May 28, 2023

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Ironically, the success of the assessees in Westinghouse Saxby presents a grave danger to plenty of other taxpayers.
Ironically, the success of the assessees in Westinghouse Saxby provides a grave hazard to lots of other taxpayers.

By Narasimhan B.L. & Rohan Muralidharan

In purchase to enjoy the large-ranging ramifications of the judgment, we may well commence with a short assessment of the judgment alone. The dispute in advance of the Supreme Courtroom was about the classification of electric relays for use in railway signaling machines.

At this juncture, we may well pause to note that ascertainment of classification of goods and solutions is critical to establish the charge of tax. Classification underneath Customs, Central Excise, and Products and Products and services Tax (GST) guidelines are centered on the Harmonised System of Nomenclature (HSN) which is an internationally created system for the classification of goods. HSN is divided into 21 Sections and ninety eight Chapters, each of which consists of Notes on how to classify the posts of that Part. For this posting, it is sufficient to note that Chapters 86 and 87 (slipping underneath Part XVII) provide the classification of locomotives and cars and pieces thereof respectively.

Based mostly on their exceptional use in the railways, the assessee in Westinghouse sought to classify these relays underneath Heading 8607 as pieces of railway locomotives. This assert was grounded in Be aware three to Part XVII which restricts the phrases “parts” and “accessories” to pieces and components appropriate for use exclusively or principally with the posts classifiable underneath Chapter 86 to 88. The assessee argued that the relays are principally intended for use with railway locomotives and as a result are classifiable as component of railway locomotives underneath Heading 8607.

On the other hand, the Division sought to classify the relays independently underneath Heading 8536 as electric machines on the floor that Be aware two(f) to Part XVII especially excluded “electric equipment” from getting categorized underneath Part XVII, whether or not it is identifiable as getting for the goods of that Part.

The Supreme Courtroom ultimately agreed with the assessee and held that the relays are classifiable as component of locomotives underneath Heading 8607. In so holding, the SC used the “sole or principal use” test of Part Be aware three to the exclusion of the embargo in Be aware two. Just one may summarise this choice so: “if an item is exclusively or principally made use of with the posts of Part XVII (which includes railway locomotives and motor autos), then it is classifiable thereunder, notwithstanding distinct exclusions to the opposite.” A reading of this proposition may well prompt a uncomplicated problem, “will the exact logic use to other pieces as well?” It is this problem with which this posting is worried.

The Supreme Courtroom ultimately agreed with the assessee and held that the relays are classifiable as component of locomotives underneath Heading 8607.~

Implications for the auto sector

Ironically, the success of the assessees in Westinghouse Saxby provides a grave hazard to lots of other taxpayers. The “sole or principal use” test, sought to be used for classification of pieces underneath Chapters 86 and Chapter 87 to the exclusion of all other conditions/skills, can be used to pretty much each posting provided for use in the automobile sector.

For instance, the pieces of motor autos classifiable underneath Chapter 87 appeal to an IGST charge of 28{ed0b873b90f1b87a4f3b347f1646a477c6eee9bccb9dcbe5ac9cb67a3d16495a} whereas the pieces which are not classifiable underneath Chapter 87 usually appeal to a lessen charge of 18{ed0b873b90f1b87a4f3b347f1646a477c6eee9bccb9dcbe5ac9cb67a3d16495a} or much less. Resultantly, thinking of the charge arbitrage, importers and domestic suppliers of these kinds of pieces – whether instantly to an automobile producer or to dealers/component companies – will will need to revisit the classification adopted for all their goods.

This is in particular so in the scenario of pieces that are personalized-intended for cars. Additional, the over assessment will be equally relevant to pieces that are provided to the just after-product sales marketplace.

Let us take into consideration the case in point of valves for auto engines which are now categorized underneath Heading 8481 (18{ed0b873b90f1b87a4f3b347f1646a477c6eee9bccb9dcbe5ac9cb67a3d16495a}) as per the concomitant Explanatory Notes to Chapter eighty four. Implementing the logic utilized by the Courtroom in the Saxby scenario, 1 would be forced to classify valves underneath Heading 8708 or 8607 in spite of there getting a distinct entry for valves in Chapter eighty four.

Considering the abundance of these kinds of products and solutions (Liquid crystal display screens made use of in dashboard displays, electric motors, swap panels, automotive chains, oil seals, transmission belts, fasteners, etc.) to which this logic may well use, the likely disruption of Westinghouse Saxby are unable to be overstated.

Apart from the tidal wave of Present Result in Notices that may well ensue, growing the tax charge on an presently strained sector is not the beacon of hope with which the money 12 months 2021 ought to commence.

The fallout of this basic principle extends over and above what is normally viewed as “automobile parts”. There are analogous Notes in other Sections of HSN these kinds of as Notes to Part XVI (Chapter eighty four & 85) and Part XVIII (Chapter 90). As a result, the classification of products and solutions that are in any other case slipping underneath the over Sections may well also be impacted due to this judgment.

The modalities of a de facto maximize in tax charge will just take time and effort and hard work to iron out. On the basic problem of how the ongoing arrangements can adapt to this alter, the pursuing concerns crop up:

– Will deal prices demand renegotiation?

– Can debit notes be issued for differential payment of tax? Will this appeal to desire?

– Can the recipients avail credit score of this differential payment?

– How will B2C transactions be impacted?

These are great inquiries that demand great solutions. That getting explained, only time will inform how much the ripples of Westinghouse Saxby will distribute.

(The authors are Principal Associate and Principal Associate of Lakshmikumaran & Sridharan Attorneys. Views expressed are their very own.)