NACIN Session 1
31-01-2024
Presentation by – CA Mrinal Garg
(B.Com, A.C.A., C.S.)
Seminar Outline 2
1. Why do we need to understand
classification provisions?
2. Legality of HSN codes in GST
3. HSN
4. Classification under GST
5. Rules of Interpretation (GIR)
6. SAC
7. Practical Example
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1. Why do we need to
understand classification
provisions?
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
4
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Parachute hair(?) oil 5
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Parachute EDIBLE Oil 6
-Excise Duty on edible oil – 0%
- Excise Duty on Hair oil – 8%
- Marico says we are not concerned about the end use.
- CBEC questions the logic of edible oils being sold in packets of
less than 200 ml bottles
- Logic – to cater to students / occasional cooks
-Provision introduced that all packaging upto 200 ml is hair oil.
All bigger packaging is edible oil.
“Coconut hair oil now in bigger packs” in order to avoid tax.
- Marico litigates and gets the new provision withdrawn
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Why do we need study HSN? 7
Over 98% of the merchandise in
international trade is classified in terms of
HS – WCO website
Also quoted in Hitachi Home and Life
Solutions v. CC(2012) 285 ELT 504
(CESTAT)
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Why do we need study HSN? 8
Under Customs, there have been MANY cases
decided by the hon’ble SC where it has been held
that the burden of classification is on the department.
Department must establish that an article falls in a
particular tariff
Hindustan Feredo Ltd HLL
Vicco Laboratories Sharma Chemical Works
Garware Nylons Ltd Chief Engineer, GWD
Polyglass Acrylic Mfg Co Puma Ayurvedic Herbal
Ponds India And many more!
Voltas Ltd (3 member bench)
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Legality of HSN Codes in GST 9
Explanationappended to notification
1/2017 and 2/2017 – CT (R) dated
28.06.2017
“(iii) “Tariff item”, “sub-heading”
“heading” and “Chapter” shall mean
respectively a tariff item, sub-heading,
heading and chapter as specified in
the First Schedule to the Customs
Tariff Act, 1975 (51 of 1975).”
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Question 10
Customs tariff act has two schedules
1. First Schedule is for Import Tariff (Import duty)
2. Second Schedule is for Export Tariff (Export duty)
So why does the GST act ask us to
refer only the first schedule?
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Answer 11
Since most of the exports are exempt
from export duty, the second schedule
contains only 50 items (as on 1.1.22)
out of which many are exempt.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Legality of HSN Codes in GST 12
(contd..)
“(iv) The rules for the interpretation of the
First Schedule to the Customs Tariff Act,
1975 (51 of 1975), including the Section and
Chapter Notes and the General Explanatory
Notes of the First Schedule shall, so far as
may be, apply to the interpretation of this
notification.”
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What is the full form of HSN?
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14
3. Harmonized System of
Nomenclature
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Nomenclature 15
Means:
“a systematic naming, or enumerating
of all goods found in international trade
along with international rules and
interpretations”
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Classification 16
Means:
“a process of arriving at a particular heading
or subheading of a commodity entering the
international trade”
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Arrangement of HSN 17
Arranged in a legal and logical manner
Supported by well defined rules
To achieve uniform classification
Each commodity is identified with 8 digits
Explanatory notes – 5 volumes by WCO
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Arrangement of Harmonized 18
system
•Raw materials/ natural goods
•Un-worked products
•Semi-finished products
•Finished products
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Principles of tariff classification 19
A commodity can be classified either
by:
•Terms of heading
•Notes to sections, chapters or
subheadings
•General Interpretative Rules
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Example 20
Eight Digit Code: 8504 40 30
85 – Chapter
8504 – Heading
8504 40 – Sub-Heading
8504 40 30 – Tariff Entry
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Example 21
Price:
Rs. 1300 + GST
I have only Rs. 1500 in
my pocket
https://www.cbic-
gst.gov.in/gst-goods-
services-rates.html
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What is the HSN? 22
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Classification “dashes” 23
“-” Single dash
“--” Double dash
“---” or “----” dashes
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Example for dashes 24
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Dashes 25
- Single Dash
-- 2 Dashes
--- Three Dashes
-- 2 Dashes
--- Three Dashes
---- Four Dashes
Case Law 26
Schenectady Herdillia Ltd v. CCE(2007)
(CESTAT)
‘Goods to fall in tariff entry with double
dash (- -) have to satisfy specifications of
single dash (-) preceding them’
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27
HSN reporting requirements in
GST
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HSN reporting requirements 28
Aggregate Annual Turnover in the preceding FY:
1. Upto Rs. 5 Crores – 4 digits compulsory
2. More than Rs. 5 Crores – 6 digits compulsory
(Notification No. 78/2020 – CT dt 15/10/2020 | effective from
01/04/2021)
Category 1: Compulsory to be shown in all tax invoices to registered
persons
Category 2: Compulsory to be shown in all tax invoices
Category 1 & 2: Compulsory to be shown in returns (GSTR 1)
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4. Classification under GST
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Why is there a need to understand 30
provisions related to classification
Leviability of
Exemptions Rate of Tax
Tax
Merit and
Taxable &
Nil Rated demerit
Non Taxable
Goods
Exemption by
Goods V/s Different
way of
Services Rate of Tax
notification
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Broad Outline of Customs 31
Tariff Act, 1975
S.No. Particulars Customs Tariff Act 1975
1 Section 12 of It states that duties of customs shall be levied at such
Customs Act, 1975 rates as may be specified in CTA, 1975 on goods
imported or exported
2 No. of Schedules 1. Import Tariff
2. Export Tariff
3 Total Sections 21
4 Chapters 99 (chapter 77 is blank which is reserved for future
use)
5 Columns 5-
a) Tariff Item b) Description of Goods
c) Unit d) Standard rate of duty
e) Preferential rate of duty
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Broad outline of Tariff 32
Section Chapter/ Sub Headings/ Sub
Chapter Heading
It is a grouping of a Chapters and Sub Chapters Each chapter is further
contain a particular class of divided into various headings
number of chapters goods. and sub headings depending
which codify a For Instance Section IV upon the different type of
particular class of covers Prepared Foodstuffs goods covered within the
and beverages which chapter.
goods e.g. includes:-
Section-I : Live Animals Chapter 16: Preparation of For instance: Chapter17
Section IV : Prepared meat. Fish etc. covers Sugar and Sugar
Foodstuffs, Beverages Chapter 17: Sugar and Sugar Confectionery. Now this is
Confectionery further divided in to heading
Chapter 18: Cocoa and Cocoa like:-
Preparation a) Cane or beet sugar
b) Other sugar, molasse
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How to read tariff 33
Locate the classification through particular section/chapter
Commodities grouped under sections, chapter etc. are arranged in increasing
order of manufacturing like Natural Products, Raw Material, Semi Finished and
Finished
Reliance is not to be placed solely on the section or
chapter titles to classify the product.
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Example: Sale of Fish
35
5. Rules of interpretation
General Interpretative Rules (GIR)
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General rules of interpretation 36
There are 6
rules in total
Ap
p
1 a ly R
be doe d if ule
n
s to re s it
le d iss solve not
Ru pplie ially to ue th the
a ent rul en
u e
seq so 2 an go
on d
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Case Law 37
CCE v. Wood Polymers Ltd. 1998 – it
was held that classification should be
done as per rules of interpretation
contained in the tariff and not as per
trade parlance and commercial
understanding. (if rules do not give a
conclusive answer, then trade parlance
has to be relied on)
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Case Law 38
O K Play (India) v. CCE 2005 – it was held that:
1. No one single universal test can be applied for the correct
classification. There cannot be a static parameter for correct
classification.
2. HSN alongwith notes provide a safe guide for interpretation of the
entry.
3. Equal importance is to be given to the Rules of Interpretation of
Tariff
4. Functional utility, design, shape and the predominant usage are
also important
5. The aforesaid aids are more important than the names used in trade
or common parlance
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Rule1: Classification to be determined as 39
per the `Heading’
Titles of sections, chapters, and sub-chapters are provided
for ease of reference only.
For legal purposes, refer to headings and sub-headings to
derive classification.
•Rules 2-4 can only be used when Rule 1 has failed
•The rules must be used in hierarchical order
All goods must be classified according to the terms of the
heading texts in the nomenclature.
AND
any relative section or chapter notes
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Example – perfumed paper 40
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Importance of legal note 41
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Case law 42
Supreme court in case of Salora
International Ltd. V/s CCE 2012
(284) ELT S.C. held that tariff entries
alongwith relevant section and
chapter notes have to be seen. If it
does not help, then other rules should
be looked in to.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Rule 2 (a): Classification of incomplete 43
or unassembled goods
If the incomplete or unfinished goods have the
essential characteristics of the complete or finished
goods then such goods should be classified in the
same heading as the complete goods.
Heading will also include finished goods removed un-
assembled or disassembled i.e. SKD / CKD packs.
For example: A cycle removed in CKD condition is a
cycle or railway coaches where seats have been
removed would still be railway coach.
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Rule 2(a) Example 44
In one of the case it was held that a scooter
body without engine is classifiable as
scooter (CETH 871190).
A motor vehicle, not yet fitted with the
wheels or tyres or battery.
Camera without a lens.
A bicycle without saddle and tyres.
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Case Law 45
Hindustan Udyog v. CCE 2001
It was held that ‘belt conveyor system’ supplied
with all material except belt (as the belt was
supposed to be purchased from the market and
fitted by the buyer) will still be classified as a ‘belt
conveyor’ as per rule 2(a) as it has the essential
characteristics of the final product.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Question 46
M/s ABC & Co. sold various
components of a machine to M/s
XYZ & Co.
- Sales in 94 consignments
- Spread over 2 years
- Further processing done on parts
CC v. Sony India (2008)
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Rule 2(b) : Classification of 47
Mixture or Combinations
Any reference in a
heading to an item shall
include the mixture or
combination of that
material with other
material.
Classification of goods
consisting of more than
one material shall be
classified according to the
principles of rule 3
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Rule 2(b) : Case Law 48
In the case of Dhariwal Industries V/s CCE, the
assessee was manufacturing `Calcutta Meetha Pan
which was a mixture of various items, primarily
ingredients being pan leaf.
The product contain 70% of dry dates and mixture
of spices and sweetner.
It was held that classification as per rule 2(b) and
3(b) ought to be done under Fruits, Nuts and other
edible parts under CETH 20.08 and not pan
masala
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Rule 3(a) : Prefer the Specific Entry 49
over the General Entry
When by application of rule 2(b) or for any
other reason, goods are, prima facie,
classifiable under two or more headings the
classification would be done as under:-
The heading which provides the most
specific description shall be preferred over to
heading providing a general description.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Case laws 50
Pragati Silicons Pvt LTd v. CCE (2010)
Plastic name plate for motor vehicle is to be classified under
‘accessory of motor vehicle’ (chapter 87) and not ‘other
articles of plastic’ (chapter 39) since a number plate is not
specified in any heading in chapter 39
Jyoti Industries Vs CCE,
it was held that Kitchen sink is more appropriately covered
under `Sanitaryware’ which is a specific description then
`household articles of iron and steel’ which is a general
description.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Rule 3(b): Essential character test for 51
Mixtures or Composite Goods
Mixtures, composite goods consisting of different
materials or made up of different components, and
goods put up in sets for retail sale, which cannot be
classified under rule 2(a) above shall be classified
according to their essential character
Articles of Gold, Articles of plastic, Religious picture
made of gold, etc.
Ex: A Mobile phone with advance zoon camera –
Classifiable as phone or camera ?
Xerox India Ltd. V/s CC Bombay – Digital printers
with fax, copier etc. – Classified as printer.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Rule 3 (c): Later the Better 52
When goods cannot be classified by reference to
(a) or (b), they shall be classified under the
heading which occurs last in numerical order
among those which equally merit consideration.
In case of M&M Ltd. V/s CCE –(1999)109ELT
739 CEGAT- It was held that if tariff entries 87.03
and 87.04 re equally applicable , then goods will
be classifiable under 87.04 as it occurs later in the
tariff.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Rule 4: Akin Goods 53
Goods which cannot be classified in
accordance with the above rules (1-3) shall
be classified under the heading appropriate to
the goods to which they are most akin
(similar)
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Rule 5: Packing Material 54
Packing material which are
- specifically designed for a specific article and
- given with the article,
- suitable for long term use,
Must be classified under the article for which it can be used.
e.g. Camera Cases, Mobile cases, Musical Instrument cases,
gun case
This provision will not be applicable when such packing
material is clearly suitable for repetitive use. Like Glass
Bottles are meant for repetitive use and therefore cannot be
classified with soft drinks.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Rule 6: Goods are comparable at the 55
same level only
The sub headings within the same heading
are comparable with each other, but not
with sub-heading under any other heading.
Accordingly the heading is to be first
determined and then sub-heading has to be
ascertained.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Other Guides for Interpretation 56
A) Classification principles evolved by courts.
B) Trade/Common Parlance understanding
C) End Use /Function Test classification
D) Other sources”-
1) Residual entry
2) Dictionary Meaning
3) Meaning under other act or standards
4) Advertisements/Product literature.
5) Expert opinion
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Practical Guide for 57
classification under GST
1. Identify the
product/service that 2. Identify sections 3. Find the relevant
requires and chapters sub-heading
classification
4. Classify the
product under 8 5. Find the heading 6. Find out the
digit / 6 digit for in GST rate schedule correct rate
SAC
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58
6. SAC
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Classification of Services 59
•Service Accounting Code (SAC)
•Chapter 99 of HSN
•Notification 11/2017-Central Tax dated 28.06.17
covers use of Service Code
•Classification under GST is based on UNCPC
(United Nations Central Product Classification)
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Classification of Services 60
Independent
Terms of
Service- Specific
Agreement
Entry
If cannot be
Bifurcation of broken up then
combined according to
service essential
character
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Classification of Services - 61
example
Free breakfast with hotel room booking v/s room
service
Renting of Truck without operator
Travel Agency services
Renting a warehouse vs warehousing services
Location linked supplies – Event in another state
Company renting a residential dwelling for its
employees
Tax preparation services provided by a Senior
Advocate.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
62
7. Let’s take a practical
example of classification
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CASE 1: You are the Advance 63
Ruling Authority!
Mrinal’s Imported Italian Glasses
-Imported from Italy
-For my personal use; I am not going to sell them
-Lenses are power lenses
Q1. What is the CHAPTER HEADING?
Q2. What is the GST Rate?
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
CASE 2: You are the Advance 64
Ruling Authority!
Paper Spoon Manufacturing
Multiple sheets of paper and pasted together and pressed for
toughness
Then, a laser is used to cut out spoons from this thick sheet of
paper
These spoons are then fitted into another machine which gives
it the depth to hold food.
Q1. What is th CHAPTER HEADING?
Q2. What is the GST Rate?
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Interesting facts 65
The WCO HS provides commodity / product codes and
description upto 4-digit (Heading) and 6- digit (Sub-
Heading) levels only.
Member countries of WCO are allowed to extend the
codes upto any level subject to the condition that nothing
changes at the 4-digit or 6-digit levels.
India has developed 8-digit level classification to indicate
specific statistical codes for indigenous goods and also to
monitor the trade volumes
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Interesting facts (not related to 66
GST)
Sachin Tendulkar is popularly known to be the
“God of Cricket” who once in order to save taxes
pleaded himself as an actor and not a cricketer
(Sachin R. Tendulkar v. Assistant Commissioner of
Income Tax). Income Tax Appellate Tribunal in this
case stated that earnings from Cricket would fall
under “Income from Other Sources” and Sachin has
been getting tax benefits on acting from 1997.
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
Important links 67
Searching HSN Code -
https://services.gst.gov.in/services/searchhsnsac
Tariff Schedule –
https://old.cbic.gov.in/htdocs-cbec/customs/custom-tariff
GST Rate Finder –
https://www.cbic-gst.gov.in/gst-goods-services-rates.html
© CA Mrinal Garg | 9977333300 | mrinal@kgca.in
For any queries or suggestions, 68
please feel free to contact me:
CA Mrinal Garg
Contact : (M) 99 77 33 3300
(O) 0731-4225588
E-Mail : mrinal@kgca.in
Address: 409-411 Chetak Centre
12/2 R.N.T.
Marg,
Indore
