Chapter 4

System of classification of Goods

Customs duties are chargeable on the act of importation of Goods. On some goods, customs duties are also charged on the act of exportation. The Goods that enter international trade are not charged to a single rate of customs duty by the importing / exporting country. It is required that such goods which enter the international trade are grouped into exclusive similar categories / class of goods [chemicals, metals, textiles, machinery, etc.] and enumerated on the basis of well defined criteria. The sub division and enumeration of all goods entering International trade along with well defined rules of interpretation, form what is normally termed as the nomenclature of goods, in a country. Governments utilise the nomenclature as the basis for prescribing appropriate duty on goods imported / exported. The nomenclature combined with the duty rates is called the Tariff. As the tariff is normally a part of the Tariff Act in a country, it is called the ‘Tariff Schedule’.

2. A good nomenclature of goods should ensure;

(i) that every product manufactured or otherwise, will get covered under a code number uniformly applied the world over.

(ii) that a set of rules is available for interpretation.

(iii) that the nomenclature is accepted internationally as a technical and legal basis for improving trade relations amongst countries.

(iv) that a statistical base, suitable for computerisation is available.

3. The need of the nomenclature was largely fulfilled by the Brussels Tariff Nomenclature (BTN) evolved by the world body, Customs Cooperation Council. However, with a view to facilitate trade flow and analysis of trade statistics in a much more coordinated manner, the Customs Cooperation Council (since renamed as World Customs Organisation) developed the Harmonised Commodity Description and Coding System (HS) in 1986. India adopted this nomenclature for tariff purposes with effect from 28.2.86. The Customs Tariff is fully aligned with the HS. The Central Excise Tariff is fully aligned with the HS at the four digit level, and at the six digit level, proper enumeration and subdivision of products is done keeping in view the goods that enter the trade, our experience with the concept of manufacture and the level of growth of the indigenous industry.

4. The World Customs Organisation (WCO), for purposes of uniform interpretation of the HS, has published detailed Explanatory notes to various headings / subheadings explaining their scope. This forms the basis for interpreting the HS. The WCO, in its various committees discusses about the classification of individual products and gives classification opinion on them. Such information, though not binding in nature provide a useful guideline for classifying goods.

5. In the Tariff Schedule, commodities are arranged in a fixed pattern with the duty rates specified against each of them. The pattern of arrangement of goods in the Tariff is in the increasing degree of manufacture involved. The pattern of arrangement of goods is in the following sequence. Natural products, raw materials, semi finished goods and fully finished goods / article / machinery, etc. The legal text of the Tariff consists of Sections, Chapters, Headings, Subheadings, subheading notes and the General Interpretative Rules (GIR). The Indian Customs Tariff has 21 sections and 99 chapters. A Section is a grouping together of a number of Chapters which codify a particular class of goods. The Section notes explain the scope of chapters / headings, etc. The Chapters consist of chapter notes, brief description of commodities arranged at four digit and six digit levels. Every four digit code is called a ‘heading’ and every six digit code is called a ‘subheading’.

6. The process of arriving at a particular heading / Subheading code, either at four digit or six digit level for a commodity in the Tariff Schedule is called ‘classification’. This helps in determining the rate of duty leviable as prescribed by the legislature. However goods intended for a ‘project’ or goods imported by post / baggage for personal use, are earmarked a separate heading in the Indian Customs Tariff, under which they will be classified straightaway. These provisions are explained separately.

7. Goods are classified taking into consideration the scope of headings / subheadings, related Section Notes, Chapter Notes and the General Interpretative Rules (GIR). The GIR is a set of 6 rules for classification of goods in the Tariff Schedule. These rules have to be applied sequentially.

8. The Interpretative Rules play a very important role in the classification of the goods. Rule 1 of the GIR gives precedence to the Section notes / Chapter notes while classifying a product. Rule 2(a) applies to goods imported in assembled / unassembled condition. Such goods may be in incomplete or finished form. Rule 2(b) is applicable to ‘mixtures’ and ‘composite goods’. Goods which are not classifiable by application of Rule 2(b), will have to be classified by application of Rule 3. Rule 3 has three sub rules. Rule 4 states that goods which cannot be classified by application of the preceding rules may be classified under the heading appropriate to the goods to which they are most akin. Rule 5 applies to packing materials / articles in which the goods are carried. Rule 6 provides the general guideline for classification of goods under the appropriate sub heading.

9. While classifying goods, the foremost consideration is the ‘statutory definition’. In the absence of any statutory definition, and any guideline provided by HS explanatory notes, the cardinal principle would be the way goods are known in ‘common parlance’. Many times statutes contain definitions and meanings of only a restricted number of words, expressions or phrases. While interpreting the common words used in the statute, giving more importance than due to common dictionary meanings may be misleading many a times as the dictionary gives all shades of meaning of a particular word. Similarly, meanings assigned in technical dictionaries will also have limited application.

10. The ‘trade meaning’ should be given due importance unless the Tariff itself requires that the terms should be interpreted in a strict technical sense. Technical dictionaries should be used in such circumstances. If any scientific test is to be performed, the same has to be carried out as prescribed to arrive at the classification of goods. The common dictionary meaning of technical words should not be accepted in such cases. Normally, the common parlance understanding is indicative of the functional character of the goods. Further, in matters of classification it makes no difference whether the quality of goods is prime or defective. There is no prohibition on customs authorities in revising the classification once decided. However revision of classification should be only done for good and sufficient reasons. In case of difficulty in understanding the scope of the headings / subheadings, reference should be made to supplementary texts like the Explanatory Notes to the HS.

11. The rate of duty specified in the Tariff Schedule is called ‘Tariff rate of duty’. Goods which are not identified for concessional rate of duty / exemption from duty by issue of an exemption notification issued in terms of Customs Act provisions, are levied to the tariff rate of duty. In the export tariff schedule, only the commodities on which export tariff is levied are stated which does not involve the rigorous process of classification. In fact export duties are leviable only on listed 26 commodities but by exemption notifications, all but one set of item (i.e., leather items) are completely exempt from export duties. In the Central Excise Tariff, an Excise Duty is specified against each subheading. Goods which are prescribed ‘nil’ rates of duty in the Tariff are those goods which are levied to ‘free’ rates of duty.

12. In the Tariff Schedule, over the years, a systematic effort has been done to unify rates on similar products to achieve economic rationality and reduction in the scope of classification disputes. As far as possible, similar goods are subjected to uniform duty rates. Various class goods are also levied to different ‘Slabs of rates of duty’. These slabs have also been reduced progressively. There are four different duty slabs in general and these are 5%, 15%, 25% & 35% at present.

13. The CBEC issues Tariff advices in the form of circulars on classification matters to ensure uniformity in classification of goods at an all India level. Such issues also get discussed in the Conferences of Commissioners of customs on Tariffs and Allied Matters (Tariff conferences) held periodically at various Custom Houses in which all the Commissioners / Chief Commissioners of customs participate. The decisions of the Tariff conferences is published in the form of minutes (in printed book form) and circulated to all the Custom Houses for compliance. An Advance Ruling Authority has been set up for giving binding tariff information to Joint Ventures set up by Non residents.

14. Permissibility of import and export of Goods is governed by the nomenclature, ITC(HS) classification of import and export goods, published by the Directorate General of Foreign Trade (DGFT). In this nomenclature, goods are arranged as they are in the HS but are codified by ten digit numerical code to identify goods with more precision for purposes of import / export control.

15. CBEC, has undertaken an exercise for unifying the classification codes under the Customs tariff, Central Excise tariff, ITC(HS) and the statistical schedule to evolve a Combined Nomenclature at the eight digit level to make it in tune with international statistical schedule. Once legislated, it will provide a base for collecting comprehensive trade data for statistical purposes.

16. The process of classification of goods is of paramount importance now, as both industrialised and developing countries use it as a tool for implementation of various trade policy instruments, international commercial arrangements, multilateral Tariff agreements. Further, as the variety of products traded internationally grows rapidly, it is all the more necessary that the nomenclature keeps up with the technological progress. The HS, taking note of the trade flow, technological progress, etc., is amended from time to time. The amended version is incorporated in the Indian Tariff Schedule, periodically.

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