Indirect Taxes

CLASSIFICATION OF GOODS UNDER THE CUSTOMS TARIFF ACT, 1975

The Customs Tariff Act, 1975 has been aligned to a great extent with Harmonized System of Nomenclature (HSN) developed by the World Customs Organisation (WCO). Custom duty is levied at the rates specified in the schedules to the Customs Tariff Act¹⁵ read with exemption notifications, if any. Therefore, on the basis of classification of a product, the rate of duty is determined. Consequently, this becomes a crucial factor while examining Customs implication on any transaction. Further, in this dynamic World, in view of countless products and business models, classification is an exercise in itself. With introduction of GST, classification of goods has become all the more important as 4-digit classification as per Customs is adopted for classification under GST. Further, even the classification rules of Customs are adopted for GST purposes.

There are two schedules to Customs Tariff Act. The first schedule provides the rate of basic customs duty (component of import duty) and the second schedule provides the rate of export duty. The first schedule is divided in 21 sections. These sections contain 98 Chapters in all. Each chapter is divided into headings, sub-headings, tariff heading. India has adopted 8-digit classification Scheme which is outlined as follows:

Particulars	Description	Example	Classification
Section¹⁶	Broad category	Textiles & Textile Articles	XI
Chapter¹⁷	Specific description – First 2 Digits	Articles of apparel and clothing accessories, knitted or crocheted	61
Heading	Next 2 Digits	Men’s or boy’s shirts, knitted or crocheted	05
Sub-heading	Next 2 Digits	Of Cotton	10
Tariff heading/item	Next 2 Digits	Shirts, hand crocheted	10

Therefore, in the above example, the 8-digit classification of hand crocheted men’s shirts is 61051010.

The interpretation of the Tariff schedule is strictly governed by six "Interpretative Rules" incorporated in First Schedule itself which are explained in brief hereunder:

Rule	Description
Rule 1	Titles of Sections, Chapters etc. are only for ease of reference. Legally, classification is governed as per terms of the heading and Section and Chapter notes
Rule 2 (a)	Incomplete, unfinished or unassembled article having essential character of the complete, finished or assembled article respectively shall be classified as complete, finished or assembled article
Rule 2 (b)	Reference to any article in an entry shall be taken to include mixtures or combinations of that article
Rule 3 (a)	If goods are prima facie classifiable under Rule 2 or more headings (after applying Rule 2), most specific description shall be preferred over general, to resolve conflicts
Ruel 3 (b)	Mixtures, composite goods, goods put up in sets for retail sale which cannot be classified as per Rule 3 (a), shall be classified as per the essential character
Rule 3 (c)	If goods cannot be classified as per Rule 3 (a) and Rule 3 (b), it shall be classified under the heading which occurs last in numeric order
Rule 4	If goods cannot be classified under above Rules, classify under heading appropriate to goods which are most akin
Rule 5 (a)	Specially shaped containers for long term use to be classified with the primary article except containers having essential character
Rule 5 (b)	Subject to Rule 5 (a) above, packing material and packing containers if are normally used for packing such goods, shall be classified along with those goods except if such packing material or container is suitable for repetitive use
Rule 6	When more than one entry are available for classification in a heading, sub-headings of same level should be compared

The above rules shall be resorted to in order to determine the appropriate classification of any goods in any chapter heading or sub-heading. Further, certain non-statutory principles developed by Courts such as trade parlance, dictionary meanings, meanings under other Acts, expert opinions, ISI specifications, CBEC Circulars, HSN explanatory notes published by World Customs Organisation etc. shall also provide guidance.