A Legal Analysis on Customs Classification of Parts and Components under the Customs Tariff Act, 1975

[YAGAY andSUN]

I. Introduction

The classification of parts and components under the Customs Tariff Act, 1975 ("CTA") remains a persistent point of legal friction between industry stakeholders and revenue authorities. Accurate classification determines applicable customs duties and import conditions, requiring interpretation of the First Schedule to the CTA, the General Rules for the Interpretation of the Harmonized System ("GRI"), and the relevant Section and Chapter Notes.

India’s classification regime is modeled on the Harmonized System of Nomenclature ("HS") formulated by the World Customs Organization ("WCO"). While domestic deviations through sub-classifications are permitted, 98% of the global trade adheres to HS, making the WCO’s Explanatory Notes and interpretative tools of significant legal value.

II. Core Legal Principles in Classification of Parts and Components

1. Principle of ‘Parts of General Use’

As per Section and Chapter Notes (e.g., Note 2 to Section XV), items of general utility, though used in conjunction with specific machinery or equipment, are classified independently. These do not qualify as parts or accessories of specific goods and must be classified under their material or generic headings.

2. Sole or Principal Use Doctrine

The "sole or principal use" test is pivotal in determining whether a component qualifies as a part or accessory. If a part is demonstrably suitable for use solely or principally with a machine or article falling under a specific heading, it is classifiable under that heading. This principle has been judicially reinforced in G.S. AUTO INTERNATIONAL LTD. VERSUS COLLECTOR OF C. EX., CHANDIGARH - 2003 (1) TMI 700 - SUPREME COURT, where the Supreme Court held that parts of specific design and use cease to be "general use" items and must be classified with the goods for which they are intended.

3. CKD/SKD Imports and the Essential Character Test

Rule 2(a) of the GRI provides that an incomplete or unfinished article, presented unassembled or disassembled, which possesses the essential character of the complete article, is classifiable as if complete. Judicial authorities, including in Shri Pundrick Ravindra Trivedi, have held that where parts can be assembled without further processing into a functional product, the classification must follow that of the finished article.

However, the jurisprudence emphasizes that Rule 2(a) is to be applied only where classification is not determinable through headings, notes, or other rules. The "as presented" standard under Rule 2(a) restricts classification to the goods submitted for assessment, rather than the intended outcome of assembly post-importation.

III. Conflicts between Exclusionary Notes and Sole Use Principle

Section Notes often expressly exclude certain components (e.g., plastic articles, tools, or electrical components) from being classified under specific Sections (e.g., Section XVII). However, the Supreme Court in Westinghouse Saxby held that if such parts are specifically designed for and solely usable with articles of the relevant chapter, they may nonetheless be classified with the principal article, notwithstanding the general exclusion.

Conversely, in Secure Meters Ltd., the Court upheld the primacy of exclusionary notes, holding that once excluded under a note, the component must be classified independently unless the reclassification under another rule is narrowly justified. This divergence has led to inconsistent interpretations, prompting the CBIC to clarify via Instruction No. 01/2022-Customs, urging field formations to evaluate the factual matrix, HS Notes, and relevant judicial precedents before invoking a classification.

IV. CKD/SKD Imports vis-à-vis Finished Goods: Judicial and Administrative Developments

The determination of whether an import constitutes a Completely Built Unit (CBU), Semi-Knocked Down (SKD), or Completely Knocked Down (CKD) kit significantly affects duty rates. The legislative and judicial treatment of such imports hinges on several parameters:

• Whether all critical components required to assemble the finished good are imported together.
• Whether such components are imported from a common supplier and in a single shipment or consignment.
• Whether imported goods can be correlated to a specific number of final articles.
• The complexity and nature of the assembly post-importation.

In Polar Appliances Ltd., the Tribunal declined to invoke Rule 2(a), holding that where individual components can be classified independently, there was no basis for treating them as a complete product.

In contrast, the Delhi High Court in M/S. RAMA KRISHNA SALES PVT. LTD. VERSUS UNION OF INDIA AND ORS. - 2019 (2) TMI 149 - DELHI HIGH COURT. and the CESTAT in M/S Y.C. ELECTRIC VEHICLE VERSUS PRINCIPAL COMMISSIONER, CUSTOMS (IMPORT) NEW DELHI (ICD TKD) - 2025 (2) TMI 1119 - CESTAT NEW DELHI applied Rule 2(a) to hold that even where certain components are sourced locally, the imported critical parts could constitute a complete article.

However, in BMW India Pvt. Ltd., the Madras High Court emphasized that when essential parts are sourced locally, classification must reflect only the components imported, not the assembled product, especially if such local sourcing is from vendors importing identical parts.

V. Rule of Specific Over General – Legal Precedence

Rule 3(a) of the GRI provides that where two or more headings refer to part of the materials or components of a mixed or composite good, or to part only of the items in a set, the heading which provides the most specific description is to be preferred.

This has been judicially upheld in IVP Ltd., where ceramic nozzles, although used in welding machines, were classified under Chapter 69 (ceramic goods) rather than under parts of welding machinery.

VI. Classification Based on Packaging and Presentation

The courts have consistently held that presentation at the time of import is critical. Classification cannot be influenced by subsequent local assembly, unless the imported kit is presented as a functionally complete or near-complete unit. See Sony India, where the SC ruled that Rule 2(a) is inapplicable unless the kit, as presented, reflects the essential character of the finished article.

Recent amendments to Notification No. 50/2017-Customs have relaxed this position for electric vehicles and motor vehicles by statutorily deeming certain critical components sufficient to constitute a CKD, even if all parts are not present.

VII. Implications of Misclassification and Revenue’s Vigilance

The Customs and Directorate of Revenue Intelligence (DRI) have intensified scrutiny over imports of parts, especially in SKD/CKD configurations, to prevent evasion of duties and circumvention of import licensing requirements. The classification of goods as parts rather than complete products is often seen as an attempt to bypass regulatory conditions such as certification under the Motor Vehicles Act, 1988, or other technical standards.

Courts have disfavored schemes that misrepresent the import status to avoid such conditions. See Phoenix International Ltd., where the SC emphasized that deliberate circumvention through classification schemes is not legally tenable.

VIII. Conclusion

The classification of parts and components under the CTA involves a multi-layered legal inquiry. The following guiding considerations must be evaluated:

• The functionality and exclusivity of the part with respect to the principal article.
• Section and Chapter Notes, particularly inclusion and exclusion clauses.
• Whether the "essential character" of the final article is discernible in the form presented.
• The extent and nature of local sourcing and assembly.
• Adherence to judicial precedents and administrative instructions.

Given the high stakes of misclassification—including denial of exemptions, higher duties, and regulatory penalties—importers are advised to conduct a supply chain audit, maintain robust documentation, and, where appropriate, seek advance rulings to ensure classification compliance under the CTA.