kundanmal Ganeshwal vs State of Karnataka that balloon has to be classified as children's toy, that being the predominant use and not as an item for decoration, which is a casual use.

The conclusion is that classification is determined by various factors such as tariff description, market parlance, basic nature of the goods and end-use. It is settled law that market parlance determines the classification if there is no specific tariff description. Even in the tariff description, while determining whether the goods will fall under a particular head, the most import factor is the basic nature or character of the goods, that is to say, what the goods are. If the tariff description itself depends upon the end-use factor, then the end-use will be relevant. Again, while determining what the end-use of the goods is, the predominant use will have to be taken into consideration and not the casual use.

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