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19 August 2021
Tamil Nadu AAAR upholds ruling by AAR that ‘air springs’ are classifiable under tariff heading 8708 attracting 28% GST, based on the test of commercial identity
In brief
Recently, in a case pertaining to the classification of air springs, which are specifically designed for use in motor vehicles as shock absorbers, the Tamil Nadu Appellate Authority for Advance Ruling (AAAR) affirmed the ruling1 of the Tamil Nadu Authority for Advance Ruling (AAR). The AAR held that the goods should be classified under the tariff heading 8708, based on the test of commercial identity, which takes precedence over the essential character of the goods.
In detail
Facts
• The appellant is engaged in manufacturing and selling air springs (goods), used in the air suspension systems of buses, trucks and trailers to provide smooth and constant ride quality.
• Under the pre-GST regime, the appellant classified the goods under the tariff heading 4016. Under the GST regime, the appellant classified the goods under the tariff entry 8708, which attracts GST at the rate of 28%.
• As the appellant’s competitors classified the goods under the tariff entry 4016, which attracts GST at the rate of 18%, the appellant sought an advance ruling from the AAR seeking clarification on the appropriate classification of the goods, with the following key submissions:
- The goods made of vulcanised rubber other than hard rubber are classifiable under the tariff heading 4016 only, and according to the technical report furnished by the chartered engineer, it is clear that the key functionality of the product is derived from the rubber component.
- Articles of vulcanised rubber other than hard rubber are specifically excluded from Chapter 87 vide Note 2 to section XVII of the First Schedule to the Customs Tariff Act, 1975 (CETA).
- Explanatory Notes to Section XVII of CETA specifically excludes ‘springs’ from the scope of ‘parts and accessories’ under Chapter 8708 of the CETA.
1 Order No. 01/AAR/2021 dated 24 February 2021
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- Competing manufacturers of ‘air springs’ have classified the same under the tariff heading 4016.
• The AAR ruled that the goods shall be classified under entry 8708, and consequently, the appellant filed an appeal before the AAAR.
AAAR’s ruling
The AAAR upheld the decision of the AAR that the goods should be classified under the tariff heading 8078 and dismissed the appeal, based on the following observations:
Functional utility, design and predominant usage
• In the case of O.K Play India Limited2, the Supreme Court had laid down that the functional utility, design, shape, and predominant usage should also be considered when classifying an item. The functional utility of air springs is that they are a part of the suspension system in motor vehicles, the design is specific to the motor vehicle, and the predominant usage is only in motor vehicles.
• Thus, although the product merits to be classified under tariff heading 4016, as per the General Notes of the HSN, based on the tests of functional utility, design, shape, and predominant usage, the product merits to be classified as ‘Parts and accessory of Motor Vehicles under CTH 8708’.
Test of commercial identity is relevant vis-à-vis functionality
• In this regard, reliance was placed on the decisions of the Supreme Court in the cases of Pragati Silicones Private Limited3, Cast Metal Industries (P) Limited4 and G.S. Auto International Limited,5 which have laid down that to determine the applicability of an item under a particular head, the test of commercial identity of the goods would be the relevant test and not the functional test.
• Even if the part that provides the essential character of the product is made of vulcanised rubber other than hard rubber and the functionality of the product is extended by the rubber portion (as claimed by the appellant and certified by a chartered engineer), the commercial identity of the product is that it is a critical component of the air suspension and lift axle system, suitable for use solely or primarily with articles of Chapters 8701 to 8705 of the CETA.
Exclusion as per Chapter Note 2
• Note 2(a) to section XVII of the CETA, which excludes a product that is an article of vulcanised rubber other than hard rubber, is not applicable in the instant case. This note only covers joints, washers, or similar items that are parts of general use, when made of any material or other articles of vulcanised rubber.
• ‘Air springs’, specifically designed for use in motor vehicles as a shock absorbent, would not be covered under the said exclusion.
• The decision in the case of Intel Design Systems (India) Private Limited6 was held as distinguishable, as in that case, the goods were specifically covered under CTH 8536 and electrical machinery and equipment under Chapter 85 were excluded by Note 2 to Section XVI of the CETA.
Exclusion as per HSN Explanatory notes
• It was also claimed that the HSN Explanatory Notes to section XVII of the CETA specifically excludes
‘springs’ from the scope of ‘Parts and Accessories’ under the tariff heading 8708. The present product is not a spring classifiable under any of the said chapters, as it is not an article of base metal or an alloy of a base metal.
2 O K Play (India) Limited v. Commissioner of Central Excise, Delhi-III, Gurgaon (Civil Appeal Nos. 6980-6983 of 2004)
3 Pragati Silicons Private Limited v. Commissioner of Central Excise, Delhi [Appeal (Civil) No. 5345 of 2001]
4 M/s. Cast Metal Industries Private Limited v. Commissioner of Central Excise, Kolkata, 2015 (325) E.L.T.471 (SC)
5 G.S. Auto International Limited v. CC Excise, Chandigarh [2003 (2) SCC 371 = 2003 (152) E.L.1. 3 (SC)]
6 Intel Design Systems (India) (P) Limited v. Commissioner of Customs and Central Excise (2008) 3 SCC 258
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• In the instant case, the goods are made of fabric coated soft vulcanised rubber trimmed with a base plate and designed to give full utility when used in axles of motor vehicles to absorb shock and provide
suspension.
Classification adopted by competing manufacturers
• Regarding the contention that competing manufacturers have classified the goods under the tariff entry 4016, it was observed that although the invoices of other manufacturers were provided, no evidence in the form of inputs used, process undertaken or test reports produced, to establish similarities between the appellant and other manufacturers.
The takeaways
This is an important ruling that has analysed the various classification principles laid down by the Supreme Court with respect to the commercial identity, functional utility, and predominant usage of a product, the exclusion in Chapter notes and the HSN explanatory notes. Interestingly, the ruling relies on the test of commercial identity in precedence over the essential character of the product (which was also certified by a chartered engineer). Although the above ruling is only binding on the taxpayer and the concerned jurisdictional officer, taxpayers have to assess the impact of this ruling based on the test of commercial identity and the decision of the Supreme Court in Westinghouse7 based on the ‘user/ principal use’ test, on the classification of parts adopted by them.
7 Westinghouse Saxby Farmer Limited v. Commissioner of Central Excise Calcutta [2021(3) TMI 291 (SC)]
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