The Supreme Court highlighted important principles for applying the common or trade parlance test in classification disputes under taxation laws. Previously, the CESTAT ruled that imported ‘aluminium shelves’ should be classified as parts of agricultural machinery under CTI 84369900.
NEW DELHI: The Supreme Court outlined key principles regarding the application of the common or trade parlance test in classification disputes under taxation laws.
Earlier, The Customs, Excise and Service Tax Appellate Tribunal (CESTAT). which had determined that ‘aluminium shelves‘ imported by a company should be classified under Customs Tariff Item (CTI) 84369900 as ‘parts of agricultural machinery, rather than under Customs Tariff Item 76109010 as ‘aluminium structures’.
Customs Tariff Item (CTI 84369900 has a duty rate of zero, while CTI 76109010 imposes a basic customs duty of 10%, a countervailing duty of 12.5%, a customs cess of 3%, and an additional customs duty of 4%.
This came during the review of a Civil Appeal against the above ruling by the Tribunal.
Facts of the Case
M/s Welkin Foods, the respondent, imported aluminium shelving, a floor drain, and an automatic watering system, and submitted Bill of Entry No. 7399702 dated 09.11.2016 under Section 46 of the Customs Act, 1962 (hereinafter referred to as “the Act, 1962”).
The respondent declared and classified that floor drain, aluminium shelving and automatic watering system under CTI 84369900 as ‘parts’ of agricultural machinery’. The appellant concurred with the classification of the floor drain and automatic watering system under CTI 84369900 as ‘parts’ of agricultural machinery’. However, they argued that the ‘aluminium’ shelving should be considered an aluminium structure rather than a ‘part’ of any agricultural machinery. Therefore, the revenue should have classified the aluminium shelving under CTI 76109010, which would entail a basic customs duty rate of 10%, a countervailing duty rate of 12.5%, a customs cess of 3%, and an additional customs duty of 4%.
The Joint Commissioner of Customs, ICD – Import, Tughlakabad held that,
“the subject goods (aluminium shelving) did not display characteristics of a machine, which is necessary for classification under CTI 8436, i.e., agricultural/horticultural machinery.”
In the Appeal, the Commissioner of Customs (Appeals) affirmed the Order-in-Original said that,
“the subject goods((aluminium shelving) cannot be said to possess characteristics of a machine or a ‘part’ of one.”
Issue Framed:
Whether the subject goods (aluminium shelving) should be classified as ‘parts of machines or mechanical appliances’ of Chapter 84 under CTI 84369900 or as aluminium structures of Chapter 76 under CTI 76109010?
Observations of the Supreme Court
The Supreme Court, after considering the arguments presented, remarked,
“The Indian approach to use-based classification is a hybrid structure that combines elements of the methods used in the United States and the European Union.”
The Court summarized the differences and similarities as follows:
- Although the tariff provisions are not as clearly distinguished in India as in the United States, both jurisdictions adopt a similar approach. Specifically, use can be considered only if (i) the tariff entry explicitly mentions use or adaptation, or (ii) such use is either inherent in the tariff entry itself or implied by the term’s meaning within that entry.
- The European Union’s approach places less emphasis on dividing provisions and focuses more on the objective characteristics and properties of the good in question. Use may play a role in classification only if it is inherent to the product and identifiable through its objective characteristics.
- Unlike the U.S., neither India nor the EU has separate governing rules for use provisions. In both cases, the consideration of use is strictly limited to the intended use, which must be objectively derived from the product’s inherent characteristics.
The Court stressed the importance of tariff headings, relevant sections, chapters, and explanatory notes in classification disputes.
It stated,
“A use limitation cannot be imposed on an eo-nomine provision unless the name inherently suggests use. An eo-nomine provision would ordinarily include all forms of the name article. Consequently, Chapter Heading 7610 would cover all forms of aluminium structures, except for prefabricated buildings of heading 94.06, which have been excluded by the heading itself,”
The Court clarified that classification disputes regarding imported goods arise when there is a disagreement between revenue authorities and importers on the appropriate tariff heading or sub-heading. In such cases, tribunals and courts are responsible for identifying the most fitting heading or sub-heading for customs law classification.
The Court emphasized that,
“When undertaking this exercise of determining the most appropriate heading, the tribunals and courts are bound by the GRIs, which are provided for in the First Schedule to the Act, 1975, and ought to be applied sequentially. The GRI 1 forms the basis for classifying goods under the First Schedule of the Act, 1975, and establishes the primacy of the notes and terms of headings in determining classification. Thus, any customs law classification dispute at its core would involve interpreting the tariff headings involved, along with the section and chapter notes relevant to such headings,”
Principles Laid down by the Court
The two Judge Bench, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, identified several principles:
a. The application of the common or trade parlance test should be restrictive. Its purpose is to ascertain the common or commercial meaning of a term within the context of a tariff heading or its defining criteria.
b. The common or trade parlance test can only be utilized in classification disputes when the following conditions are met:
- There is no explicit definition or clear guidance provided by the governing statute, which includes relevant tariff headings, Section Notes, Chapter Notes, or HSN (Harmonised System Nomenclature) Explanatory Notes.
- The tariff heading does not employ scientific or technical terminology, or the terms used are not applied in a specialized technical sense.
- The application of the common parlance test must not contradict or undermine the overall statutory framework and contextual usage defined by the legislature.
The common or trade parlance test cannot be invoked where the statute provides definitive guidance either explicitly or implicitly. Explicit guidance is present when the legislature offers a specific definition or clear criterion within the Act. Implicit guidance may occur when the terms are scientific or technical, or when statutory context indicates that words must be interpreted technically. It is only in the absence of statutory clarity, where legislative intent is unexpressed, that tribunals or courts may rely on the common or trade parlance test.
c. Under the contemporary HSN-based classification system, the common or trade parlance test should not be the first method of recourse. It requires a comprehensive examination of all pertinent materials to confirm the lack of statutory guidance.
d. When interpreting terms in a tariff item through the common or trade parlance, an overly simplistic interpretation must be avoided, with consideration given to the legal context of the words.
e. If a tariff item is general and does not pertain to a specific industry or trade segment, then the common parlance interpretation is suitable. Conversely, for tariff items specific to a particular industry, the terms should be understood as they are defined within that industry.
f. The common or trade parlance test cannot override the clear mandates of the statute. Advocate Siddhant Kohli represented the Appellant while Advocate Salil Arora represented the Respondent.
Also Read: India’s New Income Tax Rules Effective From April 1, 2026: Full Breakdown for Taxpayers
Final Order of the Court
The Court concluded that while the “mushroom growing apparatus” appears to consist of various separate machines, upon applying the relevant section notes and Explanatory Notes, it does not qualify as (i) a composite machine, as the various machines are not designed for permanent assembly, or (ii) a functional unit, since they do not work together towards a single, clearly defined function.
Instead, each machine such as the head filling machine, automatic watering system, and compost spreading equipment performs its own independent task.
It concluded,
“The only common element is that they are all part of the broader mushroom cultivation process, which is different from fulfilling a specific, unified function. Thus, mushroom growing apparatus cannot be classified as ‘agricultural machinery’ under Chapter Heading 8436. … Lastly, the subject goods also fail to qualify as parts of the machines with which they are integrated post-importation. … These shelves do not contribute to their operation, they merely serve as a surface for the devices to perform their functions. A surface supports an object but does not become a part of it,”
Consequently, the Supreme Court overturned the decision and allowed the Appeal, ultimately setting aside the impugned Judgment.
Case Title: Commissioner of Customs (Import) v. M/s Welkin Foods (Neutral Citation: 2026 INSC 19)
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