2025 (6) TMI 578 - AAR - GST

Classification of services - ATS (exhaust after-treatment system) also known as EGP (exhaust gas processor) which is a purifying and filtering apparatus/ equipment - classifiable under tariff heading 84213990 or under tariff heading 8708 of the Indian Customs Tariff - applicability of Serial No. 322 of Schedule III of Notification No. 1/2017-Central Tax (Rate) dated 28 June 2017. HELD THAT - In the instant case the applicant is manufacturing and supplying exhaust after treatment system and other components for motor vehicles/automobiles having medium duty heavy duty and high horsepower engines. Fitting an exhaust After Treatement System (ATS) is mandatory as per Bharat Stage VI standard for emission norms as prescribed by Ministry of Road Transport and Highways. It is seen that the applicant supplies the following commodities to various original equipment manufacturers in the automobile industry for use in and during manufacture of motor vehicles. An After Treatment System is an apparatus which is used for filtering or purifying gases. The Explanatory Notes to the HSN for Chapter 8421 states that these gas filters or purifiers are used to separate solid or liquid particles from gases either to recover product of value (eg. Coal dust metallic particles etc. recovered from furnace flue gases or to eliminate harmful materials (eg. Dust extraction removal of tar etc. from gases or smoke fumes remoal of oil from steam engine vapours) and they include other chemical filters or purifiers for air or other gases (including catalytic converters which change carbon monoxide in the exhaust gases of motor vehicles). In order to classify the ATS supplied by the applicant to the OEM manufacturers as parts of motor vehicle under 8708 it has to pass the three-pronged tests as mentioned above. It is seen from the submissions and the documents presented before us that the goods manufactured and supplied by the applicant are as per the specific designs and drawings provided by the OEM manufacturers. They are so designed that the said product fits perfectly with the exhaust system of the motor vehicles. The said products supplied bear the part numbers provided by the vehicle manufacturers. Further the said product has been so designed that they can fit within the overall design of the motor vehicle and function in an integrated manner with the motor vehicle for which it has been designed. Therefore there are no hesitation in holding that the said goods have been designed and manufactured and are for use solely or principally with the articles of Chapter 87 in the instant case motor vehicles. However in order to sustain the classification under Chapter 87 the said goods should also pass the first test i.e. they should not be excluded by the Note 2 to Section XVII. In the instant case it can be seen that the ATS System supplied by the applicant would not be able to perform the function of removing the exhaust fumes unless it is attached to the motor vehicle for which it is designed. It would not function as an apparatus or a machinery in any other case. Therefore since it cannot function independently of the motor vehicle for which it was designed and cannot be termed as an apparatus or machine for any other purpose it cannot be classified under Chapter 8421. Conclusion - ATS being tailor-made and incapable of functioning independently as a filtering apparatus without fitting to a specific motor vehicle does not qualify as machinery under 8421 for classification purposes. ATS merits classification under tariff heading 8708 of the Indian Customs Tariff (as applicable to GST Law).

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this advance ruling application are:

(i) Whether the Exhaust After-Treatment System (ATS), also known as Exhaust Gas Processor (EGP), which functions as a purifying and filtering apparatus for exhaust gases, is classifiable under tariff heading 84213990 (filtering or purifying machinery and apparatus for gases) of the Customs Tariff and consequently under Serial No. 322 of Schedule III of Notification No. 1/2017-Central Tax (Rate) dated 28 June 2017 for GST purposes?

(ii) If ATS cannot be classified under tariff heading 84213990, whether it merits classification under tariff heading 8708 (parts and accessories of motor vehicles of headings 8701 to 8705) of the Customs Tariff, as applicable under GST law?

These issues revolve around the correct classification of ATS for GST purposes, given its dual character as both a filtering apparatus and a component fitted to motor vehicles, especially in light of the Bharat Stage VI emission norms mandating its use.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of ATS under tariff heading 84213990 (filtering or purifying machinery and apparatus for gases)

Relevant legal framework and precedents:

The classification under GST is governed by the Customs Tariff Act, 1975, which adopts the Harmonized System of Nomenclature (HSN) provided by the World Customs Organization (WCO). The relevant provisions include:

• Section XVI of the Customs Tariff covering machinery and mechanical appliances.
• Chapter 8421 covering centrifuges, including centrifugal dryers; filtering or purifying machinery and apparatus for liquids or gases.
• Rules for Interpretation of the Customs Tariff, especially Rules 1 to 3, which govern classification based on the most specific description.
• Section and Chapter Notes, which are integral and binding parts of the tariff.
• HSN explanatory notes, which have persuasive value in interpreting the scope of tariff headings.

Judicial precedents affirming the primacy of these rules include Collector of Central Excise, Shillong vs. Wood Craft Products Limited; Camlin Limited vs. CCE; Coen Bharat Limited vs. CCE; and CCE vs. Bakelite Hylam Limited.

Court's interpretation and reasoning:

The applicant contended that ATS is an assembly of filtering and purifying components (DOC, DPF, SCR catalyst, ASC, mixer, dozing unit, sensors) designed to convert harmful exhaust gases (CO, NOx, carbons) into harmless substances (CO2, N2, H2O) in compliance with Bharat Stage VI norms. The ATS functions as a filtering apparatus for gases, squarely falling within Chapter 8421.

HSN explanatory notes for Chapter 8421 explicitly include catalytic converters and particulate filters for purifying exhaust gases from internal combustion engines. The applicant further relied on a chartered engineer's certificate confirming the ATS's function as filtering machinery.

Rule 3(a) of the Customs Tariff's Rules of Interpretation mandates classification under the heading providing the most specific description. Since ATS is specifically described under 8421, this rule favors classification under this heading over the more general heading 8708.

Further, amendments effective from January 2022 introduced tariff item 84213200 specifically covering catalytic converters or particulate filters for purifying exhaust gases from internal combustion engines, reinforcing the applicant's position.

Key evidence and findings:

• Technical description of ATS and its components.
• Chartered engineer's certification of ATS as filtering machinery.
• HSN explanatory notes and Customs Tariff amendments.
• Judicial precedents supporting classification of similar filtering apparatus under Chapter 84.

Application of law to facts:

Given that ATS is a filtering and purifying apparatus for gases, specifically designed to process exhaust gases, it fits within the description of tariff heading 8421 and the more specific tariff item 84213200. The functional character of ATS as a filtering machine is decisive.

Treatment of competing arguments:

The GST department argued that ATS should be classified under tariff heading 8708 as a part of motor vehicles, emphasizing that ATS is tailor-made to fit specific vehicle models and cannot function independently. They relied on Section XVII Notes 2 and 3, and judicial precedents such as G.S. Auto International Ltd., asserting that parts suitable solely or principally for motor vehicles merit classification under 8708.

The applicant rebutted that Section XVII Note 2(e) excludes machines and apparatus of headings 8401 to 8479 (including ATS) from being classified as parts under Chapter 87. Further, Note 3's "solely or principally" test applies only after ensuring the goods are not excluded by Note 2. ATS, being capable of use in other engines (e.g., generator engines) with modifications, fails the "solely or principally" test.

The applicant relied on Supreme Court rulings in Intel Design Systems and CCE Delhi vs. Uni Products Ltd., which held that excluded goods under Note 2 cannot be classified under Chapter 87 regardless of end-use. The CBIC Instruction No. 01/2022-Customs also supports this structured approach, emphasizing that classification must begin with exclusions under Note 2.

Conclusions:

ATS, by virtue of its intrinsic character as a filtering and purifying apparatus for gases, is classifiable under tariff heading 8421, specifically tariff item 84213200, and not under Chapter 87. The amendments to the Customs Tariff and judicial precedents reinforce this conclusion.

Issue 2: Classification of ATS under tariff heading 8708 (parts and accessories of motor vehicles)

Relevant legal framework and precedents:

Section XVII of the Customs Tariff covers vehicles and parts thereof, with Chapter 87 including heading 8708 for parts and accessories of motor vehicles. Section Notes 2 and 3 to Section XVII provide exclusion clauses and tests:

• Note 2 excludes certain articles (including machines and apparatus of headings 8401 to 8479) from being considered parts under Chapter 87.
• Note 3 requires parts to be suitable for use solely or principally with vehicles of Chapters 86 to 88 to qualify under Chapter 87.

HSN explanatory notes clarify that all three conditions must be met for classification under Chapter 87 parts.

Judicial precedents include G.S. Auto International Ltd., Intel Design Systems, and CCE Delhi vs. Uni Products Ltd.

Court's interpretation and reasoning:

The GST department contended that ATS is tailor-made to fit specific motor vehicles, fulfilling the "suitable for use solely or principally" test, and is not excluded by Note 2, thus classifiable under 8708.

The applicant and the Authority examined the exclusions under Note 2(e), which explicitly exclude machines and apparatus of headings 8401 to 8479 (including ATS) from being parts under Chapter 87. The applicant emphasized that Note 2 exclusions have primacy over Note 3 tests.

The Authority noted that ATS, although designed to fit specific vehicles, could be modified for use in other engines, failing the "solely or principally" test of Note 3. Moreover, the exclusion under Note 2(e) applies regardless of end-use or vehicle-specific design.

Precedents such as Intel Design Systems and Uni Products Ltd. confirm that goods excluded by Note 2 cannot be classified under Chapter 87, even if used solely in motor vehicles.

Key evidence and findings:

• Section XVII Notes 2(e) and 3.
• Technical evidence that ATS can be used with engines other than motor vehicles upon modification.
• Judicial precedents emphasizing the primacy of exclusions under Note 2.
• CBIC Instruction No. 01/2022-Customs clarifying classification principles.

Application of law to facts:

ATS fails the exclusion test under Note 2(e) and the suitability test under Note 3. The fact that ATS is designed to fit specific vehicles does not override the exclusion. Therefore, ATS cannot be classified under tariff heading 8708.

Treatment of competing arguments:

The department's reliance on G.S. Auto and A Raymond Fasteners rulings was distinguished on facts and subsequent judicial developments. The Authority noted that those rulings dealt with parts of general use or metal fasteners, not filtering machinery excluded under Note 2(e).

The department's argument that ATS cannot function independently as a filtering apparatus was countered by the applicant's evidence that ATS could be redesigned for other engines and that classification depends on intrinsic character, not end-use.

Conclusions:

ATS does not satisfy the tests for classification under tariff heading 8708. It is excluded under Note 2(e) and does not meet the "solely or principally" use requirement of Note 3. Hence, it cannot be classified as a part or accessory of motor vehicles under Chapter 87.

3. SIGNIFICANT HOLDINGS

The Authority held as follows:

On classification under tariff heading 84213990: "No." The ATS is not classifiable under tariff heading 84213990 for GST purposes.

On classification under tariff heading 8708: "Yes." The ATS merits classification under tariff heading 8708 as parts and accessories of motor vehicles.

This holding is based on the following key principles and reasoning:

• Classification must be determined according to the terms of the headings and relevant Section and Chapter Notes, per Rule 1 of the Rules of Interpretation of the Customs Tariff.
• Section XVII Note 2(e) excludes machines and apparatus of headings 8401 to 8479 from being parts under Chapter 87. However, the Authority found that ATS, being tailor-made and incapable of functioning independently as a filtering apparatus without fitting to a specific motor vehicle, does not qualify as machinery under 8421 for classification purposes.
• The "suitable for use solely or principally" test under Section XVII Note 3 is satisfied as ATS is specifically designed and used only for motor vehicles.
• Judicial precedents such as G.S. Auto International Ltd. and Intel Design Systems support classification under 8708 when the goods are parts solely or principally used with motor vehicles and not excluded by Section Notes.
• The Authority gave weight to the functionality test, emphasizing that ATS cannot perform its filtering function independently outside the motor vehicle exhaust system for which it is designed, and thus cannot be classified as a general filtering apparatus under Chapter 84.

In sum, the Authority concluded that despite ATS's character as filtering machinery, its tailored design and exclusive use as a part of motor vehicles, coupled with its inability to function independently, exclude it from classification under Chapter 84 and warrant classification under Chapter 87, heading 8708.