Putting The Pieces Together Of The Classification Conundrum

Preface

The classification of parts and components under the Customs Tariff Act, 1975 ('CTA') has long been a serious bone of contention between the Revenue authorities and the industry players. Determining the appropriate duty applicable to imports requires a comprehensive joint reading of the First Schedule to the CTA, along with relevant Chapter Notes or section notes and a reading of the General Rules for the interpretation contained in the 1st Schedule of the CTA ('GRI'). It is common knowledge that the entire framework of India's customs classification is based on the World Customs Organization's ('WCO') Harmonized System ('HS') nomenclature, which is an internationally accepted and standardized system of coding commodities under identified groups to achieve uniform classification across the globe. Each nation may alter or create sub-classifications as per their internal trade policies, however, largely 98% of the classification of the goods today are aligned to the HS¹. The WCO's General rules for the interpretation of the harmonized system and the Explanatory Notes [to each chapter heading] are acknowledged guiding tools that have helped overcome and resolve disputes on classifications.

The HS primarily covers all final goods that can be consumed by an end consumer and items that may be required to make up such final goods, i.e., parts and components of the final goods. As is obvious, such parts and components can by itself be marketed and traded on their own. Thus, the HS while codifying has classified these items as independent items and as goods that derive their identity as being parts of other end products. Further, when parts are put together in kits [even though in un/disassembled form] they may take on the characterization of the final goods and hence, the WCO / GRI deems such kits to be the final goods. This manner of classification of parts and the various presumptions around their taxonomy has led to countless deliberations and disputes. These issues have always been a reason for strife as the duty arbitrage owing to different treatment and classification could be substantial. Another area of dispute could arise out of the licensing requirements that may apply to the import of finished goods, however, not applicable if imports are that of parts and components.

In India over the years, various judicial precedents have judged and emphasized multiple significant factors like the manner of import of parts, state of such parts and kits at the time of import, kind of parts being imported, etc., for determining the correct classification of such imported goods. As judicial precedents continue to evolve, the customs classification for parts has become increasingly crucial and key to regulatory and legal discussions. Several key legal principles that have emerged from past decisions in relation to the classification of parts and accessories as parts of complete goods or as complete goods or as standalone goods, are laid out below:

1. Parts of General Use – One of the underlying principles of classification is that 'parts of general use' do not qualify as 'parts and accessories' of any particular item for the purposes of classification under relevant tariff heading and would be recognized distinctly as a standalone item.
2. Sole and principal use test – This criterion remains a pivotal factor in determining the classification of parts and accessories, especially when distinguishing between components integral to the main article and those intended for secondary use. The notes and chapter headings state that if parts can be shown to be suitable for use solely or principally with a particular kind of machine or with several machines of the same heading, then such parts are to be classified with machines of that kind or under the tariff headings specifically created for such parts.
3. Knocked down or Semi knocked down kits – The factual circumstances surrounding the importation of parts, particularly when they are presented in a 'kit form' is a significant consideration for determining the classification of such goods. Rule 2(a) of the GRI which addresses the classification of parts in complete knocked down condition [CKD] or semi knocked down condition [SKD], provides that items that collectively comprise the essential elements of a complete article are assessed as a whole. If these parts are presented as part of an incomplete article that still holds the potential for assembly into a functional product, they must be classified as a complete article, rather than individual parts.

The above tests are not a creation of the judiciary and are in fact enshrined in the tools of interpretation like the Section Notes, Chapter Notes, and the GRI read with the WCO Explanatory Notes. The Indian Courts amongst many judicial precedents, time and again have examined the classification of parts, components, and sub-assemblies of motor vehicles, electronics, machinery, etc., drawing upon other established precedents and the above-mentioned guidance tools. However, such determinations have not brought an end to this debate and the industry continues to be at the receiving end of Revenue inquiry as the interpretation of these provisions remains the subject matter of evolving legal standards.

With this background, we will delve into the intricacies of classifying parts and accessories based on the First Schedule to CTA and General Rules for Interpretation.

The test of specific over general

Tariff items within the same chapter will generally contain a heading to basket all 'parts and accessories' that are specifically designed for goods classified under that chapter. This classification principle aligns with the established practice of categorizing components as ancillary to the principal article, provided they share a common functional or structural relationship with the primary product. However, individual parts and components may also be classified under different chapters depending on their material composition, functionality, or specific nature. In such instances, the classification is determined based on the predominant characteristics of the component, which may not necessarily align with the chapter of the principal article, thus requiring a more nuanced approach to their classification.

Given the above, it is paramount to reference the notes enshrined within the respective chapters, as these elucidate the precise scope and ambit of parts and accessories ancillary to the principal article under the specific tariff heading. Such notes are indispensable in construing the classification parameters. Typically, the notes delineate that parts and accessories classified under a specific chapter heading shall qualify for such classification only if they are demonstrably integral to a particular model or variant of the principal article, and not merely of a general nature. The distinction is critical, as parts of a general use, irrespective of their association with the principal article, are generally excluded from the scope of that chapter heading. For example, the inclusive list set forth in the notes pertaining to motor vehicles under Chapter 87 explicitly encompasses assembled motor vehicle chassis frames, clutches, gearboxes, brakes, and similar components. These items are clearly described as being specifically designed and intended for use with a particular motor vehicle model, thereby establishing their classification as integral parts or accessories directly associated with the principal article, rather than generic or broadly applicable components. On the other hand the notes may create specific exclusions, like the section notes to section XVII [which contains Chapter 87] stipulates that parts of general use as defined in Note 2 to Section XV of base metals, or similar goods of plastic, tools (chapter 82), electrical machinery and equipment (chapter 85), brushes (heading 9603) etc., would not be considered as "parts and accessories" for the purpose of being classified under this section and would be classified in their respective heading(s). Similarly, Section XVI covering mechanical appliances and electrical equipment and their parts, specifically, exclude items like parts of general use, transmission or conveyor belts made of plastic or of vulcanized rubber, articles of chapter 82 and 83, articles of section XVII (i.e., vehicles, railways, vessels etc.), articles of chapter 90 etc. Thus, the two broad moot points that emerge are 1. Classification of specific purpose parts; and 2. Classification of specific exclusions from section / chapter.

The GRI provides that the heading which provides the most specific description shall be preferred to the headings providing a mere general description. The Larger Bench of the Tribunal in IVP Ltd.² held that ceramic nozzles even though used as parts of welding machines, would get classified under chapter 69, as the said chapter specifically cover ceramic goods and not under the heading covering parts of welding machinery, as such entry would be a general entry. Thus, the Tribunal discarded the principle of specific use and followed the rule of specific classification sans the end use of such items. On the other hand, the Supreme Court in the case of G.S. Auto International Limited³ held that if goods are suitable for use solely or primarily with articles of a specific kind then such parts would be classifiable under Chapter Heading of the principal goods but if the answer is negative then they would be classified as per Note 2 to Section XV as parts of general use. The Court stressed that to determine the classification of a part under a particular head the test of commercial identity of the goods would be the relevant test and not the functional test. It was held that "parts of general use" would not apply to items that suitable for use solely or primarily with articles of a particular chapter. Following this decision in Cast Metals Industries (P) Ltd.⁴ it was observed that where parts were manufactured as per the specific design and for the purpose of being used in particular articles [motor vehicles], then such parts cease to be goods of general purpose and would become parts of the main article for which they are manufactured. Thus, the specific use / nature of the goods would take precedence over the general nature / use of the said goods for the purposes of determining the correct classification.

To add to the complication, as mentioned above each section note begins with notes that guide an importer on what is included in the chapters [to come] and what is not. Further, section Note 2 (b) of Section XVI, clarifies that other parts, if suitable for use solely or principally with a particular kind of machine or with a number of machines of the same heading are to be classified with machines of that kind or under the tariff headings specified in the said Note. This note is preceded by Note 2(a) which provides that parts that are goods should be classified in their respective headings. The note specifically excludes a few chapter headings. Similarly, Note 2 to Section XVII states that in Chapters 86 to 88 the terms "parts" or "accessories" "do not apply to parts or accessories "which are not suitable for use solely or principally with the articles of those Chapters". It goes on to state that a part or accessory that answers to a description in two or more of the headings of those Chapters is to be classified under that heading which corresponds to the principal use of that part or accessory. Thus, does it mean that if a part, even though specifically excluded under a particular note can find its way back into the Section / Chapter by virtue of the sole and principal test?

The Supreme Court in Secure Meters Ltd.⁵, while evaluating the section notes in Section XVI [chapter 84 and 85] held that that those parts and accessories which in themselves constitute 'article' falling in any particular heading of the Chapter, the rule of sole or principal test will not apply and said article would fall in that particular heading. Furthermore, in Videocon Industries Ltd.⁶ and Samsung India Electronics Pvt Ltd.⁷ following its earlier verdict in Secure Meters [Supra] the Supreme Court held that it is clear that when goods are excluded from a particular chapter, the "pull in" through a note has to be narrowly construed, as otherwise, the basis of exclusion would be defeated, and the earlier note (of exclusion) would be rendered redundant.

Per contra the Supreme Court in Westinghouse Saxby⁸, while deciding which section note would take precedence, held that the sole and principal use test takes precedence over the exclusion created by Note 2 of the section. The Court held that while the intention of the exclusion was to cover items that can be marketed independently and are of general use, once it is acknowledged that the items under question [even though covered under the exclusion] are suitable solely or principally with a main article then such items / parts would get classified along with such main article as any other interpretation would negate the very object of group classification. The Government vide Instruction⁹ dated 5 January 2022 recorded their observation with respect to the Westinghouse decision, clarifying that the said ruling was highly specific, pertaining to the classification of relays used in the Railway Signalling System. Consequently, the instruction directed field formations to consider relevant factors such as the operative facts, HS explanatory notes, section, and chapter notes when classifying the product for assessment. While this guidance is legally sound in principle, it has often been disregarded in practice, as the application of such factors remains inconsistent in action.

Another example is conveyor belts, the section note to Section XVI specifically states that this section does not cover "transmission or conveyor belts or belting, of plastics of Chapter 39, or of vulcanized rubber (heading 4010); or other articles of a kind used in machinery or mechanical or electrical appliances or for other technical uses, of vulcanised rubber other than hard rubber (heading 4016)". However, the WCO notes to CTH 4010 provides that "Conveyor or transmission belts or belting presented with the machines or apparatus for which they are designed, whether or not actually mounted, are to be classified with that machine or apparatus (e.g., Section XVI)." A similar explanation has been provided in WCO Explanatory note to CTH 3926 which has been produced below.

"Transmission, conveyor or elevator belts or belting of any kind, presented with the machines or apparatus for which they are designed, whether or not actually mounted, are classified with that machine or apparatus (e.g., Section XVI).

The Customs Excise and Service Tax Appellate Tribunal ('Tribunal') in the case of Alpsco Graintech Private Limited¹⁰ held that conveyors and elevators which are specifically used as a part of rice milling machinery would be classifiable along with the said machinery. Many more examples can be found where it has been held that parts that are tailor-made or specifically designed for any particular machinery would be classified with such kind of machinery. These case laws follow the principle that the specific purpose of the goods takes precedence over general use.

Thus, even though the notes create an exclusion for such goods, in certain cases if the importer has been able to substantiate that the goods being imported are created specifically for a piece of machinery and/ or are imported with such machines then they would fall out of such exclusion and would merit classification with those parts. Thus, the exclusions in the section and chapter note may not be fully sacrosanct.

Classification of Parts and Components coming in Unassembled or Disassembled, SKD or CKD or CBU form

As previously elucidated, the method of importation—whether in a disassembled, SKD or CKD or in complete form constitutes a pivotal factor in ascertaining the appropriate classification of the goods and in determining whether they shall be regarded as constituent parts and components or as fully completed articles. Reference can be drawn to Notification No. 21/2002 dated 1 March 2002, which governed the applicable BCD based on whether goods were imported as Completely Built Units [CBU] or in a disassembled state. Over time, the term CBU evolved into CKD, and the distinctions in duty arbitrage between CBUs and individual parts became significant. Notably, what constituted CBU or CKD was not defined until 2011, when they were clarified to refer to units containing all necessary components, parts, or sub-assemblies for the assembly of a motor vehicle.

Rule 2(a) of the GRI specifically addresses the importation of goods in 'unassembled' or 'disassembled' form, asserting that unfinished or incomplete goods may be classified under the same heading as their finished counterparts, provided they embody the essential character of a complete or finished article. The terms 'unassembled' or 'disassembled' are not explicitly defined in the GRI. However, the Harmonized System of Nomenclature, through its explanatory notes¹¹, provides clarification in this regard. The notes indicate that if the assembly process is limited to the mere attachment of nuts and bolts, or riveting or welding, there exists a potential for the components to be classified as a finished article. It is further explained that no account is to be taken of the complexity of the assembly method, provided that there is no further working operation carried out on the components to bring them to the finished stage. Consequently, for goods to be considered distinct for classification purposes, the assembly process must transcend the basic operation of fastening nuts and bolts, involving more substantial processes, integration or assembly to differentiate the goods from a complete article. The essential character of complete or finished goods refers to the fundamental nature or defining attributes that make a product what it is intended to be, even if it is missing minor parts or components. If the item retains its primary function and identity without these parts, it is still considered complete or finished. The Supreme Court, in Shri Pundrick Ravindra Trivedi & Ors.¹², held that where the imported parts and components could be assembled and made operational by technicians without the need for additional parts, the goods were deemed to be imported in a SKD condition. Accordingly, the Court classified the goods under the SKD category, based on their ability to function as a complete entity upon assembly. The Chennai CESTAT in case of BMW India Pvt. Ltd.¹³ has observed that goods are to be considered in pre-assembled form if imported goods i.e. engine assembly, transmission sub-assembly/ gearbox of motor cars have been listed with their corresponding part number in the tracking list and the manufacturer supplied these goods in the form of the single product having unique identification number engraved on it. The engine assemblies already incorporate critical parts and components like crankshaft, cylinder heads, crankcases, cylinder head covers, flywheels, pistons, exhaust and inlet valves etc. and they were not imported separately. The matter is currently pending consideration before the Supreme Court¹⁴.

The reference to Rule 2(a) of GRI has also been validated by Revenue in Circular¹⁵ dated 05 December 1997, in as much as it references to the essential character of a complete or finished goods, where components, parts, or sub-assemblies are imported. However, it has been held that Rule 2(a) of the GRI is to be invoked only when goods cannot be classified using the chapter notes, section notes, headings, or sub-headings. In this regard, reliance is placed on the case of Polar Appliances Ltd.¹⁶, where the appellant, engaged in the manufacturing of hand mixers, citrus juicers, juice extractors, sandwich toasters, and hair dryers, imported various parts and components from outside India. The assembly of these products was carried out in India, primarily involving the procurement of nuts and bolts domestically, as well as the addition of power cords [also sourced locally]. The parts were imported through two different ports, with importation spanning a period of 2-3 months. The allegation was that the parts and components possessed the essential characteristics of the final product, thus disqualifying them for the exemption under Notification No. 50/95 - Customs, as they were mis-declared as parts and components. The Tribunal, relying on the principle that GRI should be applied only when classification cannot be achieved through chapter headings, section notes, or tariff items, ruled that when parts and components can be clearly classified under the tariff on their own, there was no reason to resort to the GRI. Thus, applicability of Rule 2(a) of GRI is to be applied only and only if all the components which are intended to make up the finished product are all presented for customs clearance at the same time. The use of the term 'as presented' in the said rule emphasizes the necessity of evaluating the goods based on their form and status at the time of importation. Hence, goods have to be assessed in the form in which they are imported and presented to the customs and not on basis of the finished goods manufactured after subjecting them to some process after the import is made. In the case of Sony India¹⁷ the Supreme Court has held that the sine qua non for the application of Rule 2(a) i.e. that the article 'as presented' must have the essential character of the complete or finished article, thereby requiring that all components / parts intended to make up the finished product are presented for customs clearance at the same time. This has led to a position that Rule 2(a) of the GRI would apply only circumstances where 100% components are presented for customs clearance at the same time.

However, the law for the purposes of certain Notifications, concessions etc. have now introduced some entries that may specifically provide that a knocked down kit is a kit containing the necessary components, parts or subassemblies, for assembling complete goods. Thus these kits containing only the critical components will be considered as CKD / SKD imports. For example, in the case of motor vehicles, Engine, gearbox and transmission mechanisms are defined as necessary components. A similar entry exists for various electric vehicles as well. Would the import of all these components automatically lead to an import of a complete vehicle? The 50/2017 – Customs, Mega Exemption Notification¹⁸ has also added an explanation that provides that the exemption provided for the knocked down kits will be available, even if one or more of the components, parts, or subassemblies required for assembling a complete vehicle are not imported in the kit, provided that the kit as presented is classifiable under the heading 8702 or 8704 of the CTA as per the general rules of interpretation. The WCO explanatory notes state that a motor vehicle not yet fitted with the wheels or tyres and battery would still constitute a finished vehicle. However, the note still presumes what is coming in is a vehicle [minus some small elements]. The Delhi High Court in Rama Krishna Sales Pvt Ltd.¹⁹ while evaluating whether the petitioner was required to comply with the certification conditions under the Motor Vehicles Act, 1988, held that the import of rear axle, motor and controller for an E-Rickshaw would not mean the importer has imported a complete motor vehicle. This legal fiction, however, was upheld for the purposes of application of Rule 2(a) of GRI, where the court held that while Rule 2(a) of the Interpretative Rules can be applied for treating the import of these goods as an import of a complete E-Rickshaw for the purposes of the CTA for determining the applicable duties. This decision of the Delhi Court has later been relied upon by the Delhi Tribunal in Y.C. Electric Vehicles20 to hold that import of components that could assemble into an incomplete E-Rickshaw would merit classification as a complete E Rickshaw. Interestingly, while deciding a similar dispute the Delhi Tribunal in Battre Electric Mobility Pvt Ltd.²¹ held that import of parts of e-scooter through 26 bills of entry could not be clubbed by the Customs authorities to contest that what was imported was an incomplete e-scooter, as there were no provisions under the Customs law to enable the Department to do this and each bill of entry must be assessed individually and where such parts are imported under separate bills of entry the Tribunal held them to be separate independent imports. Thus, various factors, such as the nature / relevance of parts being imported, how they are imported and also how they are cleared would also be seminal in deciding whether the parts imported can be considered as complete goods.

Another important factor to consider is whether all the critical components to bring the finished goods in existence are imported or whether some parts are procured locally, and whether the absence of such parts would make it difficult to classify such kits as complete or finished motor vehicles. The fact that these third-party local vendors may also import the parts and components from the same original equipment manufacturer [OEM] outside India and then carry out assembling operations to supply these parts and components to the importer further complicates the issue. The customs authorities have argued that this is merely an arrangement to circumvent the taxability of parts and components as complete goods. The Madras High Court tested the advance ruling²² in the case of BMW India Private Limited²³, wherein it was ruled that parts and components imported are not classifiable as essential components constituting a motor vehicle as some parts and components were being procured locally from a third-party vendor and hence such imported parts and components did not constitute the essential character of motor vehicle. The Madras High Court while examining the correctness of the advance ruling observed that in the peculiar business model of BMW, where the essential parts and accessories are procured locally from third-party vendors who typically also have imported such parts and accessories and have carried out the assembly operations to supply such goods to BMW, imported parts and accessories are classifiable under their respective heading and not as 'motor car/ vehicle'.

In view of the above, the following key factors play a crucial role in the classification of parts/ components/ sub-assemblies imported from outside India:

• Whether all goods [parts, accessories, components, sub-assemblies] to assemble a finished article are imported? If not, whether the essential parts are procured and imported together by the importer?
• Whether all the parts are obtained from the same supplier and in a kit form?
• Whether the quantity of parts imported can / cannot be correlated with a specific number of finished goods at a specific point in time?
• Whether all goods are imported at the same time which in turn are assembled in India to bring into existence a 'finished article'?
• What is the level of localization that has been undertaken to take away the tag of CKD / SKD?
• Whether imported goods are inter-changeable and can be commonly used for different models of finished goods?
• The manner and the complexity of assembling process that is carried out post importation of parts/ accessories?
• The way the overall supply chain logistics operate for the import of parts/ accessories.

Concluding Remarks

Considering the aforementioned analysis of the classification of parts and components, it is crucial for importers to exercise caution when importing parts. They must assess what is the essential character of these parts before finalizing the classification.

Ultimately, the classification of parts, components, and accessories under the CTA requires a nuanced understanding of both the legal framework and the specific factual circumstances surrounding the goods. Understanding the technical, make and ultimate usage of the goods and equating or differentiating it from other similar goods / parts in the market are some key inputs that assist the importers / taxpayers in accurately classifying their goods. Customs and Directorate of Revenue Intelligence (DRI) authorities are particularly vigilant in examining imports of parts and components, especially in CKD/SKD conditions, to ensure there is no misclassification or tax evasion. They closely examine the interlinkage between imported parts and locally sourced components. Any evidence suggesting a coordinated effort to import parts that, when combined, form a complete product may lead to reclassification and the imposition of higher duties. Sometimes such schemes are knowingly or unknowingly used by importers to overcome certain onerous import policy conditions, like certification / licensing from identified authorities. Such approach is detrimental, and the courts do not look on such importers favourably, however arduous the conditions may be²⁴. Declaring imports as mere dis assembly or sub-assembly to overcome any import policy regulation is strictly looked at as means to overcome import policy conditions and bringing restricted / prohibited goods into the country. Such measures are not advisable under any circumstances, instead companies should focus on re-treading their supply chain for a more compliant outcome.

On the other hand, in many instances even where there is an intent to actually import parts and components for the purposes of carrying out assembling / manufacturing in India, the Revenue authorities may take a very myopic view and seek to classify such parts as complete goods, without correctly evaluating various factors involved in such imports. To avoid or overcome such eventualities, it is important that a proper scrutiny of the supply chain process and documentation generated is carried out to glean out any discrepancies between the actual underlying transaction versus what is stated in the documents.

Footnotes

1 World Customs Organization [ https://www.wcoomd.org/en/topics/nomenclature/ ]

2 2004 (173) E.L.T. 128 (Tri. – LB) – aAirmed by the Supreme Court in 2015 (320) E.L.T. A340 (S.C.)

3 2003 (152) ELT 3 (S.C) 42015 (325) E.L.T.

4 71 (S.C.) 52015 (319) E.L.T.

5 65 (S.C.)

6 (2023) 5 Centax 108 (S.C.)

7 2023 (386) E.L.T. 641 (S.C.)

8 2021-TIOL-121-SC-LX-LB

9 Instruction No. 01/2022- Customs dated 5 January 2022

10 2019 (365) E.L.T. 944

11 Explanatory Note (VII) to Rule 2(a) of the Harmonised systems of nomenclature

12 [2015 (8) TMI 1119 – SC]

13 BMW India Private Limited vs Commissioner [2019 (366) ELT A28 (Tri. – Chennai)]

14 BMW India Private Limited vs Commissioner [2019 (367) ELT A243 (SC)]

15 Circular No. F. No. 528/128/97-Cus-Tu dated 5 December 1997

16 [2009 (9) TMI 450 – CEGAT, New Delhi]

17 [2008 (231) ELT (385) (SC)]

18 Notification No. 50 /2017 –Customs dated 30 June 2017

19 2019 (2) TMI 149 – DELHI HIGH COURT

20 2025 (2) TMI 1119 – CESTAT NEW DELHI

21 2025 (2) TMI 639 – CESTAT NEW DELHI

22 BMW India Private Limited vs Commissioner of Customs [2015 (12) TMI 482 -AAR]

23 W.P. No. 14959 of 2016 dated 5 July 2024

24 Commissioner of Customs vs. Phoenix International Limited [2007 (9) TMI 275-SC]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.