Westinghouse Saxby Farmer Ltd. Vs. Commissioner of Central Excise, Calcutta [March 08, 2021]

CITATION	AIR 2021 SUPREME COURT 1409
DATE OF JUDGMENT	8 March, 2021
COURT	Supreme Court of India
APPELLANT	Westinghouse Saxby Farmer Ltd.
RESPONDENT	Commissioner of Central Excise, Calcutta
BENCH	V. Ramasubramanian, A. S. Bopanna, S. A. Bobde

Introduction

The case of Westinghouse Saxby Farmer Ltd. v. CCE, Calcutta is one of the celebrated cases in the field of tariff classification and particularly with regard to the classification of ‘relays’ used in railway signalling systems. The judgment of the Supreme Court in the aforesaid case resolved the appropriate tariff heading under which these relays should be classified—indeed an issue of immense importance to both the manufacturing industry and tax authorities. This judgment by the Court provided clarity as to how principles of classification, including the so-called ‘principal use test’, under the Central Excise Tariff Act, 1985, are to be applied. The ratio laid down has had a lasting impact on how similar goods are treated in terms of tariff classification.

The Revenue challenged the tariff heading of origin of the relays, arguing that they were classifiable under a different heading. The appellant, Westinghouse Saxby Farmer Ltd., argued that special use in railway management signaling systems meant that their application fell to be classified differently. As such, the case was dependent upon the interpretation of tariff headings and whether certain notes applied in the Tariff Act. It was necessary that the judgment of the Supreme Court resolve these issues with a finality on the matter.

On disapproval of the Supreme Court’s judgment, Instruction No. 01/2022-Customs dated 5 January 2022 was issued by CBIC. It recorded a disagreement of CBIC with the aforesaid judgment of the Supreme Court and guided deciding of similar cases. This Instruction did attempt to address the trade representations and clarify the classification of ‘automobile parts’ and other goods, which might have implications for the general framework of classification.

The Instruction does not make a secret of the fact that concerns have been aired over the implications of the Westinghouse decision and that it may not be applicable to all similar cases. That the CBIC has gone ahead to issue this Instruction is indicative of continuous dialogue between tax authorities and the trade industry for consistency and legality in tariff classifications. This development simply puts a greater call on the establishment of clear and practical guidelines in tariff classification.

The present article surveys these developments in detail by going through the Supreme Court’s decision, the Instruction of CBIC, and their wider implications on tariff classification practices in general. Exploring these facets, the authors attempt to bring out a full understanding of the issues involved and the impact that could arise in future classifications.

Facts

The Westinghouse Saxby Farmer Ltd. case related to the classification of relays used in railway signaling systems. These were classified under Chapter Heading 8608 of the Central Excise Tariff Act, which handles railway machinery, appliances, and equipment. The Revenue disputed it and contended for their classification under sub-heading 8536.90, covering electrical machinery and apparatus.

The Appellate Tribunal, namely the CESTAT, at the first instance, went in favor of the Revenue as it opined that the relays would fall under sub-heading 8536.90; its general classification being electrical apparatuses and equipment, and not by use. The same classification was challenged by Westinghouse Saxby Farmer Ltd., an appellant, who went against it at the apex level.

The Supreme Court reviewed the case to determine whether the relays—manufactured solely for railway signalling—ought to fall within CH 8608. The court applied the ‘principal use test’, used to determine the appropriate classification based on the primary function of the goods, and its decision required interpretation of how that test applies with respect to railway signalling equipment.

The Revenue contended that the relays were electrical components which should be classified under sub-heading 8536.90, a more general classification for electrical equipment. Their argument was that the relays were of broad application and did not relate only to railway signalling systems. To that extent, the case is about the appropriate tariff heading in light of the relays’ special and principal use.

The judgment of the Supreme Court was important in the sense that it clearly explained the content of tariff headings and the application of classification principles. This therefore created a precedent on the classification of goods for specific uses under the Tariff Act and has affected subsequent cases dealing with similar classification issues.

Arguments of Appellant

Westinghouse Saxby Farmer Ltd. submitted that the relays were designed for use, and used in, railway signalling systems; therefore Chapter Heading 8608 applied. It was submitted that the principal use test, as set out in Note 3 to Chapter XVII of the Tariff Act, should be applied to classify the goods under the appropriate tariff heading. Under that test, regard should be had to the principal function of the goods which, in the present case, was for railway signalling.

The appellant, therefore, pointed out the relays were not for general electrical use, and accordingly, a classification under sub-heading 8536.90, covering electrical machinery and equipment, would be quite inappropriate to them. Their contention is that the classification is too general and not reflective of the application of the relays in railway systems.

Westinghouse also challenged the Revenue’s reliance on Note 2(f) to Section XVII of the Tariff Act, under which certain electrical goods are excluded from Chapter 86 if they are for other uses. The appellant submitted that this note was irrelevant in their case because the relays were designed and manufactured specifically for railway signalling and were not offered for sale as general electrical equipment.

The case of the appellant was that tariff classification should reflect the use and context of the goods in issue. It was submitted that the use of the relays for railway signalling systems was a fact of central relevance to the determination of the correct classification under Chapter Heading 8608.

The case of Westinghouse Saxby Farmer Ltd. rested mainly on the issue that a more accurate classification, which would most nearly match the principle use of the relays, was required to result in the proper tariff measure. On its behalf, it established the need for tariff classifications to correspond to product functions and applications.

Arguments for Respondent

The Revenue case was based on a general categorisation of relays as electrical apparatus, falling under sub-heading 8536.90. It was submitted that relays, as electrical components, should be classified according to their general function, not by their specific application. The Revenue submitted that subheading 8536.90 was properly applicable, having regard to the nature of the relays as electrical machinery.

The Revenue also relied upon Note 2(f) to Section XVII of the Tariff Act, which excludes from Chapter 86 goods used independently of railway signalling systems. They submitted that this note supported their classification of the relays under sub-heading 8536.90, on the basis that it excluded electrical machinery not used specifically in railway contexts.

Furthermore, the Revenue submitted that the classification should be in accord with the general tariff principles favouring a wider grouping of electrical apparatus. It was also submitted that the particular use of the relays for railway signalling did not override the general classification applicable to electrical machinery.

The Revenue took the view that the relays might be used for a variety of electrical applications other than those for which they were apparently designed, and a broader classification under sub-heading 8536.90 was accordingly justified. That, it was submitted, was consistent with previous tariff interpretations and the general principles of the Tariff Act.

In summary, the arguments of the Revenue were: in general terms, that relays are items of electrical equipment and that the tariff notes covering the exclusion of particular goods from a heading applied. The judgment was therefore based on general principles of classification, but not upon the use to which the relays would actually be put in railway signalling.

Judgment

The Supreme Court, however, decided in favour of Westinghouse Saxby Farmer Limited and assigned the relays to Chapter Heading 8608. Application of the ‘principal use test’ was resorted to by the court. It dealt with what the goods were mainly used for. Since the relays were made specifically for railway signalling systems, the court ruled that Chapter Heading 8608 was the correct classification.

The Supreme Court rejected the Revenue’s classification under sub-heading 8536.90 on the basis that use was not adequately reflected in the general category of electrical machinery. The Court pointed out that the relays were not intended for general electrical purposes, so they should not be classified under a more general tariff heading.

Lastly, it was held by the Court that Note 2(f) to Section XVII of the Tariff Act did not apply to the relays in this case. Such a note was excluded from Chapter 86, which relates to certain electrical goods, but the Court held that it did not apply to such goods as the relays here in issue, which were designed for use in railway signaling equipment.

The Supreme Court’s judgment in favor of the appellant crystallized the application of classification principles and provided precedence on how related goods should be classified. It underscored that the principal use of goods was central to determining their appropriate tariff heading.

The Supreme Court, in its judgment, had the following assertion: A precise classification must be made with respect to the exact use the goods are intended for, so that tariff headings answer to the description and use for which they are intended.

Analysis

The judgment of the Supreme Court in Westinghouse Saxby Farmer Ltd. laid emphasis on the principle relating to the principal use of goods in tariff classification. In classifying the relays under Chapter Heading 8608, the Court thereby reaffirmed the principle that the particular application to which a product is put should decide its tariff heading, ensuring that the goods are not just classified by their general category but based on their use to which they are put.

The decision also clarified the scope of Note 2(f) to Section XVII, which takes some goods out of Chapter 86 in their independent use unrelated to railway signalling. The ruling of the Court explained that this note did not apply to the relays under consideration, showing that tariff notes are to be read in the context of specific goods.

The Instruction on the part of CBIC, post-Supreme Court decision, was an effort to further guide the issue of tariff classification. It recognizes the specificity of the Westinghouse decision and instructs the tax authorities to look at a set of factors, including HS Explanatory Notes and relevant tariff notes in classifying any goods.

This is emphasized in the Instruction through the citing of various prior decisions, most notably Intel Design Systems and Uni Products that have made decisions based on the application of certain exclusions or classifications that depend on the exact nature of goods. Thus, it all reflects on the need to understand the fine rules of tariffs and how they are applied in different contexts.

Conclusion

The House of Lords decision in Westinghouse Saxby Farmer Ltd. clearly set a precedent for the classification of goods by their principal use. By holding that the relays were classifiable under Chapter Heading 8608 on account of their special application in railway signalling systems, the Court reinforced the fact that the function which a product is to serve and the use to which it is intended to be put are basic and essential in determining its correct tariff heading. This judgment is, therefore, a very welcome elucidation of the application of the ‘principal use test’ as enshrined in the Central Excise Tariff Act, 1985.

The subsequent CBIC Instruction tried to assimilate the implications of the Westinghouse ruling by saying what is required in classification is an integrated approach. Though the Westinghouse decision was confined to railway signalling equipment, principles underlying that judgement may not apply to all cases, observed the Instruction. It is this guidance which brings forth the complexity and requires the concerned tax authorities at each step of tariff classification to look into the specific tariff notes and explanatory guidelines for that matter.

The approach of the Instruction shows that the response to this ruling of the Supreme Court is somewhat cautious, implying that even though it may have a leading effect, it cannot apply to all similar cases. Since the Revenue has filed a review petition against the Westinghouse decision, there could well be continuing discussions and perhaps even further development in this branch of the law, which would refine classification practices.

The Westinghouse case thus underlines the fine and contextually appropriate tariff classification. It sets the standard for the valuation of goods in their principal use, guaranteeing that tariff classifications duly indicate the intended application of products. As the legal and regulatory landscape moves through decades of development, principles laid down in this decision can be expected to continue influencing classification practices and interpretations.

The Supreme Court judgment and the CBIC Instruction, to all intents and purposes, once again reaffirm that every statutory provision, be it the specific tariff rules or general tariff rules, has to be carefully gone through. It also represents a judicious mix of classification, balancing detailed principles of law with practical field experience.

REFERENCES

1. SCC Online
2. https://indiankanoon.org/doc/25691035/ 
3. https://lakshmisri.com/insights/articles/westinghouse-saxby-farmer-ltd-the-saga-continues/

This Article is written by Nandini Achhra student of Vivekananda institute of professional studies, Delhi; Intern at Legal Vidhiya.

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