Classification of excisable goods.

The Central Excise duty is chargeable at the rates specified in the schedule to the Central Excise Tariff Act, 1985. The said schedule is divided into 20 sections and 96 Chapters. There are no Chapters with numbers 1,6,10,12 and 77. As such there are effectively 91 Chapters. Each Chapter is further divided into headings and sub-headings. In order to determine the applicable rate of duty in respect of a particular item, the positioning of that item under a particular head or sub-head is essential. The positioning of an item in the appropriate heading/sub-heading is called classification. The classification of an item is generally decided in view of how it is described in commercial parlance. However a deviation from this principle is made when the trade meaning or commercial nomenclature does not fit into the scheme of the statute.

The Central Excise Tariff Act, 1985 incorporates five Rules of interpretation, which together provide necessary guidelines for classification of various products under the schedule. As regards the Interpretative Rules, the classification is to be first tested in the light of Rule 1. Only when it is not possible to resolve the issue by applying this Rule, recourse is taken to Rules 2,3 & 4 in seriatim. The provision of the individual Rule is as follows.

Rule 1 This rule provides that section and Chapter titles are only for the ease of reference and, therefore, do not have any legal bearing on the classification of goods, which is determined according to the terms of headings and relevant section or Chapter notes and according to the other interpretative rules if such headings or notes do not otherwise require. Thus goods are to be classified in terms of the heading and relative sections or Chapter notes without recourse to any interpretative rules. It is only when the goods cannot be classified on this basis, the assistance is to be sought from the interpretative rules.

Rule 2(a) This rule provides classification of an article referred to in a heading, even if that article is incomplete or unfinished, or is presented in an unassembled or disassembled form. An important condition to be satisfied for classification in this manner is that in its incomplete or unfinished state, the article has the essential character of the complete of finished article. Some of the important aspects which are relevant in this regard are functional aspect, physical aspect and the degree of completion of the product.

Rule 2(b) This rule relates to mixture or combination of materials or substances, and goods consisting of two or more materials or substances. According to this rule headings in which there is a reference to a material or substance also apply to that material or substance mixed or combined with other materials or substances. This rule does not apply where specific provisions exist in the headings or the sections or chapter notes excluding such classification.

Rule 3 This rule lays down three steps for classifying the goods which are, prima facie, classifiable under several headings. The sequential order of the steps contemplated are

1. most specific description;
2. essential character; and
3. heading which occurs last in numerical order;

This rule applies when goods are prima facie classifiable under 2 or more headings.

In the first step, {Rule 3(a)} the general guidelines are that a description by name is more specific than the description by character and a description which identifies the goods clearly and precisely is more specific than the one which is less complete.

The second step {Rule 3 (b)} relates only to mixtures, composite goods consisting of different materials or components and goods put up in sets. This rule finds applicability if rule 3(a) does not help. In all such cases the goods are to be classified as if they consist of material or components which gives them their essential character.

When goods cannot be classified with reference to Rules 3(a) and 3(b), they are to be classified in terms of Rule 3(c)- in the heading which occurs last in numerical order among those which equally merit consideration. This is a fall back provision for resolving the matter when no heading can be regarded as providing a more specific description than the others and when it is not possible to identify the material or component which gives the concerned goods their essential character.

Rule 4 When goods cannot be classified in accordance with rules 1,2, & 3, then they are to be classified in a heading of a product which is most akin to the goods in question. Kinship can, of course, depend on many factors such as description, character, purpose etc.

Rule 5 This rule postulates that the classification of any product under a sub-heading is to be contemplated after the product concerned has been properly classified under its proper four digit Chapter heading. The classification in the sub-heading of a heading is determined mutatis mutandis in accordance with the principles applicable to classification in the four digit headings.

Section 37B of the Central Excise Act, 1944 empowers the Central Board of Excise & Customs to issue orders, instructions and directions, for the purpose of uniformity in the classification of goods or with respect to the levy of excise duties on such goods.

In order that assessee knows the correct classification and rate of duty applicable to the goods manufactured by him in advance, the instrumentality of classification declaration has been prescribed. The classification declaration is to be filed in quadruplicate in a prescribed proforma with the Superintendent of Central Excise, having jurisdiction over the factory. The details which are required to be given in the declaration include

3. the full description of –

all excisable goods produced or manufactured by the assessee; all other goods produced or manufactured by him and intended to be removed from his factory; and all the excisable goods already deposited or likely to be deposited from time to time without payment of duty in his warehouse.

• the Chapter, heading no. and sub-heading no., if any, of the schedule to the Central Excise Tariff Act, 1985, under which each good falls;
• the rate of duty leviable on each such good ;
• the exemption notification availed or proposed to be availed, if any,
• write up and flow chart on the process of manufacture; and
• list of critical raw materials.

In case the assessee is availing the benefit of small scale sector exemption notification, he is to give a declaration about the total value of clearances during the preceding financial year, the details pertaining to use of brand name, if any, on the goods manufactured, availment of Modvat credit etc.

The declaration is to be filed by an assessee producing or manufacturing excisable goods for the first time within 30 days of commencing the production of such excisable goods and thereafter every year at the beginning of the financial year and also when there is a change in the rate of duty or tariff classification or whenever a new item is intended to be manufactured. The correctness of the declaration should be duly certified by the assessee. The assessee should also ensure that he satisfies all the conditions, if any, prescribed in any exemption notification the benefit of which he claims and should certify to this effect.

1. Whether the declaration is filed in the required no. of copies;
2. Whether all particulars about the assessee i.e. name and address, location of the factory, Central Excise registration no., range, division, ECC code no. have been furnished;
3. If it is not the first declaration, ensure that the previous serial no. of the declaration is mentioned;
4. Whether the effective date for declaration has been indicated;
5. Whether the correct description of each excisable goods including the byproducts, waste products or intermediate products to be used for captive consumption along with brand name/trade name/ commercial name and complete specification has been mentioned.
6. Whether the unit of assessment, heading/sub-heading no. and effective rate of duty along with exemption notification have been provided;
7. Whether the conditions, if any, prescribed in the exemption whose benefit is claimed are duly satisfied;
8. Whether all the enclosures as mentioned under the heading 'Procedure for filing declaration under Rule 173B' are enclosed;
9. Whether the declaration bears the seal and signature of the assessee or his authorised signatory.

Onus for making correct declaration on assessee.

The assessee is legally liable to ensure that the declaration made by him under Rule 173B is complete (i.e. no products whether dutiable or not, are omitted), factually correct and specific. Failure on this count may not only attract legal provisions but also may result in recovery of duty in respect of goods which do not discharge their duty liability correctly owing to improper declaration, by invoking extended period of limitation. The assessee cannot escape this onus by making vague declarations or on the plea that the departmental officers had been visiting the factory and were, therefore, conversant with the process of manufacture etc.