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KSE Ltd. v. Commissioner of Customs, Cochin
Factual and Procedural Background
The appellant imported machinery described as equipment for preparing animal feeding stuff and filed a Bill of Entry dated 18-10-2008, classifying the goods under Customs Tariff Heading (CTH) 8436 10 00 with a claimed duty rate of 7.5% plus other applicable rates. The goods were cleared under Risk Management System (RMS) without detailed assessment after payment of the declared duty. Subsequently, a post-audit verification by the Department reclassified the goods under CTH 8479 89 99, attracting a higher duty rate, and demanded differential duty of Rs. 45,06,821/- with interest. This demand was confirmed by the Commissioner of Customs, Cochin, in an order dated 20-10-2011. The appellant challenged this order by filing the present appeal.
Legal Issues Presented
- Whether the imported machinery should be classified under CTH 8436 10 00 as machinery for preparing animal feeding stuffs or under CTH 8479 89 99 as machines and mechanical appliances having individual functions not specified elsewhere.
- The legal validity and extent of reliance on HSN explanatory notes in classifying imported goods under the Customs Tariff Act, 1975.
Arguments of the Parties
Appellant's Arguments
- The imported machines are specifically used for preparing cattle feeds and fall under the Customs Tariff Act, 1975 entry 8436, which covers machinery for preparing animal feeding stuffs.
- When a tariff heading refers to a particular function, machines intended for that function must be classified under that heading.
- In case of conflict in classification, the statutory headings and sub-headings override non-binding instruments like the HSN explanatory notes, which should only be used when the statute is ambiguous.
- The Department's reliance on HSN explanatory notes, which conflict with the statute, is legally unsound and contrary to classification principles.
- HSN explanatory notes must be interpreted in their original context and have only persuasive value, not statutory force.
Revenue's Arguments
- The imported machinery forms part of a 500 TPD industrial cattle feed plant and is meant for industrial production.
- Such machinery does not fall under heading 8436 and has been correctly classified under 8479 by the Department.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dunlop India Ltd. & Madras Rubber Factory Ltd. v. UOI & Others (S.C.) | Classification of imported goods must be determined by reference to the words of the statute and tariff schedule entries. | Supported the appellant's argument that classification should not rely solely on HSN explanatory notes but on statutory headings and sub-headings. |
| Chetna Polycoats (P) Ltd. v. CCE (Tri.) | HSN explanatory notes have persuasive value but no statutory force in classification. | Reinforced the appellant's position that HSN notes are non-binding and secondary to the tariff schedule. |
Court's Reasoning and Analysis
The court examined the nature and composition of the imported machinery, which comprised various units forming a 500 TPD cattle feed manufacturing plant designed for industrial-scale production. It noted that classification under a sub-heading requires the goods to first fall within the broader heading. The appellant’s claimed heading 8436 relates to "other agricultural, horticultural, forestry, poultry-keeping or bee-keeping machinery," excluding machines designed for industrial use.
The court found that the imported machinery does not fit within any category under heading 8436 since it is not agricultural, horticultural, forestry, poultry, or bee-keeping machinery, nor related to germination plants or poultry incubators. Consequently, the sub-heading 8436 10 00 could not apply.
While acknowledging that HSN explanatory notes have no statutory force, the court recognized their persuasive value and alignment with the Customs Tariff Act. The explanatory notes explicitly exclude industrial machines from heading 8436, supporting the view that the imported machinery is not classifiable thereunder.
The court then considered heading 8479, which covers machines and mechanical appliances with individual functions not specified elsewhere in the chapter. Since the imported machinery performs the distinct and independent function of manufacturing cattle feed and is not covered by any other heading, the court found the classification under 8479 appropriate and upheld the impugned order.
The appellant’s cited case laws were acknowledged as correctly stating the principles of classification by reference to statutory headings and sub-headings rather than solely on HSN notes. However, the court found no error in the Commissioner’s classification based on the statutory framework and persuasive guidance from the HSN notes.
Holding and Implications
The appeal is dismissed, and the impugned order confirming classification of the imported machinery under CTH 8479 89 99 and the consequent demand of differential customs duty is upheld.
The decision directly affects the parties by affirming the higher duty liability on the imported goods. No new precedent is established beyond the application of established principles regarding tariff classification and the limited role of HSN explanatory notes.
[Order per : V. Padmanabhan, Member (T)]. - The appellant filed a Bill of Entry No. 234169, dated 18-10-2008 for clearance of certain import equipments describing as machinery for preparing animal feedings stuff and declared classification of the same under CTH 8436 10 00 and claimed duty payment @ 7.5%+0%+3%+3%+4%. Accordingly they paid the Customs duty and cleared the goods without assessment and exemption under RMS. Subsequently on post-audit verification, the Department was of the view that the imported goods are rightly classifiable under CTH 8479 89 99 and liable to payment of Customs duty @ 7.5%+14%+3%+3%+4%. The differential duty amounting to Rs. 45,06,821/- with applicable interest was demanded and the same was confirmed in the impugned order dated 20-10-2011 by the Commissioner of Customs, Cochin. Aggrieved by the impugned order, the present appeal has been filed.
2. With the above background, we have heard the learned counsel Shri N. Anand appearing for the appellant as well as Shri Parashiva Murthy, Authorised Representative for the Revenue.
3.1 Learned counsel for the appellant summarised the arguments advanced by the importer as follows :-
i. The imported machines are used for preparing cattle feeds and are covered by a specific entry/heading in the Customs Tariff Act, 1975, i.e. 8436 and that when a heading refers to a particular function, then the machine intended for such a function must fall for classification under that heading.
ii. In the event of a conflict with regard to classification of goods contained in the schedule, the headings/sub-headings have an overriding effect over the non-binding non-statutory instrument of HSN and that interpretations should be resorted only in cases where the words of the statute or entry in the schedule are ambiguous.
iii. Attempt of the department to place reliance on external aids of interpretation, which is apparently in conflict with the legislation, is bad in law, and is opposed to the basic principles of classification and interpretation.
iv. Explanatory notes to HSN has to be read, understood and construed in the context of its origin, on par with the foreign judgment or enactment.
3.2 He also cited several case laws in support to the argument that classification of import goods are required to be decided by reference to the words of the statute and entries in the schedule and should not be decided on the basis of HSN explanatory note which at best can have a persuasive value.
i. Dunlop India Ltd. & Madras Rubber Factory Ltd. v. UOI & Others [ (S.C.)]
ii. Chetna Polycoats (P) Ltd. v. CCE [ (Tri.)].
4. Learned AR on the other hand supported the impugned order. He submitted that the machinery imported by the appellant is meant for use in industrial production i.e. for 500 TPD cattle feed plant. He submitted that such machinery will not be classifiable under 8436 and has been rightly classified under 8479.
5. At the outset, we give below the two competing Customs Tariff headings :-
| Tariff item | Description of goods | Unit | Rate of duty |
| 8436 | OTHER AGRICULTURAL, HORTICULTURAL, FORESTRY, POUTLRY-KEEPING OR BEE-KEEPING MACHINERY, INCLUDING GERMINATION PLANT FITTED WITH MECHANICAL OR THERMAL EQUIPMENT, POULTRY INCUBATORS AND BROODERS. | ||
| 8436 10 00 | -Machinery for preparing animal feeding stuffs -Poultry-keeping machinery; poultry incubators and brooders; | u | 7.5% |
| Tariff item | Description of goods | Unit | Rate of duty |
| 8479 | MACHINES AND MECHANICAL APPLIANCES HAVING INDIVIDUAL FUNCTIONS, NOT SPECIFIED OR INCLUDED ELSEWHERE IN THIS CHAPTER | ||
| . .. . | . . . | ||
| 8479 89 99 | Other | u | 16% |
6. The importer is a manufacturer of cattle feed and has the necessary factory for manufacturing the same. The machinery which has been imported includes mixtures, grinders, dust filter, pellet presser, pellet press meal conditioner, pellet press dies, pellet coolers counter stream and cyclone type, molasses mixer screw feeder, etc. These machines make up a 500 TPD cattle feed plant. From the above description, we note that what has been imported is a complete cattle feed manufacturing plant comprising of several assorted equipments and their parts. It is also to be noted that all these equipments working together are designed to manufacture cattle feed on an industrial scale.
7. The appellant has sought classification of the imported goods under 8436 10 00 as machinery for preparing animal feeding stuff. This subject heading falls under the heading of “other agricultural, horticultural, forestry, poutlry-keeping or bee-keeping machinery, including germination plant fitted with mechanical or thermal equipment, poultry incubators and brooders.” In the impugned order, the learned Commissioner has ruled out classification of the goods under 8436 by referring to HSN explanatory notes. The appellant has vehemently argued before the learned Commissioner as well as before the Tribunal in the present proceedings that HSN explanatory notes has, at best, only a persuasive value. They have relied upon several decisions which also lay down the same law saying that the HSN explanatory notes have no statutory force since they are not part of the tariff schedule. The appellant has also argued that the entry under 8436 10 00 which covers machinery for preparing animal feeding stuff should cover the goods under import.
8. When we refer to the Heading of 8436, we are of the view that the imported machines do not fall within any of the categories of machines outlined therein. For example, it cannot be considered as an agricultural machine or horticultural machine. It is also not a machine which finds use in forestry or poultry or bee-keeping. It is also not connected with germination plant or poultry incubators. For considering a machinery for classification under a sub-heading, it is necessary that it should fail within the heading and thereafter the sub-heading under which it falls is to be decided. We note that since the imported goods are not includable in the Heading of 8436, it cannot be included under the sub-heading 8436 10 00. It is not disputed that the HSN explanatory notes have persuasive value. The Customs Tariff at the relevant time is fully aligned with the HSN and as such we are of the view that reference may be made to HSN for guidance as a legal aid. The explanatory notes under 8436 says that the heading covers machinery not falling under 8432 to 8435 which is of the type of machines used on forms (including agricultural schools, co-operatives or testing stations), in forestry, market gardens, or poultry-keeping or bee-keeping farms or the like. However, it excludes machines clearly of a kind designed for industrial use. From the reference to explanatory notes above, we find that the imported machines, which are clearly designed for industrial use cannot be included under 8436. The imported machinery is meant for a cattle feed manufacturing plant with the capacity of 500 TPD. The sub-heading 8436 10 claimed by the appellant is meant to cover machinery only for preparing animal feeding stuff and cannot be enlarged to include a 500 TPD cattle feed manufacturing plant. Hence, we are of the view that the entry under which classification is sought by the appellant does not cover the goods under import.
9. Next, we turn to the question what would be the appropriate classification. The impugned order classified the goods under CTH 8479. This heading is applicable for machines and mechanical appliances having individual functions and not specified elsewhere in the chapter. Since the imported machines are capable of performing the independent function of manufacturing of cattle feed and this function is distinct and independent from any other machine or appliance listed out individually in Chapter 84, we find no infirmity in the classification ordered by the learned Commissioner in the impugned order.
10. The case laws relied upon by the appellant reiterates the view that classification should not be resorted to only on the basis of HSN explanatory notes, particularly when these are not supported by the headings and sub-headings of the schedule to the Customs Tariff Act, read with the rules for the interpretation of the schedule. Here we approve the classification ordered by the Commissioner for the reason that in terms of the headings and sub-headings of 8436, the imported goods will not be classifiable therein. Such a view also finds support from the HSN explanatory notes.
11. In view of the above discussions, we find no infirmity in the impugned order, the same is upheld and the appeal is dismissed.
(Order was pronounced in Court on 6-2-2017)
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